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Silicon Valley’s Obsession With a $10 Billion Prize: Term Sheet

Department of Defense-Chris LynchDepartment of Defense-Chris Lynch
A "Hack the Pentagon" sign is displayed in the hallway near the office of Chris Lynch, then-director of the U.S. Defense Department's Defense Digital Service in Washington D.C. on Aug. 23, 2016. Andrew Harrer—Bloomberg via Getty Images

This morning, Fortune published a captivating investigation of the inner-workings of 21st-century military-techno complex. It’s called “How Amazon and Silicon Valley Seduced the Pentagon,” and it was done in partnership with ProPublica, the non-profit investigative news organization. 

The story delves into the JEDI project (Joint Enterprise Defense Infrastructure), which is the Pentagon’s initiative to move its information technology systems to the cloud. And there’s a $10 billion, 10-year contract at stake.

The story explains how some of America’s biggest tech companies used a little-known advisory board, some aggressive advocacy by a few billionaires and some unofficial lobbying to open a backdoor into the Pentagon. And so, no matter who wins the JEDI contract, one winner is already clear: Silicon Valley. The question is no longer whether a technology giant will emerge with the $10 billion prize, but rather which technology giant (or giants) will.

From the story:

There are certainly benefits. The Pentagon’s technological infrastructure does indeed need to be modernized. But there may also be costs. Silicon Valley has pushed for the Pentagon to adopt its technology and its move-fast-and-break-things ethos. The result, according to interviews with more than three dozen current and former DOD officials and tech executives, has been internal clashes and a tortured process that has combined the hype of tech with the ethical morass of the Washington industry-government revolving door.

The story reminded me of the Q&A I did with Founders Fund partner Trae Stephens. Stephens served on Donald Trump’s transition team and made recommendations on changes to the U.S. Defense Department ahead of his inauguration. He said he spent a lot of time talking to people about the individual agencies, like the Defense Digital Service and the Defense Innovation Unit – Experimental. When asked if he came out of those conversations feeling optimistic, he said, “It’s difficult to come out of conversations with a huge bureaucracy feeling super optimistic.” 

Fortune’s new story provides so much more detail and color about the way those agencies are run. An excerpt:

The Pentagon’s cloud initiative ultimately ended up being led by Chris Lynch, the head of Defense Digital Service. DDS was no ordinary unit; it was a corps of software engineers hired from Google, Amazon and other tech companies to “challenge the status quo, burdensome policies and established bureaucracies in an effort to streamline DOD’s ability to introduce modern software development, tools and practices,” according to a department spokesperson. 

And Lynch himself was no ordinary government employee. As a teenager, he had been arrested and expelled from his Ohio high school after he and some friends called in a bomb threat as a joke. But he grew up, earned his high school degree, worked at Microsoft and then ran a series of startups. At 43, he wore hoodies to an office dominated by starched white shirts and still considered himself an insurgent, a point he conveyed by posting a sign reading “The Rebel Alliance” outside the entrance to his group’s office; the name also reflected his obsession with Star Wars. (His team came up with the acronym JEDI for the cloud project.)

Read the full feature here.

VENTURE DEALS

Knotel, a New York-based startup that designs and operates bespoke spaces for brands, raised $400 million in funding at a valuation of $1 billion. Wafra led the round, and was joined by investors including Mori Trust, Itochu, and Mercuria. 

Drop, a Canada-based mobile rewards platform, raised $44 million in Series B funding. HOF Capital led the round, and was joined by investors including Royal Bank of Canada.

Numbrs Personal Finance, a Switzerland-based developer of an app that enables users to manage existing bank accounts in one place, raised $40 million in funding at a valuation of more than $1 billion. The investors were not named. Read more.

TapClicks, a San Jose, Calif.-based provider of marketing intelligence, analytics, reporting, workflow and orders management, raised $10 million in funding, from Boathouse Capital.

CropX, an Israel-based provider of a farm management platform, raised $10 million in funding. Investors include Sumitomo, Armada Capital, TaL Capital, Finistere Ventures, Germin8 Ventures, GreenSoil Investments, Innovation Endeavors and OurCrowd.

