Venture participation in defense technology startups is still slow, but experts say interest is growing.

Late last year, software and hardware technology startup Anduril made headlines by closing a massive $1.5 billion Series E.

The funding is notable for its size alone, as it was the fourth largest funding raised by a U.S.-based startup last year, but funding went to defense and security companies. This also caught my attention.

Defense technology as a sector has historically not attracted the venture capital associated with many other technology industries. Last year, U.S.-based defense technology startups invested just $2.1 billion in a total of 53 deals, including Anduril’s $1.5 billion, according to Crunchbase data.

For comparison, more than $10 billion was invested in US-based cybersecurity startups last year.

So far this year, less than $200 million in funding has been paid to domestic defense technology startups across 26 deals, painting an even bleaker picture.

But industry insiders say times are not so bad, and although defense technology can have a complicated relationship with venture capital and investors, interest in the field is high.

culture war

Defense technology, venture capital, and general technology culture have not always been harmonious. Even though technology developed in Silicon Valley has been used by the military for decades, some investors have shied away from participating in the field for moral reasons, and technology companies have He is wary of technology being used for military purposes.

Perhaps the most recent notable example was just five years ago, when Google employees protested the company’s Pentagon drone surveillance contract called Project Maven.

“I think there are more LPs supporting this mission now,” said Daniel Ateja, president and managing director of RTX Ventures, the venture arm of aerospace and defense giant RTX (formerly Raytheon). .

“People understand that technology is important,” he added. “If you stand by, the enemy will use that to their advantage.”

One thing that may be contributing to that shift in thinking is the huge shift in thinking in terms of defense technology over the past decade or so, from tanks and missiles to space, cybersecurity, and AI.

Last fall, Thomas Tull launched the multibillion-dollar American Innovation and Technology Fund. The fund has invested in startups such as Anduril, Capella Space, and Shield AI.

Tal said there are signs that more investors are showing interest in the sector. Events such as the Ukraine war have added to the “sense of urgency,” he said.

money talk

Of course, market size and exit success also help push VCs and their LPs in a certain direction.

If Lochhead and RTX’s combined market cap of $25 trillion isn’t enough to convince people to put money into defense, there are recent success stories from venture capital-backed companies.

Interest is growing because of the continued growth of VC-backed companies such as Shield AI and Anduril, as well as formerly VC-backed companies such as Palantir, Tal said.

Palantir went public in 2020, while Anduril was valued at $8.5 billion after raising capital in December. San Diego-based aerospace and defense technology company Shield AI, which has raised some of the largest funding in defense technology over the past few years, raised $60 million in December His valuation came to $2.2.

Just last week, Austin, Texas-based geospatial data visualization startup Hypergiant was acquired by private equity firm Tribe Capital. The company has a contract with the Department of Defense that will allow users to integrate multiple disparate data sources to make real-time decisions based on what’s happening in the real world.

Hypergiant founder Ben Lam said he has noticed a difference in investor attitude in this space. “Defense technology certainly wasn’t that attractive when I started,” he said.

Expand your use case

Apart from rising valuations for some startups, another reason why defense technology startups may be getting more love from investors is that , he said, simply because there are very few companies that can truly be defined as defense technology.

For example, Hypergiant has use cases not only in defense but also in several different sectors for geospatial data platforms.

“Restaurants were one of the first areas we moved into,” Lamb said with a laugh.

Such a business model serves several purposes. It helps companies develop their platforms as they are used by more customers and in different ways. It also helps companies attract talent who may not want to work for a strictly “defense technology” startup.

There’s also the fact that government and defense contracts take time (surprisingly, the federal government doesn’t move quickly). Having a commercial arm of the business will help startups waiting to gain a foothold in the defense sector become profitable faster.

“It’s definitely safer to have a dual purpose,” Ateya said. “That could certainly make it more attractive to investors.”

investor interest

And the space appears to be attracting even more investors.

“I think 10 years ago there was very little investment in aerospace and defense,” Ateja said. “Over the past five years, that amount has increased significantly.”

Ateya needs to look no further than his company, which was founded just last year. RTX has already made about a dozen investments, including startups such as Impulse Space, cyber company SpiderOak, and manufacturing startup Fortify.

Other technologies that pique his interest are innovations in aviation-focused advanced propulsion, edge computing, and electrification startups.

The technology and innovation may be there, but some would like to see more investors focus on this sector, just as there are investors who specialize in enterprise SaaS and direct-to-consumer startups. There is.

“I don’t think enough people are paying attention to this,” says Lamb, who is also co-founder of genetic engineering startup Colossal Biosciences. “It’s getting better, but I think it can get better.”

But there are signs that investment in defense technology, and not just venture capital, is starting to take root deeper.

Just this spring, Doug Beck left his position as Apple’s vice president to become the company’s new director of defense innovation. The unit helps the Defense Department deploy commercial technologies, such as those developed by startups in Silicon Valley and elsewhere.

Leaving such a role at Apple would seem to indicate that Beck, a Navy Reserve captain, understands the Department of Defense’s true commitment to embracing new technology.

It’s a commitment clearly recognized by other investors as defense technology moves away from bombs and missiles and toward space technology, AI and cybersecurity.

“I think investors are being asked more about that mission now,” Ateya said.

methodology

According to Crunchbase data, defense technology is defined by the military, national security, and law enforcement industries. Most of the announced rounds appear in the database. However, there may be a slight lag for rounds reported late in the quarter.

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