Saturday, July 07, 2018

Defense Industry Adds Venture Capital to Its Arsenal: Industrial giants look to startups to bolster internal research

Boeing’s HorizonX venture arm has a portfolio that includes stakes in electric-airplane maker Zunum Aero, above, and in productivity software maker Upskill. 

The Wall Street Journal
By Doug Cameron
July 5, 2018 8:00 a.m. ET

Defense companies are looking beyond their own laboratories for the next technology breakthrough.

Long known for acquiring suppliers and spending big on research that might not pay off for years, Boeing Co., Lockheed Martin Corp. and others are now vying to invest in startups. Executives say they can no longer rely solely on their own researchers to outflank new drone, software and battery companies.

“We disrupt ourselves so someone else doesn’t disrupt us,” said Brian Schettler, managing director of Boeing’s HorizonX venture arm, which launched in April 2017.

The corporate venture-capital market has more than doubled over the past five years. American companies made more than 1,200 deals worth a record $34.3 billion in 2017, according to the National Venture Capital Association and PitchBook.

Aerospace and defense companies face stiff competition for deals. Alongside traditional players such as tech firms and drugmakers, a growing array of manufacturers—from power-tool maker Stanley Black & Decker Inc. to General Motors Co. —is sifting startups for technology that could ensure their future.

While a handful of industrial giants such as General Electric Co. and 3M Co. have long-established venture arms, these new entrants share a common focus on artificial intelligence, autonomous vehicles and other areas that could lead to new manufacturing processes and storage technologies, changing the way companies design and produce.

“There is an ongoing collision of the tech world with industrials,” said analyst Rob Wertheimer, at Melius Research LLC.

Boeing’s HorizonX arm announced eight deals this year, adding to a portfolio of investments that includes stakes in electric-airplane maker Zunum Aero and in Upskill, a productivity software company.

Lockheed in June doubled the size of its 2-year-old Lockheed Martin Ventures unit to $200 million with savings from recent changes to U.S. tax law. Like its competitors, Lockheed hopes to harvest technology from the companies it invests in for its own systems and platforms. In return, Lockheed executives say they can give leaders from small firms access to multibillion-dollar research into everything from missile systems to asteroid mining.

“Engineers love problems, and we have really great problems to work on,” said Chris Moran, general manager of Lockheed Martin Ventures and an engineer himself. “You see the gears in their heads turning.”

Defense executives first woke up to the threat that startups pose to their businesses in April 2016, when Elon Musk’s SpaceX won its first rocket-launch deal from the Pentagon—ending a decadelong monopoly for a Boeing-Lockheed joint venture.

Other companies say more mundane products have shaken their faith in their monopoly on good ideas.

Don Allan, Stanley Black & Decker’s chief financial officer, said the debut of internet-based home-security systems such as Nest and Ring raised concerns internally that such technology could threaten the company’s commercial-protection business. The two startups have since been acquired by Google’s Alphabet Inc. and Inc . , respectively.

Mr. Allan said the company gathered its business heads three years ago to identify other threats. They established a venture-capital arm that has made 13 deals, including two this year. The unit has invested in firms developing 3-D printing and security systems, as well as energy-storage systems that could alter the design of its power tools.

“We see now how fast batteries are changing,” Mr. Allan said.

Executives say such investments give their well-established companies an injection of entrepreneurial culture. Some startups say selling themselves to an industrial giant can have the opposite effect.

“Suddenly, I was one of a thousand lab coats,” said a former Lockheed executive whose small firm was acquired by the defense giant before it launched its venture arm.

For big companies, startup investments have a different success rate than the M&A or big equipment purchases that CFOs are used to analyzing.

Mr. Allan said he drew on advice from two former 3M executives who sit on Stanley Black & Decker’s board as the company developed its new venture-capital arm. That helped him prepare for one outcome of venturing that newcomers can find unsettling.

“3M wrote off half its ventures!” he said.

Original article can be found here ➤

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