Pitchbook says defense tech is a stalwart in an otherwise chilly VC environment

Technology companies, especially small ones, have often had difficulty selling their wares to the Pentagon thanks to bureaucratic red tape and excruciatingly slow sales cycles. And the U.S. greatly needs to work with the tech sector in order to stay competitive in a world of increasingly high-tech (and AI-powered) weapons systems. 

But over the past year a narrative has developed that the defense tech sector is heating up. Now Pitchbook has published some numbers that put data behind the chatter.

According to Pitchbook, while overall venture capital deals have slowed over the past year, the defense tech sector has weathered the storm better than most others. 

U.S. VC investment began tumbling in 2022, hit bottom in 2023, and hasn’t recovered. Meanwhile, defense tech investment remained relatively steady. VCs put $35.8 billion behind startups across 800 deals in 2022, and $34.9 billion invested across 627 deals in 2023. 

“The decline in [defense tech] is less than the broader decline in VC, which suggests that defense-adjacent companies continue to attract VC funding and may not be as risky as generally thought,” Pitchbook emerging-tech analyst Ari Javaheri tells Fast Company in an email. (These difficult years come on the heels of a 2021 and 2022 that National Venture Capital Association CEO Bobby Franklin called “the two biggest years in the history of venture capital.”)

So far in 2024, private investors have bet $9.1 billion on defense tech startups across 228 investments, Pitchbook research shows.

The number and value of exits (defense tech startups getting acquired or going public) in 2024 are nothing spectacular, Pitchbook says, but they’re on pace to beat last year’s numbers. The sector produced 39 exits worth $2.2 billion in 2023, and have already produced 35 exits worth $8.3 billion just halfway through 2024. 

Pitchbook points out that the number of defense tech startups being acquired (versus other kinds of exits) has picked up, with $5.2 billion spent by acquirers across 36 deals so far this year. “This trend suggests larger players are likely to continue acquiring smaller companies to expand their product portfolios,” Javaheri writes in his report.

Some of the credit for the sector’s durability may lie with the Defense Innovation Unit (DIU), the defense tech accelerator based in Silicon Valley that works with promising startups to develop defense-grade products and helps them reach the scale needed to do business with the Pentagon (which for years has relied on huge defense contractors for new equipment). During 2023, the DIU says it awarded 90 contracts worth $298 million to startups to build technology prototypes for potential use by defense. Cumulatively, the DIU says it transitions about half of these (one-off) development contracts to full defense contracts. 

The DIU’s profile within defense circles has been growing. In 2023 the unit began reporting directly to the U.S. Secretary of Defense. The DIU also secured $983 million in funding for fiscal year 2024, way up from the $191 million it received in 2023. The unit is now headed by Doug Beck, who came to the DIU from Apple, where he was a VP reporting directly to CEO Tim Cook. 

Javaheri points out another trend that may be impacting the Pentagon’s ability to source high-tech products from startups: In the past, former Pentagon officials and military officers have crossed over into roles in the private sector within big defense contractors, but they’ve now begun taking roles at VCs where they focus on defense tech startups. For example, former Defense Secretary Mark Esper is now at Red Cell Partners, while former Secretary of the Army Ryan McCarthy is now at Scout Ventures.

“This shift is seen as an opportunity to leverage their extensive networks and expertise to potentially streamline the acquisition process for the Pentagon,” Javaheri tells Fast Company.

Perhaps the biggest factor pushing up defense tech investment is the fact that the Pentagon increasingly has realized that Silicon Valley companies are the best and fastest source of new technologies needed to fight a very different kind of 21st-century warfare. 

“We’re at this extraordinary moment when everything in war is changing,” said Christopher Kirchhoff, one of the original founders of the DIU (then called DIUx), during a media roundtable Monday. “It’s not just the drones in Ukraine. It’s the fact that a month ago the U.S. had to ask the Ukrainians to evacuate our tanks from the front because a quarter of them got whacked by Russian kamikaze drones.” 

“In the Middle East we’re seeing the same phenomena of inexpensive commercial technology changing the game,” said Kirchhoff, who is also the coauthor of a new book called Unit X: How the Pentagon and Silicon Valley Are Transforming the Future of War, “whether it’s the quad-copters used by Hamas to break down the Gaza border fence on October 7th, or now the Hezbollah loitering munitions [over] the north of Israel.”

<hr class=“wp-block-separator is-style-wide”/> https://www.fastcompany.com/91152692/pitchbook-defense-tech-investment-chilly-vc-environment?partner=rss&amp;utm_source=rss&amp;utm_medium=feed&amp;utm_campaign=rss+fastcompany&amp;utm_content=rss