Close partnerships between the Department of Defense (DOD), universities, and technology manufacturers in and around World War II led to the rise of companies like Lockheed Martin and Raytheon. However, at the turn of the century, the sentiment toward working in defense changed. In the early 2000s, technology companies had little incentive to work with the DOD. Increasingly, tech talent pursued other endeavors, and working in the defense industry became more taboo.

In 2023, escalating geopolitical tensions led to increased demand for advanced defense technologies in the US. The Ukraine and Russia conflict, paired with rising tensions with China, has highlighted the importance for the US to avoid getting left behind when it comes to defense technology. In 2022, US defense spending increased by $71 billion, to a total of $877 billion. Increased spending, coupled with escalating global conflict, has led to a substantial growth in VC interest in the defense sector. The number of defense tech investments rose from 60 in Q4 ‘22 to 89 in Q1 ‘23. VC funding in the defense sector has been higher over the last three years than the previous ten years combined.

Rising global conflict and increased demand for the modernization of defense systems in the US have changed both investor appetite and general sentiment. As more people have opted to work in building defense technology, and the US government has committed more funds for advanced technology, new opportunities have arisen. One of the biggest opportunities is making sense of the massive amount of data that is being collected by the Defense Department.

Vannevar Labs is a company that provides defense and national security technologies for critical national security problems. Vannevar Labs' flagship software, "Decrypt", is a foreign text workflow platform that helps intelligence officers find patterns and insights in vast amounts of battlefield information, translate foreign languages, and search for key documents. The company was named after Vannevar Bush, an American engineer and science administrator who played a key role in the development of the Manhattan Project and the creation of the National Science Foundation, among other notable achievements. The company's goal is to use technology to solve some of the most important national security problems facing the US.

Source: DFJ Growth

Vannevar Labs was founded in 2019 by Nini Hamrick (President) and Brett Granberg (CEO) while both were in business school at Stanford University.

Hamrick was drawn to public service early on because of her family. Her grandfather had served in the military and public office and her father was a US attorney focused on criminal prosecutions. Hamrick took an interest in national security after the September 11th attacks where she saw the effects on people in her life who had worked at the Pentagon and World Trade Center. After graduating from Harvard, Hamrick had a seven-year career in government. She worked on counter-terrorism missions for both the DOD and the Office of the Director of National Intelligence. Hamrick explained her decision to leave government this way:

Granberg’s grandfather lost an older brother in World War II and his grandmother grew up in Scotland at a time when she was taught to run to her elementary school in zigzags to avoid bombings from German planes. Growing up, Granberg always felt the need to do more for people who were experiencing trauma similar to that of his grandparents, as he explained this way:

After three years at McKinsey, focused on aerospace and defense, Granberg spent two years at In-Q-Tel, the venture capital arm of the CIA, before starting at Stanford business school in 2018.

As a former Intelligence officer and former intelligence investor, Granberg and Hamrick connected immediately while at Stanford over their shared focus on having an impact in the intelligence space. As the pair began to come up with ideas, the first use case they wanted to solve was a specific problem in counterterrorism intelligence—Arabic language data that was stored in different formats. The genesis for this initial focus came, in part, from personal experience Hamrick had in counterterrorism.

As of August 2023, Vannevar Labs has ~80 employees with backgrounds across military, intelligence agencies, large tech companies like Amazon and Apple, and other well established defense tech start-ups like Anduril and Palantir.

Vannevar Labs builds computer vision and natural language processing products for use in security and defense. Vannevar Labs software provides battlefield information to allies, identifies threats, and is intended to help the US deter and deescalate conflict. At its core, Vannevar Labs aggregates previously inaccessible and incoherent data and applies a real-time intelligence layer to translate and surface insights for an array of government customers.

Originally, Vannevar Labs was focused on an Arabic OCR (optical character recognition) problem. However, the company found that this product was over-optimized for a non-urgent issue that was winding down in importance. As less resources were being spent on counterterrorism, there became less need for the product. However, the lessons that resulted from building for this specific problem laid the groundwork for what would become Vannevar Labs’ next product, Decrypt.

