Frontier Technology. What is it really? It’s technology that lives at the intersection of what is disruptive and cutting edge for a society. 💥 For us @ Scout, this type of technology offers solutions to commercial industries and national security initiatives that reshape the status quo. The caveat here is that these emerging, deeply complex technologies inherently carry an immense amount of investor risk. The lack of experience in these new fields, combined with the exotic nature of the technologies, exponentially steepen the risk curve. 📈This makes managing frontier risk a unique and difficult problem for the typical VC investor.
Now insert Scout Ventures into the equation. The core investment team, composed of solely Service Academy Graduates, 🪖 has not only spent years of service understanding the unique challenges within the military, but has spent time pushing frontier technology as investors, working closely with the Department of Defense, Intelligence Agencies, National Laboratories, and a collaborative veteran network within venture, to position technology that will bolster America’s national security. 🇺🇲 In addition, our unique access to non-dilutive capital sources equip us well to handle frontier risk.
For example, a quantum computing company may require $5M+ in Research and Development capital before it has a chance of introducing a product to the market. In contrast, a SaaS company may be able to get to market with only 50K-150K of capital. The intensive capital structure coupled with the long and often extended timelines doesn’t sit well with most investors who are looking to turn a quick profit on the next big SaaS IPO. These vast differences in early stage capital investment philosophy creates an amazing opportunity for firms that excel in the asymmetric risk reduction associated with frontier tech.^Scout
The problems facing our country and the world are hard. A solution requires a sustained investment strategy that includes significant amounts of both time ⏲️ and money 💸. Therefore, one of the most effective ways to mitigate the risk of commercializing cutting edge frontier technology is through the deployment of non-dilutive capital. Non-dilutive capital includes grants, credits, and awards without requiring equity in return, therefore providing resources to early stage companies without diminishing common or preferred ownership stakes.
Let’s not forget that the United States government continues to be the largest supporter of pushing technological innovation, being the largest funder of research and innovation for the last 70 years. 🦾 To put their involvement into perspective, the government catalyzed the innovation behind GPS, the internet, and cellular communications 🛰️ when those were on the frontier of national security. Today the government’s contribution to research and development continues to expand at record rates with a focus on critical technology areas such as:
-Artificial Intelligence and Machine Learning
-Microelectronics
-Quantum Computing (and its direct application in cybersecurity)
-Next Generation Communications
-Space Tech and more!
In the last six years, the requested DoD budget for Research, Development, Technology, and Evaluation (RDTE) has grown by over 57% to $130.1B, with a $16.5B allocation towards Science and Technology. These budget increases will increase the amount of non-dilutive capital available for new innovators. And by helping investors pick up the tab, government funding helps startups strike a balance between commercial imperatives and achieving technological breakthroughs.
At Scout, we pride ourselves on providing our founders access to non-dilutive funding to help support our mission of making the world 🌎 a better, safer place. How do we do this? Through three factors: 1) sourcing opportunities for funding, networking founders to key decision makers, and writing letters of support, 2) identifying companies progressing towards commercialization through key milestone achievements, and 3) identifying emerging opportunities through conversations with organizations responsible for grant writing.
Within Fund III, 68% of our portfolio companies accessed non-dilutive capital and were awarded, in total, over $50M+ with an average non-dilutive capital to equity invested ratio of 2:1. In some cases, like with our Quantum portfolio company UbiQD, they received 3.6X the investment amount in non-dilutive capital from NASA and the Department of Defense. This direct access to non-dilutive capital incentivizes founders to work on new solutions to increasingly difficult problems by ensuring they can capture the asymmetric upside if they’re successful, while mitigating the time or budgetary constraints of purely public or private financing.
American Innovation and the next big national security breakthroughs are living in these frontier technologies. While these advanced technology startups have the steepest risk profile for investors, we’re excited to support their innovation by mitigating frontier risk and spurring traction that’s productive for our investors and country. 🎤^ mic drop
