Report: VC Firms up Investments in Military Tech Startups

Military technology startups are enjoying a record investment boom led by venture capital (VC) firms.

This wave of investments has been fueled by the Russia-Ukraine war and tensions between the U.S. and China, both of which have led to confidence that the U.S. will begin hiring Silicon Valley defense-tech firms, the Financial Times (FT) reported Tuesday (June 20).

VC firms made more than 200 defense and aerospace deals in the first five months of the year, per the report. Those deals were worth nearly $17 billion, which is more than the sector raised in all of 2019.

Silicon Valley had long avoided military technology, wary about being associated with unpopular wars as well as the Pentagon’s slow and cautious procurement system, which tends to favor traditional defense companies, the report said.

Investors and founders said this unease has been trumped by the hope that startups could begin to get a piece of America’s colossal defense budget, which will be a record $886 billion for 2024, according to the report.

“The appetite has changed significantly since we started in 2015,” said Brandon Tseng, co-founder and president of ShieldAI, which manufactures artificial intelligence (AI)-powered fighter pilots and drones, in the report. “That year we pitched to 30 seed investors and got 30 ‘no’s.’ Then Russia invades Ukraine and suddenly everyone is taking a look.”

Defense technology, like AI before it, could prove to be immune to the funding downturn that has plagued the startup world recently, the report noted.

The amount of venture capital raised by American startups dropped by 55% between 2022’s first quarter and the same period this year. Meanwhile, the annual internal rate of returns for venture companies in the third quarter of 2022 dipped to negative 7%, the lowest level in 13 years.

This new funding landscape will force businesses to reexamine how they find financing, David Metz, CEO of Prizeout, wrote in an opinion piece for PYMNTS last month.

“In recent years, money was flowing freely, funding was never-ending for ideas that sometimes never came to fruition, and companies without products saw unexpected valuations,” Metz wrote at the time. “We’re seeing this end, and that’s not necessarily a bad thing.”