The Buyer Changed: What Actually Happened in Defense Tech, and Where the Money Is Really Going
Defense Tech Investing: How the Pentagon Buys Now
For 40 years, defense followed a predictable pattern: startups won pilots, and primes won programs of record. That pattern has started to break, and the cause has less to do with technology or politics than with how the Pentagon buys.
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On March 14, 2026, the U.S. Army awarded Anduril, a company nine years old, an enterprise agreement worth up to $20 billion. The vehicle consolidates roughly 120 separate contracts into one (DefenseScoop, March 14, 2026).
Months later, Fortune reported that contract dollars flowing to the 15 highest-valued defense tech startups still total less than 1% of all Department of Defense contracting (Fortune, July 25, 2026).
Both statements are true at the same time. Reading them together is the key to understanding where defense capital is actually going.
This piece examines five trends reshaping how the Pentagon buys, what each means for investors, where the risks sit, and why we believe much of the opportunity lives in private markets.
Both obvious readings are wrong.
The first reading holds that Silicon Valley has taken over defense. The dollars say otherwise. The primes posted record backlogs in the second quarter of 2026, including Lockheed Martin at $230 billion, RTX at $289 billion, and General Dynamics at $136.5 billion, up 32% year over year.
The second reading holds that defense tech is a hype bubble riding headlines. The contracts say otherwise. Production awards are being signed in under 12 months. Saronic went from prototype to a $392 million Navy production contract in less than a year.
What changed is neither the technology nor the politics. It is how the Pentagon buys.
Three forces sit behind all of it.
AI’s appetite for compute and power: The Pentagon cannot build frontier AI itself, which pulls it toward private builders. National security as industrial policy: The fiscal 2027 request totals $1.5 trillion (U.S. Department of War, April 21, 2026). Government as investor: The Pentagon now holds equity in more than a dozen companies (Defense One, June 18, 2026).
Those forces show up in five specific trends. Each carries a different lesson for investors.
1. The Pentagon handed startups the paperwork.
The Anduril agreement is a ceiling, not revenue. Its value lies in the structure. Roughly 120 contracts became one pre-priced vehicle, so new task orders can arrive without a new competition each time. Saronic shows the same dynamic at the company level, moving from prototype to production award in under 12 months.
The primes are not losing, which makes this trend easy to misread. The change is in the mechanism of the award, not yet in who receives most of the dollars.
What it means for investing
Back companies that sell a platform able to absorb new task orders without new competition, rather than a program that has to win each one.
2. A $400 drone now sets the price of defense.
An FPV strike drone costs $300 to $400. A purpose-built interceptor drone costs about $2,500. A Patriot interceptor costs $3 million or more. That exchange ratio is rewriting procurement.
The numbers show up in the budget and on the battlefield.
- HomeThe fiscal 2027 request includes $75 billion for drones and counter-drone systems, the largest year-over-year increase of any program area.
- HomeThe Defense Autonomous Working Group alone goes from $225.9 million to $54.6 billion.
- HomeUkraine had roughly seven drone manufacturers before 2022. It now has about 500, and they produced more than 4 million drones in 2025.
What it means for investing
Back manufacturing cost curve and volume, not one more exquisite platform.
3. A 39-day war showed where the bottleneck sits.
Operation Epic Fury hit more than 13,000 targets in 39 days. Between 1,060 and 1,430 Patriot interceptors were fired, close to half the prewar stockpile. These figures describe a war that has already happened.
The recovery will be slow, and the government is responding.
- HomeReplenishing the most-used munitions runs to roughly mid-2029.
- HomeMultiyear framework agreements are now in place, with PAC-3 MSE production rising to 2,000 a year by 2030 and THAAD to 400 a year.
- HomeThe Department of Defense has taken equity in at least 12 supply chain companies, including about 15% of MP Materials, alongside a 10-year magnet offtake agreement.
What it means for investing
The investable layer is upstream. Energetics, solid rocket motors, forgings, and critical minerals matter more than final assembly.
4. Germany amended its constitution to pay for this.
Countries do not rewrite their founding law for a spending cycle. European defense, security, and resilience startups raised a record $8.7 billion in 2025, up 55% year over year and roughly four times the level of five years earlier. In July 2026, Helsing raised $1.8 billion at an $18 billion valuation, the largest defense startup round in Europe’s history.
The caveat
The EU’s SAFE program is €150 billion in loans, not grants, with a 10-year grace period. National roadmaps for the 5% of GDP commitment were due in mid-2026. That deadline has passed, and it is the real test of whether political will converts into procurement.
What it means for investing
Europe is a second, largely uncorrelated demand engine with its own procurement channel, discounted for pace.
