The top venture capital backed national security startup companies have raised tens of billions of dollars to fund their operations but far less when it comes to winning federal contracts, says a report released this month by the Silicon Valley Defense Group (SVDG).
“To date, the DoD and IC have provided lip service and door prizes but no sustained commitments to ensure that the venture-funded defense and dual-use startups become part of major acquisition programs,” says the NatSec100 & the Future of National Security Innovation report. “The irony is that while the DoD/IC have been unable to make serious commitments to this ecosystem, China has embraced Civil/Military fusion, tightly integrating ‘commercial’ startups and quickening China’s speed of innovation.”
The top startups, which include companies like SpaceX, Anduril Industries, Databrick, and Sierra Space, have raised $42 billion in funding to date but have only generated between $2 billion to $5 billion from federal contracts, SVDG says.
Venture funding in national security companies declined in 2022 from 2021 and continued to drop through April 2023, the study says. In 2021, the high-mark, 97 startups received $15.6 billion, and in 2022 69 firms raised $8.7 billion with SpaceX and Anduril dominating with $2 billion and $1.5 billion, respectively.
The report warns of potentially darkening clouds.
“Policymakers should be wary of taking the $42 billion raised to date by NatSec100 companies for granted,” SVDG says. “The capital and deal flow of 2021 were likely spurred on by low-interest rates and a bullish stock market. In 2023, the market is much more uncertain, If this generation of defense tech startups fails due to a lack of government contracts, VC-funded defense innovation may decline precipitously.”
Through April, 18 companies have raised just over $1.3 billion, nearly the same for all of 2017 when 40 firms received $1.4 billion in investments.
The companies in the NatSec100 are ranked according to weighted metrics that include headcount growth, total capital raised, and fundraising momentum.
The report also highlights several dual-use startups that are not traditional national security companies, including ICON, which 3D-prints homes, Chainalysis, a crypto forensic startup, and Whoop, which makes wearable health monitoring devices. All three companies have federal contracts, ICON to explore printing housing for the Army and planetary construction for NASA, Chainalysis to monitor criminal activity for the intelligence community, and Whoop to monitor soldier health.
Companies developing space technologies, and artificial intelligence and machine learning technologies account for the greatest share of startups in the top 100, followed by big data, the report says.
The report also lists the leading investors in the NatSec100, with In-Q-Tel having 34 companies in its portfolio followed by Gaingels with 14, Alumni Ventures and Hemisphere Ventures 12 each, and BlackRock rounding out the top five with 11. Lockheed Martin’s [LMT] venture arm is tied for eighth with investments in nine startups.
Several policy recommendations are outlined in the report, including the need for metrics to better track the success of defense and dual-use startups, consolidate DoD’s disparate organizations that are working with private capital such as the Defense Innovation Unit, the Office of Strategic Capital, and the services’ respective entities, and ensuring that startups get in on more contract action.
The report highlights the U.S. Space Force’s National Security Space Launch program, which went from two launch vehicle suppliers to potential opportunities for five companies. However, it says this “forward-thinking” approach is not being widely adopted, noting that for producers of solid rocket propellants for over-the-horizon munitions, the DoD awarded Defense Production Act funding to “the underperforming incumbent” but no other firms in this space such as Ursa Major and X-Bow Systems.
The report does not name the DPA awarded, which was Aerojet Rocketdyne [AJRD].
“This represented a missed opportunity to invest 10-20% of the contract in new entrants, which would have stimulated innovation and competition,” SVDG says.