Source: The United States Patent Office

Decrypt

Vannevar Labs’ flagship product is Decrypt, a software platform that helps intelligence officers find patterns in vast amounts of battlefield information, translate foreign languages, and search for key documents. Decrypt launched in January 2021 to collect and process foreign language text data with a UI that enables users to quickly interpret the data.

Early on, Vannevar Labs suspected that the use case for Decrypt was becoming a top three problem across DOD, resulting in high urgency from the DOD to procure services to solve it. Vannevar Labs launched an initial beta with the primary feature being the search for a singular, small data source. Despite the limited functionality, the high urgency of demand enabled Vannevar Labs to be able to deploy it quickly, gain traction, iterate, and expand adoption.

Source: Vannevar Labs

Decrypt is designed to drive military and foreign policy decision-making. The product reads and digests script-based languages which are typically hard to read and may often be handwritten. This is intended to enable government partners to understand and respond to foreign actors with greater speed, accuracy, and efficiency. Decrypt has been used by various agencies and military branches; for example, the US Air Force uses Decrypt to analyze technical documents about Russia's anti-aircraft systems.

Vannevar Labs’ products are designed to have intuitive and collaborative interfaces. This is in contrast to manual methods for data collection and synthesis or legacy solutions provided by incumbent defense primes. Vannevar Labs’ agile product development process involves deploying minimal viable products with government clients, testing, and tailoring features to the specific needs of the client. This has proven to be effective in building quality software for the DOD. Using this process, Vannevar Labs was able to convert a $25K pilot to a $1.3 million contract in ~4 months.

Customer

Vannevar Labs' end user profile primarily consists of military service members and intelligence officers. The company's products have been deployed in various US military bases worldwide. Customers use the Decrypt product to provide battlefield information for allies in war zones. The US Air Force is one of more than a dozen government customers currently using the Decrypt product. The Air Force’s specific use case for Decrypt was to analyze technical documents about Russia's anti-aircraft systems.

Selling to government customers can be challenging, especially for startups with limited resources and lacking a track record. The process of understanding the pain points of service members and intelligence officers is complex and time-consuming, with approval to test a product often taking months. On top of that, 70% of the U.S. government’s IT budget is spent on maintaining legacy systems — perpetuating a situation where a small number of incumbents dominate. Although, any startup working to procure government contracts needs to generate a level of excitement among customers greater than that of the status quo. The value proposition of Vannevar Labs’ Decrypt product is that it eliminates labor-intensive, manual processes and expands what is possible.

Market Size

The defense tech market is a substantial and growing industry driven by government spending. In the 2023 fiscal year, total national defense spending was projected to reach more than $813 billion. Of its 2022 budget, the US Department of Defense allocated approximately 44% ( ~$344 billion) to contractors.

Source: Bloomberg Government

The defense tech market in particular is expected to reach $184.7 billion by 2027 and is growing at a CAGR of 15.9%. This growth is fueled by the government's increasing demand for innovative technologies to meet national security goals. Within defense tech, the market for AI capabilities in the military is set to expand from $9.2 billion in 2023 to $38.8 billion by 2028 with a CAGR of 33.3% during the forecast period. Although small compared to the broader DOD spending, this is one of the fastest-growing segments in the defense department.

Competition

Defense-Focused AI and ML Startups

Primer: Primer, founded in 2015, is an AI/ML technology company specializing in AI-powered data analysis. Its products can parse, analyze, and search large volumes of data and documents across several languages, allowing Primer to improve time to identify threats via social and news media and to accelerate mission planning and asset tracking. In June 2023 it announced a Series D round where it raised $69 million. Primer has raised $237 million in total funding to date from investors like Lux Capital, DCVC, and Avalon Ventures. Vannevar Labs is uniquely focused on foreign text workflows whereas Primer is focused on enabling others to customize their own AI capabilities.

