Investment in military tech startups is booming as the war in Ukraine and geopolitical tensions lead to growing confidence that the US government will give lucrative contracts to Silicon Valley companies making cutting-edge defence systems, UK’s (Financial Times) said.
US venture capitalists have agreed more than 200 defence and aerospace deals in the first five months of this year worth nearly $17 billion more than the sector raised during the entire of 2019, the Financial Times said citing data from PitchBook.
This boom has mirrored the gold rush also experienced by the artificial intelligence sector, even as investment in start-ups in other parts of the tech industry has plummeted in recent months amid a broader downturn.
US venture investment in defence startups surged from less than $16 billion in 2019 to $33 billion in 2022, PitchBook data shows. Investors piled a record $14.5 billion into such startups in the first quarter of this year.
Silicon Valley had shunned defence technology for years, spooked by association with controversial overseas conflicts and wary of the Pentagon’s notoriously slow and risk-averse procurement process.
According to interviews with more than 15 investors and founders, this wariness has given way to a belief that startups are finally in line to take a significant share of the US’s mammoth defence budget, which has grown over two decades to reach a record $886 billion for 2024, the Financial Times.
Large VCs have begun to invest in companies that build defence products as well as, for the first time, “kinetic” weapons systems.
“We are seeing more VCs saying they are comfortable investing in startups doing,” Mike Brown, the former director of the defence innovation unit at the US Department of Defence, said.
The war in Ukraine has been a “game changer” for US military interest in commercial technology, Brown added.
The Ukraine war has been fought through a combination of traditional trench warfare and high-tech systems such as satellite communications, data intelligence and autonomous drones.
Private companies have provided Ukraine with satellite radar imaging to detect movement of Russian convoys and internet connectivity that is resistant to Russian jamming efforts.
But some defence tech founders cautioned that while the public procurement process had improved, it was still painfully slow. They said that there is a long gap between developing a prototype and being awarded a government defence contract, during which time young companies are likely to run out of cash and fail.
In August 2015, Former Defense Secretary Ash Carter created what he called the Defense Innovation Unit Experimental (DIUx), whose mission is to identify and invest in companies that develop technologies that may be useful to the military, build relationships with startups, and recruit best talent.
Through this unit, which acted as an intermediary between the Pentagon and technology companies, hundreds of millions of dollars from the Department of Defense budget were channeled towards startups.
In March 2016, Carter organised the Defense Innovation Board (DIB) tasked with providing advice and recommendations to the Pentagon’s leadership. He appointed former Google CEO Eric Schmidt to chair DIB, which included current and former executives from Facebook and Google.
Three years after Carter launched DIUx, it was renamed the Defense Innovation Unit (DIU). DIUx was described as ‘a proven, valuable asset’ to fostering innovation across the Defense Department and transforming the way DoD builds a more lethal force.
In early 2018, the Trump administration requested a steep increase in DIU’s budget for fiscal year 2019, from $30 million to $71 million. For 2020, the administration requested $164 million.
In 2019, the US created a military branch called Space Force to conduct military operations in outer space, incentivising a new round of private capital flows into defence tech focused on space warfare. SpaceX has been one of the biggest private winners, receiving large contracts to help build communications and missile-tracking satellites.
Now, a significant number of investors believe that recent technological developments around artificial intelligence have provided a further onus on Silicon Valley groups to assist in US defence efforts.
“The common wisdom for founders has historically been: don’t build a startup reliant on selling into the government,” says Dan Gwak, managing partner at Point72 Private Investments.
“Now there is an existential technology advancement that I think can shift the global superpower balance,” he said, referring to the rapid development of AI.
Source: Qatar News Agency