I had the opportunity to gather some experience in defense M&A myself, and I can honestly say that Anduril's success is remarkable, especially with their fast-growth strategy. If their relations with the DoD reduce the immense workload associated with approval processes and legal issues, it's an absolute cheat code in this industry. Thanks for sharing!
Great read. Anduril’s vision for the future is getting proved out in conflicts like Azerbaijan/Armenia and Russia/Ukraine. Having a lot of sophisticated but relatively inexpensive weapons is where militants can see asymmetry. Do you think a larger company (like of on the primes) could view Anduril as an acquisition target?
We’ll agree with Packy that it is a good question. We’ve dived into exit strategies for DefenseTech companies a few times over the years. At this point, we think Anduril is getting too big to be acquired. Probably the best ‘comp’ for this sort of company is Maxar which was acquired for $6.4B… Anduril is almost 3x that size, already and growing!
Really, a DefenseTech startup that wants to be acquired should probably find the off-ramp before hitting multi-billion dollar valuations…. But that’s just our thoughts.
You can read some more of our thoughts on the topic at:
Anduril seems focused on platforms, but what Ukraine has exposed is that the US and EU lack fundamental military industrial supply capacity.
Fancy drones and what not are great, but do not replace nor substitute for sheer volume of artillery shells, or anti air defense systems, or enough missiles to bombard Ukraine pretty much every day. It isn't even clear that the US has sufficient dumb aerial bombs and basic air to ground missiles to combat a peer adversary. In particular, it is clear that Russia alone is outproducing the US and EU today at least 6 to 1 in artillery shells - and that this ratio will only slightly contract even going forward to optimistic projections going into 2025.
The cost on the Russian side is a small fraction of this - well below adjusting for purchasing power parity differences.
Nor is this the only area: the Patriot Pac3 costs over $4 million per missile. Russian air defenses, much less the missiles that the Pac3 would be defending against, cost a tiny fraction.
Given this: is what Anduril doing truly critical to US or Western military strategy?
Creating ever more complex and expensive systems is exactly what the Western military industrial complex has been doing for the last 30+ years.
What Anduril is doing is the opposite of "creating ever more complex and expensive systems." The idea is that they can build a bunch of cheaper, easier to manufacture, attritable hardware that gets better capabilities by being part of the system of other cheaper, easier to manufacture, attritable hardware. Obviously need more shells / better manufacturing overall. Read that Moneyball Military piece I linked if you haven't.
I did read it - the problem is that the "Moneyball" comparison is valid only for comparisons within the existing US/EU military industrial complex system.
The costs and use cases of the examples are still extremely high vs. what Russia, China and other nations are deploying in the form of their own developed equipment. This is why I used specific examples showing actual costs as opposed to relative. Ultimately, anything is going to look "cheap" compared to literally 6 and 7 digit deployed systems that the US presently relies on, but it still doesn't mean that the result is optimal.
Or to go back to your Moneyball comparison: The Oakland A's might be one of the cheapest teams in Baseball but they are still deploying multi-million dollar stars and are a franchise worth over a billion dollars, but that is only in comparison with literally 99% of the sports franchises in the entire sports world. Furthermore the A's success is relative: the reality is that the high spending teams in MLB absolutely do better, overall, than the A's do, and this is because of the MLB focus on competitiveness via a luxury tax, biasing of draft picks and so forth.
The same situation does not exist in the real world of sovereign military power.
Inspired by Packy's analysis of Anduril M&A, I whipped up a detailed update on the state of Defense M&A. I argue that the VC-backed entrants are largely not ready for acquisitions, but that PE-backed growth-stage companies are ready to expand into more domains, while incumbents need to shore up supply chain weakness.
I worked in the trenches of SBIR, diving deep into solicitations and carving out competitive Phase I/II/III grants.
One thing to explore further is how Crossing the Valley of Death might be re-defined and become easier in the coming future if M&A activity in defense stays robust, Anduril included. Previously, Crossing the Valley meant obtaining stable profitability from the government alone. Speaking with veterans and defense tech founders, many see integrating their product via acquisition into an Anduril as a viable way to realize their dream.
I’ve also seen a software-first approach in defense tech is a trend not exclusive to Anduril and has grown out of the Palantir playbook: Vannevar Labs, Picogrid, Nominal, Hazel, ScaleAI, and plenty of other startups exploding with a NatSec business wing.
Exciting times! Anduril is a great case study into how some disruption appears to be hitting the big primes.
Great read, @Packy McCormick! Anduril is a class-defining company and has helped paved the way for many defense tech startups to find ways to provide innovative tech to DoD (and Allies & Partners). We’ve previously suggested that ‘Primes’ should consider outsourcing their R&D to defense tech startups that can then be rolled into the prime through M&A.
An interesting part of defense M&A strategy is not just acquiring companies, but also existing contracts with the DOD. Those contracts are often multi-year and can be used to push products from other Divisions.
I had the opportunity to gather some experience in defense M&A myself, and I can honestly say that Anduril's success is remarkable, especially with their fast-growth strategy. If their relations with the DoD reduce the immense workload associated with approval processes and legal issues, it's an absolute cheat code in this industry. Thanks for sharing!
Thanks for reading, Martin!
Really fascinating to read about the military purchase process. Like this real world angle you’re taking my guy.
something to this whole real world thing...
:) at the end of the day, it's all that matters.
