Starter Funding The Path To National Prosperity

Past stories covered the state of venture capital investments in AI and DevOps security, but there’s a growing adjacent space investors should watch that extends security to national prosperity. Since the eponymous Marc Andreessen noted the need to increase funding for these companies in his 2020 blog, Time to Build, more startups have answered the call. These businesses cover tremendous range. They take the form of companies that shore up our civic infrastructure, enable our military to better compete, and fix supply chain issues from logistics to ensuring the security and integrity of software critical to government operations. 

Aaron Ishikawa is a General Partner and the Investment Team Lead at Aero X Ventures, a VC firm founded in 2021 to fund seed and series A rounds for startups in the civic infrastructure and national prosperity spaces. These companies build technologies often with dual uses in sectors like aerospace, energy, construction, and mining. The team has invested in 4 startups in 2023 and it anticipates investing in 10 more startups over the next year. 

What’s Aero X’s Mission? 

The goal is to identify and support innovative startups with the potential to create substantial value in their respective markets. The team provides each portfolio company with a comprehensive suite of services, including capital, strategic guidance, market intelligence, and access to a large network of industry contacts. Aero X supports founders with guidance from a specialized advisory board, industry connections, and advice around technology, innovation, regulatory landscapes, and government interfaces. 

Why Invest In “National Prosperity” Tech? 

These investments contribute to the nation’s security, and these technologies will transform both government and commercial markets. The consistent increases in defense funding and rapidly converging alignment between the needs of commercial and DoD organizations are driving unprecedented, industry-wide growth. That creates meaningful opportunity to support aerospace and defense sub-markets that are using technologies to solve difficult problems at scale. 

For example, aerospace and defense have a pressing need for solutions that gather and process actionable intelligence in large, dangerous or unpredictable environments to rapidly improve the efficacy of  Advanced Air Mobility (AAM), Robotics & Autonomous Systems (RAS), Smart Manufacturing and other adjacent sectors. These submarkets are growing rapidly. By 2030, AAM will be a $230 billion market (63.3% CAGR from 2022), $83 billion is an achievable target for RAS (26.4% CAGR from 2022), and Smart Manufacturing should hit $148 billion (16.6% CAGR from 2022). 

Investing in the defense sector is also more stable in that the sector tends to be more resilient in economic downturns since defense budgets are often planned years in advance. This provides a certain level of insulation from commercial markets.

Aren’t These Bits And Atoms Markets More Capital Intensive Than Regular SaaS, AI, Or Cyber Security Startups?

Deep tech startups tend to require more early capital for R&D, manufacturing, and regulatory compliance. They may also need significant investment in infrastructure and specialized labor. However, investors can mitigate these capital risks by prioritizing startups with scalable, market ready technologies that offer platform-agnostic solutions and possess defensible, step-change intellectual property.

Investing in defense tech startups can be costlier due to deep tech development hurdles and lengthy sales cycles and stringent security measures. However, the potential for substantial returns – driven by increasing global defense investment and dual-use technology opportunities – and the opportunities to shape technological innovation and contribute to national security make this an exciting and worthwhile investment arena.

What Companies Has The Team Funded To-Date?

The team has led the seed round for Vermeer, which provides vision-based navigation for GPS-denied spaces. In H1 2023, Aero X invested in Whisper Aero, Istari, and Exyn Technologies, companies poised to win big in stealth mobility tech, digital twins for agriculture and aerospace, and autonomous aerial systems for GPS-denied spaces. The team anticipates leading at least two series A investments in Q3 2023 alongside other deep tech and defense tech investors. 

What Should Founders Fundraising Now Consider? 

Venture capital fundraising is challenging, and while investors are still deploying capital in the sector, they’re more selective than they were in the past. This means that founders need to have a strong value proposition and a clear path to profitability.

Earlier stage companies will have an advantage because they’re fundraising with a clean sheet in terms of financing history. Companies that raised capital in the past few years may be attached to outsized performance expectations and valuations that no longer reflect their market value. Depending on how they’ve executed with that capital and positioned themselves for recent market shifts, they may find significant barriers to raising new capital.