Defense technology firms claim the nature of warfare is rapidly changing—yet current conflicts remain dominated by traditional weaponry. American weapons startups have not yet taken center stage in war.
War focuses attention on the immediate present. This was evident during a week of conversations in Washington with leaders of defense tech startups, traditional military contractors, and Pentagon officials. Prior to the US and Israeli strikes on Iran, startups like Anduril and Saronic garnered significant attention, promising rapid, low-cost delivery of AI-powered autonomous weapons. However, in recent conflicts, the US has relied more heavily on cruise missiles and bombs supplied by established defense contractors. "In terms of the munitions being used, it's not much different from how wars were fought ten or twenty years ago," said Roger Zakheim, Director of the Ronald Reagan Presidential Foundation and Institute, which focuses on national security. This reality serves as a sobering reminder for venture capital firms that have invested tens of billions of dollars, anticipating a rapid transformation in warfare where new defense tech would disrupt legacy contractors. Wars typically utilize thoroughly tested weapon systems, and Anduril's most prominent products, such as autonomous fighter aircraft, remain in the prototype phase. Conversely, recent conflicts have highlighted the critical importance of prime contractors: for example, RTX, the maker of the Tomahawk cruise missile, and fighter jet manufacturer Lockheed Martin. Demand for their equipment has surged, and orders to replenish stocks are expected to support their financial performance for years to come. Pushed into the background are the startups that have secured massive venture funding. According to the Reagan Institute, total funding in this sector reached $56 billion last year, an 83% annual increase. However, this figure far exceeds the actual value of Pentagon contracts awarded to private defense tech companies: just $4.3 billion last year, representing less than 1% of the total. These startups aim to emulate the success of SpaceX and Palantir, whose technologies are now deeply integrated within the Pentagon. Besides Anduril, which is developing systems like autonomous fighter jets, leading funded companies include:
Saronic Technologies: Autonomous unmanned surface vessels Shield AI: AI pilot software for drones Neros: Various unmanned aerial vehicles Castelion: Hypersonic weapons
Tara Murphy Dougherty, head of Bain Capital-backed software firm Govini, noted that most defense budgets are already allocated to existing programs. "We are not going to stop funding for fifth-generation fighter jets or nuclear submarines. The budget available for startups is much smaller than people think," she said. Some startups are targeting niche gaps exposed by the conflict in Ukraine, such as low-cost drones that traditional contractors struggle to produce. Virginia-based startup Heven AeroTech is gaining attention; it develops hydrogen-powered drones and is valued at over $1 billion. Bentzion Levinson, a former Israeli military commander and current CEO, stated that military needs are evolving. "Drones that can deploy equipment, launch weapons, or serve as loitering munitions represent the future of this ecosystem," Levinson said. Nevertheless, gaining government trust remains challenging for startups. Levinson's company recently signed a basic ordering agreement with the US Army—a type of contract that does not guarantee purchase but can expedite the process if a decision is made to buy. Meanwhile, the conflict with Iran has demonstrated to the US how adversaries are deploying low-cost autonomous weapons on the battlefield, including inexpensive drones from Iran's Shahed Aviation Industries, which have become a core asset. "It's more like the adversary's version of Anduril, not our Anduril," Zakheim remarked regarding the Shahed drones. Last Thursday, a national security conference hosted by the Reagan Institute took place. This more institutional event was bookended by venture capital-focused defense tech conferences organized by Andreessen Horowitz and Founders Fund earlier in the month. Unlike summits featuring high-profile CEOs like Palantir's Alex Karp, the Reagan Institute's keynote speaker was the understated Michael Duffy, the US Deputy Under Secretary of Defense for Acquisition and Sustainment. Duffy called for increased private investment in defense but suggested funds should be directed toward expanding factories, supporting component suppliers, and strengthening supply chain resilience, even if "it's not as glamorous as new prototypes and technologies." The Institute graded the US on achieving its national security objectives:
Quality of new defense tech startups: A– (High mark) Overall "defense modernization": D Manufacturing capability: D+
For some prominent emerging defense companies and their investors, the positive news is that senior military leaders are willing to support them. "How do we remove barriers and create pathways for companies like Saronic, Anduril, and Shield AI?" Duffy asked. For instance, Anduril recently secured one of its largest contracts to date: a 10-year agreement to provide software and other products to the US Army, potentially worth up to $20 billion, though the funding is not fully committed. If it secures more contracts of this nature, Anduril could achieve its ambitious goal: growing from $2.2 billion in revenue last year to $16 billion by 2030. However, Alex Moore, a defense tech investor at 8VC and a Palantir board member, conceded that the vast majority of defense startups fail to "truly break through" to become major Pentagon suppliers. He noted that traditional defense contractors often acquire struggling newcomers at "very low prices," suggesting that acquiring these failed startups serves the national interest. Speaking on a panel, he stated, "A lot of VCs are going to lose a lot of money, but in the end, we will gain a wealth of intellectual property at no cost, which benefits national security." What could salvage some investments is faster reform of the Pentagon's procurement system. Chip Walter, a general partner at Marlinspike, a defense investment firm that backs Anduril, argued that the Pentagon needs a "dual-track approach": procuring traditional military technology for "high-end warfare" while also supporting startups pursuing low-cost solutions. At the same time, Walter, a former executive at Northrop Grumman, added, "We must stop disparaging the prime contractors. Without them, our operations against Iran simply wouldn't be possible."
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