Great read. Anduril’s vision for the future is getting proved out in conflicts like Azerbaijan/Armenia and Russia/Ukraine. Having a lot of sophisticated but relatively inexpensive weapons is where militants can see asymmetry. Do you think a larger company (like of on the primes) could view Anduril as an acquisition target?
It's a good question ... I have to imagine they've thought about it but I'm sure it would be very challenging to get done.
We’ll agree with Packy that it is a good question. We’ve dived into exit strategies for DefenseTech companies a few times over the years. At this point, we think Anduril is getting too big to be acquired. Probably the best ‘comp’ for this sort of company is Maxar which was acquired for $6.4B… Anduril is almost 3x that size, already and growing!
Really, a DefenseTech startup that wants to be acquired should probably find the off-ramp before hitting multi-billion dollar valuations…. But that’s just our thoughts.
You can read some more of our thoughts on the topic at:
https://buildingourfuture.substack.com/p/hey-weve-got-a-problem-here
and
https://buildingourfuture.substack.com/p/military-monday-more-about-roll-ups
Anduril seems focused on platforms, but what Ukraine has exposed is that the US and EU lack fundamental military industrial supply capacity.
Fancy drones and what not are great, but do not replace nor substitute for sheer volume of artillery shells, or anti air defense systems, or enough missiles to bombard Ukraine pretty much every day. It isn't even clear that the US has sufficient dumb aerial bombs and basic air to ground missiles to combat a peer adversary. In particular, it is clear that Russia alone is outproducing the US and EU today at least 6 to 1 in artillery shells - and that this ratio will only slightly contract even going forward to optimistic projections going into 2025.
Even disregarding the sheer numbers - the economics are also striking. The outproduction is not only in numbers but in cost. This article notes EU artillery shells cost from 2000 to 3300 euros in fully depreciated, low capacity peacetime terms: https://www.technology.org/2023/01/05/how-much-do-155-mm-artillery-rounds-cost-now-and-how-many-are-fired-in-ukraine/
The cost on the Russian side is a small fraction of this - well below adjusting for purchasing power parity differences.
Nor is this the only area: the Patriot Pac3 costs over $4 million per missile. Russian air defenses, much less the missiles that the Pac3 would be defending against, cost a tiny fraction.
Given this: is what Anduril doing truly critical to US or Western military strategy?
Creating ever more complex and expensive systems is exactly what the Western military industrial complex has been doing for the last 30+ years.
What Anduril is doing is the opposite of "creating ever more complex and expensive systems." The idea is that they can build a bunch of cheaper, easier to manufacture, attritable hardware that gets better capabilities by being part of the system of other cheaper, easier to manufacture, attritable hardware. Obviously need more shells / better manufacturing overall. Read that Moneyball Military piece I linked if you haven't.
I did read it - the problem is that the "Moneyball" comparison is valid only for comparisons within the existing US/EU military industrial complex system.
The costs and use cases of the examples are still extremely high vs. what Russia, China and other nations are deploying in the form of their own developed equipment. This is why I used specific examples showing actual costs as opposed to relative. Ultimately, anything is going to look "cheap" compared to literally 6 and 7 digit deployed systems that the US presently relies on, but it still doesn't mean that the result is optimal.
Or to go back to your Moneyball comparison: The Oakland A's might be one of the cheapest teams in Baseball but they are still deploying multi-million dollar stars and are a franchise worth over a billion dollars, but that is only in comparison with literally 99% of the sports franchises in the entire sports world. Furthermore the A's success is relative: the reality is that the high spending teams in MLB absolutely do better, overall, than the A's do, and this is because of the MLB focus on competitiveness via a luxury tax, biasing of draft picks and so forth.
The same situation does not exist in the real world of sovereign military power.
Inspired by Packy's analysis of Anduril M&A, I whipped up a detailed update on the state of Defense M&A. I argue that the VC-backed entrants are largely not ready for acquisitions, but that PE-backed growth-stage companies are ready to expand into more domains, while incumbents need to shore up supply chain weakness.
Full piece: https://austinegray.substack.com/p/deal-flow-dinner
I worked in the trenches of SBIR, diving deep into solicitations and carving out competitive Phase I/II/III grants.
One thing to explore further is how Crossing the Valley of Death might be re-defined and become easier in the coming future if M&A activity in defense stays robust, Anduril included. Previously, Crossing the Valley meant obtaining stable profitability from the government alone. Speaking with veterans and defense tech founders, many see integrating their product via acquisition into an Anduril as a viable way to realize their dream.
I’ve also seen a software-first approach in defense tech is a trend not exclusive to Anduril and has grown out of the Palantir playbook: Vannevar Labs, Picogrid, Nominal, Hazel, ScaleAI, and plenty of other startups exploding with a NatSec business wing.
Exciting times! Anduril is a great case study into how some disruption appears to be hitting the big primes.
Writing about Anduril is definitely on my short list.
Great read, @Packy McCormick! Anduril is a class-defining company and has helped paved the way for many defense tech startups to find ways to provide innovative tech to DoD (and Allies & Partners). We’ve previously suggested that ‘Primes’ should consider outsourcing their R&D to defense tech startups that can then be rolled into the prime through M&A.
https://buildingourfuture.substack.com/p/hey-weve-got-a-problem-here
The rubber meets the road here. This article is right on time. Thank you so much.
An interesting part of defense M&A strategy is not just acquiring companies, but also existing contracts with the DOD. Those contracts are often multi-year and can be used to push products from other Divisions.