Defense technology aiming for new heights under the next administration

The recent rally in the stock market, particularly in tech stocks, suggests an exciting business environment under the second Trump administration, and the introduction of new technologies such as AI, cyber, autonomy, military space, and defense technology. should encourage a continued rise in . application. During the first Trump administration, the S&P 500 index rose 50%, tech stocks rose 138%, and the Magnificent 7 stocks rose 380%. Looking ahead, the extension of interest rate cuts from the Tax Cuts and Jobs Act (2017), a loosening of the regulatory environment, and the potential for lower interest rates due to easing inflation will all combine to create a positive economic outlook.

This economic outlook provides fertile ground for profits in the defense technology sector, which is already one of the most promising areas for venture investors. Since 2021, venture investments in defense technology have totaled more than $100 billion, an increase of 40% over the previous seven years combined. The drivers for increased investment are likely to further strengthen over the next four years. First, geopolitical tensions are rising; second, the technologies needed by the military are increasingly being developed by the private sector rather than government labs.

The first large-scale ground battle in Europe since World War II, new fighting in the Middle East, and China’s aggressive actions in the South China Sea all highlight the co-occurrence of geopolitical conflicts. There is. Additionally, America’s adversaries China, Russia, Iran, and North Korea are cooperating more closely than ever before in an axis of authoritarian states that allows them to join forces toward a common goal of weakening the United States. are. During President Trump’s first term and during his recent campaign, he advocated modernizing and strengthening the military. In this campaign, he began referring to President Reagan’s “peace through strength” doctrine, which harkened back to a time when the United States spent 6% of GDP on defense, compared to 3% today. , which is the lowest relative level in 75 years. Sen. Roger Wicker, the incoming chairman of the Senate Armed Services Committee, has gone on record as calling for a generational investment in defense spending of 5% of GDP.

Currently, military superiority relies heavily on commercial technologies such as AI, autonomy, cyber, and space that are used in military applications. The Ukraine war demonstrated the power of new technologies such as commercial satellite imagery, small aerial drones, and maritime autonomy that allowed Ukraine to sink or neutralize a third of the Russian fleet without a regular navy. Over the past 50 years, the drivers of military technology have changed dramatically from government laboratories to consumers and businesses. As a result, venture funding has become the primary funding mechanism, two to three times the size of the Department of Defense’s research and development budget.

The positive picture for defense technology investment builds on several developments under the Biden administration. The Defense Innovation Unit, created to bring more commercial technology to the Department of Defense, currently has a $1 billion budget (an eight-fold increase since I led it in 2022) and its director is currently Reports directly to the Director. The Office of Strategic Capital now has the authority to make up to $1 billion in loans for component technologies such as batteries and quantum computing that are critical to national security. Last year, the deputy secretary of defense announced the Replicator initiative, which aims to deliver thousands of consumable autonomous systems within 18 months, and the Pentagon recently appeared to be on track with that plan. He said he could see it.

Additionally, the U.S. Space Force announced a commercial acquisition strategy to purchase more data from a new satellite constellation that provides multimodal sensors and faster revisit rates than ever before. The U.S. Army’s autonomous program is on track to begin production of remote combat vehicles in 2027, while the U.S. Air Force develops a manned-unmanned teaming concept known as Combat Cooperative Autonomy to complement fighter jets. I am doing it. The AI, cyber, autonomy, and space technologies that my company, Shield Capital, invests in are increasingly finding applications in national security, which means more opportunities for a broader range of commercial vendors.

In addition to technology implementation, the Department has produced several studies on the defense industrial base, including the Primary Industrial Strategy Implementation Plan and Supply Chain Risk Management, both of which have identified increased supplier concentration as a national security concern. It has been identified as a risk. There is a growing consensus that the supply base needs to expand beyond the primary vendors, creating opportunities for more vendors. Given the importance of incorporating new technologies, expanding the supply base, and scaling new capabilities more quickly, there is a significant advantage for venture-backed companies, which currently supply only 1% of defense procurement.

Some wonder if the Ministry of Government Efficiency will dampen this trend. I think this is highly questionable since only 21% of the 2024 defense budget has been raised. Opportunities abound to streamline and reduce personnel budgets (26% of budget) and maintenance of older ships, tanks, and planes (35% of budget). For example, Army personnel positions have increased by 40% since 9/11. Criticism of military procurement is likely to focus on multitrillion-dollar programs such as the F-35 and Ford-class aircraft carriers. Modernizing military capabilities, as the United States did during the Reagan era, means acquiring new technologies and weapons systems to replace the aging fleet.

As a result, I believe DOGE will accelerate trends that promote defense technology. Elon Musk will be a proponent of fixed-price contracts rather than the cost-plus approach of defense primes. A good example of a fixed-price contract is SpaceX’s Falcon 9 rocket development, which cost only 10% of NASA’s expected development costs. Additionally, many of the appointees to key national security positions in the new administration, like DOGE’s leadership, come from business and venture capital backgrounds, and are likely to do things differently, such as fixed-rate is likely to bring about a reform mindset that incorporates more private sector incentives. price agreement.

Rising geopolitical tensions, increased use of commercial technology for military applications, an increased need to diversify the defense supply base, and the incoming Trump administration’s priorities combine to make things better than ever for defense technology. Foresight is emerging. These fundamental trends are sure to benefit defense unicorns like SpaceX, Anduril, and Palantir, as well as a growing array of new companies, including Shield Capital’s three investments in Apex, Danti, and Code Metal. This will also lead the way for suppliers.

During the Cold War, Silicon Valley technology helped make the nation safer. History is repeating itself, with entirely new technologies and vendors providing our warfighters with the best this country has to offer. By modernizing our nation’s military and expanding our warfighter capabilities from more suppliers, we will take defense technology to new heights.