Venture capital firms (VCs) are increasing investments in national security startups amid a proposed record $1 trillion DOD budget, while also diversifying risk due to concerns over inflated valuations by targeting startups that do business with both governments and the private sector, according to a report by PitchBook. VCs are prioritizing companies that stand out, particularly those securing grants like the Small Business Innovation Research (SBIR) program.
Amid rising market uncertainty, Alexander Harstrick, managing partner at J2 Ventures, explained:
LPs (Limited Partners) are seeing that there are very few ways to make money in this modern and more fractured world, and the only enterprise that has signaled that it is going to spend a lot more money on a lot more stuff is the DOD.
He noted that a wave of new funds is entering the space, many modeled after a16z’s American Dynamism strategy, with some of these funds becoming “decreasingly discerning” in terms of the types of startups they back.
Despite a record-setting DOD budget, a proposed $50 billion budget cut by Defense Secretary Pete Hegseth is leading many investors to shift their focus to startups that serve both government and commercial markets. Ryan Micheletti of The Veteran Fund commented:
There’s a cap on how much the Defense Department can spend. Commercial uses help us de-risk our investment.
Startups solely dependent on federal contracts are increasingly seen as too risky under the Trump administration’s shifting defense priorities.
VC funding in defense startups has increased yearly, reaching about $31 billion globally in 2024 amid rising global security concerns and advances in AI, drones, and cybersecurity. The adoption of AI in aerospace and defense is projected to grow from approximately $28 billion today to $65 billion by 2034. Growth in defense technology is expected to continue as investor interest and funding in the sector remain strong.
The full article can be found here.
Editor: Melanie Seelig
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