Welcome to the 47th episode of Deep Tech Catalyst, the channel by The Scenarionist where science meets venture!
In this episode, we dive into the complex and exciting world of dual-use technologies with Sherman Williams, Managing Partner, and Forrest Underwood, Venture Partner, at AIN Ventures.
Together, we explore the core ingredients that make dual-use startups investable—from navigating government funding pathways to positioning for commercial scalability.
Key Themes Covered:
🌎 Understanding the Dual-Use Technology Landscape
🎯 Problem/Solution Fit in Dual Use
🤝 Navigating Market Validation and Key Stakeholders in Defense Tech
✅ 4 Key Criteria VCs Seek in Investable Dual-Use Startups
📈 3 Insights for Planning a Scalable Dual-Use Startup
KEY INSIGHTS FROM THE EPISODE
🌎 Understanding the Dual-Use Technology Landscape
In the Western world, particularly in the United States, government entities are the primary investors in advanced and deep technologies. Funding typically comes from non-dilutive sources, such as grants, tax incentives, and other subsidies. To secure this funding at the earliest stages, scientists working at a lab scale need strong grant-writing skills.
The Scale of U.S. Defense Spending
To put the scale in perspective, the U.S. Department of Defense (DoD) alone has a multi-billion annual budget allocated to advanced technology initiatives. Additional government funding pools likely bring this total closer to a trillion dollars. When considering the entire U.S. national security infrastructure—including the DoD, intelligence agencies, and law enforcement—annual spending tops well over a trillion dollars.
That said, when referring to potential dual-use government funding, it’s important to note that opportunities exist not only in defense but also in sectors like energy (Department of Energy), healthcare (NIH, ARPA-H), and others. This broader perspective expands the possibilities for technology applications across various sectors.
The DIME Framework and Commercial Potential
In detail, “dual-use” means that companies can expand commercially. This aligns with the DIME framework—Diplomatic, Information, Military, and Economic—which helps map where spending occurs.
The Economic sector, representing commercial potential, is the largest by far, outpacing the other three combined. This framework guides us in prioritizing companies that might start with government applications but can eventually scale commercially.
Successful Case Studies from the Past
There are historical precedents for this:
The Internet, originally developed by the U.S. government, operates on the TCP/IP protocol—adopted initially by the Department of Defense.
GPS and radar, once primarily military technologies, are now essential for commercial and civilian use.
This illustrates that some technologies, though initially military-focused, can eventually have significant commercial impact.
🎯 Problem/Solution Fit in Dual-Use
The government and customers don’t buy “technology”; they buy products and services.
To build a valuable product, it's crucial to deeply understand the specific needs of your customer. This process is complex, particularly in government contexts where needs vary widely—from the end user, like a warfighter with tactical or operational challenges, to the acquisitions community procuring the solution, and finally, the requirements branch that verifies and funds it.
Founders must ensure alignment across these groups to solve the correct problem, which involves translating emerging tech into usable products and services. This is where founder creativity is key.
The goal is to turn technology into effective solutions and navigate the challenging path to market.
It’s important to consider not only today’s needs but also the technologies that will drive us forward. For instance, AI and autonomy are critical, as are material science advancements and software-integrated hardware.
🤝 Navigating Market Validation and Key Stakeholders in Defense Tech
In defense tech, the government represents a unique customer base, and securing early market validation requires engaging specific stakeholders.
Products must address critical issues, with applications in national security or potentially large commercial markets.
Successful founders typically target vast commercial sectors but align with security use cases, reflecting our dual-use approach.
Defining Market Validation in Dual-Use
In terms of validation, there’s no universal standard. In a rapidly evolving technology landscape, market needs and threat applications shift at an exponential pace. This dynamic environment means validation and product requirements are never static.
A common misconception is that entering the defense market requires a radically different approach than other sectors. But in every industry, one essential condition for success remains: paying customers.
