As Canada gears up to spend heavily on defence, some domestic defence tech entrepreneurs have become frustrated with how the country is talking and thinking about so-called “dual-use” technologies.
The term dual-use, which refers to products with both civilian and military applications, has come to dominate recent conversations about defence tech in Canada. At the Arctic Edge conference on Tuesday, which was held at Torys’ office as part of Toronto Tech Week, some founders argued that the term has been tossed around so frequently that it has lost its utility, and asserted that Canada needs to reframe its approach.
Paul Ziadé, NVD
“As an entrepreneur raising money, I’ve become very annoyed with the term dual-use.”
Meanwhile, venture capitalists (VCs) outlined why dual-use tech is likely here to stay, but also acknowledged that domestic firms still have their work cut out for them when it comes to supporting the country’s defence innovators.
“As an entrepreneur raising money, I’ve become very annoyed with the term dual use,” North Vector Dynamics (NVD) co-founder and CEO Paul Ziadé said on stage, arguing that it has become “so overused that it has lost all meaning.”
Ziadé acknowledged that “dual-use is a real thing,” but said he also thinks Canada’s approach to developing such technologies has been a tad “ahistorical.”
The NVD CEO highlighted that many of the technologies we see as dual-use today were initially funded with solely military applications in mind. Ziadé cited GPS, which was originally developed for missile guidance and submarine tracking, and duct tape, which was built to seal ammunition cases, as two prime examples of this.
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Ziadé believes Canada’s burgeoning defence tech industry is “really kind of cornering ourselves trying to find these multiple applications.”
Fellow panellist, Dominion Dynamics founder and CEO Eliot Pence, traced the origins of the country’s obsession with this idea to it being “easy for VCs to sell to their [limited partners (LPs)]—not because we actually give a shit about dual-use.”
“I think it’s a story that we tell ourselves, and the consequences are hugely regressive,” Pence argued. The Dominion CEO said that while the industry often thinks the best path to developing dual-use tech is “to go from outside the military to inside.” He believes the inverse is true—that “the best way to get more dual-use is to double down on single use.”
During the following panel, some VCs took issue with Pence and Ziadé’s comments. Maverix Private Equity co-founder and managing partner Mark Maybank argued that “there is some merit” to the term dual-use.
Startups that sell one product to one buyer, such as the Department of National Defence, have “a very limited [total addressable market (TAM)] and a significant amount of concentration risk,” whereas dual-use means commercial buyers and other applications that reduce some of that risk and boost that TAM, making them more attractive to prospective VCs, Maybank said.
For his part, Maybank is happy that Canada is talking so much about dual-use in the first place. “Whether we’re debating defense or dual-use, we have cultural permission to have a conversation that we couldn’t have two years ago, five years ago, certainly not 10 years ago.”
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Maybank expressed hope that our understanding of dual-use evolves over time as Canada fully absorbs the impact of geopolitical shifts and its increased defence spending.
Fellow panellist, Garage Capital general partner Devon Galloway said his team is “huge fans of dual-use companies,” noting that Garage’s most successful defence tech startups also have commercial applications. He thinks businesses ought to focus on both to ensure their survival should the Government of Canada’s renewed commitment to defence eventually waver.
“A long way to go”
In true Canadian fashion, Galloway also offered a mea culpa on behalf of domestic VCs. “The Canadian capital ecosystem should be humble and say sorry to the defence founders in the room,” he said, and fellow panellist Matt Cohen, founder and managing partner of Ripple Ventures, obliged.
To date, many Canadian VC funds have been restricted from investing in defence technologies by their LPs given both historically negative public sentiment toward military spending and the government’s lack of interest in the sector. But recent federal commitments are beginning to turn the tide for firms like Ripple. Garage, which recently invested in Canada Rocket Company alongside Ripple, has never been limited in this respect—Galloway said this is because Garage fought against such restrictions from the outset. The only restrictions it has is that startups must sell only to NATO members and allies.
“We’ve still got a long way to go.”
Devon Galloway,
Garage Capital
But Galloway said he has spoken to many entrepreneurs in Garage’s portfolio lately regarding “the rigamarole” they are currently navigating with other domestic VC firms, which have decided to dip their toes into defence investing only to get cold feet at the last minute.
“I won’t name names, but when a founder building a defence tech company goes all the way through the process with a fund in Canada who’s committed [to figuring] out defence, and gets to the finish line and is told ‘that’s a little too kinetic for us,’ it just makes me a little sick.”
While Galloway takes heart in the Business Development Bank of Canada recently telling VCs it is willing to lift its restrictions around defence investing for the many funds in which it is an LP, he said the industry has “still got a long way to go” when it comes to supporting defence.
All images courtesy Tarsipix Studios. Photos by Brian Simon.