Rebellion Defense: Rebellion Defense was founded in 2019 to build mission-focused AI and ML software tools to solve defense challenges for the government. Unlike Vannever Labs, which has focused on one individual product, Rebellion Defense’s product suite includes three products, Iris, Dispatch, and Nova. The product suite’s functionality includes synthesizing different types of collected intelligence data using AI to understand threats, acting as mission planning software to accelerate the execution of military operations, and uncovering security weaknesses in missions and systems. It raised a $150 million Series B in September 2021 led by Insight Partners and Venrock which valued the company at $1 billion.

Accrete AI: Accrete AI was founded in 2017 and specializes in natural language processing (NLP) and ML technologies for both commercial and defense applications. Its core product, Argus, is a source threat detection AI software agent which secured a multi-year contract with the DOD in 2022. Accrete AI has raised a total of $29.3 million over six rounds of funding. The Argus product is based on content on the open-source web, rather than harder-to-access, high-leverage sources that Vannevar Labs focuses on.

Incumbent Defense Primes

Raytheon: Raytheon was founded in 1922 and serves customers in the commercial aerospace and defense industries in a variety of ways—namely through the operation of its subsidiaries. In 2022, Raytheon was the second biggest defense contractor in the US. It has built an extensive product list of products that transform unstructured content into useful analysis, which would be considered competitive with Vannevar Labs.

Source: Raytheon

Northrop Grumman Corp: Northrop Grumman Corp, founded initially in 1939 and taking its current form in 1994, builds and sells advanced weapons, including aircraft, next-generation space systems, and cybersecurity solutions. In 2022, It was the fifth-largest defense contractor in the US. According to its website, it does have AI and ML applications specifically for intelligence use cases, with specific threat detection products that have already secured sizeable government contracts.

Vannevar Labs operates on a business model primarily focused on procuring government contracts from the DOD as a source of revenue. The company's sales cycle typically involves conducting pilots, demonstrating the product, and ultimately securing a contract. This sales cycle can be a 6-12 month process, and for new contractors, it typically takes at least 18 months of planning before a government contractor wins their first contract.

Vannevar Labs is focused on high-urgency problems, allowing it to go to market more quickly than someone focused on non-urgent problems that may also require more lobbying. Its first Decrypt sale was for a ~$25k, three-month pilot with four users that occurred shortly after it was demoed. In real time, Vennevar Labs improved Decrypt to take over more and more of their workflow, which let it convert the $25K pilot to a $1.3 million contract in ~4 months.

Instead of relying solely on government funding for R&D costs, Vannevar Labs takes on R&D risk by investing its own funds into developing new products. The company has successfully attracted private funding: every dollar invested by the DOD it has been able to attract more than three dollars of private funding for further product development. While its specific pricing structure is not publicly available, the major costs associated with Vannevar Labs' business include product development, conducting pilots, testing, and security and compliance.

Vannevar Labs has begun to garner industry recognition and customer usage across the DOD. The company’s products have delivered significant mission wins, fostering enthusiasm and driving increasing demand among users who rely on it for daily intelligence and mission planning. The company's solutions have been successfully deployed across 15 military bases worldwide. , Vannevar Labs’ financial milestones include having reached $25 million in revenue and attaining profitability as of January 2023. Additionally, the company was featured on Forbes' list of the top 50 AI companies in April 2023.

Vannevar Labs’ latest round of funding as of August 2023 was a $75 million Series B in January 2023, which valued the company at $575 million. This brought the company’s total funding to $87 million. Notable investors include Felicis, General Catalyst, Point72 Ventures, and Costanoa Ventures. Its valuation as of its Series B implies an estimated 23x multiple on the reported $25 million revenue produced by Vannevar Labs in 2022.

