Defense tech VC investment hit $29.7B in 2023 — nearly triple the $10.3B invested in 2019. The narrative has shifted from "VCs won't touch defense" to "VCs can't get enough of it."
The companies driving this shift are not purely defense contractors. They are dual-use startups — companies that build technology with both commercial and military applications, collect commercial revenue to de-risk the business model, and use DoD contracts to build moats that are almost impossible for any competitor to replicate.
Understanding how defense tech investments actually work — deal structure, government contracts, investor requirements, and exit paths — is now essential knowledge for any serious startup investor or founder operating in technology.
What "Dual-Use" Actually Means in Defense Tech
Dual-use refers to technology that serves both civilian and military markets. This is not new — GPS, the internet, and night vision all originated in defense research and migrated to commercial use. What is new is the direction of flow. Today, the most powerful dual-use companies start commercial, develop superior products in the market, and then sell hardened versions to the DoD.
Autonomy & Robotics
Anduril, Shield AI, Joby, Joby Defense
Cybersecurity
Palantir, IronNet, Fortress Information Security
AI & Computer Vision
Scale AI, Clarifai, Synthetaic
Space & Satellite
Planet Labs, HawkEye 360, Pixxel
Biodefense
Resilience, Ginkgo Bioworks, AbSci
Energy & Power
Fervo Energy, Commonwealth Fusion, Oklo
The dual-use structure is strategically superior for investors. Commercial revenue validates product-market fit in a competitive environment, while defense contracts create multi-year revenue certainty that commercial SaaS rarely achieves. Track leading companies on the Defense Tech Dashboard.
How Defense Tech Investments Actually Work
Defense tech follows standard VC equity mechanics at the investment level — preferred shares, liquidation preferences, pro-rata rights — but layered with compliance requirements that most traditional VCs have had to learn from scratch.
| Investment Factor | Standard VC | Defense Tech VC |
|---|---|---|
| Investor nationality | Open to all | Often US persons only (ITAR/CFIUS) |
| Due diligence timeline | 4–8 weeks | 8–20 weeks (security + FOCI review) |
| Revenue model | ARR / subscriptions | OTA, SBIR, program of record |
| Customer sales cycle | 1–6 months | 12–36 months |
| Exit paths | Strategic M&A, IPO | Strategic M&A (prime contractors), IPO |
| Board composition | Standard preference | May require cleared US citizen board members |
The Defense Tech Procurement Ladder: From SBIR to Program of Record
Most defense startups follow a staged government revenue ladder before reaching the multi-hundred-million-dollar contracts that create durable investor returns.
SBIR / STTR Phase I
$50K–$300K3–6 months to award
R&D validation, non-dilutive capital, government credibility
SBIR Phase II
$500K–$2M6–12 months
Prototype development, first DoD relationship
OTA Agreement (DIU / SOCOM / AFWERX)
$1M–$50M3–9 months to award
Production prototypes, operational testing, fast procurement
Program of Record
$50M–$1B+ (IDIQ ceiling)18–36 months
Sustained revenue, extremely high switching costs
Who Is Funding Defense Tech in 2025–2026
The defense tech VC landscape has bifurcated into dedicated defense funds and generalist funds that have built dedicated defense practices. The top investors by deal volume and check size include:
a16z (American Dynamism)
Defense, national security, aerospaceTechnology that strengthens American industrial competitiveness
Founders Fund
Deep tech, defense, biodefensePalantir, Anduril — first movers in Silicon Valley defense
8VC
Defense software, DoD modernizationBacks companies replacing legacy prime contractor software
Shield Capital
Pure-play defense techSeed-to-growth, former military leadership team
General Catalyst
Dual-use, national resilienceDeployed capital into Anduril Series E and similar
In-Q-Tel (IQT)
Intelligence community technologiesStrategic investor, not financial return focused
What Defense Tech Investors Actually Look For
Having evaluated dozens of defense tech companies and sat across the table from the funds writing the largest checks, the diligence criteria are more specific than most founders realize:
What Gets Funded
- ✓ Founder team with military or IC operational background
- ✓ Technology that replaces legacy prime contractor software
- ✓ Commercial revenue base proving the product actually works
- ✓ Clear OTA or SBIR pathway as first DoD revenue
- ✓ US-person ownership structure (ITAR-compliant from day one)
What Gets Passed On
- ✕ Technology built entirely for defense with no commercial proof point
- ✕ Foreign investor cap tables (triggers CFIUS review)
- ✕ No technical moat — just services or integration
- ✕ Teams that underestimate 24-month government sales cycles
- ✕ No path to a program of record within 3–5 years
The Exit Question: Who Acquires Defense Tech Startups?
Defense tech exits look different from SaaS exits. The buyer universe includes prime defense contractors (Lockheed Martin, RTX, Northrop Grumman, L3Harris), large commercial tech companies building government divisions (Palantir, Microsoft, Google), and public market IPOs for the largest platform companies.
| Company | Last Valuation | Exit Status |
|---|---|---|
| Anduril Industries | ~$28B (2024) | Private — IPO expected 2025–2026 |
| Shield AI | ~$2.7B (2023) | Private — preparing for public markets |
| Palantir | $90B+ (public) | NYSE listed since 2020 (PLTR) |
| SpaceX | ~$350B (2024) | Still private |
| Hermeus | ~$100M (est.) | Early-stage — USAF OTA |
The defense tech opportunity is structural, not cyclical.
The US has spent decades relying on prime contractors that move at government speed. The DoD's own innovation units — DIU, AFWERX, NavalX — were explicitly created because the traditional procurement system could not onboard fast-moving technology companies. Dual-use startups are not just filling a gap in the market. They are replacing the legacy industrial base entirely — and the investors who recognized this in 2019 have already generated some of the most durable venture returns of the decade.
Track the latest defense tech fundraising rounds, valuations, and company updates on the Defense Tech Dashboard.
Follow defense tech investment trends and company valuations on the Defense Tech Dashboard at Value Add VC. Originally published in the Trace Cohen newsletter.