The national security startup boom is real — and complicated

National security has always been a lucrative opportunity for startups, but recently venture capital has been pouring into the sector at an astounding rate.

The Trump administration has vocally prioritized defense and security spending, but the trend started a few years before he took office, sparked by initiatives like the CHIPS Act and government-focused accelerators. The spike in venture capital investment is visible both at national scale, and locally in the DMV, where startups can gain an edge thanks to proximity to the Pentagon and Capitol Hill.

Across the US last year, national security–focused firms (think cyber, defense, aerospace, autonomous vehicles) reported raising $46.3 billion across nearly 1,900 deals. That’s an almost 900% increase in less than a decade. Individual investors are also putting money into the sector by buying defense and aerospace stocks, which have been climbing and spiked in January following Trump’s call to increase the US defense budget by 50% next year, to $1.5 trillion. 

That’s all garnering a lot of media attention, said Margaret Roth, a principal at the DC/Baltimore VC firm Squadra Ventures, which invests in early-stage national security startups. 

“The things that my job is about are on TV and regular nightly news,” said Roth, who’s been working in the national security space as a founder and VC for more than a decade. “I never would have thought when I started this job.”

Where money and mission overlap

DC-area companies in the sector, across various specialties like cyber, aerospace and secure data analysis, reported almost half of last year’s regional VC total. 

Just over a month into this year, national security companies in the DMV have raised $180 million — already surpassing the total amount invested in 2017, per PitchBook data. 

A generation of founders — those who are now between 25 and 45 years old, per Roth of Squadra Ventures — have witnessed or directly served in wars in Afghanistan and Iraq. It makes sense to her that there would be a move to build national security technology, in contrast to the surge of personal apps like Uber and Facebook in the 2000s and 2010s. 

“Growing up in 20 years of conflict,” Roth said, “shaped why they choose to spend time and invest their mental capacity, their energy, in … this industry.”

The pattern has continued in recent years, including with the Ukraine-Russian war, where some US-led startups have been testing technology on the battlefield. That invasion was a powerful motivator for some people who hadn’t considered developing defense tech, said Josh Weed, managing partner at the security tech-focused firm Veteran Ventures Capital. 

“The invasion of Ukraine I think brought an awareness to the general population that we do live in a world that has bad actors and threats that could really terrorize a very large country,” Weed said. “I think that brought some of the geopolitical risks to roost.”

Mixed signals from the public sector

Members of Congress in December passed a historic $901 billion defense spending budget, an amount higher even than what Trump had initially asked for. It’s expected to allow the Department of War to replenish allocations for “critical technology areas” like AI and quantum.  

But two programs that long provided grants for startups and small businesses to develop and scale expired last fall, and were not extended in the recent defense budget.

The 40-year-old SBIR (Small Business Innovation Research) program offers non-dilutive funding for early-stage companies to research, prototype and possibly commercialize their technology in several phases. STTR (Small Business Technology Transfer) is similar, but requires a formal partnership with a nonprofit research institution. 

Torev Motors landed a $225,000 SBIR grant about a year ago, for research and development work with the US Army for its electric motors that don’t require rare earths to operate. That work ended in September, and Torev founder/CEO Rory Brogan has been waiting to hear back from the program about his application for $2 million to fund the next phase. He declined to share specifics, but said the plan is to start testing hardware for “large ground vehicles.” 

With the SBIR approval in limbo, Brogan is pursuing other government contracts and contacting private drone companies to find additional applications for the motor. He’s also raised $2.5 million in venture capital, and plans to open a round early this year. 

Showing you can raise smaller investment rounds is a route to getting big national security contracts, said Roth of Squadra Ventures: they “very effectively demonstrate what companies are good.” SBIR funding was essentially a vetting mechanism for government contracts, she said, as well as a critical source of early cash needed by national security companies (especially those in hardware) to iterate and scale. 

In the DMV region, there are a few other sources. FedTech houses several accelerators and programs aimed at connecting and commercializing innovations in the private and government agencies, including with the DoW. 

Then there’s Afwerx. Founded in 2017 by former Air Force Secretary Heather Wilson, Afwerx is an accelerator for developing Air Force and Space Force technologies. “We needed a Silicon Valley-like tech ecosystem to penetrate defense tech,” explained Weed, of Veteran Ventures Capital.

But a major part of the Afwerx model has been connecting companies to SBIR and STTR funding — which has not been renewed. 

Breaking the bureaucracy, while moving with caution

Increased defense spending does mean there’s more money up for grabs, Weed said. 

Historically, contracts often go to established companies like Lockheed Martin, Boeing, Northrop Grumman and Leidos. The Trump admin has put forth efforts for speedier acquisition processes and lower barriers to entry, which allows for more companies to be in the running, he said, and lawsuits from large-but-relatively-new companies like Palantir have been signalling that firms are tired of the current system. 

Palantir, a software firm started by PayPal cofounder Peter Thiel and Alex Karp in 2003, provides data analytics and surveillance tools across the US government. It’s been frequently criticized for how the tech is used to track people, including a new $30 million contract with ICE to track people who self deport from the US. But it has been instrumental in changing the defense tech startup game, per Weed.

“Palantir and others have really had to break through the bureaucracy and the red tape that the primes have  set up to get access to government programs,” he said. “That has really opened up highways for other startups and innovative companies.”  

Roth of Squadra Ventures also sees the recent executive orders as a positive sign for startups looking to tap into nat sec funding. “The DoD says it wants to reinvent itself,” she said, and “signaled that it wants technology to develop at a pace where it can bring that change.”

Greg Davis, founder of the Oregon drone imaging firm, agrees. He’s landed contracts with the Airforce, Army and the Department of Homeland for his tech that automates information gathering about different movements, like boats on water and wildfire activity. 

To work in this space, caution is key, he said. “These are sophisticated, complicated technologies in operating environments where the technology has to work. Lives are on the line.”

As Brogen at Torev Motors waits to hear about that SBIR contract, he’s excited at the prospect of technology he’s creating to be used by the federal government. 

“It’s a huge opportunity, but it has moved slower in my personal experience,” Brogan said. “We believe that it’s going to be worthwhile.”