Kobiton, an Atlanta-based mobile device cloud, raised $5.2 million in funding. BIP Capital led the round.

Yotta, an Austin, Texas-based energy storage company, has raised $1.5 million in seed funding. The investors were not named. Investors include SWAN Impact Investment Group.

HEALTH & LIFE SCIENCES DEALS

Oncorus Inc, a Cambridge, Mass.-based oncolytic virus company, raised $79.5 million in Series B funding. Cowen Healthcare Investments and Perceptive Advisors led the round.

Chinook Therapeutics, a Canada-based developer of precision medicines for kidney diseases, raised $65 million in Series A funding. Versant Ventures led the round, and was joined by investors including Apple Tree Partners and Samsara BioCapital.

PRIVATE EQUITY DEALS

EMEX Holdings LLC, which is backed by O2 Investment Partners LLC, made an investment in BLUEFIN LLC, a provider of software-enabled facility asset management consulting solutions to commercial, government and institutional facility owners. Financial terms weren’t disclosed. 

AE Industrial Partners acquired Columbia Helicopters, an Aurora, Oregon-based provider of heavy-lift rotorcraft services. Financial terms weren’t disclosed. 

Quorum Software, a portfolio company of Thoma Bravo, acquired OGsys, a Fort Worth-based provider of cloud-based oil and gas accounting software for small and medium-sized businesses. Financial terms weren’t disclosed. 

New State Capital Partners made an investment in CDS (Computer Data Source), an Eatontown, N.J.-based provider of enterprise-level data center third-party maintenance. Financial terms weren’t disclosed. 

Sheridan Capital Partners made an investment in Oral Surgery Partners, a St. Louis-based oral surgery practice management company. Financial terms weren’t disclosed. 

Ultimus Fund Solutions, which is backed by GTCR, agreed to acquire LeverPoint Management, a Clifton Park, N.Y.-based provider of fund administration, accounting, tax and back office support services to private equity, venture capital and real estate managers. Financial terms weren’t disclosed. 

Sigma Electric Manufacturing Corporation, a portfolio company of Argand Partners, acquire Avalon Precision Casting, a Cleveland, Ohio-based maker of complex thin wall investment castings products for the aerospace, defense, HVAC, power, agriculture and oil and gas markets. Financial terms weren’t disclosed. 

PMC Capital acquired StyroChem, a Canada-based maker of expandable polystyrene grades used in food service, packaging, construction, casting and specialty applications,  from WinCup. Financial terms weren’t disclosed. 

OTHER DEALS

Simply Good Foods Co. agreed to buy Quest Nutrition, an El Segundo, Calif.-based maker of protein bars, in an all-cash deal of $1 billion.

IPOs

Alibaba, the Chinese e-commerce company, is delaying its $15 billion listing in Hong Kong, Reuters reports citing sources. Read more.

GP Club, a South Korea-based skincare products maker, has mandated banks for an IPO in the country that could come as early as this year. Sales reached $460 million in 2018 and profit reached $140.6 million, per Forbes. An IPO could value the firm at about $3.3 billion. Goldman Sachs backs the firm. Read more.

Averda International, a Dubai-based waste management firm, is in talks with banks for an IPO that could value it at upward of $700 million, Reuters reports, citing sources. Read more.

Docebo, a Toronto-based corporate learning system, filed for an IPO in Canada. Intercap

EXITS

Splunk Inc. (NASDAQ: SPLK) agreed to acquire SignalFx, a San Mateo, Calif.-based SaaS leader in real-time monitoring and metrics for cloud infrastructure, microservices and applications. Financial terms weren’t disclosed. SignalFx had raised approximately $178.5 million in venture funding from investors including General Catalyst, CRV, Tiger Global, and Andreessen Horowitz.

PEOPLE

DW Healthcare Partners made three promotions: Gabe Becher to managing director; Eric Moore to principal; and Aaron Kennedy to vice president.