Last November, I attended a Deep Tech Dinner hosted by Pete Mathias, Partner at Alumni Ventures. After finding my seat, I was immediately struck by the diverse mix of backgrounds at the table. To my right sat a venture investor from Lockheed Martin, while across from me was a former Navy Seal turned tech private equity investor. Next to him was an active duty Navy aircraft carrier Commanding Officer, and beside him, a nuclear submarine officer now providing private credit to new defense contractors. After appreciating my luck in finding such good company, I couldn’t help but reflect on the convergence of private capital and national security in the room.
As the evening unfolded, topics ranging from nuclear microreactors to space manufacturing circulated the table. Regardless of the subject matter, all parties shared a definitive excitement regarding venture capital’s role in catalyzing this innovation.
Looking back on that night, those conversations were just a small fragment of a larger movement in venture capital to overhaul a defense model that’s struggled to keep pace with rapid technological advancements amid rising global tensions. As conflicts intensify worldwide, VCs are backing a new defense paradigm. In 2023, VC investment in defense tech clocked in at a whopping $35.8 billion – up from $1.9 billion just ten years earlier.
Silicon Valley’s roots trace back to a collaboration between government, private industry, and academia, all focused on advancing national security during World War II and the Cold War. Some of the earliest venture-backed companies, like Fairchild Semiconductor, played pivotal roles in advancing groundbreaking technology breakthroughs in microchip technology for NASA, the Pentagon, and more.
However, as conflicts slowed in the 1970s and 1980s, the Department of Defense (DOD) adopted a more structured approach, emphasizing predictive schedules and stricter cost controls. Since then, the DOD’s technology acquisition strategy has been built on the belief that future military needs can be anticipated and met through long-term planning. This system largely relies on a cost-plus business model, where the government reimburses contractors for development costs, and contractors earn a fixed profit, usually between 7-10%. Shifting financial risk from contractors to the government, this structure has drawn criticism for creating incentives for maintaining the status quo over seeking new innovation and creating a bureaucratic defense technology development ecosystem.
Whether those criticisms are valid or not, necessity is the mother of innovation and current defense needs are underscoring the imperative to move quicker. Rising geopolitical tensions coupled with extreme on-the-fly battlefield adaptations during the war in Ukraine have yet again highlighted the need for accelerated technological advancement to protect the US, its allies, and values. In recent years, the DOD has increasingly recognized that relying on its fleet of aircraft carriers, ships, and fighter jets (just to name a few “exquisite” assets) is insufficient on its own and could lead to weaknesses.
The vulnerability of costly, slow-to-develop assets has pushed the DOD to explore a hybrid force structure, combining smaller, more affordable autonomous systems with larger assets when needed. This trend extends beyond the US. As militaries worldwide increasingly rely on autonomous and AI-driven technologies, demand for tech-infused military products is surging.
These shifting dynamics have opened the door for venture-backed companies to significantly drive impact alongside the more capital-intensive projects needed to build new nuclear submarines or F-35s for example. As a result, a wave of new defense startups has emerged, successfully demonstrating that a market-driven approach — where companies fund their own R&D — can yield powerful results.
In a conversation I had with Julia DeWahl, Co-Founder and President of Antares Industries and serial angel investor, she noted, “The defense tech category has grown over the last decade as the DOD has realized the value it can get from products built by smaller, nimbler companies than the traditional primes. The DOD has developed programs and funding to nurture the startup pipeline, recognizing just how quickly they need to advance their technology to remain dominant vis-a-vis other global powers.”
Anduril offers a prime example of how this new, innovative approach can transform defense technology, blending software and hardware to accelerate military advancements. The company has played a crucial role in modernizing the US military’s tech capabilities, notably contributing to rapid technology deployment to support the war in Ukraine. The company’s meteoric rise — from blueprint sketches to contracts with US Special Operations Command and a $1 billion Department of Defense program in just 31 months — demonstrates how quickly defense innovation can thrive when fueled by a business incentivized to produce the best solution, at the lowest cost, under the shortest timeline.
Rather than adhering to the rigid, specification-driven contracts typical of defense contracting, Anduril leverages first principles, prioritizing mission needs over predefined requirements. This flexible approach has fostered incredible adaptability and interconnectedness across its products, setting it apart from traditional contractors that often have siloed software stacks.
Some of Anduril’s products include:
Venture capitalists aren’t eyeing defense just to disrupt outdated procurement processes. From an investment standpoint, the sector offers several appealing characteristics. For one, governments worldwide allocate substantial budgets toward defense and security. The US alone boasts a defense budget of $886 billion this year, and liberal democracies globally also provide willing customer bases — capturing even a small share of this eye-popping market size presents a lucrative opportunity for emerging defense startups. Further, securing defense contracts provides sticky, long-term revenue streams akin to SaaS, services an end market resilient to economic downturns, and offers plenty of options for contract expansion down the line.
What’s more, the DOD is not a typical customer and often plays an active role in product refinement and development, frequently providing additional non-dilutive funding sources via grants. DeWahl’s Antares Industries, a startup building kilowatt-scale nuclear microreactors for both defense and commercial applications, offers a prime example of this dynamic: raising seed capital from a cohort of venture investors and supplementing that with non-dilutive funding from the DOD (AFWERX) and DOE.
These appealing investment opportunities have prompted a wave of venture capital firms to prioritize defense as a strategic sector in their portfolios. Lux Capital’s “Securing Life and Environment,” General Catalyst’s “Global Resilience,” Alumni Ventures’ “U.S. Strategic Technology” thesis, and Andreessen Horowitz’s high-profile “American Dynamism” strategy are just a few examples of firms betting on defense to support US national interests. Importantly, investments under these strategies span far beyond the battlefield, encompassing sectors like aerospace, supply chain management, and cybersecurity.
“Critical infrastructure is the backbone of our nation’s security – without it our resources by which we defend ourselves, both weapons and people, are rendered useless. At face value, it’s a bit of an unsexy category, but recognition of its importance has occurred in the wake of Covid, the Ukraine-Russia conflict, and even the [recent] hurricanes in the Southeast, and I’m glad to see more people interested in working and investing in our nation’s infrastructure.”Julia DeWahl, Antares Industries
“Critical infrastructure is the backbone of our nation’s security – without it our resources by which we defend ourselves, both weapons and people, are rendered useless. At face value, it’s a bit of an unsexy category, but recognition of its importance has occurred in the wake of Covid, the Ukraine-Russia conflict, and even the [recent] hurricanes in the Southeast, and I’m glad to see more people interested in working and investing in our nation’s infrastructure.”
However, while defense presents attractive investment opportunities, it also comes with notable challenges. Sales cycles to secure government contracts can stretch over several years, and navigating this “valley of death” is often bogged down by approval processes and bureaucracy. Further, to succeed, startups must develop commercially viable solutions that address real military needs and deliver strategic impact. Understanding these dynamics and which products can be practically applied is complex and often non-obvious. Further, while the DOD has made progress in recognizing the tech sector’s role in defense innovation, considerable work remains to overcome regulatory and procurement barriers.
Despite the hurdles, the partnership between venture capital and national security is likely here to stay. Innovation has always been key to safeguarding democracy, and venture capital’s risk-taking model — focused on identifying home runs but accepting write-offs gracefully — aligns well with the risk profile taken on by these startups and their bold experimentation.
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