5. Defense tech stopped meaning anything.
Two data providers counted the same six months of defense tech funding and disagreed by a factor of 2.4. Crunchbase counted $14.6 billion in the first half of 2026. PitchBook counted $35.4 billion. The entire gap comes from where you draw the boundary.
PitchBook’s Q2 2026 data shows why. Five of the ten largest quarterly rounds went to companies outside defense-specific segments: Groq, Cyera, Form Energy, Helion, and Cowboy Space (PitchBook, Q2 2026). Meanwhile, the Pentagon’s AI office awarded Anthropic, Google, OpenAI, and xAI up to $200 million each for agentic AI, structured as prototype agreements outside standard acquisition regulations.
What it means for investing
Some of the best defense exposure in a portfolio may not be labeled defense at all.
The market is skeptical, and some of that skepticism is fair.
Defense investing carries real risks, and the data shows where they sit.
- Home
Market
The U.S. aerospace and defense ETF is down roughly 12% since the Iran conflict began, while the S&P 500 gained 3.5% over the same period. - Home
Valuation
Anduril at $61 billion on roughly $4.3 billion of 2026 target revenue is about 14 times forward revenue. Early-stage rounds are pricing at 17 to 50 times, some with no recurring revenue. - Home
Concentration
Anduril’s Series H alone was about a third of second-quarter venture dollars in the category, and the top 10 rounds made up 62%. - Home
Budget
CSIS shows national defense funding falling 16% in real terms from fiscal 2027 to fiscal 2028, then flat. The $1.5 trillion request is also not law. The discretionary portion needs 60 Senate votes, alongside a proposed $73 billion cut to non-defense spending.
None of this undoes the change in how the Pentagon buys. It does mean entry price and timing matter more than the headlines suggest.
The prime flip is in how the Pentagon buys, not yet in who gets paid.
We think about the shift in four stages.
- Home
Stage 1 (2017 to 2023)
A new class of company exists, venture-backed and software-first, owning its own intellectual property. - Home
Stage 2 (2024 to 2025)
That class gets funded at scale. - Home
Stage 3 (2026)
That class starts winning prime-scale contract vehicles and the integration layer. - Home
Stage 4 (the open question)
Those vehicles either convert into revenue and market share, or they do not.
We are in stage three. Stage four will determine which companies mature into enduring contractors.
Why this is a private-markets story.
The rounds behind Anduril, Saronic, Shield AI, and Helsing are all private, and none of the four has filed to go public. Investors who wait for an IPO miss the milestones that matter most: a prototype-to-production award in under 12 months, the round before a company owns a software backbone outright, and a first prime-scale vehicle win.
Liquidity is arriving anyway. Defense tech exit value in the first half of 2026, excluding SpaceX, reached roughly $72 billion, already more than any prior full year. That points to a path to returns that does not depend on public markets as the only exit.
The constraint is access, not capital. The rounds that matter are oversubscribed and invitation-only.
What we are actually investing in.
As an investor on the U.S. Strategic Tech team, I look for companies built for the new buying pattern rather than the old one. That thesis shows up across the portfolio.
Autonomy across domains
Edgerunner AI builds on-device agents for air-gapped environments where cloud-dependent models fail. Havoc AI applies similar principles to maritime autonomy.
The software and integration layer
Picogrid builds infrastructure for modern missions, enabling autonomous systems to share data and operate as coordinated networks.
Manufacturability as strategy
Firestorm focuses on additive manufacturing and distributed production. Astro Mechanica builds propulsion designed for iteration.
Energy as national security
Radiant develops portable microreactors. Pacific Fusion pursues modular fusion aligned with long-horizon energy resilience.
Portfolio companies are shown for illustrative purposes only and are not necessarily indicative of any AV fund or investor. Investments shown are not available to future investors, except potentially in the case of follow-on investments. Past performance does not guarantee future results.
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The open question is conversion.
Winning a vehicle is not the same as converting it into revenue. Task orders have to arrive, production has to scale, and quality has to hold. Valuations at 14 times forward revenue and above leave little room for delay. Some startups will convert, and some will not.
That is why we favor platforms over programs, manufacturing capacity over exquisite design, and the upstream layer over final assembly.
The buyer changed first. The market is still catching up.
The Pentagon has changed how it buys, and capital is still sorting out what that means. The primes keep their backlogs. A new class of companies keeps winning the vehicles that decide who builds next.
The US Strategic Tech Fund’s view is straightforward. Back the companies built for the new buying pattern, stay disciplined on price, and pay attention to access. Stage four is still open, and it is the one worth watching.
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