Rising Olympians or Fallen Titans
The state of Defense Tech financing in 2024
Building our Defense has covered the intersections of defense, technology, and finance for the past 18ish months.
Without a doubt during that time, we’ve witnessed a renaissance in the broader Aerospace & Defense sector (to understand why, go back to the origins of Building our Defense).
DefenseTech (which I will use to also include a broader collection of technologies such as space, aerospace, aviation, and certain dual-use technologies) has remained one of the few bright spots in an otherwise dour tech market.
In November, Pitchbook highlighted the growth of the sector, highlighting that in 2021, VC funding was 40% higher than the seven preceding years, combined!
2023 saw the lowest overall VC activity since 2018, but even as VC activity remains cool, DefenseTech appears hot. The last quarter of 2023 saw $2.75Bn deployed into defense, space, and dual-use technologies. And things continue to look up as VCs have raised more than $1Bn so far in 2024 to deploy into these sectors.
Nevertheless, we should pause and ask just how hot this sector really is?
Venture Capital Funds Available
To be sure, there have been some eye catching headlines.
Let’s start by looking at the VC and PE funds that have raised for investing in DefenseTech.
So far in 2024, more than $1Bn has been raised by VC firms to invest in DefenseTech. Leading this was a16z, who announced earlier this month a $600M raise for their first ‘American Dynamism’ fund which invests in Defense, Aerospace, Health Care, Manufacturing, and other hard techs designed to advance the national wellbeing. This American Dynamism fund is part of a much larger raise of a16z’s—more than $7Bn. It’s also rumored that General Catalyst is nearing a close on $6Bn in new funds, which it will use across sectors that include aerospace and defense.
It may be worth noting that these two firms—a16z and GC—will have raised 44% of all funding by VC firms at this time in 2024. Interestingly, StrictlyVC has pointed out that the concentration of LP capital in the top five VC firms has jumped dramatically to nearly 45% in 2024 (up from around 20% last year).
Scout Ventures announced it closed on its $94M Fund IV for frontier and dual-use technologies and DCode has raised $19M for GovTech. Meanwhile, OTB ventures raised $185M to invest in deep tech, which shares many overlaps with DefenseTech.
For space-focused investment, Seraphim Space announced this week that it had raised $100M in a first close for its Fund II and Alpine Space Ventures raised $10.7M (10M EUR) from the NATO Innovation Fund for investing into startups.
I’m also aware of several emerging and boutique firms that are nearing closes soon, too. I suspect that emerging funds may continue to struggle to raise first funds, as LPs seek safety during this period of higher interest rates and economic volatility.
Are you investing in aerospace, defense, or dual-use companies? Contact us to access our dealflow and take advantage of our expertise in the sector. We’ve built investment programs for top funds.
Now, let’s look backward to see how 2024 is comparing relative to the previous quarter. In the last quarter of 2023, Shield Capital and Harpoon Ventures raised $186M and $125M respectively for investments into dual-use technology companies.
So, investor fund raising looks to be gaining steam in 2024, in a big way. This is good news, as that suggests that there will be strong growth in capital deployment for at least two or three years (that committed capital has to go somewhere, right?)
Private Equity Funds Available
Private Equity funds have seen similar growth.
So far this year, Capitol Meridian Partners and Arlington Capital Partners have raised $1.2B and $3.8B respectively, for $5B new PE funds for the Aerospace and Defense sector.
In the last quarter of last year, no PE firms raised for dedicated funds in the A&D sector. However, KKR raised $3B for its third technology growth fund, which includes heavy investments into defense-adjacent companies.
I’ll also admit that I’m not as deeply plugged in to the PE sector as I am to VC. There may be other firms that have raised funds, that I have somehow missed. Nevertheless, I feel relatively comfortable assessing PE fund raises as up, but not as dramatically as VC. This isn’t likely surprising to most, as PE is a slightly more stable asset class with companies having more mature cash flows. As such, it’s less subject to the volatility and bubbles that we’ve seen in the VC ecosystem.
We won’t be addressing PE deployment in this article, as we’re more focused on the venture side. Nevertheless, for mature companies with stable cash flows, PE represents an important opportunity for exit strategies.
Deployment of Capital
Coming back to the venture and startup side, as more firms are raising more funds, what are we seeing as far as deployment goes?
