Startup investors are fueling a boom in U.S. defense tech as China standoff opens doors at home
Hadrian Automation CEO Chris Power
Hadrian Automation
When President Joe Biden announced an executive order last month limiting U.S. investment in critical technologies in China, the venture capital community hardly blinked.
That’s because many U.S. startup investors have already retreated from China, after years of political mudslinging between the world’s two largest economies led to increased sanctions and trade restrictions.
But with the door to the Chinese tech market closing, VCs are seeing new opportunities on their home turf. The U.S. government is actively promoting investments in semiconductors and broader industrial development, and investors are finding a widening talent pool invigorated to take on tough challenges in light of world events, with an explicit focus on protecting U.S. values.
“VCs are saying, ‘Where’s the most stable places to invest? And quite frankly, where’s the talent?'” said Gilman Louie, co-founder of venture firm Alsop-Louie Partners. He’s also CEO of America’s Frontier Fund, which says in its mission statement that it’s “committed to reinvigorating our nation’s innovation and manufacturing prowess in critical frontier technology sectors.”
“In uncertain times, when there’s unpredictability and global stress, whether you’re a U.S. investor or a foreign investor, you want to come to America to invest,” Louie said.
Once seen as a vast market of opportunity for U.S. tech companies and investors, China is now filled with more risk than reward and is increasingly viewed as a rival in developing key technologies, including advanced artificial intelligence and quantum computing, that will drive global markets in the decades to come.
Last year, the U.S. announced export controls aimed at limiting Beijing’s ability to produce advanced military systems, and more recently the Biden administration restricted the ability for U.S. investors to back critical tech in China.
Meanwhile, lawmakers passed the CHIPS and Science Act, which promised to pump tens of billions of dollars into semiconductor manufacturing in the U.S. The goal is to reduce international dependence on chips that are key to development of electronics, cars and medical equipment and are becoming more important to national security with the rapid evolution of AI.
Lindsay Gorman, senior fellow for emerging technologies at the German Marshall Fund’s Alliance for Securing Democracy, said she’s seen a “new crop of venture capitalists” in the last few years that prioritize U.S. tech competition with China and U.S. national security.
“Ten, 15 years ago, these geopolitical lines were not part of the equation,” Gorman said.
Louie added that he doesn’t “know of a single major fund out there that isn’t thinking about disruptive tech investing in the U.S., investing in defense tech, investing in microelectronics and AI in the next generation and next iteration.”
In Torrance, California, just south of Los Angeles, Hadrian Automation is building efficient factories to help space and defense companies get parts faster and cheaper. CEO Chris Power, who started the company in 2020, said he’s seeing increased interest from large growth funds that have typically invested in software.
“Everyone’s kind of standing up their own practices to support the market,” Power said. Hadrian’s early backers include Lux Capital and Peter Thiel’s Founders Fund, which have longer histories of investing in manufacturing and deep science.
Palmer Luckey, Founder @ Oculus VR Andutil Industries, during day two of Collision 2019 at Enercare Center in Toronto, Canada.
Stephen McCarthy | Sportsfile | Getty Images
VC funding in aerospace and defense tech has shot up in recent years, according to data compiled by PitchBook for CNBC. In 2019, 69 companies in the sector raised a total of $1.7 billion in value. In 2021, that jumped to 119 deals worth $6.4 billion. Last year, which was the worst for tech stocks since 2008, saw a slight slippage in the space to $5.6 billion, though the number of deals was the same as 2022, according to PitchBook.
The poster child for U.S.-focused defense tech is Anduril Industries, co-founded in 2017 by Oculus Rift designer Palmer Luckey. The company, which ranked seventh on the latest CNBC Disruptor 50 List and has been valued at $8.4 billion by private investors, develops autonomous technology for national security and warfare.
On Thursday, Anduril announced the acquisition of Blue Force Technologies, which develops autonomous aircraft for defense and commercial customers.
While Anduril started with a focus on military contracts, other startups have navigated their way there.
Not just about patriotism
Saildrone, which makes unmanned ships, was originally focused on monitoring environmental data for fisheries and agencies like the National Oceanic and Atmospheric Administration.
It later became clear to CEO Richard Jenkins that the company needed to expand its aperture to bring in more revenue, since the government wasn’t spending enough on science to make the business work. Bilal Zuberi, a partner at early investor Lux, asked the company if it would consider selling its products to the Navy or Coast Guard.
