Military Technology Elevating Amidst Incoming Government Change
Military Technology Elevating Amidst Incoming Government Change
The recent surge in the stock market, particularly for tech stocks, indicates a stimulating business environment during the second term of President Trump. This climate is predicted to further enhance the growth of defense tech, integrating advancements such as AI, cybersecurity, autonomy, and space technology for military purposes. During President Trump's first term, the S&P 500 saw a 50% increase, tech stocks soared by 138%, and the Magnificent 7 stocks increased by 380%.
Looking ahead, the benefits of reduced tax rates under the Tax Cuts and Jobs Act (2017), a less stringent regulatory environment, and decreasing interest rates with controlled inflation present a favorable economic outlook. This positive economic scenario offers promising prospects for the defense tech sector, which has already attracted substantial venture investment. Since 2021, defense tech has received venture investments exceeding $100 billion, surpassing the investment of the previous seven years combined.
Factors fueling this increased investment are likely to intensify in the coming years. First, global political tensions are escalating, and second, the private sector is increasingly responsible for developing the technology required by militaries. Contemporary geopolitical conflicts involve countries such as China, Russia, Iran, and North Korea, which are collaborating more closely than ever before. During President Trump's first term and recent campaign, he advocated modernizing and strengthening the military, drawing from the Reagan doctrine of "peace through strength."
Investment in defense tech depends on commercial technologies being utilized in military applications. The war in Ukraine demonstrated the effectiveness of new technologies, such as commercial satellite imagery, small drones, and maritime autonomy, which enabled Ukraine to incapacitate one-third of the Russian fleet. Over the past 50 years, there has been a significant shift in the driving forces of military technology from government labs to consumers and businesses. Consequently, venture capital financing has become the primary financing method and is, in some cases, two to three times more significant than the Defense Department's R&D budget.
During the Biden Administration, the Defense Innovation Unit now boasts a $1 billion budget, nearly eight times larger than its size under my leadership in 2022, and its director has direct access to the Secretary of Defense. The Office of Strategic Capital now has the authority to offer up to $1 billion in loans for essential technologies like batteries and quantum computing. The Department of Defense announced the Replicator initiative, aiming to deliver thousands of autonomous systems within 18 months.
The U.S. Space Force unveiled a commercial acquisition strategy to obtain more data from new satellite constellations that provide multi-modal sensors and faster revisit rates. The U.S. Army's autonomy program is scheduled to produce the Remote Combat Vehicle in 2027, while the U.S. Air Force is developing a manned-unmanned teaming concept known as Combat Collaborative Autonomy to bolster fighter jets. Commercial vendors benefit from the increased application of AI, cybersecurity, autonomy, and space technology in national security projects.
In addition to technology adoption, the Department of Defense has produced studies focusing on the defense industrial base, such as the first Industrial Strategy Implementation Plan and Supply Chain Risk Management. This recognition of increased supplier concentration as a national security risk signifies opportunities to broaden the supplier base beyond primary vendors, benefiting a larger array of vendors. With the significance of integrating new technologies, scaling capabilities more efficiently, and fostering competition, venture-backed companies have an enormous potential to increase their share in defense procurement, which currently accounts for only 1% of these sales.
Despite concerns about government efficiency, the Department of Defense's procurement budget comprises only 21% of the projected fiscal 2024 defense budget. There are more substantial opportunities for efficiency improvements and reductions in personnel budgets (26% of the budget) and the maintenance of outdated ships, tanks, and planes (35% of the budget). For example, the size of Army staff positions has grown by 40% since 9/11, and criticism of military procurement may focus on the costly programs like the F-35 or Ford-class carriers.
Modernizing military capabilities as the U.S. did during the Reagan era requires acquiring newer technologies and weapons systems to replace aging fleets. To achieve this, the U.S. must invest in and procure advanced technologies and weapons systems.
I think DOGE is going to boost the trends driving advancements in military tech. Elon Musk is expected to advocate for set-price agreements instead of the traditional cost-plus strategy used by major defense contractors. A fantastic instance of this is SpaceX's Falcon 9 rocket development, which cost just 10% of what NASA anticipated. Moreover, many individuals with backgrounds in business or venture capitalism are being appointed to crucial national security roles in the new administration, much like the leadership at DOGE. This shift in leadership is likely to bring a fresh perspective on doing things differently and incorporating more incentives from the private sector, such as fixed-price agreements.
The rising geopolitical tensions, the increasing integration of commercial tech in military applications, the need to diversify the defense supply chain, and the priorities of the incoming Trump Administration create an incredibly favorable climate for military tech. These forces will undoubtedly boost defense tech start-ups like SpaceX, Anduril, and Palantir, but they will also pave the way for an expanding pool of suppliers such as Apex, Danti, and Code Metal—three companies backed by Shield Capital.
During the Cold War, technologies developed in Silicon Valley played a significant role in enhancing our national security. History is repeating itself, but this time with a new cast of technologies and vendors that will equip our military with the best resources our nation has to offer. Modernizing our forces and expanding our warfighter capabilities through a larger number of suppliers will catapult defense tech to unprecedented heights.
In this favorable economic outlook, innovation in defense technology, driven by reduced taxes, a less strict regulatory environment, and controlled inflation, is expected to attract even more venture investment. This increasing investment in defense tech, fueled by global tensions and the private sector's role in technology development, could potentially lead to a larger share of defense procurement for venture-backed companies, currently only accounting for 1%.
The pending shift in leadership, with individuals from business and venture capital backgrounds in crucial national security roles, may bring about fixed-price agreements in military tech development, similar to SpaceX's cost-effective Falcon 9 rocket. This approach, coupled with the rising geopolitical tensions and the growing integration of commercial tech in military applications, could significantly boost defense tech startups and expand the pool of suppliers, like Apex, Danti, and Code Metal.