Industry Q&A – Marc Cooper & Larry Gelwix Discuss Disruption in Defense Tech

Industry Q&A – Marc Cooper with Larry Gelwix

by CEO Marc S. Cooper

Solomon Partners’ Industrials and Technology groups recently shared insights on how a rising category of Silicon Valley-backed companies disrupts the defense technology landscape. Their report – Ripe for Disruption – delved into artificial intelligence, autonomous systems, defense analytics, and more. I recently sat down with Larry Gelwix, Head of Industrials at Solomon, to discuss key takeaways from the report.

Larry, can you tell us about the impact of technological innovation on the US defense sector?

Absolutely. Despite rapid technological innovation disrupting virtually every industry, the US defense sector has historically been the domain of mature, and in many cases, publicly traded contractors. This is due to the steep barriers to entry, such as the high costs and complexities of constructing multibillion-dollar defense programs and systems. However, with the rise of new technologies, Silicon Valley startups are increasingly playing a pivotal role in protecting and defending Americans at home and our allies abroad.

How significant is the entry of venture-backed startups into the defense ecosystem?

Their entry marks the most significant transformation since the 1990s. Following the end of the Cold War, a network of more than 50 major defense contractors consolidated into today’s big five US players: Lockheed Martin, RTX, General Dynamics, Northrop Gruman, and Boeing. These are all publicly traded companies located in and around Washington, D.C.

Are these five contractors still the dominant players?

Yes. However, the Department of Defense (DoD) is also contracting with nimbler, fast-growing enterprises to augment and accelerate its capabilities across increasingly ubiquitous technological domains such as artificial intelligence (AI), machine learning (ML), autonomous systems, and data and analytics. As the DoD continues to rely on AI-enabled warfighting technology, Silicon Valley technology will likely be in demand for the foreseeable future, setting up another round of consolidation as the industry’s leading contractors vie to gain a foothold over the competition.

How does Solomon Partners fit into this landscape?

We have unique insights into M&A opportunities in the defense and aerospace sectors, given our deep relationships with industry operators and our knowledge base and network within technology, software, data, and analytics. We provide a framework for how strategic acquirers and investors can evaluate the ever-evolving landscape of defense technology opportunities to gain a competitive advantage.

What is the DoD’s stance on technological growth and innovation?

The Defense Department must grow and innovate technologically. As Secretary of Defense Lloyd Austin remarked at the Reagan National Defense Forum last December, “When we sharpen our tech edge, we expand our military edge.”

Can you tell us more about the DoD’s budget allocation for R&D and procurement?

While spending on national defense, as a percentage of GDP, remains about half of what it was during the last decade of the Cold War, the DoD’s latest budget request included $145 billion for R&D and $170 billion for procurement. These are the largest investments of their kind in US history. Additionally, this funding is further bolstered by the creation of the Defense Innovation Unit in Silicon Valley, which focuses on fielding and scaling commercial technology across the military, and the Office of Strategic Capital, designed to attract and scale private capital in critical technologies.

What is the 2023 Department of Defense’s Data, Analytics and AI Adoption Strategy?

Deputy Secretary of Defense Kathleen Hicks announced the release of the 2023 DoD Data, Analytics and AI Adoption Strategy last November. The strategy prescribes an agile approach to AI development and application, emphasizing speed of delivery and adoption at scale, leading to five specific decision-advantage outcomes: quality data, governance, insightful analytics and metrics, assurance, and responsible AI.

How do investors and major players effectively invest or strategically acquire into this broad and constantly evolving ecosystem?

Sustained American leadership depends on strong partnerships among the public and private sectors to deliver innovative, technology-driven solutions. However, the barriers to entry can be high when it comes to developing advanced technologies backed by years of experience and millions (or billions) of dollars of research and development spend.

Companies and investors looking for an advantage in this proverbial arms race may find it less expensive—and less daunting—to acquire or otherwise financially back those already in the government’s orbit.

Smaller startups may not have an established and trusted relationship with the DoD or other large organizations that prioritize predictability and security. If they can gain one, however, a domino effect can occur. The marriage of technological innovation and trusted access to one or more government agencies can provide the path to sustained success in the defense sector – and can be facilitated via acquisition or capital investment.

What is the future of the United States’ defense capabilities?

We believe that the US is on the precipice of a fundamental realignment of the country’s defense capabilities, which will provide startups, their investors, middle-market companies, and the industry’s majors opportunity to realize the value of their investments.

If the US wants to train, equip, and outfit the military of the future, the DoD and the larger defense ecosystem will need to continue tapping into Silicon Valley’s ingenuity, harnessing technologies that have in many cases already transformed other aspects of our world. People can learn more about navigating the defense technology landscape in our report.