Why VC Funds Are Suddenly Pouring Billions Into Defense

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Today, we've got a very special, incredibly timely episode for you. Ever since we started Tech Mates, we had some great conversations about geopolitical sovereignty in this part of the world and the founders building [music] the next wave of defense technology. We've put together three powerful conversations that have stuck with us and shaped our thinking over the past year. We'll dive into the need for deterrence, how fast local manufacturing is becoming [music] the ultimate weapon, and how venture capital is rewriting its rules to fund dual-use technology. It's all about protecting our future by being prepared. Let's start with Vu Tran and his sobering wake-up call on why we can't afford to ignore defense anymore.

Wait, do you mind our powers? Can we build something in this space? And yeah, it's the way any good startup starts. It was organic. It wasn't with purpose, it was organic. And then off the back of that, we really looked at pivoting his business. We like to say that he used to be 98% aerospace, 2% defense. Now, he's 98% defense, 2% aerospace with a 2% margin of error, right? So, we're pretty much a defense business. And what we focus on is something called solid rocket motors. Now, what solid rocket motors are is you have two types of motors in essence. You have liquid motors, which Rocket Lab and SpaceX will use because they can throttle them, reuse them, etc. And you have solid rocket motors, which are like just giant firecrackers. You light them, you can't throttle them, you can't put them out, they just fire.

The thing about solid rocket motors is they used heavily across defense because they're highly stable once you've made them and you can transport them and store them very easily as opposed to a liquid motor, which is why almost every single missile you can think of is powered by a solid rocket motor. The challenges globally are sorry, at least in the western world there are two major providers of solid rocket motors. It's a duopoly. Aerojet Rocketdyne and Northrop Grumman. Now, today you don't have to be a genius to see the fact that the amount of money that is being spent on defense is insane. But, the global primes, which are the large defense companies, their ability to cater for this demand will be impossible, right? Like they just don't have the ability to move fast enough to cater for this space. So, our thesis is really simple.

There will be a proliferation and they're already is started, but our thesis back then was there's going to be a proliferation of defense companies across the world, right? And you have to open up the newspaper today, if anyone even reads a newspaper anymore, and see what what's happening there. So, but more importantly for us, it's not about trying to capture opportunities or demand, right? At the end of the day, building a large successful company is actually going to be the byproduct of focusing on building something that Australia really needs, which is the ability to build defense capability and the area that is most scary that no one wants to touch, which is lethality, which is missiles, right?

So, I said to people that I stepped back from Go One, I did my own version of Eat, Pray, Love and wandered the wilderness and I ended up at guided weapons and missiles after leaving education technology, right? But, the honest truth of it is is the best way to be able to describe it to you is that is what we call the porcupine or the echidna strategy, right? If you think about the echidna or the porcupine, it doesn't have all those spikes on its back because it wants to go out and kill things. It has those spikes on its back so that when a predator looks at it, they might think twice before they want to have a bite, right? So, that's why they call it defense, not offense, right? Australia is not looking to invade another country. Though New Zealand looks pretty good, probably not at this point in time, right?

What Australia's what what's important is Australia needs the ability to defend to defend itself. And I'm going to put it this way to you, Mark, who has a child, and Hendrick, who is who's expecting a child. I think that the chances of my kids, who are 6 and 3 today, pick up picking up a gun in the next 20 years, not because they want to, because they want to join the army, but because they have to defend their country, it is higher in the next 20 years than it was in the last 20 years.

Well, I I I disagree with you. I think I think what you meant to say is the chance of them picking up a remote control to control the FPV drone.

Yes, exactly. Picking up an FPV drone, you know, like like controller to do that. I You're You're 100% right. But, the thing that it comes back to for me is that, you know, and I sound crazy. I I I've been saying this for whatever, a number of years, and I sound less crazy, I think, each year as things progress. But, I've been saying to people like, we are not moving fast enough. We are not prepared enough as a country or as an allied world. And I think the challenge And I'm not trying to fearmonger. I'm just saying, you guys remember there was that Chinese ship that went between Australia and New Zealand back in February? I'd like to say it did a hot lap of Australia, right?