2024
So far in 2024, the deployment of capital has been painstakingly slow. We’ve only seen confirmed investments of $125.5M into defense-focused tech startups. This includes:
Allen Control Systems’ $12M seed round
Defense Unicorns’ $35M Series A
Firestorm Labs’ $12.5M seed round
Raft’s $60M funding round
Picogrid’s $12M seed round
Defense Unicorns is a software startup providing open-source software and AI capabilities to support national security.
The Space subsector has been much more active with $383.7M split across the companies:
Iceye ($93M)
Orbex ($20.7M)
Varda Space ($90M)
Bright Ascension ($2.9M)
Phase Four ($6.3M)
Interlune ($18M)
Quaise Energy ($21M)
Axelspace ($44M)
Albedo ($35M)
Latitude ($30M)
Simera Sense ($14.8M)
Kurs Orbital ($4M)
Orbio Earth ($4M)
Of course, there have been additional dual-use and defense adjacent technology companies that have raised in 2024–albeit not many. Dual-use companies that have raised this year include:
Jeh Aerospace ($2.75M)
MagnusMetal ($74M)
Alethea ($20M)
Procurement Sciences AI ($10M)
Blue Laser Fusion ($37.5M)
Buzz Solutions ($5M)
Turbine One ($15M)
This gives a combined value across space, defense, and dual-use of $673.5M. These numbers are down from the last quarter of 2023, which saw at least $380M for defense startups and $500M for space startups. Adding in the dual-use companies that raised in 2023, brings the total deployed in that quarter to over $2.75Bn—more than four times deployment in 2024.
Are you a company building aerospace, defense, or dual-use technologies? Contact us and see how we can help.
2023
In defense, Shield AI led the sector in late 2023, with its $100M equity (and $200M debt) Series F financing, at a $2.8Bn valuation. In addition to Shield AI, VCs invested in the other defense tech companies including Mach Industries ($79M), X-Bow Systems ($65M), Saronic ($55M), Second Front Systems ($40M), Cambium ($19M), Castelion ($14.2M), and Labrys Technology ($5.5M). GoTenna also raised during the quarter, but has not disclosed the size of the round.
Shield AI is an American aerospace and defense technology company based in San Diego, California. It develops artificial intelligence-powered fighter pilots, drones, and technology for defense operations.
Space and dual-use companies raised significantly as well, with some large, monster rounds.
Space launch company Firefly Aerospace raised $300M. Rocket engine maker Ursa Major raised $138M in a Series D round. Space software company True Anomaly raised $100M. Qosmosys raised a mind-boggling $100M in seed funding to develop a lunar lander.
In the dual-use space, X-Energy raised $235M for its development of nuclear energy systems. Divergent raised $230M for its additive manufacturing business. SkyNRG raised $191M for its work on sustainable aviation fuels.
Certainly there have been some large rounds. Nevertheless, the average round in Q4 2023 was 2.5x larger than the average round in 2024.
So, what’s going on?
While it would be easy to say that funding is falling, that’s overly simplistic.
Fourth quarters generally see the strongest investments throughout the year, while first quarters are often the worst performing quarter. Venture funding is seasonal. And deals are often completed more quickly near the end of the year, as firms will close down for the holidays. After the holidays, there’s a bit of a hangover across the industry and things pick up slowly.
Second, as already mentioned above, there were some massive deals at the end of 2024. In fact, there were 11 companies that raised $100M or more in that quarter. In other words, the largest fundraise of 2024 so far wouldn’t even break the top ten. That undoubtedly skews the numbers a bit
Finally, as many of the firms have been raising funds dedicated to the sector, they have cut back on deal flow. Now that they have the funds, expect to see a marked increase in capital deployment throughout the rest of 2024.
Conclusion
The Defense Tech sector had a very strong performance in the last quarter of 2023.
So far in 2024, capital deployment to companies appears muted, but not unexpectedly so.
VC firms have rebuilt or are rebuilding their war chests and preparing to ramp up deployment.
Expect to see continued strong performance in the sector across the remainder of 2024 and into 2025.
If you’re a DefenseTech, Dual-Use, or SpaceTech company looking to navigate the government and investment ecosystem, please reach out and find out how we can help.
If you’re an investor looking to invest into making America stronger and safer, contact us to learn how we have helped two top firms develop their aerospace & defense investment programs and to access our dealflow.
And if you’re a member of the DoD or military trying to figure out how to craft policy and regulations to be more technologically friendly, we are here to help.
And as always…
Keep building!
Andrew
Divergent Technologies, a dual use tech company working in automotive and A&D, raised $230M in a Series D financing that closed in October 2023.