The aerospace and defense sectors face a pivotal moment as geopolitical tensions rise, labor shortages increase and technological innovation accelerates, driving demand for modernizing military and aerospace operations.
Early-stage tech investors are taking note, as funding shifts toward startups that address challenges in automation, digital transformation and supply chain resilience — each significant for these sectors. Demand for new aircraft, ships and advanced defense systems is a top priority for the Department of Defense.
The future of aerospace and defense relies on speed to production and out-maneuvering our adversaries. Utilizing AI/ML in design, simulation and part production as well as autonomous systems and navigation is key to achieving that.
The U.S. government is beginning to embrace working with early-stage startups to be able to use and partner with these products while ultimately ensuring national security.
AI/ML in defense
The rising interest in aerospace and defense is driven by labor shortages, supply chain disruptions and the sector’s critical infrastructure value. Meanwhile, global defense spending continues to increase as nations prioritize modernizing their forces to address new threats.
The U.S. Department of Defense increased its fiscal year 2024 budget to $842 billion — $100 billion more than FY 2022 — focused on integrating technologies such as AI, automation and advanced manufacturing into defense systems.
Key trends shaping the investment landscape include the sector’s reliance on automation and robotics to address labor shortages, particularly in defense and aerospace, where aging workforces create operational risks.
Where investors see traction
The defense industry is not just home to established corporate players. Startups are emerging rapidly, with many achieving high valuations due to their innovative products and ability to fill capability gaps within the U.S. military. Among those are unicorns Anduril Industries, Epirus, HawkEye 360 and Shield AI.
Anduril, valued at $14 billion, recently raised $1.5 billion and is projected to reach $1 billion in revenue by 2026.
Other startups are filling labor gaps while improving efficiency and safety. For example, GrayMatter Robotics 1 uses AI-driven robots for high-precision tasks, helping manufacturers streamline production and ensure consistent quality. Similarly, Hadrian, which specializes in automation, is reimagining labor-intensive machining processes to produce complex aerospace parts faster and at a lower cost.
Many aerospace and defense startups are leveraging AI and ML to optimize everything from supply chain logistics to real-time threat detection. The goal is to create systems that are not just automated, but intelligent and capable of predicting issues before they arise and adapting to changing conditions in real time.
Opportunities in space and beyond
The defense sector is looking to space not just as the next frontier for exploration but for strategic investment, as well.
Responsive Space is a high-priority mission to be able to launch, maneuver and operate space systems on a short notice. This includes space situational awareness startups that focus on missile defense systems and autonomous spacecraft. The commercial SSA market is a growing focus for investment, combining systems in space and on Earth.
Dual-use innovations, like those from Palantir Technologies, are also compelling, as startups develop technologies that serve commercial and defense applications, offering multiple revenue streams. The ability to target commercial and defense sectors is attractive to early-stage investors, as it reduces dependency on government contracts and opens up opportunities for commercial scaling.
Key takeaways for investors
Early-stage investors face significant growth potential alongside barriers to entry, making partnerships with experienced players essential.
- Dual-use technologies are a strong bet: Startups bridging commercial and defense markets are better positioned for long-term success.
- Unmanned aerial vehicles: UAVs play crucial roles in intelligence observation, supply chain support and engagement in hostile environments.
- Autonomous systems and navigation: Advances in GPS and AI enhance navigation in contested areas and help identify opposing UAVs and their signals.
- Digital transformation is driving value: The need for solutions that optimize operations fuels investor interest.
- Partnerships are key: Navigating the complexities of defense contracting necessitates partnerships to execute effectively.
Investors have a unique opportunity to shape the future of aerospace and defense by supporting startups that leverage technology to address critical challenges. Investing in this sector is crucial for enhancing national security and safeguarding our democracy.
Katie Vasquez is an investor at Calibrate Ventures, where she invests in early-stage deep-tech startups. Previously, she was an investor at MTech Capital, investing in early- to growth stage companies in the fintech and insurtech industries in the U.S. and Europe. She has also worked as a strategy consultant at EY-Parthenon advising private equity firms and corporate executives in the software and technology sectors. She received a bachelor’s degree in astrophysics with honors from Brown University and serves on the board of Synergist Network, a network of women in investing.
Illustration: Dom Guzman
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