Zuberi said Jenkins came to him with a key concern. He was unsure how his team would react if the environmental company they joined began selling to the defense sector. Zuberi talked about how he sees the opportunity differently. Saildrone’s technology can help prevent greater human casualty by, for example, learning of certain precise moves by the Chinese government in advance so the U.S. could send a warning signal and avoid a greater conflict.
Jenkins decided to make the pitch to his team. He told staffers he had a “pretty firm line on not weaponizing the platforms,” and keeping the focus on data collection tools. He also said the company wasn’t forgoing its climate work.
Saildrone didn’t lose any employees as a result of the shift.
Saildrone autonomous boats rove the seas, collecting data about weather, ships, fish and more.
“There was a perception that the technology industry doesn’t understand the importance of national security and what it takes to protect our democracy,” Zuberi said. “And then the military doesn’t care about the technology that we’re developing. I think that perception has somewhat been shattered.”
Zuberi said that for industry leaders it doesn’t have to be about patriotism. They can just look at the untapped potential in defense tech.
“It’s not like the last five years, suddenly investors woke up more patriotic than they used to be,” Zuberi said. “I think they just realized that there’s a big business opportunity here that they want to access.”
‘To work in defense was certainly taboo’
Paul Kwan, managing director of venture firm General Catalyst, had a similar observation.
“What’s changed around tech the last few years is people want to work on stuff that makes a difference and has a bigger impact on the world,” said Kwan, who has written about the firm’s “renewed” focus on “modern defense and intelligence.”
While tech workers at companies including Google and Salesforce have made headlines in the past for protesting their employers’ defense contracts, the topic is more nuanced now in the startup world.
“As a technologist, to work in defense was certainly taboo,” said Kyle Harrison, general partner of Contrary Capital. “I think the conversation has been more open. I think there’s still people that feel very strongly about it, for and against. But it used to be nobody really talked about it, where now people are acknowledging that it’s really difficult to protect a lot of the values that you think are important if your defense apparatus is from the ’80s.”
Part of the movement is driven by an awareness of the Russian war in Ukraine, several VCs said, which has highlighted the role defense can play in protecting values of democracy.
US President Joe Biden arrives to speak on rebuilding US manufacturing through the CHIPS and Science Act at the groundbreaking of the new Intel semiconductor manufacturing facility near New Albany, Ohio, on September 9, 2022.
Saul Loeb | AFP | Getty Images
“You have an aggressor nation, taking land and causing death and destruction to civilians,” said Raj Shah, managing partner of Shield Capital, adding that tech workers “want to do something to help and they want to have meaning in their lives. And photo-sharing apps are only so important.”
As Lux co-founder Josh Wolfe said, “Do you want to build software that has people clicking on ads, or do you want to do things that have a lasting impact on the safety and security of the American people and helping to reduce human suffering around the world?”
It’s not just shifting sentiment within the tech community. There’s also a growing openness from the U.S. defense community to procuring technology from newer players.
“The government’s becoming a better customer,” said Shah, who previously served as managing partner of the Defense Department’s Defense Innovation Unit, which seeks to accelerate the use of emerging technologies. “It actually makes business sense to solve important security problems.”
Power, CEO of Hadrian, said the narrative of “Silicon Valley hates the government and the government hates Silicon Valley” is gone, even though he says “I don’t think it was ever true.”
“People are viewing selling software to the government as a real market opportunity versus something that may or may not happen or would take them 10 years,” Power said.
One area where the shift in mindset has become abundantly clear in the past year or two, Power said, is in recruiting. In the past, some potential prospects expressed little interest in manufacturing, but now Power said he finds many more people who are compelled to solve these problems.
Wolfe said that trend permeates throughout his portfolio.
“Money follows talent,” Wolfe said. “And talent is going into hard tech.”
WATCH: Chipmaking nations such as the U.S. are teaming up against China
A logo hangs on the building of the Beijing branch of Semiconductor Manufacturing International Corporation (SMIC) on December 4, 2020 in Beijing, China.
Vcg | Visual China Group | Getty Images
Shares of Semiconductor Manufacturing International Corporation, China’s largest contract chip maker, fell nearly 7% Friday after its first-quarter earnings missed estimates.
After trading on Thursday, the company reported a first-quarter revenue of $2.24 billion, up about 28% from a year earlier. Meanwhile, profit attributable to shareholders surged 162% year on year to $188 million.
However, both figures missed LSEG mean estimates of $2.34 billion in revenue and $225.1 million in net income, as well as the company’s own forecasts.