Uh-huh.

They weren't whale watching, right? And the one thing people don't talk about is the fact that that Chinese ship was a missile cruiser with about 112 vertical launch cells on board. Australia estimates, people will say, Australia has less than 100 guided weapons across its entire arsenal. That one Chinese ship doing a hot lap of Australia had more missiles on board it than probably the entire Australian army combined. And it's not to say the Chinese are at the enemy. What I'm trying to say is that you just think about what what intimidation factor that sits at in terms of being able to do a whole lap of your country with a Chinese missile cruiser. Or doing live fire exercises 150 nautical miles off the coast of Sydney, right?

And it's so it I shouldn't say this, but like, as soon as that was on the news, there were people who called me up and said, "Hey, you know that defense stuff you're talking about? It might have legs."

So, Vu makes a very strong case for deterrence. But, how do you build those spikes if everything is manufactured overseas? Next up, David [music] Moody explains how his tech, which literally started in the kitchen microwave, is bringing defense manufacturing back home to act as a massive global [music] deterrent.

Share whatever you can share. I mean, just just so like kind of I mean, cuz I I think it's important to kind of bring that information out so people understand, right? Like where where things are actually at.

Yeah, and I'm going to be careful what I can actually say. I think what I didn't realize before I started getting uh pulled into these meetings and getting involved in this stuff was how close we are to conflict and how seriously other countries are taking this.

Well, with China specifically?

With China specifically. And I think a lot of it Ukraine is definitely pushed people's thinking in that, right? Where the unthinkable happens, you know, someone in this day and age went to war. Smart people went to war. Like, how could that be? And I think New Zealand is sitting here going, well, smart people won't Yeah, smart people stay out of this. But the problem is it's happening regardless of what you think. And so then going, well, do we want to be the country that is so ill-prepared that we send people out to slaughter? Or do we want to be you know, do we want to be getting prepared for this? And to me, what I'm doing, well, it's not wasn't initially for defense or anything along like that. I can actually be part of a solution. And from my perspective, right, deterrent. I don't I hope that my stuff never ends up in a war zone. But there's this there is this deterrent.

At the moment, America is toothless in terms of manufacturing and and and the world knows it. So, hey, they cannot you you I don't actually know about you know, Freedom Forge. So, what what to America mobilizes its industry. It's not defense industry to commercial industry to go and have four random bonus and and all these companies. That doesn't exist anymore. So, going ahead, America actually can't right now build a war machine. So, you're seeing and that's why and uh it probably frustrates some people, but you're seeing huge money being spent on groups that you know, like Anduril and Sintered and and all these other these comp- that are building up this ability to manufacture. And if nothing else, what it's doing is it's saying, "Hey, we are able. If we had to, we are able to to meet a conflict.

And so therefore kind of what I'm looking at with our stuff is saying well, if America has this technology, they can build and respond extremely quickly and that's a deterrent saying okay, well, I now know America's got teeth again.

Yeah, but I mean is the main concern China's invasion of Taiwan? Cuz I don't think China's ever going to invade or anything to America itself or New Zealand itself, it's just so far. But what is the actual like kind of threat?

Yeah, okay, it is a multi-faceted and I don't claim to know everything on this. But if if you look at Taiwan, the the concern there from my understanding is Taiwan is the biggest builder of microchips uh which is why you're seeing so much money being spent in America on microchips. If Taiwan was invaded, America loses the ability to compete electronically. And what we're seeing is that the the the war has changed. I don't know how we got so deep into war. We're seeing war war has changed. It's no longer going to be I've got the biggest machine. It's going to be I've got

swarms of stuff.

Yeah.

