Defense Tech’s Big Test

Introduction

The U.S. defense sector is at the front end of the largest private capital cycle it has ever seen, with venture capital investment assuming an inceasingly powerful role in driving innovation and growth in the new defense industrial base. Venture capital deployed roughly $40 billion into defense and dual-use companies in 2025—more than double investments in 2024—and 2026 is on track to break that record. Defense tech venture investing, which was once limited in scope, is not only now mainstream, but increasingly described as overheated.

A record number of venture capital firms, like the one I am a part of, are surging funding into the defense sector because the opportunity—and urgency—for new entrants to accelerate capability is apparent. But the durable success of defense tech as a venture investment category is predicated on venture-backed companies being able to deliver nonlinear returns, which is only possible if real and sustained demand signals—backed by both the Pentagon and Congress—can dependably survive administration changes and budget cycles.

And a critical gauntlet for venture-backed companies lies ahead: scale.

Key Takeaways

• Private capital is a key source of American advantage. Venture investing in defense technology has gone mainstream, with defense and space technology considered among the most “investable” categories today.
• Venture-backed defense technology companies are accelerating capability development at a critical time for U.S. national security needs.
• The next five years—which include a presidential transition, regardless of which party wins—will test both the government’s commitment to new approaches and whether private capital can help deliver scale, not just innovation, for the American warfighter.
• Whether venture capital becomes a dependable plank of the American defense industrial base depends on both the Department of Defense and Congress committing to backed signals that endure across administration transitions, which translate to scale and returns to capital.

Cycle Time and the Capital Clock

For the past decade, the Department of Defense has focused on creating the conditions for innovation—and courting America’s best entrepreneurial talent to focus on building for the national interest. The Department of Defense now has a broad tool kit at its disposal to accelerate frontier research and development, crowd in private capital, bridge prototype to production, and contract commercial solutions at speed. Many of the department’s instruments were developed at a time when entrepreneurs genuinely struggled to raise money to build for defense, and the department in turn genuinely struggled to meaningfully field technology developed outside of the prime ecosystem. But things have changed. While for the past two decades, venture capital concentrated heavily in technology for the consumer markets, there is a genuine surge of credible start-ups in the defense and dual-use category and a groundswell of capital to support their ambitions.

But the clock is ticking. Venture capital has historically operated under a specific time horizon. Venture funds are capitalized by limited partners who provide capital to deploy into promising early-stage start-ups, and in exchange venture funds aim to deliver substantial returns to their investors within a specified time horizon, typically 10 years. Returns are delivered through liquidity events—for example, a company becoming large enough to go public or a strategic merger or acquisition within the ecosystem.

The best returns accrue to early-stage investors, who back founders, technical risk, and market thesis before a clear government commitment. But the road to success for a venture-backed company—particularly one building capital-intensive hardware products—runs through being able to raise large later-stage rounds, which only become possible when real, backed demand signals are clear. For a hardware-intensive defense company, these rounds can be a hundred million dollars or more to build out facilities, ramp up production capacity, and hire industrial talent. To underwrite that type of investment, private capital looks for a backed demand signal and a discernible path to procurement and a long-term program of record. For the company, the logic is unforgiving: Its runway runs out on a fixed clock, and the next round of capital depends on a demand signal tied to a clock that is annual at best—and routinely worse, as Congress has turned the continuing resolution (CR) into the status quo. Between the inherent structural mismatch in cycle time and the self-defeating budgeting-by-CR that has become commonplace under both political parties, the distance between capital need and backed demand signal can be dangerously wide. And that’s exactly where a number of fast-growing, venture-backed defense tech companies are headed.

The Past Four Years of Reform

The past four years have seen real reform work across two presidential administrations. The Department of Defense stood up the Office of Strategic Capital in late 2022, a credit instrument explicitly designed to leverage private capital for critical technology production. Between fiscal year (FY) 2021 and FY24, the Defense Innovation Unit’s budget grew by an order of magnitude, transforming it from a technology scouting organization into a serious commercial-solutions contracting pathway.

The Trump administration has built on this momentum with a sharp focus on amplifying demand signals and an articulated goal of attracting private capital into the defense industrial base. The newly launched Economic Defense Unit, placed at the deputy secretary level and paired with the Office of Strategic Capital, is an institutional expression of that goal—built to leverage the department’s economic, commercial, financial, and capital-markets tools in support of companies critical to national security. The military departments have all kick-started “demand signal” initiatives to start meaningful and actionable cross-talk among capital allocators, entrepreneurs and innovators, and the U.S. government. The use of alternative contracting pathways—and the reinforcement of how the contracting process is a direct warfighting support function—are all necessary revisions to how the department does business.

But the Department of Defense depends on Congress to authorize and appropriate a budget it can depend on. For venture capital to become a durable plank of the defense industrial base, the signals have to be backed—and backing is the congressional half of the equation.

Where Signal Gets Backed

The executive branch drafts the defense budget—for FY27, an eye-watering $1.5 trillion request for the Department of Defense—but it is Congress, through the messy, orthogonal processes of authorization and appropriation, that decides what actually gets funded. Congress can mandate programs the department did not ask for, accelerate ones it favors, and zero out ones it does not. Congress can reset procurement quantities, attach conditions, and move money between accounts.

