Space, Defense, and Going to Market with DCVC's Matt O'Connell

Matt O'Connell is an operating partner at DCVC, a deep tech VC firm backing entrepreneurs using computational approaches to solve trillion-dollar problems.

What's your background and what led you to DCVC?

I failed as a musician in New York. I shared a practice loft with Blondie for a couple of years, decided I would go to law school, and found out that I liked mergers and acquisitions. I worked on Wall Street for a while and got involved early in the cable business. I left to be the M&A guy for Chuck Dolan, who started HBO, and helped him build a big cable empire. I realized I could never run the company because his son was going to do it, so I left and after a couple of hops ended up in venture capital at the end of the '90s.

In the summer of 2001, I found a broken satellite company. I was really fascinated that these satellites could take pictures from the sky. 9/11 occurred, and I became obsessed with the idea that you can look from the sky and see bad guys. Nobody else believed it was a sustainable business. Commercial earth observation was a failing industry at the time. So I started living in the Holiday Inn at Dulles Airport, trying to fix the company. I'd go down to Virginia, work all week and come back to New York. 

When the US went into Afghanistan, nobody knew where anything was. Our troops had to use Russian maps! So I built that company up over 10 years, took it public, and sold it for a billion dollars. It was a great American success story. We created a lot of jobs, we developed innovative ways to collect, analyze and distribute intelligence, we protected the environment, and along the way we made a lot of money for the investors and employees.

After that, I ran a satellite company called OneWeb. I had fundamental differences with the founder. I said if you spend at this rate, you'll go bankrupt. OneWeb did eventually go bankrupt, but I was long gone by then. They burned through about $3.5 billion in investor dollars. I then went into venture again with Seraphim Space, which only does space. Around 2020, I got recruited by DCVC, which is a great firm out in Palo Alto. One of the co-founders, Matt Ocko, recruited me. He said, what do you want to do? I said, can I do not just space but also defense tech investments? He said, of course! 

For those who aren't familiar, can you give a high-level overview of DCVC?

We're a mid-sized Palo Alto firm, managing around $5 billion across three main areas. Deep tech broadly is the biggest, along with biotech, and energy and climate. Deep tech ranges from classic networking and software to a lot of AI–but also to companies that use AI to solve hard physical problems in industries that have resisted change for decades. For that reason, I think we're regarded as one of the more active AI investors. 

We do cyber, where we had a big hit with SentinelOne. We've done networking, robotics, quantum, and intelligent transportation. We also do space. The name DCVC comes from Data Collective, so there is a strong preference for new ideas that use data and computation in creative ways to solve extremely complex problems with wide application. For example, intelligent cameras that can monitor forests in California for wildfires and then zoom in and say, I see smoke where there is normally no smoke.

Part of my role at DCVC involves serving as the chairman of a drone defense company called Fortem Technologies. A bad drone comes in, Fortem’s radar senses it, and we send a drone that can fire a net to catch the bad drone or can blow it up, depending on whether you're over a populated or unpopulated area, and whether you want to take the drone home to learn whose it is. Last week I got to sit next to the deputy commissioner of the NYPD who focuses on counterterrorism to talk about drones in urban situations. That's really cutting-edge stuff.

As an operating partner, my role is to help portfolio companies grow, by giving them operating advice or making strategic introductions. Some of it gets very sophisticated. There's a craze right now for data centers in space, for instance. People assume if you put a data center in space you don't have to worry about cooling because space is so cold. Well, that's not actually as easy an answer as it seems. And then some of my advice is pretty basic. In February I was giving a CEO guidance that, since it was February, he needed to have a comp plan for the year. You want to set the bar in February so that if people reach it, you shower gold on them. The advice I give ranges from the fairly obvious to the incredibly arcane.

You've been in the space industry for decades. When you look at the space economy today, what are you paying attention to?

