4 July 2023

The NatSec100 is our newly developed, annual ranked list of the top venture-funded defense and dual-use startups. It was developed to offer a data-driven snapshot of the evolving techno-security ecosystem.

 The list is by no means a perfect indicator of the future success or failure of the companies it comprises; rather, it is intended to drive conversation around the emerging tech ecosystem in national security. While the DOD has long resisted “picking winners,” the NatSec100 ranks companies based on which are the comparative front-runners in the defense and national security space each year.

 The top-tier startups on this year’s inaugural NatSec100 have collectively attracted an impressive $47.25 billion in funding over the past five years. (To put that into perspective, DARPA has spent slightly less than $20 billion on R&D over the past five years.) They are developing a variety of technological capabilities vital to our national security and are funded by the world’s leading venture capital firms. And yet, the revenue generated by these companies from the federal government currently stands somewhere between $2 and $5 billion, a figure markedly lower than their collective funding. The companies included on this list are all private, so their revenue numbers are not public. We estimated annual revenue numbers from non-public information and public government contracts.

This discrepancy highlights a critical issue for policy makers: without substantial contracts from government customers, venture investors will put their money elsewhere. The result would be new defense-focused and dual-use startups finding it impossible to raise private capital, and existing ones pivoting to commercial customers or going out of business. This would have significant negative ramifications for our future national security capabilities.

 As SVDG previously outlined in our Emerging Tech Readiness article, venture-funded defense and dual-use startups offer three advantages that make them particularly useful to national security: speed, scale, and selection. Ultimately, tech startups can offer a "catalog" of new, leading-edge technologies that buyers in need of immediate capabilities can access overnight. However, to date the national security sector has failed to provide consistent and sufficient contracts for emerging technology companies that would help these startup companies advance more quickly from their early and growth stages into profitability. This lack of sustainable government revenue may discourage both startups and their investors from participating in the national security market.

This is not to suggest that venture-backed companies have no future in the national security market. Rather, the DOD and IC should evaluate their own capability development and acquisition strategies and then take appropriate measures to ensure the sustained viability of defense and dual-use startups. 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 defense acquisition programs. 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.

Methodology

Silicon Valley Defense Group (SVDG) collaborated with Franklin Templeton and Balyasny Asset Management to compile the NatSec100 list, taking into account the Office of the Under Secretary of Defense for Research and Engineering (OUSD(R&E))’s 14 Critical Technology Areas and private conversations with the DOD and intelligence community. Eligible companies are all engaged in the Department of Defense (DOD) critical technology areas, and the rankings reflect weighted, quantitative factors that allowed us to analyze companies’ size, growth, and momentum. Specifically, we analyzed headcount growth, total capital raised, and fundraising momentum (represented by the recency of the last financing round), to assign a weighted score to each company. While these metrics are by no means perfect indicators of success for these companies, they demonstrate momentum in the world of venture-backed growth.

Critical Technology Areas and Investments: The Current Landscape

This year’s NatSec100 companies roughly align with Office of the Under Secretary of Defense for Research and Engineering (OUSD(R&E))’s 14 Critical Technology Areas. In particular, companies specializing in space technology and artificial intelligence/machine learning comprised the majority of the NatSec100. This is perhaps unsurprising due to the rapid pace of AI/ML development over the past year, in areas like generative AI, natural language processing, computer vision, large language models, etc. Space-related technologies have also accelerated, due in part to the commercialization of space and the significant increase in domestic launch capacity due in part to SpaceX’s Falcon 9 rocket.

Space has historically been an important national security domain, and the NatSec100 is evidence that this trend is continuing. Space technology developed by NASA and the DOD is illustrative of the traditional trend wherein technology created for national security purposes is later deployed for commercial use cases as well. The development of satellite communications and GPS is perhaps the best example of how space has historically been the ultimate dual use domain. The acceleration of this dual use trend is exemplified by the space tech companies listed in the NatSec100, nearly all of which serve both government and commercial customers across various space subsectors, including launch, manufacturing, and in-space services.

