The Best Defense Companies Aren't Defense Companies
By: Ben Walker, General Partner
The venture capital world has found a new darling in defense technology. From multi-billion dollar valuations to glossy headlines, the narrative is clear. Defense tech is where the smart money goes. Sand Hill Road has discovered the Pentagon, and it’s a match made in heaven.
But amid the self-congratulations, we are missing something fundamental about where the real opportunity lies.
The Defense Tech Gold Rush
The surface-level numbers are compelling. Equity funding for defense tech startups more than doubled to $17.9 billion in 2025, up from $7.3 billion the year prior. The number of firms actively investing rose 41% as mainstream VCs dropped previous objections and piled in. The administration is proposing a $1.5 trillion budget, and startups like Anduril, Shield AI, and Palantir command valuations that force investors to pay attention.
The pitch writes itself: massive government budgets, urgent national security needs, sticky customers who don't churn, and a defense establishment finally ready to embrace innovation.
The Uncomfortable Reality
For all the excitement, the pitch obscures some structural problems.
The addressable market is smaller than it looks. Yes, defense budgets are increasing, but only a fraction reaches innovative companies. The technology-specific modernization accounts most relevant to emerging defense tech total just $40-50 billion. That's a far cry from the headline figures found in pitch decks.
Sales cycles can outlast fund lifecycles. Government procurement isn't just slow, it's glacial. Some VCs can tolerate an 18-month enterprise sales cycle, but major defense contracts can take 3-5 years to materialize, assuming they materialize at all. For a fund with a 10-year life, that math gets uncomfortable fast.
Concentration risk is real. When your primary customer is the U.S. government, you're building a monopsony business. One budget cut, one shift in administration priorities, one change in military doctrine, and your entire market can move overnight.
The best technology doesn't always win. In commercial markets, superior products tend to win on merit. In defense, the most successful contractors aren't the most innovative, they're the most compliant. The Pentagon rewards predictability and risk aversion, qualities fundamentally misaligned with venture-scale outcomes. This makes early-stage assessment exceedingly difficult for investors seeking to back the best founders.
The Overlooked Opportunities
While everyone chases the next Anduril, a quieter thesis is playing out in dual-use technologies. The companies are building for commercial markets first, with defense applications that complement and accelerate growth.
This isn't a novel insight. It's the actual history of how defense technology creates value. GPS didn't generate its biggest returns in missile guidance, it generated them in logistics, ride-sharing, and location services. The internet didn't reach its potential through ARPANET. It exploded when it went commercial. Palantir itself now derives much of its growth from commercial customers. The pattern is consistent: defense origins, commercial scale.
Dual-use isn't just a diversification play. It's a structural advantage across several dimensions.
Market diversity compounds resilience. A company serving both defense and commercial customers isn't just accessing two revenue streams; it's accessing two countervailing risk profiles, development timelines, and growth curves. When defense procurement stalls, commercial revenue keeps the lights on and the roadmap moving.
Commercial markets accelerate innovation. Commercial customers iterate faster, deliver more rapid feedback, and punish mediocrity more efficiently than government buyers. A company serving both sectors can use defense revenue to fund R&D while commercial applications generate the rapid feedback loops that early-stage companies need to find product-market fit.
The valuation math actually works. This is the critical point. The $495 billion in defense tech valuations only makes sense if these companies develop robust commercial revenue. Pure-play defense can't support the multiples investors are paying. Dual-use isn't just a nice-to-have. It's the implicit assumption baked into every major defense tech valuation today. The market just hasn't said it out loud.
What This Means for Investors
None of this is to say defense tech is a bad investment. The sector has real tailwinds and genuine urgency behind it. But the current consensus that the biggest returns will come from companies built exclusively for the Pentagon deserves more scrutiny than it's getting.
Instead of asking "How do we sell to the Pentagon?", the better question is: "How do we build technologies so compelling that both commercial and defense markets can't ignore them?"
The best defense contractors of the next decade may not be the ones built exclusively for defense. They may be the commercial solutions so advanced that the government has no choice but to adopt them. That's where we're placing our bets.