During an earnings call Friday, an SMIC representative said the earnings missed original guidance due to “production fluctuations” which sent blended average selling prices falling. This impact is expected to extend into the second quarter, they added.
For the current quarter, the chipmaker forecasted revenue to fall 4% to 6% sequentially. Gross margin is also expected to fall within the range of 18% to 20%, compared to 22.5% in the first quarter.
Still, the first quarter saw SMIC’s wafer shipments increase by 15% from the previous quarter and by about 28% year-on-year.
In the earnings call, SMIC attributed that growth to customer shipment pull in, brought by changes in geopolitics and increased demand driven by government policies such as domestic trade-in programs and consumption subsidies.
In another positive sign for the company, its first-quarter capacity utilization— the percentage of total available manufacturing capacity that is being used at any given time— reached 89.6%, up 4.1% quarter on quarter.
“SMIC’s nearly 90% utilization rate reflects strong domestic demand for semiconductors, likely driven by smartphone and consumer electronics production,” said Ray Wang, a Washington-based semiconductor and technology analyst, adding that the demand was also reflected in the company’s strong quarterly revenue growth.
Meanwhile, the company said in the earnings call that it is “currently in an important period of capacity construction, roll out, and continuously increasing market share.”
However, SMIC’s first-quarter research and development spending decreased to $148.9 million, down from $217 million in the previous quarter.
Amid increased demand, it will be crucial for SMIC to continue ramping up their capacity, Simon Chen, principal analyst of semiconductor manufacturing at Informa Tech told CNBC.
SMIC generates most of its revenue from older-generation semiconductors, often referred to as “mature-node” or “legacy” chips, which are commonly found in consumer electronics and industrial equipment.
The state-backed chipmaker is critical to Beijing’s ambitions to build a self-sufficient semiconductor supply chain, with the government pumping billions into such efforts. Over 84% of its first-quarter revenue was derived from customers in China.
“The localization transformation of the supply chain has been strengthened, and more manufacturing demand has shifted back domestically,” a representative said Friday.
However, chip analysts say the chipmaker’s ability to increase capacity in advance chips — used in applications that demand higher levels of computing performance and efficiency at higher yields — is limited.
This is due to U.S.-led export controls, which prevent it from accessing some of the world’s most advanced chip-making equipment from the Netherlands-based ASML.
Nevertheless, the chipmaker appears to be making some breakthroughs. Advanced chips manufactured by SMIC have reportedly appeared in various Huawei products, notably in the Mate 60 Pro smartphone and some AI processors.
In the earnings call, the company also said it would closely monitor the potential impacts of the U.S.-China trade war on its demand, noting a lack of visibility for the second half of the year.
Phelix Lee, an equity analyst for Morningstar focused on semiconductors, told CNBC that the impacts of U.S. tariffs on SMIC are limited due to most of its revenue coming from Chinese customers.
While U.S. customers make up about 8-15% of revenue on a quarterly basis, the chips usually remain and are consumed in Chinese products and end users, he said.
“There could be some disruption to chemical, gas, and equipment supply; but the firm is working on alternatives in China and other non-U.S. regions,” he added.
SMIC’s Hong Kong-listed shares have gained over 32.23% year-to-date.
Close-up of a hand holding a cellphone displaying the Amazon Pharmacy system, Lafayette, California, September 15, 2021.
Smith Collection | Gado | Getty Images
Amazon is expanding its online pharmacy to fill prescription pet medications, the company announced Thursday.
The company said it has added “hundreds of commonly prescribed pet medications” to its U.S. site, ranging from flea and tick solutions to treatments for chronic conditions.
Prescriptions are purchased via Amazon’s storefront and must be approved by a veterinarian. Online pet pharmacy Vetsource will oversee the dispensing and delivery of medications, said Amazon, adding that items are typically delivered within two to six days.
Amazon launched its digital drugstore in 2020 with the added perk of discounts and free delivery for Prime members. The company has been working to speed up prescription shipments over the past year, bringing same-day delivery to a handful of U.S. cities. Last October, Amazon set a goal to make speedy medicine delivery available in nearly half of the U.S. in 2025.
The new pet medication offerings puts Amazon into more direct competition with online pet pharmacy Chewy, as well as Walmart, which offers pet prescription delivery.
Amazon Pharmacy is part of the company’s growing stable of healthcare offerings, which also includes One Medical, the primary care provider it acquired for roughly $3.9 billion in July 2022. Amazon’s online pharmacy was born out of the company’s 2018 acquisition of online pharmacy PillPack.
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