The New Arsenal: How Venture Capital Is Rebuilding America’s Defense Industrial Base

For most of the last half-century, America’s defense industry optimized for scale, process, and predictability. A small group of prime contractors designed highly complex systems, governments funded them over decades, and military advantage was measured in platforms that took years to develop and even longer to replace.

That model produced extraordinary capability, but it was built for a world where time was an asset and conflict unfolded slowly. Today, that assumption no longer holds.

Modern conflict compresses timelines in ways the defense industrial base was never designed to handle. Drones can be designed, deployed, countered, and redesigned within a single budget cycle. Software updates now matter as much as hardware upgrades. Supply chains are contested, logistics are targets, and power itself has become a vulnerability. Under these conditions, advantage increasingly flows to systems that can be adapted, manufactured, and replaced quickly.

This piece examines how venture capital is reshaping America’s defense industrial base, why that shift reflects structural change rather than speculation, and what it means for long-term value creation in strategic technology markets.

Over the past several years, venture capital has moved decisively into defense and strategic technologies. This is not because investors suddenly became interested in geopolitics, but because the economics of defense began to change. New procurement pathways opened. Software and advanced manufacturing matured. And the gap between what modern warfare demands and what legacy systems can deliver became increasingly difficult to ignore.

By late 2025, defense technology had become a mainstream venture allocation. PitchBook data shows that defense tech startups raised approximately $28.4 billion in the first half of 2025 alone, already exceeding the full-year total from 2023 (PitchBook via SG Analytics, 2025). Projections indicated the category was on pace to exceed $50 billion for the year. In parallel, companies like Anduril reached private valuations above $30 billion, signaling investor belief that venture-backed firms could scale far beyond the historical role of subcontractor (Crunchbase News; Reuters, 2025).

Venture capital is not chasing the next conflict. It is responding to a deeper realignment in how military capability is built, sustained, and upgraded.

Defense did not get trendy. The constraints changed.

The clearest way to understand this shift is to focus on incentives rather than headlines.

Modern conflict increasingly rewards three attributes.

Speed: As threats evolve faster than traditional acquisition cycles.
Volume: As attritable systems alter the economics of deployment.
Adaptability: As the battlefield becomes a network of sensors, software, logistics, and power.

The legacy primes were built for a different environment. Their strengths remain substantial. They excel at program management, certification, and large-scale production once requirements stabilize. Their limitations are also structural. Cost-plus procurement models reward risk minimization, not rapid iteration.

Venture-backed entrants operate under different assumptions. They expect specifications to change. They design systems that can be upgraded quickly and manufactured flexibly. From our vantage point as U.S. Strategic Tech Investors, this divergence in operating tempo is one of the most important forces reshaping the defense industrial landscape today.

The capital shift reflects structure, not speculation.

Government priorities reinforce this alignment. The U.S. Department of Defense requested a record $145 billion for Research, Development, Test, and Evaluation (RDT&E) in fiscal year 2024, the largest R&D request in the department’s history (U.S. Department of Defense, FY2024 Budget Request). Spending priorities emphasized autonomy, artificial intelligence, advanced networking, space systems, and next-generation deterrence.

Similar patterns are visible across U.S. allies, including members of the North Atlantic Treaty Organization (NATO) and Indo-Pacific partners, where defense budgets increasingly prioritize drones, AI-enabled command systems, space infrastructure, and resilient energy systems (SIPRI; NATO reports, 2023–2025).

From primes to neoprimes.

A new defense company once meant a subcontractor or a narrow capability provider. Today’s “neoprimes” aim higher. They seek to own integrated systems, software layers, and increasingly the manufacturing base itself.

Anduril is the most visible example. Its $2.5 billion Series G round and $30.5 billion valuation in 2025 signaled investor confidence that a venture-backed company could plausibly grow into prime-like scale while maintaining a Silicon Valley development cadence (Crunchbase News; Reuters, 2025).

The broader pattern matters more than any single company.

Neoprimes tend to favor vertically integrated platforms rather than isolated components. They design hardware for repeatable manufacturing rather than bespoke production. And they pursue business models that support reinvestment rather than pure cost recovery.

Legacy contractors still dominate revenue and backlog. Lockheed Martin reported a record backlog of approximately $176 billion at the end of 2024, reflecting the durability of long-term programs (Lockheed Martin Investor Relations, 2024 Form 10-K). That scale will not disappear quickly.

At the margins, however, change is visible. Reuters reported that venture-backed defense firms roughly doubled their share of Pentagon contract value in 2025, even though their absolute share remains small (Reuters, 2025). The near-term dynamic is growth, not displacement.

What we are actually Investing In.

As an investor in the Alumni Ventures US Strategic Tech team, I view this moment less as a defense tech surge and more as a reindustrialization cycle, with national security acting as the forcing function. Believing in America today means betting on builders: those who forge factories, harden supply chains, and deliver capability under constraint.

That thesis shows up repeatedly across the portfolio.

Across these examples, the common thread is not novelty. It is execution under real-world constraints.

Why this matters for venture outcomes.

Skepticism toward defense investing has historically been reasonable. Procurement can be slow. Revenue is often opaque. Exit paths were limited.

Those constraints are loosening, though not disappearing.

Defense-related exit activity rebounded in 2024, and 2025 saw renewed public market interest in defense and space-adjacent companies (PitchBook, 2025). Strategic acquirers increased activity through acquisitions, partnerships, and minority investments as they sought to close capability gaps more quickly. At the same time, companies that demonstrated manufacturing discipline and system-level ownership began to look less like speculative projects and more like long-duration industrial assets.

From a portfolio construction perspective, the opportunity is not about betting on conflict. It is about participating in the rebuild of the industrial base that supports deterrence, resilience, and allied interoperability.

The hard part comes next.

Designing a prototype is one challenge. Scaling production, meeting quality standards, and delivering reliably over time is another. This is where legacy primes retain real advantages, and where many startups will struggle.

The next phase for neoprimes is therefore operational. Supply chains, quality control, training, sustainment, and cost discipline will determine who matures into an enduring contractor and who remains a niche supplier.

That reality reinforces the central point. The new arsenal is not primarily a story about software or weapons. It is an industrial story.

The arsenal is being rebuilt in factories, power systems, and code.

It is tempting to interpret today’s defense tech momentum as a cultural shift in Silicon Valley. The reality is more structural.

Warfare has changed. Supply chains have become contested terrain. Energy, manufacturing capacity, and software-defined systems now sit at the center of deterrence. The defense industrial base is being asked to move faster, iterate continuously, and operate under persistent stress.

Venture-backed builders are stepping into that gap because they are designed for it. They absorb early risk, invest heavily in development, and build systems with the expectation that requirements will evolve. They are not always cheaper, and they are rarely profitable early. But they are aligned with the realities of modern conflict in ways legacy structures struggle to replicate.

This does not mean the primes are going away. Their scale, experience, and production depth remain indispensable. A more likely outcome is a new equilibrium, where incumbents and neoprimes coexist, partner, acquire, and compete across different layers of the stack.

For investors, the implication is clear. Defense is no longer a static, slow-moving corner of the market defined solely by cost-plus contracts. It is becoming a dynamic industrial category where execution, manufacturability, and systems thinking shape long-term value.

The US Strategic Tech Fund’s view is straightforward. Believing in America today means betting on the builders. In the new arsenal, advantage will belong to those who can build, deliver, and endure. That is where American competitiveness, and durable value creation, are most likely to emerge.

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