It's I think what did I see the other day that a $30 billion um or $300 billion aircraft carrier can be taken out by $3 million worth of drone. It's a complete change, right? And so then all of a sudden microchip becomes one of the most important things. America loses Taiwan, America is on the back foot. It can't compete and therefore will be beaten in the technology war. So that to me that's my understanding of why Taiwan is is such a um a big deal. So whether it is actually open war with America or whether it's just over Taiwan, yeah. But then I think like you in Ukraine, the question is this going to spread further? It's yeah, and I think um I saw an uh a podcast the other day with uh ex-head of MI6 just saying that America Europe needs to needs to have hard power, right? And it's just it's building up and it's for no other reason than being a deterrent.

Going back to again, don't want to sound like a warmonger because that's really not me, but I think I think we can play a role in being a deterrent.

It's crazy how the thinking around sovereign manufacturing has completely shifted and become critical for national security over the last couple of years. But who's funding all this hardware? Our last guest, James Penner, runs a massive government-backed VC fund. He explains how the venture capital mindset and even strict government policies are rapidly [music] shifting to back defense and dual-use technology.

So and you've got I can't remember the name of it, but yeah, startups, multi-billion dollar startups in in the US now sort of trying to disrupt these big prime industries. Technology is hugely disruptive in in military warfare, but there's huge beasts of machinery sort of behind the the incumbents as well. Yeah, it seems like yeah, a small country like New Zealand has no no reason why it couldn't be producing, you know, cheap disruptive warfare. Um and also, you know, we've got companies that are working on things like the cybersecurity as well. Um so you guys are familiar with Crism trying to build secure operating systems which, you know, on the defense side as well as the sort of military side.

Yeah. Well, that's that's a good that's a great kind of like I think point you raised because I think cuz New Zealand is sort of I think the um only I don't know. I think this is the only country where I heard some say where you know, there there was a lot of kind of protest and there's a big kind of public policy stance around not hosting US nuclear submarines back in the '70s and something. Kind of Kiwis are very proud of that of that of that kind of perception and what that means and what that says about them. Um and you've heard from a lot of our founders who are working in in deep tech and hardware that that could be dual use, they are I think at a first pass very hesitant to work with defense or to go into defense or to work with American defense companies. But I think and and and, you know, I think I think Rocket Lab initially, you know, had to make that choice.

Initially, they weren't willing to do that either. Eventually, they made that choice and I think they're now one of the biggest customers of the US government.

Mhm. For for satellite launch.

Yeah, what what do you think about that? I mean, do you guys as as a fund have restrictions on companies that are in defense? I remember when we were applying or or getting the certification for AIP, for example, I think we had to certify that we don't invest in the companies that I don't remember exactly language, but it was something like, you know, they couldn't be kind of defense-related or they couldn't be offensive capabilities or something. So, there was there's definitely, um, I think a position in the government that that makes that sort of off-limits. Whereas, it feels like now that's actually a very interesting opportunity not only from financial point of view, but also from a strategic point of view of New Zealand having its own industry to eventually, you know, if in in the worst case, defend itself.

Yeah, it's and it is a live topic. We are literally, you know, in the next couple of weeks we'll take to the board some some thoughts around how do we how do we evolve our um policies on this because yes, the geopolitical landscape's changing. Yes, warfare's changing, you know, we've we've talked about the disruptive technologies and drones and things like that. But also, you know, the way civilian uh infrastructure's being challenged and as well and attacked. And so, and cybersecurity on top of that, there's there's all sorts of different ways and it becomes even more broad. Currently, we are our policy is sort of restricted to indiscriminate weapons, things like cluster bombs and um weapons that are, you know, things that are actual weapons that are going to harm civilians, I think mines or those kind of things.

But we had a on top of that, we have a sort of a general consensus that we don't really do military, um, at this stage without it being a hard and fast rule. So, we have to navigate that quite carefully and obviously, our main concern is damaging the reputation of New Zealand. So, we're very mindful of that. But as you say, like mindsets globally shifting even in it's literally sort of month by month at this stage um we've gone from over the last sort of until 3 years ago there was a massive drop off for years in terms of defense spending globally and that was seems to be all reversing over the next 10 years.

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