ROSE COVERED GLASSESA Spin On The Revolving Door: Pentagon Officials Turned Venture Capitalists
“NEW YORK TIMES” By Eric Lipton
“Retiring generals and departing top Pentagon officials once migrated regularly to the big established weapons makers. Now they are increasingly flocking to venture capital firms that have collectively pumped billions of dollars into Silicon Valley-style startups”
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“When Defense Secretary Lloyd J. Austin III and other top officials assembled for an event at the Ronald Reagan Presidential Library, they walked into a lesson in how the high-stakes world of Pentagon lobbying is being altered by the rise of defense technology startups.
Inside, at this elite gathering near Los Angeles of senior leaders from government and the arms industry, was a rapidly growing group of participants: former Pentagon officials and military officers who have joined venture capital firms and are trying to use their connections in Washington to cash in on the potential to sell a new generation of weapons.
They represented a new path through the revolving door that has always connected the Defense Department and the military contracting business.
Retiring generals and departing top Pentagon officials once migrated regularly to the big established weapons makers like Lockheed Martin and Boeing.
Now they are increasingly flocking to venture capital firms that have collectively pumped billions of dollars into Silicon Valley-style startups offering the Pentagon new war-fighting tools like autonomous killer drones, hypersonic jets and space surveillance equipment.
This new route to the private sector is one indicator of the ways in which the United States is trying to become more agile in harnessing technological advances to maintain military superiority over China and other rivals.
But the close ties between venture capital firms and Defense Department decision makers have also put a new twist on long-running questions about industry access and influence at a time when the Pentagon is under pressure to rethink how it allocates its huge procurement budget.
During Mr. Austin’s visit to the Reagan Library, Mark T. Esper, who served as defense secretary under President Donald J. Trump, was on hand with business cards from Red Cell, a venture capital firm. Red Cell has invested in new military startups like Epirus, whose anti-drone technology Mr. Esper said in an interview he had helped pitch to top Pentagon officials.
Also on the guest list for the event were Ryan McCarthy, the former Army secretary, and Raj Shah, the former head of the Pentagon’s Defense Innovation Unit. Both now work for venture capital firms.
The New York Times has identified at least 50 former Pentagon and national security officials, most of whom left the federal government in the last five years, who are now working in defense-related venture capital or private equity as executives or advisers. In many cases, The Times confirmed that they continued to interact regularly with Pentagon officials or members of Congress to push for policy changes or increases in military spending that could benefit firms they have invested in.
“There’s panache now with the ties between the defense community and private equity,” said Ellen M. Lord, a former under secretary of defense for acquisitions, who said she had been solicited by a number of venture capital firms but had decided to focus on advising individual military contractors. “But they are also hoping they can cash in big-time and make a ton of money, too.”
This new generation of venture capitalists has big incentives to tap into its network of government and military contacts, many of whom it previously helped move ahead in their careers.
Unlike former officials who have joined the big military contractors, they are not salaried executives inside public companies.
Instead, as venture capitalists who profit in part when the startups they are backing make it big, they are wagering that at least a few of the companies they have invested in will hit the jackpot in the form of major military contracts — enough, perhaps, to generate a lucrative buyout offer or even to drive one of the startups to sell shares and go public, potentially generating an even bigger windfall for the early investors.
“A few years back you would have gone to be executive vice presidents at Lockheed Martin — totally not sexy,” said Chris O’Donnell, a former Navy SEAL and now a director at Franklin Venture Partners, whose investments include Air Space Intelligence, an air traffic control company, and CesiumAstro, a space communications company.
“Now, a venture capital guy comes up and says, ‘I will pay you twice as much. I will give you a cut in the form of carried interest in the deal and you will hobnob with the C.E.O.s of the companies we invest in,’” Mr. O’Donnell said during an interview, as he prepared to host a dinner for top Pentagon officials, members of Congress and other industry executives. “It’s much more attractive.”
The new venture capitalists say they typically use their access to press the Pentagon to provide more funding for emerging technologies in general, rather than to push for contracts for a particular startup they are backing.
“I can really leverage my experience, my positions, my voice to help accelerate innovation adoption,” Mr. Esper, a former defense industry lobbyist, said in an interview.
Pushing for a bigger share of the pie
One recent focus for the venture capitalists has been urging Congress to set aside at least $1 billion in the coming year for the kinds of cutting-edge technologies their startups are pursuing. Ensuring that innovative new firms get a bigger slice of Pentagon spending after decades in which the business has been dominated by a handful of giant prime contractors, they say, is vital to national security.
