Defense Tech Scaling New Heights With Incoming Administration

The recent run up in the stock market—especially for tech stocks—signals a stimulative business climate during the second Trump Administration which should fuel a continued rise for defense tech—the incorporation of new technologies such as AI, cyber, autonomy and space for military applications. The first Trump Administration saw an S&P 500 increase of 50%, a much larger tech stock increase of 138%, and 380% for the Magnificent 7 stocks. Looking forward, the combination of extended rate reductions in the Tax Cuts and Jobs Act (2017), a lighter regulatory environment, and likely lower interest rates with easing inflation all create a positive economic outlook.

This economic outlook provides fertile ground for gains in the defense tech sector which has already been one of the most promising areas for venture investors. Since 2021, venture investment in defense tech totals more than $100 billion, 40% more than the previous seven years combined. The factors driving increased investment are likely to intensify during the next four years: first, rising geopolitical tensions and, second, the technologies which militaries need are increasingly developed by the private sector rather than government labs.

The first large-scale land war in Europe since World War II, renewed fighting in the Middle East, and China’s aggressive actions in the South China Sea all highlight simultaneous geopolitical conflicts. Further, America’s adversaries—China, Russia, Iran and North Korea—are collaborating more closely than ever in an axis of autocrats which enable them to combine strengths in their collective goal of weakening the United States. During Trump’s first term in office and most recent campaign, he advocated modernizing and strengthening our military. In this campaign, he began referring to the Reagan doctrine of “peace through strength” which recalls an era when the U.S. spent 6% of GDP on defense compared to today’s 3%—the lowest relative level in 75 years. The incoming chair of the Senate Armed Services Committee, Sen. Roger Wicker, is on record calling for a generational investment in defense spending at 5% of GDP.

Military superiority now depends to a large degree on commercial technologies such as AI, autonomy, cyber, space, and others being used in military applications. The war in Ukraine has shown the power of these new technologies such as commercial satellite imagery, small aerial drones, and maritime autonomy which enabled Ukraine to sink or disable one-third of the Russian Fleet without a regular navy. In the last 50 years, there has been a dramatic shift in the drivers of military technology from government labs to consumers and businesses; consequently, venture funding has become the primary financing mechanism and is two to three times the size of the Defense Department’s R&D budget.

The positive landscape for defense tech investing builds on several developments during the Biden Administration. The Defense Innovation Unit, created to deliver more commercial technology to the Pentagon, now has a $1 billion budget (up 8 times since I led it in 2022) and whose director now reports directly to the Secretary of Defense. The Office of Strategic Capital now has the authority to make up to $1 billion in loans for component technologies, like batteries or quantum computing, important for national security. Last year, the Deputy Secretary of Defense announced the Replicator initiative with the goal of delivering thousands of attritable autonomous systems within 18 months and said recently that the Department appears on track to do so.

In addition, the U.S. Space Force announced its commercial acquisition strategy to buy more data from new satellite constellations that provide multi-modal sensors and ever-faster revisit rates. The U.S. Army’s autonomy program is on track to begin producing the Remote Combat Vehicle in 2027 while the USAF is developing a manned-unmanned teaming concept known as Combat Collaborative Autonomy to complement fighter jets. AI, cyber, autonomy and space technology, which my firm—Shield Capital—invests in, are increasingly applied to national security uses and this means more opportunity for a wider set of commercial vendors.

In addition to the technology adoption, the Department has produced several studies on the defense industrial base including the first Industrial Strategy Implementation Plan and Supply Chain Risk Management, both of which identify the increased concentration of suppliers as a national security risk. There is a growing consensus that the supply base must broaden beyond the prime vendors which will create opportunities for more vendors. Given the importance of incorporating new technologies, growing the supply base and scaling new capabilities more quickly, there is tremendous upside for venture-backed companies which today supply only 1% of defense procurement.

Some question whether the Department of Government Efficiency will dampen these trends. I believe this is highly doubtful since procurement was only 21% of the fiscal 2024 defense budget. There are richer opportunities for efficiency and reductions in the personnel budget (26% of the budget) and the maintenance of older ships, tanks and planes (35% of the budget). For example, staff positions in the Army have grown 40% since 9/11. Criticism of military procurement is likely to focus on the trillion-dollar programs such as the F-35 or Ford-class carriers. To modernize military capabilities as the U.S. did during the Reagan years means procuring newer technologies and weapons systems to replace aging fleets.

As a result, I believe DOGE will accelerate the trends fueling defense tech. Elon Musk will be a proponent of fixed-price contracts rather than the cost-plus approach of defense primes. A great example of a fixed-price contract is SpaceX’s Falcon 9 rocket development which was only 10% of NASA’s projected development cost. Additionally, many of the designees for key positions in national security in the new Administration are from business or venture capital backgrounds, similar to DOGE leadership, and are likely to bring a reform mindset of doing things differently and incorporating more private sector incentives like fixed-price contracts.

Rising geopolitical tensions, increasing use of commercial technologies in military applications, the growing need to diversify the defense supply base and the priorities of the incoming Trump Administration combine to create a better outlook than ever before for defense tech. These underlying trends will certainly benefit the defense unicorns such as SpaceX, Anduril and Palantir but they will also lead the way for an ever-growing set of new suppliers like Apex, Danti and Code Metal—three Shield Capital investments.

In the Cold War, Silicon Valley technologies helped make us more secure as a nation; history is repeating itself but with a whole new set of technologies and vendors which will equip our warfighters with the best the nation has to offer. Modernizing our force and expanding our warfighter capabilities from a greater number of suppliers will elevate defense tech to new heights.