As a sector, defense tech startups raised $135.3 billion from 2016 to 2022 across 4.7K deals according to Pitchbook. During the first half of 2023 large defense primes like Raytheon, Northrop saw valuations decline by 3.9% and 16.1% respectively in the public markets. This is compared to a 14.1% gain in the S&P 500 as of June 2023. Palantir is the only US-based, publicly-traded, software-focused defense tech company that had seen a 180% gain during the first half of 2023. However, it has yet to return to its 2021 peak of $35.20 a share.

Source: Koyfin

Geopolitical Tensions Driving Demand

Escalating geopolitical tensions have led to increased demand for advanced defense technologies with global military expenditure rising 3.7% to $2.2 trillion in 2022. Similar expansion of DOD spending creates the opportunity for Vannevar Labs to extend and grow existing contracts while also expanding its product line to service the new and changing government demand.

Source: Statista

Expansion into Hardware

Vannevar Labs may have an opportunity to vertically expand into hardware as it continually expands its product catalog. Anduril, as an example, strategically built both software and hardware product because it wanted to own more of the outcomes and shape its own destiny. In only five years subsequent to this, Anduril has managed to develop a wide range of innovative software and hardware assets and has been effective in securing government contracts.

Talent Acquisition

In 2023, Silicon Valley has seen a shift towards greater support for defense tech companies. As a result, it has become easier to acquire high-quality talent. As layoffs from tech companies continued in 2023 and the defense sector expands its spending and investment, there is an opportunity for defense tech startups to pick up talented engineers to expedite product development.

New Product Risk

Go-to-market for defense tech companies requires meaningful funding, familiarity with existing military force structure, testing and certification requirements, and an intimate understanding of the DOD's unique operational requirements. The DOD needs constant vendor support to maintain the product for its entire life cycle. This has historically skewed contracts towards a handful of established defense companies.

Given this dynamic, any new product that Vannevar Labs launches, as it looks to expand its product ecosystem, will be subject to the arduous sales process of the DOD and be forced to beat out the large, legacy defense primes. Effectively, any new product launch comes with risk for Vannevar Labs as the DOD may or may not adopt it. Even if it wins a pilot contract, the potential for churn exists when working to convert a single-year contract to a multi-year contract. In the world of VC-backed defense tech, VC funding is raised after contracts are secured, so failing to secure a multi-year contract after the first year can negatively valuation, forward-looking financial metrics, and future ability to raise funding.

Limited Data to Build Efficient Models

Commercial AI algorithms require a lot of data paired with examples of what to do and what not to do in order to perform specific tasks. Defense AI applications rarely have access to breadth and depth of data when compared to commercial models. With limited data, poorly defined environments, and unreliable communications, AI for defense is forced to do more with less. For Vannevar Labs and any other defense tech startup, getting access to enough quality data to build effective models is a significant technical risk.

Security and Privacy Risk

When dealing with mission-critical and highly sensitive data, especially as a startup, Vannevar Labs is at risk of data breaches and attacks. To address this risk it must put robust security measures in place to protect against cyber threats, data breaches, and unauthorized access — obviously this is already a requirement for government contractors. Maintaining data privacy and complying with relevant data protection regulations is of the utmost importance when dealing with classified, mission-specific data. Unlike consumer-facing big tech data breaches, of which there are many, should a defense tech company have classified information stolen, it would be a much more significant issue.

Startups building products for the defense sector are growing in number, value, and importance as geopolitical tensions escalate across the world. Vannevar Labs has enabled intelligence officers to comprehend, target, and respond to foreign entities through the use of AI that is designed specifically for the sector. Although still early, the company has managed to attract high-quality talent, demonstrate usage across agencies and groups, and had early success in securing government contracts. The next phase of the company’s life cycle will be tested with its ability to produce an entire product ecosystem and with its ability to extend single-year contracts to multiple years. As it is clear that AI and ML solutions are becoming more important for national security and intelligence, Vannevar Labs is well positioned. However, it has significant work to do in order to gain meaningful market share in the constantly evolving space.