“The military-industrial-congressional complex is pretty comfortable with market share as it is,” said Sally Donnelly, a former Defense Department official who is now a founding partner at Pallas Ventures, which invests in startups while also helping them interact with Pentagon officials. “It’s a precooked system that needs to be shaken up a little bit.”
Pentagon procurement officials confirmed that they had repeatedly met with former Defense Department officials who are now venture capitalists. They said recommendations pushed by the venture capitalists had played a role in changes they are making in the way they acquire technology, helping accelerate purchases from some of the startups, like Saildrone, which makes marine surveillance equipment.
“We definitely hear from them,” said Schuyler Moore, the chief technology officer at Central Command.
In the last four years, at least $125 billion of venture capital has flooded into startups that build defense technology, according to data assembled for The Times by PitchBook, which tracks these investments, compared with $43 billion in the prior four years.
But at least so far, the defense-tech sector has had only a few breakthrough success stories. They include Palantir, which makes artificial intelligence software and went public in 2020, and Elon Musk’s SpaceX, which has a market valuation of more than $175 billion, larger than the market capitalization of Lockheed Martin, the world’s largest military contractor.
Much more frequently, it has been a continuing struggle for venture-backed defense technology companies to secure large-scale contracts.
That is where the new generation of well-connected venture capitalists comes in.
More than a dozen of them, assisted by think tanks and other nonprofits that get funding from venture capital groups, have been pushing Congress and the Defense Department to accelerate spending with defense-tech companies, or to make policy changes that make it easier for them to get Pentagon money.
Lawmakers and Pentagon officials said they welcomed the input.
“They want to do things,” said Representative Ken Calvert, Republican of California and chairman of the House Appropriations subcommittee that oversees the Pentagon budget. “Let’s face it, their budgets for research and development of new technologies are much better than ours. So they’re developing technologies that we can’t.”
But not everyone on Capitol Hill is pleased with the new revolving door, including Senator Elizabeth Warren, Democrat of Massachusetts, who raised concerns about it with the Pentagon this past summer.
The growing role of venture capital and private equity firms “makes President Eisenhower’s warning about the military-industrial complex seem quaint,” Ms. Warren said in a statement, after reviewing the list prepared by The Times of former Pentagon officials who have moved into the venture capital world. “War profiteering is not new, but the significant expansion risks advancing private financial interests at the expense of national security.”
‘Let’s go faster’
The annual Reagan National Defense Forum, the event attended by Mr. Austin this month, drew a substantial contingent of venture capitalists eager to mingle with government decision makers at cocktail parties and over meals, some held in the main atrium of the Reagan Library, where the plane used by President Ronald Reagan as Air Force One hangs suspended over visitors.
Doug Philippone, a former Army Ranger who is now the co-founder of Snowpoint Ventures, a defense-sector venture capital firm, was busy during the event chatting with various members of Congress and Pentagon officials. They included Heidi Shyu, the under secretary of defense for research and engineering, and Representative Pat Ryan, Democrat of New York, a West Point graduate who serves on the Armed Services Committee.
Mr. Philippone, whose firm has invested $172 million over the last two years mostly in defense-tech companies, said he had repeatedly urged government officials to pick winners to get money flowing to them.
“Let’s go faster,” Mr. Philippone said, recalling his message. “Why does it take so long?”
Certain startups like Shield AI are initially building their business almost entirely around revenue from Pentagon contracts and research awards, a risky bet given how slowly the Defense Department moves.
The result is a lot of pressure on the companies, resulting in an almost frantic push for support from Washington.
“A venture capitalist that is going to put tens of millions or even hundreds of millions of dollars into your startup, they are expecting to see revenue of $50 and $100 million a year,” said A.J. Piplica, the founder and chief executive of Hermeus, a venture-capital-funded startup that is working to build a new type of hypersonic jet. “And building a book of revenue of that scale, when you are working with the Defense Department primarily, is very, very difficult.”
Mr. Philippone, who is widely known in the industry for his role in helping build Palantir’s Pentagon sales before he set up his venture capital firm, is not shy about his advocacy. He said he works with every company he invests in to push the Pentagon or other agencies to move more quickly.
“I’m meeting with members of Congress,” he said. “I’m talking to members of the military. I’m introducing them to different people.”
