National accelerator Y Combinator recently updated its request for startups, noting its specific interest in backing defense tech startups, which could open up more funding opportunities for Colorado-based defense tech businesses.
YC nodded to two local companies in a blog post about the update.
“SpaceX showed the world that a private space company could be vastly more effective than the publicly-funded United Launch Alliance,” YC wrote in the blog post. “New companies that sell to the [Department of Defense] like [Denver-based] Palantir and Anduril are showing that the same thing is true for defense tech.”
YC’s increasing focus on defense tech follows venture capital giant Andreessen Horowitz’s investment thesis of “American Dynamism,” which involves backing founders and companies that “support the national interest,” like defense. Over the past three years, venture capital firms have invested more than $100 billion in defense tech startups, with Andreessen Horowitz writing more checks than any other investor.
“Broadly speaking, there’s definitely a lot of energy,” in defense tech startups, said Ali Javaheri, an analyst for VC data firm PitchBook. “There’s a big cultural shift.”
Last year, investors pumped $33 billion into defense tech startups, according to PitchBook, roughly the same amount of capital that was invested in the sector in 2022 and 22% below the record high set in 2021.
A portion of the $33 billion invested in defense tech startups last year went to Colorado businesses. Sierra Space, a space defense company in Louisville, raised a $290 million Series B in September. Three months later, Centennial-based True Anomaly, which builds spaceflight training technology for U.S. Space Force warfighters, pulled in a $100 million Series B round.
PitchBook keeps a broad definition of defense tech startups. It includes firms like California-based Anduril, which makes advanced defense technologies, and includes companies like OpenAI. The ChatGPT maker isn’t a defense-focused firm, but it does have a contract with the U.S. Department of Defense to apply its artificial intelligence technology for cybersecurity.
Below are the top 10 VC deals in defense tech startups since 2016, according to PitchBook.
Companies like California-based Anduril and Denver-based Palantir, a firm that creates software for the U.S. military, are among the most well-known defense-tech firms. But newer startups have launched in recent years to bring more innovations to the defense industry.
Colorado Springs-based Defense Unicorn raised a $35 million Series A in March. Founded in 2021, the startup helps national security entities and the U.S. Department of Defense continuously deliver artificial intelligence tools and software in any environment, including places without access to the internet.
Ohio-based Ghostdog, a military intelligence startup from Olive AI founder Sean Lane, raised nearly $4 million for its secure web browser that allows U.S. intelligence agencies to collaborate.
Texas-based Match Industries, founded by MIT dropout Ethan Thornton in 2022, raised $79 million last year to “replace gunpowder” for the defense industry.
Among the top investors in defense tech startups are Andreessen Horowitz, the CIA’s VC fund In-Q-Tel and New Enterprise Associates.
Here are the top 10 investors backing the most defense tech startups since 2016.
As entrepreneurs and startup investors find new energy for defense tech, the Department of Defense has been less enthusiastic.
VC-backed startups received less than 1% of the $411 billion Defense Department contracts awarded in the government’s fiscal year through September, according to The Wall Street Journal. The DoD also recently opted to no longer fund Shift, a $2 million fellowship program that boosted the Pentagon’s relationship with startups and venture capitalists, according to Forbes.
“It comes down to the fact that the DoD doesn’t really know how to purchase these technologies in a way that fits with Silicon Valley’s ethos of ‘move fast and break things,’” PitchBook’s Javaheri said.