Launch has always been interesting. A lot of people like launch because launch is fun. A rocket goes up, it's really cool. I had a launch in 2008 and invited the two founders of Google because the guy who started what became Google Maps was a friend. It was fun having Sergey Brin and Larry Page there. We're in Rocket Lab, which is doing very well. There's no question that SpaceX is a remarkable company, and it has made a lot of people rich. I'm not sure there's room for every little launch company that’s starting and I think the economics of small launch are challenging. One guy called me and said nobody's built a rocket launch company in his geographical area and he thinks it's a great idea because there's no competition. I thought, well, maybe there's a reason why no one wants to launch from there. As the saying goes, “If you want to fish, go where the fish are, there should be fish.”

There are areas within even the hot categories where you can still make money, though. I led the due diligence on Impulse Space, which was started by Tom Mueller. Tom was employee number one at SpaceX and ran propulsion there. After a legendary career, he started Impulse. The idea is you have a big SpaceX launch and inside it you have a smaller vehicle made by Impulse. SpaceX gets you to low Earth orbit and then Impulse takes you up to medium Earth orbit or to geostationary orbit. Impulse is growing fast.

I've been looking at inter-space laser links forever. When I was recruited to run OneWeb in 2015, in my interview I asked why they weren't doing inter-space links. They had a long answer. I said, I think what you're actually saying is that the founder designed a bus that's too small for links, and that maybe in a future generation you'll have to do it because I know Musk can do it. Communications in space is going to be very important and inter-space laser links will be crucial.

I'd also love to have somebody figure out how to make money cleaning up orbital debris. I was on the phone with one of the leading companies yesterday and I said, I applaud what you're doing. I'm just not sure who's going to pay, when they're going to pay, and how much they’ll pay. I've been on panels with other space investors where somebody asked, so you guys are in space because you love it? And they all said, yes. I said, no. I was able to build a billion-dollar company because nobody else was doing it, but to me a deal is a deal. I like space but I don’t invest in a deal just because it’s a space deal.  I happen to know a lot about space, but really what I’m looking for is a good deal. 

Space technology for defense and intelligence is clearly critical and it’s growing in importance. America needs faster missiles, cheaper missiles, and the capacity to build more of them quickly. This sounds a little hawkish, but there are big bad people in the world. The Chinese want to be number one. They'd be happy to have us be number two. The Russians have always wanted to destroy America. So we have to get our game on. I’m glad that there’s a strong recognition in America now that we have to get faster at producing all this stuff.

And drones have changed the world. Ukraine really opened a lot of eyes. I've been working on drones for five years. I actually agreed to go to Israel around 2002 and told them I'd come see their tech even though they were a relatively small customer for my satellite company, because they had better drones than America did and I wanted to learn about drones.

Everything is changing fast. Fortem Technologies, the company I'm chairman of, recently successfully executed one of the first autonomous drone swarm defenses. We did a five-on-five test, fully autonomous, and our drones took down the counter-drones. I haven't heard anybody else crowing about doing that. Think of the risk to stadiums, utilities, the White House, etc etc. I was sitting with the deputy commissioner for counterterrorism at the NYPD and I said, in addition to your job, you've got two little kids. How do you sleep at night? She said, I don't sleep a lot. But somebody has to worry about these things.

I'm glad there are a lot of tech people worrying about our national defense. There are a whole bunch of young guys in El Segundo revved up on Red Bull and coffee, thinking about what-if scenarios. It's a good thing. 

I think venture capitalists are better suited to the intelligence side of defense than the heavy production side. We can invest in the development of a missile, but producing hypersonic missiles at real scale takes a lot more capital. There's a role for venture and certainly a role for growth-stage capital/Private Equity. We can make the world safer.

Should venture capital be involved in defense tech? There's growing skepticism from some operators that VC-backed companies are producing nice toys rather than field-ready technology.

