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Comment by trjordan | Hacker News Reader

The article you linked basically answers your question. The standard model for defense companies isn't VC-friendly -- you're either building hardware with a limited ceiling, or you're building a consulting business that bills by the hour. Those can be fine businesses, but they're not amenable to wiring $10m and getting back $100m 3 years later.

Defense buyers aren't inherently irrelevant, though. I'm working on a defense-related project at a VC-backed company, and plenty of our peers are. We're selling a standard SaaS model, and that continues to support our business model.

The real challenge is that most tech companies scale up before going after defense, so they can absorb the costs. If you're small, you're going to have to figure out how to scale quickly in the defense world. If you can crack that, I'm sure you'd find a VC or two.

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I'm not an economics expert, but I spent some time in that industry and it's like I was on another planet. I think the VC-unfriendliness of defense isn't just an industry norm, it's a direct byproduct of the really weird structure of that market. I can't think of another industry where...

1. There are almost as many sellers as there are buyers (if not more sellers than buyers).

2. Virtually all revenue comes from contract-based programs.

3. The IT+personel security needs are so high that you can only outsource substantial work to other players in the same industry, or firms that specialize in working with the industry, so cutting costs by outsourcing doesn't work as well as it does elsewhere.

That very small pool of buyers can kick the can down the road whenever they want, so a huge chunk of money has to go into simply predicting when your company's next payday will happen. When your forecasts are wrong, you have to spend a bunch of time laying off employees who no longer have anything to do. Or it goes the other way, and you have to frantically recruit the best engineers you can find, and shuffle them all through a rigorous (read: expensive) background check process. Oh, and on the topic of background checks- don't forget that you have insane security needs, even by tech industry standards.

All of this makes for an environment that just isn't VC-friendly. Overhead is high, revenue is unpredictable, and the industry is designed that way. No amount of genius management/engineering can change that.

Agree. Defence suppliers, like the ICE in Neuromancer, need to look more and more like their customers, from hiring ex-military staff to being partly physically colocated, before their customers will accept them and give them hints about which ways deals are likely to go, and which are soon to come out for tender.

This is consistent wit my experience. The defense world is very different from the normal market. Defense contractors tend to be very big (Lockmart, Boeing, L3) or very very small and specialized. For example there is a cottage industry around Ft. Campbell that supplies custom gear to Army Special Forces on essentially a walk-in basis. Getting in to either side of the industry isn't exactly easy.

Yeah. I have a friend who works for an organization which is a subcontractor for a critical aerospace system. They're basically sustained by one or two contracts and just had cutbacks because the two contractors they were allied with weren't selected for a new project.

> Those can be fine businesses, but they're not amenable to wiring $10m and getting back $100m 3 years later.

Sounds like classic Silicon Valley thinking. The defense market isn't made up of rational actors perfectly evaluating every possibility. It's made up of humans with a huge budget buying things which they really don't want to fail. That means one thing: Inertia.

You don't make the money on the initial contract. That's just your foot in the door. You make the money on the 10 years of consulting work and follow-up projects and maintenance and adjustments and updates that come your way because hey we used these guys last time and they seemed alright.

Agree. There's a reason that the GEM acronym (government, education, medicine) is a thing. Most sales people try to avoid them because they're going to be long sales cycles.

However, that's not to say all sales people avoid them. There are specialists just like VCs that do know their way around GEM. It's just going to be a smaller, more niche community.

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