Silicon Valley VCs are Frenzying Over Defense Tech Startups – You Won’t Believe the Reasons Why!

Investments in military technology startups are exploding as war in Ukraine and geopolitical tensions with China lead to growing confidence that the US government will award lucrative contracts to Silicon Valley companies building cutting-edge defense systems .

U.S. venture capitalists settled more than 200 defense and aerospace deals in the first five months of this year worth nearly $17 billion, more than the industry raised during the entirety of 2019, according to data from PitchBook.

This boom mirrored the gold rush experienced by the AI ​​sector as well, even as investment in start-ups elsewhere in the tech industry has plummeted in recent months amid a broader recession.

U.S. venture capital investment in defense startups increased from less than $16 billion in 2019 to $33 billion in 2022, data from PitchBook shows. Investors amassed a record $14.5 billion in such startups in the first quarter of this year.

Silicon Valley has shunned defense technology for years, fearful of its association with controversial overseas conflicts and wary of the Pentagon’s notoriously slow and risk-averse procurement process, which has favored established defense contractors.

According to interviews with more than 15 investors and founders, this wariness has given way to the belief that startups are finally in line to take a significant share of the gigantic US defense budget, which has grown over two decades to to reach the record figure of 886 dollars. billion for 2024.

Big VCs including Andreessen Horowitz and Sequoia Capital have begun investing in companies building defense products and, for the first time, “kinetic” weapon systems, a military reference to active warfare that includes lethal force.

“We’re seeing more and more VCs saying they feel comfortable investing in startups that do . . . technology that can have a kinetic effect used exclusively for the military,” Mike Brown, a partner at San Francisco-based Shield Capital and former director of the defense innovation unit at the U.S. Department of Defense.

Sequoia Capital conducted an approximately $6 million seed round in Mach Industries earlier this year, according to two people familiar with the deal. Mach was started last year by 19-year-old MIT dropout Ethan Thornton and develops hydrogen-powered weapons and defense systems. Sequoia declined to comment.

Anduril Industries, a defense technology company rated at 9 billion dollars whose biggest backer is Andreessen Horowitz, recently revealed that it’s in talks to develop its first weapons by creating a “roaming munitions” version of its autonomous drones — aerial weapons systems that can passively wait for a target and then attack.

Last year, Los Angeles-based Anduril won a $1 billion contract from the US Special Operations Command to lead the integration of systems that can identify, track and intercept hostile drones.

“We’re at war, it’s real,” said Teresa Carlson, who previously led Amazon’s efforts to sell its AWS cloud computing service to the US government and who recently joined the venture firm of Silicon Valley General Catalyst as a consultant. “Now we have to think about how to use the technology in different ways.”

General Catalyst, which manages $33 billion, launched a “global resilience” practice in April to bolster defense and intelligence firms.

The Russian invasion of Ukraine was a “game changer” for US military interest in commercial technology, according to former director of defense innovation Brown.

The war in Ukraine has been fought through a combination of traditional trench warfare and high-tech systems such as satellite communications, data intelligence and autonomous drones.

Private companies such as Virginia-based defense group HawkEye 360 ​​and Elon Musk’s SpaceX have provided Ukraine with satellite radar imagery to detect the movement of Russian convoys and internet connectivity resistant to Russian jamming efforts.

“Appetite has changed significantly since we started in 2015,” said Brandon Tseng, co-founder and president of ShieldAI, a $2.7 billion start-up that makes fighter pilots and drones based on artificial intelligence. “We pitched to 30 seed investors that year and got 30 ‘no’s. Then Russia invades Ukraine and suddenly everyone takes a look. Funds that thought it was taboo are no longer doing it.”

As many as six defense tech unicorns — startups valued at over $1 billion — have emerged from the funding wave: ShieldAI, HawkEye 360, Anduril, Rebellion Defense, Palantir, and Epirus.

But some defense tech founders warned that while the government procurement process had improved, it was still painfully slow.

ShieldAI founder Tseng warned of the “valley of death,” a reference to the long gap between developing a prototype and being awarded a government defense contract, during which young companies are likely to run out of money and fail.

Big contracts awarded to companies like Anduril and ShieldAI are still an “outlier,” according to the founder of a defense unicorn who now works as an investor at a large San Francisco-based venture capital firm.

“It is still incredibly difficult to sell to the US government; founders face a variety of benefits and unfair lobbyists [for the major defence contractors]”, said the person. “There are a lot of highly regarded defense companies that still haven’t met investor expectations.”

“The key is to sell the services directly to the people who are carrying out the mission,” said Vannevar Labs founder Brett Granberg. “If you crack that code you unlock eight or nine-figure contracts.”

Vannevar Labs revenues grew from $3 million to about $25 million last year on the back of a surge in government contracts, according to two people familiar with the matter. The company, which analyzes global communications to provide military intelligence, raised $75 million in January from investors including Felicis Ventures.

In recent years, the United States has established a number of government agencies to encourage greater technological development by the private sector with homeland security applications, including the Defense Innovation Unit in 2015 and Afwerx in 2017, which allows private companies to sell innovative technology to the United States Air Force.

In 2019, the United States created a new military branch called the Space Force to conduct military operations in space, spurring a new round of private capital flows into defense technology focused on space warfare. Musk’s SpaceX was one of the biggest private winners, receiving big contracts to help build communications and missile tracking satellites.

Now, a significant number of investors believe that recent technological developments related to artificial intelligence have placed an additional burden on Silicon Valley groups to assist in US defense efforts.

“The common wisdom for founders has historically been: Don’t build a startup dependent on selling to the government,” says Dan Gwak, managing partner at Point72 Private Investments.

“There is now an existential technological advance that I think can shift the balance of the global superpower,” he said, referring to the rapid development of AI. “The last time this happened was with the atomic bomb. We are finally seeing the government take steps to win the tech race.