In any industry, you get a hot success and then a whole lot of followers. I was so early in Earth observation. I remember being told to go back to New York because no one would ever make money in the area. And then we sold for a billion dollars. Suddenly, instead of three Earth observation companies, let's have 100. A lot of investors are lemmings. You get the same thing with AI and you're getting the same thing in defense tech. Defense tech is having a moment, and every small company has to lean forward. But there's a difference between leaning forward and being “more hat than cattle”, and then there's flat-out false promises.

Unfortunately, that's happened a lot in Ukraine. People coming in and promising things they can't deliver. I regret that some people have done that. Some big names are often accused of selling vaporware. Now, at Fortem, the guys who started the company are mostly Mormons. I said to them last summer, you guys don't like to brag, do you? "Oh, no, Mormons don't brag." I said, yeah, that makes for a really bad sales guy. But one of these guys was a tinkerer. They built the first net-enabled drone literally in a conference room. And then when it came to explosives, I remember saying to the head of production, what would you do if you were king for the day? He said, I'd rip out the nets, put in a little explosive, and blow stuff up. That's kind of how little companies get started.

The investing public has changed. Europe has a very different attitude toward defense now than it did a few years ago, when European investors shied away from defense for historical reasons. Another challenge is that the market is moving incredibly fast. We all knew jamming was a big deal, but now it's a really big deal. 

The Russians realized they were getting outrun on the field, so they've ramped up innovation and are catching up. I said to the management of Fortem, you're in a tough situation because the product-market fit changes week by week. Now we're going to use jamming. Now we're going to use AI. It's a scary world, but it's also a fascinating intellectual problem: How do you solve something when the equation changes week by week?

As an operating partner helping founders grow their companies, what's the most important thing for deep tech founders to get right?

I generally focus first on the total addressable market and how you go to that market. If I'm going to visit a drone company, I'll let my colleagues with engineering degrees look at the tech and tell me if what the company is saying is tech BS. I want to know how the company wants to get to the market. Tech companies are usually started by engineers and they have to early on get into the usual go-to-market questions. Who do I want to sell to? What do they actually want to buy? How much are they willing to pay? How much does it cost me to produce?

I used to have an ad by IBM on the wall of my office: "Stop selling what you have. Start selling what they need." That's the key to a lot of success. When I was trying to buy a company from Lockheed, one of their sales guys actually referred to the lady who was the head purchaser for the U.S. government as Jabba the Hutt. He didn't realize he was near a hot mic. Unfortunately for him a segment of that tape made it back to the government. That's not how you treat your customers. By contrast, I could tell you the names of my satellite  company’s top 10 international customers, their spouses' names, and in many cases their kids' names. Because I liked them. It's not just business. We sat around trying to figure out how to make the world safer.

Engineers are not naturally good at marketing. They're usually terrible at it. And you have to blend that engineering skill with what the market wants. Too many people say, well, Steve Jobs didn't care what the market wanted, he told them what they wanted. Not exactly. He was just ahead of the curve and then explained to the market why they were going to love something. Larry Page has a great test: think about the toothbrush. We all use it at least once a day. Good people use it twice. If you find tech that a lot of people will use twice a day, game over - you’ve got a hot product.

Too many people come to us with ideas and I ask, who are you going to sell it to? They say it's really great tech. I say, and how are you going to make money? They say, we have an awesome team. That's a good talk for a different firm. We get excited about new ideas and talented entrepreneurs and we want to help them grow. But they have to accept that at some point they've got to make money.

Governments are often a good way to start but if you really want to make money long-term you need a broader market – the commercial world. Google Earth/Google Maps came from a company called Keyhole. Keyhole was originally going to be a video game company. They were working on rendering graphics and realized they could render graphics faster than anyone else. So they went and talked to the U.S. government. The first serious money came from the three-letter agencies. Then they went to the consumer market. Start with the government, do proof of concept, make it work, then go to the mass market. Because then you're not talking about thousands or even 100,000 units. You're talking about billions. My friend Michael Jones, who co-founded Keyhole, said at a talk in Hyderabad, "We apparently have 300 million users, which makes us slightly bigger than Brazil."

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