Venture To Defense Tech Startups Still Lags, But Experts Say Interest Is Growing

Late last year, software and hardware tech startup made headlines when it closed a massive $1.5 billion Series E.

While the raise was noteworthy for its size alone 鈥� it was the fourth-largest round raised by a U.S.-based startup last year 鈥� it also was eye-catching because it went to a defense and security firm.

Defense tech as a sector historically has not drawn in the venture capital associated with many other tech industries. SA国际传媒 shows that last year, U.S.-based defense tech startups saw only $2.1 billion invested in 53 total deals 鈥� and that includes Anduril鈥檚 $1.5 billion.

For comparison鈥檚 sake, U.S.-based cybersecurity startups saw more than $10 billion invested last year.

This year so far seems to paint an even bleaker picture, with less than $200 million going to defense tech startups domestically in 26 deals.

However, those in the industry say times are not nearly that bad, and even though defense tech sometimes can have a complicated relationship with venture capital and investors, interest in the space is at a high.

A culture war

Defense tech, venture dollars and the general tech culture haven’t always been a harmonious mix. Despite Silicon Valley-developed tech being used by the military for decades, some investors have shied away from the space for moral reasons, and tech companies have been wary of letting their tech be used for military purposes.

Perhaps the most recent notable example was just five years ago when workers protested the company鈥檚 Pentagon drone surveillance contract for what was called Project Maven.

鈥淚 do think you are now seeing more LPs supporting the mission,鈥� said , president and managing director at , the venture arm of aerospace and defense giant RTX, formerly .

鈥淧eople understand technology does matter,鈥� he added. 鈥淚f you sit on the sidelines, your adversaries will use it to their benefit.鈥�

One thing that could be leading to that changing mindset is the massive change when thinking in terms of defense tech in the last decade or so 鈥� from tanks and missiles to now space, cybersecurity and AI.

launched the multibillion-dollar last fall. The fund has made investments in startups such as Anduril, and .

Tull said he has seen indications of more investors warming to the sector. Events such as the war in Ukraine have added a 鈥渟ense of urgency,鈥� he said.

Money talks

Of course, market size and successful exits also can help push VCs and their LPs in certain directions.

If 鈥檚 and RTX’s combined quarter-trillion-dollar market cap isn鈥檛 enough to convince anyone of the money in defense, there also have been more recent examples of VC-backed companies鈥� successes.

The continued growth of VC-backed companies such as Shield AI and Anduril 鈥� as well as formerly VC-backed 鈥� has increased interest, Tull said.

While Palantir went public in 2020, Anduril was valued at $8.5 billion after its funding in December. San Diego-based aerospace and defense technology Shield AI 鈥� which has had some of the largest fundraises in the defense tech space through the past several years 鈥� was valued at $2.2 after raising $60 million in December.

Just last week, Austin, Texas-based geospatial data visualization startup was bought by private equity firm . The company, which has contracts with the Pentagon, allows users to integrate several different sources of data for real-time decision-making based on what is happening in the real world.

, founder of Hypergiant, said he has noticed a difference in investors鈥� attitudes in the space. 鈥淒efense tech certainly was not as sexy when I started,鈥� he said.

Expand your use case

Aside from the growing valuations of some startups, Lamm said another reason defense tech startups may be getting more love from investors is that few can truly be defined as simply defense tech.

Hypergiant, for instance, has use cases in several different sectors for its geospatial data platform in addition to defense.

鈥淩estaurants were one of our first sectors we went into,鈥� Lamm said with a laugh.

Such a business model serves several purposes. It can help a company with the development of its platform since it鈥檚 being used by more customers in different ways. It also can help a company attract talent that may not want to work for a strictly 鈥渄efense tech鈥� startup.

There also is the fact that government and defense contracts take a lot of time (surprisingly, the federal government does not move swiftly). Having a commercial arm to the business can help startups become revenue-producing more quickly as they wait to get a foothold in the defense sector.

鈥淒ual purpose is definitely the safer way to go,鈥� Ateya said. “That certainly can be more attractive to investors.鈥�

Investor interest

And the space does seem to be attracting more investors.

鈥淚 think 10 years ago there was very little invested in aerospace and defense,鈥� Ateya said. 鈥淚n the last five years, that has gone up tremendously.鈥�

Ateya needs to look no further than his own firm, which was founded just last year. RTX already has made about a dozen investments, including in startups like , cyber firm and manufacturing startup .

Other tech that intrigues him is innovation in advanced propulsion, edge computing and electrification startups focusing on aviation.

While the technology and innovation may be there, others would like to see even more investors concentrated on the sector, just as there are investors who specialize in enterprise SaaS or direct-to-consumer startups.

鈥淚 don鈥檛 think there are enough people that are focused on it,鈥� said Lamm, who also co-founded genetic engineering startup . 鈥淚t has gotten better, but I think there should be more.鈥�

However, the signs are there that defense tech investing is starting to take deeper root, and not just with VCs.

Just this spring, Doug Beck left his role as vice president at to become the new director for the , which is helping with the 鈥檚聽 adoption of commercial technology, like that being developed by startups in Silicon Valley and elsewhere.

To leave such a role at Apple would seem to indicate Beck, a captain in the Navy Reserve, sees a real commitment from the DOD when it comes to embracing new tech.

It鈥檚 a commitment other investors also are clearly seeing as defense technologies drift further away from bombs and missiles and more toward space tech, AI and cybersecurity.

鈥淚 think investors are more compelled to the mission of it now,鈥� Ateya said.

Methodology

Defense tech is defined by the industries of military, national security and law enforcement, according to SA国际传媒 data. Most announced rounds are represented in the database; however, there could be a small time lag for rounds reported late in the quarter.