Should Your Tech Company Enter The Defense Market? Key Considerations To Weigh

“WASHINGTON TECHNOLOGY” By Erik Swabb, Matthew Olsen and Stephanie Evans

“The defense market offers an opportunity for significant commercial upside due to the geopolitical developments driving up demand. Companies that carefully evaluate the various factors at issue early—and establish robust compliance and contracting strategies—will be in a position to succeed.”

_________________________________________________________________________________

“The surge of capital in defense technologies has created unprecedented opportunities for commercial companies to do business with the U.S. government and its allies abroad, notwithstanding the federal government shutdown.  For dual-use companies that have technologies with both commercial and defense applications, selling to the government and the broader defense market can add to and diversify revenue streams, foster relations with key government officials, and provide a strategic advantage in the marketplace.

But going this route also introduces new challenges, including different business models, compliance obligations, and investor dynamics. 

In light of these opportunities and challenges, we have identified five key considerations that companies with dual use technologies should keep in mind when deciding whether to enter the defense market.

Understanding the Business Model for Defense Sales

Success in the defense market depends in critical part on a deep understanding of the complex defense acquisition system.  Direct sales to the government generally require gaining traction with three key players: the end user (e.g., the soldier on the frontline who uses the product), the buyer (e.g., the government officials who award contracts), and Congress, which provides the requisite authorities and appropriates the necessary funds to purchase the product/service. 

In this system, acquisition decisions hinge on more than the factors that drive commercial sales where these three players are typically merged into the customer.  Companies need to invest in expertise to understand the complex acquisition process and how to translate commercial innovation into mission solutions that both address defense needs and gain traction with these key players.

Mission Alignment and Organizational Readiness

Entering the defense sector requires internal alignment about working on national security missions and a willingness within the company to operate in a highly regulated environment.  Companies should assess whether key stakeholders—leadership, employees, customers, and investors—would support such work.  Consensus with these stakeholders can help avoid misunderstandings later (e.g., cost and revenue growth expectations) that lead to business challenges.

Compliance as a Business Enabler

Defense contracting often introduces new compliance requirements, such as procurement integrity, export controls, cybersecurity, supply chain risk management, and ethics rules.  Selling to the government may also restrict who can invest in and work at the company.  Complying with these obligations can be burdensome and costly but is necessary to mitigate the regulatory risks associated with doing business in the defense market.

Capital and Investor Considerations

The defense market typically operates on a much slower revenue cycle than venture-backed commercial enterprises are used to.  Companies should assess whether existing investors understand the government contracting timeline and are willing to accept longer return-on-investment horizons.  While the growth of defense-focused VC funds has eased this challenge, alignment between company leadership and sources of capital remains critical.

Strategic Tradeoffs and Long-Term Implications

Selling to the U.S. government can foster relations with key officials, build credibility with customers and investors, and validate technology, among other benefits.  At the same time, entering the defense market can result in export restrictions and limit global market flexibility, in addition to increasing costs due to, for example, regulatory compliance.  Companies should consider how building a government sales business fits into their long-term commercial strategies.

The defense market offers an opportunity for significant commercial upside due to the geopolitical developments driving up demand.  But entering this market often demands commitment, patience, and flexibility, as well as a company-wide desire to contribute to the national defense of the United States and its allies.  Companies that carefully evaluate the various factors at issue early—and establish robust compliance and contracting strategies—will be in a position to succeed.”

Should Your Tech Company Enter The Defense Market? Key Considerations To Weigh

ABOUT THE AUTHORS:

WilmerHale Partner Erik Swabb’s practice focuses on high-stakes investigations and regulatory counseling related to defense, national security and government contracting. He conducts internal investigations and has successfully resolved inquiries by federal inspectors general, the Department of Justice, the Department of Defense, the Department of the Treasury, Congress and other government entities.

Matthew Olsen is a WilmerHale partner and co-chair of the firm’s Defense, National Security and Government Contracts Practice. As an internationally-recognized leader on national security law and policy, he advises clients navigating a wide range of legal and business risks when operating in complex legal, regulatory, and geopolitical national security environments.

Stephanie Evans, a WilmerHale partner, advises domestic and international clients on a wide range of corporate transactions, with a particular focus on mergers and acquisitions, joint ventures, strategic alliances and financings.