A tougher fundraising environment reveals which companies and sectors investors have real conviction in, and which areas aren’t attractive outside of a bull market. AI startups dominated dealmaking this year, but there is another sector that VCs have stayed committed to: defense tech.
We saw the latest example of this trend just this week. On Tuesday, Shield AI raised a $200 million Series F round led by Thomas Tull’s US Innovative Technology Fund, with participation from Snowpoint Ventures and Riot Ventures, among others. The round values the San Diego–based autonomous drone and aircraft startup at $2.7 billion.
The sheer size of the round alone makes this deal interesting. “Mega-rounds” over $100 million have become uncommon enough to warrant raised eyebrows in today’s climate. Through the third quarter of 2023, only 194 rounds above $100 million were raised, compared to 538 in 2022 and 841 in 2021, according to PitchBook. Late-stage fundraising has also been largely muted for much of 2023. Just over $57.3 billion was invested into late-stage startups through the third quarter of this year, much lower than the $94 billion such companies raised in 2022, and the $152 billion we saw in 2021.
Brandon Tseng, the co-founder and president of Shield AI, told TechCrunch+ his company was able to raise in this environment largely because of its metrics. The company’s revenue is growing 90% year over year, per Tseng, and it is on the path to becoming profitable in 2025.
This round is also made more interesting by the space the company operates in, since it’s the latest sign of how much investors have leaned into defense tech in recent years.
Tseng agreed that the investor appetite for companies like his has improved a lot, and he recalled how Shield AI’s first few fundraises were particularly hard.
That rings true. Eight years ago, Silicon Valley folks weren’t interested in backing companies in the category, but a few factors have helped change investors’ attitudes toward the sector over the past few years.
Perhaps most importantly, the sector now has success stories investors can point to, both for metrics and growth trajectories. Palantir Technologies raised $3 billion in venture funding before it went public at a $16.5 billion valuation, and with a current market cap of $40 billion, it’s one of the few 2021 venture IPOs performing well today. Anduril Industries is valued at $8.5 billion and doesn’t seem far off from an exit, either. When you have comparables like these, investors can be much more confident that startups in your sector can have the potential to produce venture-scale returns.
“Defense tech is really fricking hard,” Tseng said. “You have to be purpose-built to go and do this. Working with governments can be challenging in so many different ways. Defense tech is inherently different from any market out there. I think it’s great [that] it’s been growing. It’s been fun to see this space come into its own and for Shield AI to be a part of it.”
Shield AI isn’t the only defense startup to raise a mega-round this year. Lyten, a lithium battery materials manufacturer, raised $200 million in September, and defense AI startup Helsing raised a $223 million Series B that month, too.
Defense tech has also proven to be rather recession-proof, given that its customers — government entities — don’t have budgets that swing with the health of the markets, unlike corporations or other kinds of startup customers. Plus, the problems governments use defense tech to solve aren’t likely to go away in a tougher market.
“Investors see defense as counter-cyclical,” Tseng said. “When there are downturns in the market, the government continues to spend. It’s one way that [VCs] offset downturns.”
It’s no wonder, then, that investment into defense tech looks poised to continue to rise as the number of companies building in the space swells. Several early-stage defense tech startups are already benefiting from the trend — ARX raised a $1.2 million pre-seed round, and Shift5 raised a $33 million Series B.
And as tensions across the globe continue to expose the shortcomings of the defense industry, the sector is likely to see even more entrepreneurs coming up with new solutions to those problems. Seeing investor appetite for the category grow doesn’t hurt either.
“People now widely recognize the world is not a safe place. I would claim we are less safe and stable today than we were in 2013,” Tseng said. “Investors really appreciate that global stability is super important for macroeconomic growth to exist. The key to stability is having strong deterrents, and that’s going to be coming from companies like Shield AI.”
If funding continues to decline in 2024 — which seems quite likely — I think defense tech will be one of the few sectors that continues to see growth in both funding and the number of companies building.
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