But he said he was not a lobbyist because he is not paid for the advocacy work and it does not make up at least 20 percent of his time, the threshold for disclosure in federal law. Almost none of the venture capitalists promoting defense technology are registered as lobbyists.
Mr. Esper would not disclose the names of the government officials he spoke with on behalf of his firm’s investments, other than to say they included Pentagon officials. At times, he said, he urged them to consider specific technologies, like those from Epirus, which uses an electromagnetic pulse to disrupt or disable enemy drones. Mr. Esper said his effort in this field is based on a belief that he can help the Pentagon confront change.
“Part of this is just kind of being able to reach out to leaders within the building and say, hey, there’s a neat tech. You should check it out,” Mr. Esper said. “Because it’s being worked through echelons down. So if you know there’s a need and you can put a technology in front of them and say, just check it out, see how it works.”
Nick Sinai, an Obama-era White House official who is now a venture capitalist with Insight Partners, traveled to the Middle East last spring to meet with Gen. Michael E. Kurilla, who oversees the Pentagon’s Central Command operations in the region, to suggest ways to enhance military equipment now in use.
He suggested that the Pentagon acquire more data from commercial satellite companies that can help it improve awareness of what is happening on ocean waters. Among his firm’s investments is HawkEye 360, a startup that sells satellite data that can allow the military to track enemy movements.
Several months after the visit, the Navy doubled the size of a contract with HawkEye 360 to provide a more extensive array of satellite data. Mr. Sinai said the larger contract, worth $12.3 million, was unrelated to his intervention.
Many of the venture capitalists keep ties to Washington. Mr. Shah, the former head of the Defense Innovation Unit, serves on a congressionally appointed commission looking at ways to revamp the Pentagon’s budgeting process.
“D.C.-wise, we are very plugged in,” Mr. Shah said of his firm, which includes Michael Brown, who also served as head of the Defense Innovation Unit until he left last year.
Mr. Esper is co-chairman of a commission set up by the Atlantic Council that is studying ways to accelerate the Pentagon’s embrace of new technology. The Atlantic Council staff set up a series of 70 briefings for Pentagon and congressional officials to promote their ideas.
The lead author of the report, Stephen Rodriguez, is an executive at a defense venture capital firm. He also serves as an adviser to Applied Intuition, a software startup and military contractor that helped fund and promote the report. Funding for the Atlantic Council report also came from several other venture-backed defense startups and Mr. Philippone’s Snowpoint Ventures.
Mr. Rodriguez and his team keep a chart of all the recommendations that have resulted in policy changes, including expanding the power of the Defense Innovation Unit by making the new leader of the office a direct report to the defense secretary, and eliminating the prohibition on firms with more than 50 percent financing from venture capitalists from getting Pentagon small-business grants.
“We were not in the business of pitching or lobbying,” Mr. Rodriguez said. “We were just briefing our recommendations, and had detailed discussions about what the implementation of them would look like.”
Mr. O’Donnell, of Franklin Venture Partners, helped start what he calls the Silicon Valley Defense Group, which has sponsored a dozen “salon” dinners over the last year offering off-the-record opportunities for venture capital executives to meet with Pentagon officials and members of Congress.
The group has sent letters to members of Congress to push them to invest $1 billion next year in the Defense Innovation Unit, which is distributing a large share of its money to tech startups.
“The goal is to get a lot of conversations with the right people,” said Sam Gray, a former Pentagon acquisitions executive who is now the Washington-based director of the Silicon Valley Defense Group, as well as a partner at Franklin Venture Partners.
While many of the startups have yet to win substantial government funding, some are beginning to hit pay dirt.
Anduril secured a contract worth up to $1 billion with the U.S. Special Operations Command to identify, track and intercept enemy drones. Hermeus, the hypersonic jet startup whose investors include Ms. Donnelly’s firm, as well as funds set up by the investor Peter Thiel and Sam Altman, the chief executive of Open AI, recently secured a major Defense Innovation Unit contract.
Doug Beck, a former Apple executive who now leads the Defense Innovation Unit, said in an interview that the venture capitalists were not getting any special favors, nor did they ask for them.
“They are leaning in on policies that help break down systemic barriers, because that rising tide of defense innovation lifts all their boats,” he said, “and because they believe in the impact for the nation.”
A Spin On The Revolving Door: Pentagon Officials Turned Venture Capitalists
ABOUT THE AUTHOR
Eric Lipton is investigative reporter for The New York Times, who digs into a broad range of topics from Pentagon spending to toxic chemicals.
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Ken Larson
