Across the wide world of mergers and acquisitions in the government market, the conversation and activity primarily centers around the singular buying and selling of whole businesses.

But the increasing profile of venture capital in GovCon presents a third way of sorts. One emerging company is at the center of the action with many owners/investors that each hold a part of the whole.

Venture activity represents “deals of a different stripe” with the same muscles involved: belief in a business and a willingness to put down money, which means taking risks, in support of that belief.

It is logical that our coverage of all things venture capital belongs in the M&A Trends category.

By no means is this a complete list of VC themes we watch, and neither are the collections of names mentioned, but here is a trio that stand out to me as WT’s unofficial ventures correspondent.

The primes

WT’s use of that word “prime” is liberal in nature because it applies to every company who holds direct contracts with the U.S. government, not just the blue chip defense hardware companies most often labeled such.

Their federal agency customers all want the latest-and-greatest technologies as soon as possible, so where can the prime contractors go to find those tools?

First the GovCon companies evolved into scouts, especially the IT systems integrators as they seek to keep up with all the advances in software.

Many WT Top 100 companies have taken that scouting work up a notch by investing in startups and other emerging businesses whose tech has been proven in commercial markets. The investments also signal a belief in the tech’s promise for government adoption and scaling.

Lockheed Martin, Booz Allen Hamilton, RTX, Science Applications International Corp., Maximus, Noblis and LMI are among those with dedicated venture funds and/or teams that search for and invest in growth-stage businesses.

General Dynamics is an investor in Epirus and participated in that defense tech startup’s recent $250 million Series D round. Boeing in 2022 put $50 million into AEI HorizonX, a fund managed by the private equity firm AE Industrial Partners but still connected to the aerospace giant.

L3Harris Technologies connects into the VC ecosystem through its partnership with Shield Capital, which takes on most of the scouting responsibility in that arrangement. L3Harris’ participation in Shield AI’s $240 million F-1 capital raise also is part of the conversation.

Even Carahsoft, the public sector IT distribution giant, is now a venture investor via its backing of the secure mobile software provider Hypori.

Will more prime contractors also decide to get in the venture game? That remains to be seen because some of them clearly prefer to acquire companies outright.

On the other hand, SAIC’s entry into and subsequent acquisition of Morpheus Data does provide an example of how one can lead to another. SAIC has since sold Morpheus Data to Hewlett-Packard Enterprise.

For GovCon companies who are conservative in acquisitions, this deal of a different stripe presents an alternative pathway to getting tech access and reach into the innovation ecosystem.

The more purpose-built

Perhaps no investor in this category fits the description like In-Q-Tel, the intelligence community’s arm for investing in startup companies to make sure IC member agencies have the latest and greatest.

In-Q-Tel’s list of backings over the years is too long to list, but perhaps the name Palantir will get your attention. Palantir has disrupted the government software market since its 2003 founding, no doubt about that, but the early backing by In-Q-Tel did give the company an inside look at government requirements and especially for scaling.

We also must return to Shield Capital because this firm wears the hat of a purpose-built VC firm focused on national security. Shield’s leadership group includes Managing Partner Raj Shah and Partner Michael Brown, who both once led the Defense Innovation Unit in separate stints.

People clearly believe in what Shield is doing given the firm’s closure of its inaugural $186 million fund in 2023. The firm lists nearly two dozen portfolio companies on its website that cut across areas such as space, cyber and autonomy.

Razor’s Edge Ventures also fits the bill of a purpose-built VC in the GovCon ecosystem with investments across the software and hardware domains, the latter of which includes the rocket motor maker X-Bow Systems.

Then there is Blue Delta Capital Partners, the venture investment firm focused on federal technology services companies headquartered in Greater Washington. Blue Delta’s fourth fund closed in the summer with $250 million in commitments from investors.

But Blue Delta touts its approach to investments as more of a growth coaching variety: acquire non-controlling stakes in growth-stage contractors, then work with their leadership teams to scale the business. That is the path Acentia went down, with Blue Delta’s assist, before its sale to Maximus in 2015.

Other investing names that crop up from time-to-time include Point72 Ventures, Decisive Point Ventures, First In Ventures, Andreesen Horowitz’s American Dynamism practice, Insight Partners and Lux Capital.

Just about all of these firms tout a braintrust of government and industry veterans, providing startups another pathway to connect into the customer and partnering landscapes.

The unicorns

Anduril, Epirus, Saronic, Shield AI and SpaceX are examples of VC-backed startups that have achieved touted valuations north of $1 billion. They crossed both the business version of the “Valley of Death,” not just the one related to how the government often fails to buy emerging tech at scale.

It is worth reminding that unicorn success stories are kind of like the principle taught by the 80/20 rule, in that the smallest group of companies dominates the majority of the discussion.

Of course, nine out of 10 startups in the U.S. do end up failing within five years. Often times for reasons that have nothing to do with the product or service offering.

We are often told that SpaceX skews the startup discussion so much that it may need a category all to itself. We agree.

There is an argument that the other four aforementioned companies likewise need to be separated from the rest of the pack because it seems like more investors are trying to get involved with these few.

Perhaps calling them outliers is enough to know they are not the norm, even as VC feels much more normal in this overall ecosystem.

Check out these venture-focused episodes of our WT 360 podcast to hear directly from some of the investing leaders themselves.