Key Investors

This year’s NatSec100 investors include top-tier venture capital (VC) firms and In-Q-Tel. VC firms like Andreessen Horowitz, Founders Fund, and Lux Capital have investors dedicated to deep tech and moonshot technologies, which tend to align with the DOD’s critical technology areas. In-Q-Tel is a natural fit for defense investing, as its mission is to identify and invest in companies developing cutting-edge technologies that serve United States national security interests. In-Q-Tel has invested in 34 of the 100 companies on this list, significantly more than any other investment group, albeit with relatively lower funding levels.

Policy Recommendations

Better Reporting Metrics

It’s important to track the success of defense and dual-use startups in the national security market to judge to health of the national security innovation ecosystem. These metrics should monitor private funding and company growth, as well as government contracts and procurement of emerging technologies. It should track beneficiaries of the Defense Innovation Unit's (DIU) Other Transaction Authorities (OTAs), the recipients of AP-FIT grants, the Title III/Defense Production Act winners, and those that secure AFWERX STRATFI/TACFI awards.  These will provide a clearer picture of the health of the national security innovation ecosystem and the effectiveness of DOD/IC efforts to support innovative challengers to the established defense industrial base.

Private Capital Partnership Consideration

Another step towards enhancing our techno-security landscape is to consolidate DOD efforts in connecting with private capital. These efforts, currently distributed across various departments like the Office of Strategic Capital, DIU, and Service-led initiatives, should be streamlined and consolidated. This centralization would improve efficiency, coordination, and accountability, and it could further be enhanced by linking with Intelligence Community efforts, like In-Q-Tel.

 Nurturing New and Emerging Suppliers

If the DOD is truly committed to cultivating an emerging industrial base to supplement the established industrial base, it is essential to act decisively. This means seeking out and insisting on the inclusion of new suppliers, with a specific focus on those without a prior record of performance. It's an approach that promotes innovation and drives competitiveness.

 The Space Force's approach with the new National Security Space Launch (NSSL) serves as a good model. Their Request for Proposals (RFP) expanded the supplier base, increasing the number of winners from two in the previous award to five in 2023. This not only broadened the playing field but also opened opportunities for 1-3 members of the NatSec100 to secure a contract, even without prior space exploration credentials.

 However, not all sectors are embracing this forward-thinking strategy. A case in point is the Over-the-Horizon (OTH) munitions sector. The Ukraine conflict has highlighted the urgent need for new solid munition suppliers, like Ursa Major and Xbow. Yet, the first significant Defense Production Act (DPA) award was granted to the underperforming incumbent. This represented a missed opportunity to invest 10-20% of the contract in new entrants, which would have stimulated innovation and competition.

 To ensure the growth and resilience of our national security infrastructure, it is paramount to incorporate and nurture emerging suppliers. This strategy fosters a more diverse and adaptable industrial base, better equipped to face the evolving challenges of the 21st century.

Dual-Use Technologies

Some of the dual-use startups on the NatSec100 might be surprising because they’re not traditional national security companies. At #13 on the list is ICON, a startup that 3D-prints homes. The Army awarded ICON a $9M contract to explore printing housing for the military, and NASA funds ICON’s development of a space-based construction system intended to support lunar and Martian colonies. Whoop, the wearable health-monitoring startup at #41 on the list, has DOD contracts to support soldier health and well-being. And Chainalysis, the crypto forensics startup, helps the intelligence community monitor criminal activity and state-sponsored activity on the blockchain. Any startup that fits the DOD technology categories is eligible for the NatSec100, provided they have evidence of national security customers. As a result, the NatSec100 includes a variety of commercially focused companies who have also found federal market success.

Critical Technology Investments: Trendlines

Last year, SpaceX and Anduril constituted the two largest fundraises in all of venture capital, receiving $1.97B and $1.48B respectively.[1] However, deal count and capital raised actually declined from 2021, and has continued to decline so far in 2023.  At its height in 2021, 97 startups on the NatSec100 received a total of $15.61B, and in 2022, 69 startups on the list received a total of $8.72B. But moving past SpaceX and Anduril, there’s a decline in total capital raised by the remainder of the NatSec100 list.

Policymakers should be wary of taking the $47.25B raised in the last five years by NatSec100 companies for granted. 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.