Validation can take many forms—a service contract, a letter of intent, a pilot, or a low-rate production contract. Each case varies, depending on the nature of the product and the needs of the customer. Whether it’s a material solution for aircraft or a software application, founders must consider several factors to gauge product-market fit.
Key Metrics for Assessing Market Readiness
Founders must evaluate critical elements such as problem-solution fit, customer relationships, and the essential prerequisites for scalability, including security, operational authority, and production capacity. By addressing these foundational aspects, founders can assess whether their traction is substantive and if the opportunity extends beyond a one-time contract into something scalable and sustainable.
✅ 4 Key Criteria VCs Seek in Investable Dual-Use Startups
In dual-use Deep Tech there are 4 key factors VCs prioritize in evaluating startups:
1. Team
This is always the foremost consideration. A capable and committed team is essential.
It's two things I'm looking for. One is an unfair advantage. I want to know, and you don't actually have to have that advantage, but if you, if you can visualize that unfair advantage and it's feasible and [...] That's something that we can achieve. Then the second part is, are you willing to run through walls to go get it? If both of those things are true, there is a very high probability that we are going to be good partners together.
2. Market Size and Growth Potential:
Targeting a large, growing market is essential; without it, even the most innovative ideas can struggle. Founders must focus on solving a problem substantial enough to attract venture capital backing.
3. Go-to-Market Strategy
Dual-use technology stands out in that the go-to-market strategy with government applications is often more clearly defined compared to other sectors. In commercial areas, having a unique advantage is essential for market entry. However, for founders unfamiliar with navigating government markets, partnerships with experienced investors can provide crucial guidance.
4. Technological Differentiation and Competitive Advantage
The technology should offer something genuinely unique and defensible. It’s also important to emphasize that you don’t need to have a competitive advantage right from the start, but you must have a strategy to develop one. Many founders begin with a unique insight or specialized knowledge without yet having fully developed the code, hardware, or other assets needed to establish that edge. Laying the groundwork for that advantage is key, even if it’s just on paper at first.
📈 3 Insights for Planning a Scalable Dual-Use Startup
Planning a product is one thing, but scaling a hardware product can be challenging. Here are 3 key considerations to keep in mind.
The Role of Government Partnerships
While it’s important to be cautious about making blanket statements—since there are multiple paths to success—scaling hardware, especially in deep tech or dual-use fields, is often challenging without government involvement or substantial government incentives.
Take recent success stories like Tesla and SpaceX. Tesla received millions of loans from the U.S. government in 2009, which helped support their scaling efforts. Similarly, SpaceX’s existence and growth have been largely supported by government contracts, particularly with the Department of Defense.
For hardware founders, developing a plan to sell to the government can be crucial. While software might not require this, scaling hardware without government backing is considerably more difficult. When it comes to true scalability—as opposed to just securing some sales—government partnerships can make a substantial difference.
Early-Stage Focus: Building, Testing, and Partnering
For early-stage founders, don’t overemphasize scale too soon. Focus on validating a venture-backable problem, building the product, testing it with users, gathering feedback, and iterating quickly. Scale becomes easier to manage once you’ve refined your core offering.
Especially in defense, consider partnerships with prime contractors. Founders often see primes as competitors, but in reality, they’re not. Common misconceptions include fears of IP theft, yet legal protections and oversight prevent this in most cases.
Primes, or “hyperscalers” in hardware, play a critical role in helping companies sell to the Department of Defense.
Understanding Prime Contractors and Their Role in Defense
To clarify, a “prime contractor” is one of a few major defense companies. The defense industry consolidated to streamline government contracts, making it easier for the Department of Defense to work with these primary integrators.
Primes coordinates with other companies in the industrial base to deliver integrated solutions to the government, meaning the DoD doesn’t have to manage dozens of suppliers for a single project.
While early-stage companies often secure R&D contracts directly through government programs like SBIR, scaling hardware typically requires integration into larger defense systems, making partnerships with primes or other B2B suppliers essential. Direct government sales can work for R&D, but broader scaling usually involves collaborative pathways and partnerships for long-term success.
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