VCs should study nuclear strategy
Just because it's not VC-backable doesn't mean it's irrelevant
I was alarmed by a recent Russian strike in Ukraine. As far as I know, it was the first employment of Multiple Independently-targetable Re-entry Vehicles (MIRVs)…ever.
MIRVs were, until last month, a technology associated exclusively with nuclear weapons. The US was the first to deploy them in the early 1970s.
While it seems to have been the a common impression that the role of MIRVs was to improve missiles’ abilities to penetrate Soviet anti-ballistic missile defenses, the reality of the situation is that MIRVs were developed because they enabled allow one missile to “cover” multiple nearby targets in the Pentagon’s nuclear war plans. This made the American nuclear deterrent more economically efficient.
In any case, MIRVs are a Cold War-era technology that I frankly never thought I’d hear of being used. But the point this week isn’t about hypersonic re-entry vehicles, it’s about the underlying strategy.
I believe that every citizen of a nuclear-armed country should learn the basics of nuclear strategy. It’s an important element of public policy that most of us don’t understand well enough to have at least a somewhat informed discussion on, and that isn’t right.
Some people need more than a passing familiarity with the field. Politicians, military officers, and intelligence analysts are one group — they’re supposed to create and execute it. Academics who specialize in political science and economics are another; it is a political exercise with broad economic impacts. I contend that venture capitalists should also study this topic in depth, for a substantively different set of reasons.
What VC and nuclear strategy share is that they’re a remarkably similar type of game: they have multiple, but limited, numbers of rounds, with a small set of players — each of which has only a few options in any given round.
For a VC, this looks like dealing with multiple term sheet negotiations involving founders and the other investors already on their cap table. Depending on the situation, VCs have these options in any one round of a particular game:
They could decide not to invest in the startup (either initially, or more if they’ve already invested)
They could decide to make an initial investment in the startup
They could decide to invest more in the startup, exactly as much as they’re entitled to1
They could decide to invest more in the startup, but less than they’re entitled to
They could decide to invest more in the startup, and try to buy more than they’re entitled to
For nuclear planners, this looks like needing to structure forces and plans to be able to deal with multiple nuclear conflicts at once.
These choices basically parallel the options available to a VC partnership.
Depending on the situation, here are their options as I understand them in any one round of a particular game:
They could decide not to use nuclear weapons (either initially, or more if they’ve already used them)
They could decide to initially employ nuclear weapons
They could decide to respond with nuclear weapons, and by attempting to match the other players’ use as closely as possible, neither escalate nor de-escalate the situation2
They could decide to respond with nuclear weapons, in such a way that attempts to de-escalate the situation
They could decide to respond with nuclear weapons, and escalate the situation further
Beyond the types of moves available to players, there are similarities in the structure of the games.
For example, it’s possible that either type of game might have a player engaging in multiple different games with different players at the same time. For a VC, this might look like negotiating multiple term sheets with different startups at once. In the case of nuclear strategy, this might look like needing to plan to fight multiple conflicts at once.
Furthermore, the main other player in the game might be somebody playing the game that they only intend to play once — like a founder (who if a VC passes on them, is unlikely to come back to the VC in the future) or a head of state who knows they’re done after the war.
Alternatively, the main other player might be planning to play essentially in perpetuity. This might look like negotiating with another VC fund that’s already on the board of a company, or a leader of a hostile nation-state who intends to remain in power after the conflict concludes.
This characteristic of the other player may not be clear during the game.
For both groups, different starting conditions and players will likely lead to different outcomes at the end of the game.
The analogy does eventually break down; not all elements of nuclear strategy should be important to VCs.
Concepts like deterrence are important to understand as a citizen, but they do not seem particularly useful in considering early-stage strategy from an investor’s perspective.
Similarly, conventional military strategy isn’t as accurate a model to VC decision-making because there are so many different options available to players; VCs don’t have all that many choices when they’re evaluating investments.
Nuclear strategy isn’t something a VC should study to seek potential investment candidates. I don’t believe a government will or should give contracts for nuclear weapons adjacent technology to startups. There’s too much risk of corporate failure having programmatic effects for a part of the defense portfolio with KPIs of security and reliability.
But I think citizens of states that have committed to a nuclear deterrent should understand the underlying strategy.
Furthermore, I believe strongly that by learning about other fields, everybody — including VCs — can learn how to think in ways that make us better at what we do all day.
This would be based on their pro rata rights, which would have been laid out in the term sheet of a prior financing round in which the VC participated.
See the Wikipedia article about Herman Kahn for a model of escalation in this context.