For decades, one of the most powerful signals Congress has sent has been the multiyear commitment. Multiyear procurement authority was formally established in 1981 and applied over the years to programs like the M1 Abrams, AH-64 Apache, F/A-18 and Tomahawk. The logic is straightforward: When industry can underwrite a longer production line, capacity expands and unit costs fall. In the last few years, Congress has embraced the expansion of multiyear procurement through the SPEED and FoRGED Acts, widening eligibility beyond traditional large platforms to munitions and other systems. These reforms matter for venture-backed new entrants—companies still raising private capital while racing to scale capability—because a multiyear commitment is a demand signal that can help underwrite the financing for scale. Earlier this year, the Pentagon offered a compelling demonstration of the use of multiyear procurement, announcing the first production framework of a low-cost hypersonic missile and large-scale procurement commitments for thousands of additional low-cost munitions. For the venture-backed companies that sped the development of some of these capabilities, this powerful market signal will undoubtedly unlock additional private capital to scale. The FY27 budget request now before Congress has the opportunity to equip the department further, nearly tripling munitions procurement with named multiyear expansions across critical lines.

Congress has shown openness to new departmental initiatives to crowd capital into the defense industrial base. When the Office of Strategic Capital was stood up at the end of 2022, it met real congressional skepticism—about its instruments, its scope, and how its authorities would interact with existing ones. Within a year, Congress codified it through the National Defense Authorization Act (NDAA). The FY27 budget request asks for a substantial increase over its FY26 level for direct loans and loan guarantees. The Office of Strategic Capital’s rapid growth across two administrations is what it looks like for an executive branch idea to become a durable, legislatively supported tool. The newly launched Economic Defense Unit is the next test of that pattern. Stood up in early 2026, the Economic Defense Unit starts off where the Office of Strategic Capital did three years ago—outside of statute and dependent on executive authority for its survival. The FY27 budget request asks Congress to fund it, but the more consequential step will be to codify it, ensuring it outlasts any single administration. Both offices are charged with using their economic tools to attract and scale private capital into critical technologies and production capacity, injecting capital directly into core areas for the defense industrial base.

The single most powerful signal Congress can send is also the simplest: Pass defense appropriations and authorizations on time. Much has been written about the deleterious effects of continuing resolutions, but for venture-backed companies racing to cross the valley of death against a ticking capital clock, a continuing resolution is not just friction—it can be lethal. As venture capital underwrites larger and larger funding rounds to deliver the scale the department demands, the greatest backed signal Congress can offer is to do its own work on schedule.

Recommendations

For the Department of Defense

• Tools developed over the last decade to encourage new entrants into the defense market are working. The early stage problem is largely solved. Momentum should continue with deploying all available tools—including the tools resident in the Office of Strategic Capital, in the Economic Defense Unit, and under the Defense Production Act—to crowd in capital for scaling production.
• The military services have begun necessary work to communicate demand signals to new entrants and private capital. These mechanisms should be seen as a new way of doing business and durable infrastructure that transcends administration transitions.
• Statutory multiyear procurement, block-buy authority, and enterprise-wide contracts are powerful demand signals. Historically, these instruments have nearly exclusively been used to procure from the legacy defense primes. The FY27 budget expands the use of these mechanisms, and where merited, the department should use these instruments to contract with venture-backed new entrants that can speed capability to the force.

For Congress

• End the continuing resolution status quo. Continuing resolutions slow progress, introduce uncertainty, and raise the cost of capital for every defense-focused start-up in the country.
• Expand multiyear procurement authority across a broader set of platforms, munitions, and other systems where production must scale across multiple years.
• Authorize the Office of Strategic Capital at the FY27 requested levels—sufficient to subsidize production-scale loan volume—solidifying Office of Strategic Capital as a durable industrial base instrument.
• Codify the Economic Defense Unit through the NDAA and authorize it at the FY27 requested level, ensuring its authorities endure administration change.
• Reauthorize the Defense Production Act past its upcoming expiration with a multiyear horizon and fully appropriate Title III at the FY27 request scale—the largest direct industrial base investment ever requested under the authority.
  

Conclusion

Venture capital is helping to rebuild the American defense industrial base. Whether this will be a lasting trend depends on whether the Department of Defense and Congress can reliably deliver backed signals on horizons private capital can underwrite at the stage where scaling capital is essential to deliver capability relevant for the force. The next few years will reveal whether we are at the front end of a long investment cycle, or whether this is just a moment in time. Decisions made in Washington over the next five years will determine the answer.

About the Author

Mela Louise Norman is a partner at New Vista Capital, a venture capital firm investing in aerospace, space, and defense technology. She has served multiple times at the Pentagon, most recently as the deputy chief of staff to former Secretary of Defense Lloyd Austin, and on Capitol Hill, where she was the chief of staff to Senator Elissa Slotkin (Michigan) during her tenure in the U.S. House of Representatives.

About the New American Defense Industrial Base Series

This essay series, The New American Defense Industrial Base, features expert practitioners with experience in government, industry, and finance writing on the most pressing challenges in defense acquisition today. For more in this series, click here. The defense industrial base series is made possible by general support to the Center for a New American Security (CNAS) Defense Program and corporate support for the series.

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