defense tech startups receive more than $17 billion in funding thus far in 2023

Defense tech startups are managing to attract billions of dollars from venture capitalists lately on the back of the ongoing armed conflict between Ukraine and Russia and an overall escalation in geopolitical tensions resulting from that event.

According to data from PitchBook, early-stage companies in this sector attracted $14.5 billion from investors resulting in a 15% year-on-year jump. This may not sound as much but the figure is also twice as much as what these businesses brought in during the same period in 2021.

A total of 151 deals were made by VCs with startup in the defense tech segment as Russia-Ukraine war is expected to speed up the procurement process within top US government defense institutions including the Pentagon.

Overall, during the first five months of this year, more than $17 billion have been poured into defense tech startups across 200 and so deals. This amount is already exceeding the total that the sector raised during 2019, PitchBook data also cites.

Defense Tech Space Unicorns are Proliferating but VCs May Be Unaware of the Risks

The United States defense budget for 2024 is expected to reach a record at $886 billion while global defense spending rose to $2.24 trillion by the end of 2022 and may continue to grow rapidly if the war in Ukraine prolongs and tensions keep escalating.

Companies such as Anduril, which recently raised $1.5 billion during its Series E funding round led by Valor Equity Partners, is one of the few titans of the industry. The company was valued at nearly $9 billion during this capital raise that included among its participants some top-notch VC firms like General Catalyst, Andreessen Horowitz, and the Founders Fund.

Other companies valued at over $1 billion – a.k.a. unicorns – in this up-and-coming space include HawkEye 360, Epirus, and Palantir (PLTR). The latter is uniquely positioned to tap on two emerging trends – AI and defense tech – and investors’ interest on the company’s prospects has become evident lately as its share price has surged by 147% thus far in 2023.

Also read: Palantir Launches its Own Large Language Model Called AIP

Meanwhile, another top VC Fund, Sequoia Capital, made its first investment in the sector just a few days ago when it poured $5.7 million into Mach Industries, a company that is developing a fuel that uses available oxygen and hydrogen to power remotely-piloted aircraft.

“There is a major modernization effort underway to advance the U.S. defense technology and build a new generation of military systems”, a spokesperson for the fund told Reuters in an emailed statement.

Despite the fact that there is a seemingly sound rationale for the momentum the sector is seeing, experts indicate that some VC firms may be stepping into these deals without necessarily being acquainted of the caveats of working with the US government.

In this regard, they cite long sale cycles, lengthy procurement procedures, and significant back-and-forthing that may result in many firms requiring more funding than expected to stay afloat while not being awarded a contract.

“The risk is VCs entering the space without requisite knowledge of the federal sales cycle and defense innovation ecosystem. It’s complicated and bureaucratic, and generally you’d want some experience if you’re placing bets on companies that will ultimately have to develop a catered go-to-market strategy for the Department of Defense”, analyst Ali Javaheri from PitchBook emphasized.

Renewable Energy and Biotech are the Hottest Segments of Defense Tech

top segments receiving the most vc money

The segments within this industry that are attracting the majority of VC funds are renewably energy & generation, biotech, and sensing, connectivity & security. During the 12 months ending on 28 April, these three subsets have brought a combined total of $10.6 billion in VC funding.

“The defense tech industry is undergoing significant transformation as governments prioritize national security objectives and promote the adoption of commercial technologies for military use. The establishment of innovation hubs like the Defense Innovation Unit (DIU) and capital providers like the Office of Strategic Capital are meant to bridge the gap between the military, entrepreneurs, and investors”, the PitchBook report cited.

The rise of artificial intelligence (AI) and the race that multiple companies have engaged in to develop the most powerful models to commercial enterprises for various purposes have both attracted and cautioned governments as bad actors may now be able to gain their hands on state-of-the-art technology that was previously available to only a handful of sophisticated defense institutions.