Silicon Valley VCs rush into defence technology start-ups
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Investment in military tech start-ups is booming as the war in Ukraine and geopolitical tensions with China lead to growing confidence that the US government will give lucrative contracts to Silicon Valley companies making cutting-edge defence systems.
US venture capitalists have agreed more than 200 defence and aerospace deals in the first five months of this year worth nearly $17bn — more than the sector raised during the entire of 2019, according to data from PitchBook.
This boom has mirrored the gold rush also experienced by the artificial intelligence sector, even as investment in start-ups in other parts of the tech industry has plummeted in recent months amid a broader downturn.
US venture investment in defence start-ups surged from less than $16bn in 2019 to $33bn in 2022, PitchBook data shows. Investors piled a record $14.5bn into such start-ups in the first quarter of this year.
Silicon Valley had shunned defence technology for years, spooked by association with controversial overseas conflicts and wary of the Pentagon’s notoriously slow and risk-averse procurement process, which has favoured established defence contractors.
According to interviews with more than 15 investors and founders, this wariness has given way to a belief that start-ups are finally in line to take a significant share of the US’s mammoth defence budget, which has grown over two decades to reach a record $886bn for 2024.
Large VCs including Andreessen Horowitz and Sequoia Capital have begun to invest in companies that build defence products as well as, for the first time, “kinetic” weapons systems, a military reference to active warfare including lethal force.
“We are seeing more VCs saying they are comfortable investing in start-ups doing . . . tech that can have a kinetic effect used purely for the military,” Mike Brown, a partner at San Francisco-based Shield Capital and the former director of the defence innovation unit at the US Department of Defence.
Sequoia Capital led a seed round of about $6mn into Mach Industries earlier this year, according to two people with knowledge of the deal. Mach was started by 19-year-old MIT dropout Ethan Thornton last year and develops hydrogen-powered weapons and defence systems. Sequoia declined to comment.
Anduril Industries, a defence tech company valued at $9bn whose largest backer is Andreessen Horowitz, recently revealed it was in talks to develop its first weapons by creating a “loitering munitions” version of its autonomous drones — aerial weapons systems that can wait passively for a target and then attack.
Last year, Los Angeles-based Anduril won a $1bn contract from US Special Operations Command to lead integration of systems that can identify, track and intercept hostile drones.
“We are at war, it is 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 Silicon Valley venture firm General Catalyst as an adviser. “We now have to think about how we utilise tech in different ways.”
General Catalyst, which has $33bn under management, launched a “global resilience” practice in April to back defence and intelligence companies.
The Russian full-scale invasion of Ukraine has been a “game changer” for US military interest in commercial technology, according to former defence innovation director Brown.
The Ukraine war 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 defence group HawkEye 360 and Elon Musk’s SpaceX have provided Ukraine with satellite radar imaging to detect movement of Russian convoys and internet connectivity that is resistant to Russian jamming efforts.
“The appetite has changed significantly since we started in 2015,” said Brandon Tseng, co-founder and president of Shield AI, a start-up worth $2.7bn that makes artificial intelligence-powered fighter pilots and drones. “That year we pitched to 30 seed investors and got 30 ‘no’s’. Then Russia invades Ukraine and suddenly everyone is taking a look. The funds who thought it was taboo no longer do.”
As many as six defence tech unicorns — start-ups valued at over $1bn — have emerged from the flood of funding: ShieldAI, HawkEye 360, Anduril, Rebellion Defense, Palantir and Epirus.
But some defence tech founders cautioned that while the public 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 defence contract, during which time young companies are likely to run out of cash and fail.
The large contracts awarded to companies such as Anduril and ShieldAI are still an “outlier”, according to the founder of one defence unicorn who now works as an investor at a large San Francisco-based venture firm.
“It is still incredibly hard to sell to the US government; founders are up against a stack of unfair advantages and lobbyists [for the big defence contractors],” the person said. “There are a load of highly valued defence companies that still haven’t performed to the expectations of investors.”
“The key is to directly sell services 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 $3mn to about $25mn last year on the back of a surge of government contracts, according to two people with knowledge of the matter. The company, which analyses global communications to provide military intelligence, raised $75mn in January from investors including Felicis Ventures.
In recent years, the US has set up a series of government agencies to encourage more private sector development of tech with national security applications, including the Defense Innovation Unit in 2015 and Afwerx in 2017, which allows private companies to sell innovative tech into the US air force.
In 2019, the US created a military branch called Space Force to conduct military operations in outer space, incentivising a new round of private capital flows into defence tech focused on space warfare. Musk’s SpaceX has been one of the biggest private winners, receiving large contracts to help build communications and missile-tracking satellites.
Now, a significant number of investors believe that recent technological developments around artificial intelligence have provided a further onus on Silicon Valley groups to assist in US defence efforts.
“The common wisdom for founders has historically been: don’t build a start-up reliant on selling into the government,” says Dan Gwak, managing partner at Point72 Private Investments.
“Now there is an existential technology advancement that I think can shift the global superpower balance,” he said, referring to the rapid development of AI. “The last time that happened was with the atom bomb. Finally we’re seeing the government taking steps to win the tech race.”
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