The bullet train of growth in the advanced defense tech sector may be slowing down, as a perfect storm in Washington, Silicon Valley and Wall Street could spark a wave of consolidation in an industry that until recently seemed poised for endless expansion.
Here is how it might unfold: The unprecedented wave of private venture capital that has propelled startups and new entrants in the industry, many of which are building autonomous systems, AI-driven tools or other cutting-edge capabilities, reaches its peak and recedes. Sky-high valuations for some defense tech companies drop.
Expectations of a $1.5 trillion Pentagon budget are dashed after the midterm elections, meaning the money simply is not there for companies hoping their groundbreaking technology will become part of the Defense Department’s Drone Dominance Initiative, President Trump’s proposed Golden Dome missile shield or other major projects.
People were interested in these podcasts
Smaller companies may merge or be gobbled up by industry giants.
Democrats, already highly skeptical of what they view as the Trump administration’s over-the-top spending and increasingly heavy-handed efforts to reshape the U.S. defense industry, could scale back Pentagon funding for some key programs if they control one or both houses of Congress come January.
The desperate need for more Patriot missile interceptors and other traditional military weapons, which are running low because of the Iran war, will consume more money from a suddenly shrinking pot. That could further choke off funding for new industry entrants.
Key Republicans on Capitol Hill who champion today’s defense technology revolution say a troubling narrative may be forming. Some of the most exciting defense technologies, the political argument might go, are not even playing a central role in the U.S. campaign against Iran, fueling questions about why they deserve more money.
“What I’m concerned about is that the new defense tech hasn’t even gotten a shot on goal in” the Iran war, said Rep. Pat Harrigan, North Carolina Republican and a combat-decorated Green Beret who is one of Capitol Hill’s loudest proponents for new defense technology.
“Everybody, except myself, everybody in the Pentagon, in the administrative branch, and up here on Capitol Hill has been messaging that we are going to substantially increase defense spending. So they’ve speculatively been following that, making those investments,” he said in a recent exclusive interview on The Washington Times’ “Threat Status” podcast.
“Here is the nightmare scenario: It doesn’t come. And that is what I’m incredibly concerned about, because if that happens, all of this defense tech, new defense tech money that’s come on board, it’s going to die on the vine, and it’s not going to come back for a generation,” Mr. Harrigan said. “What’s on the table is all the new defense tech startups having to sell their intellectual property to the existing primes in order to make something of the investments that their investors have made over the last several years. This would be catastrophic for defense.”
That broader narrative has some exceptions. Cutting-edge drone boats made by Texas-based firm Saronic have played a role in the Iran war, as have low-cost attack drones made by Arizona-based SpektreWorks. The military has relied on AI-powered tools for targeting during the conflict. New imaging capabilities, communications tools and other products have been validated on the battlefield in the Middle East.
Yet if the dream of a $1.5 trillion defense budget does not materialize and private capital investment slows, it may be exceedingly difficult for some of those companies to scale up or, in a worst-case scenario, stay afloat at all.
The end result could be a 21st-century version of the post-Cold War “Last Supper,” when defense industry leaders were gathered for a landmark 1993 dinner at the Pentagon and told in no uncertain terms to consolidate.
What followed was a historic wave of mergers and acquisitions, shrinking the number of major defense contractors from at least 51 to five.
This article is based on conversations with more than a dozen high-level sources, from current government officials to defense industry C-suite leaders, many of whom believe that at least some level of contraction or consolidation is likely and may already be underway.
A tidal wave of cash
The Pentagon’s intense focus on AI, drones, space-based capabilities and other advanced technology has fueled a financial boom across the industry.
Exact dollar figures differ greatly by source, depending on how one classifies “defense tech” companies. Still, the trend lines are clear, showing a sector accelerating at a breakneck pace:
About 5,000 new firms entered the defense industrial base in both fiscal years 2024 and 2025. The dollar amount of contract awards to “nontraditional” defense firms hit $122.6 billion in fiscal year 2025, up from $61 billion a decade earlier, according to data from the Center for Strategic and International Studies.
The online database Crunchbase reported that $14.6 billion in venture investment has gone into military, national security and law enforcement companies this year, blowing past last year’s record high of $9.6 billion. It was just $1.6 billion in 2020.
Last year brought the creation of 10 “defense tech unicorns,” an industry term for a defense tech startup valued at $1 billion or more, according to the digital media platform Techloy. Those firms include counter-drone radar company CHAOS Industries, hypersonic weapons maker Castelion and others.
Much of the recent venture investment has flowed to companies now considered central players in the broader U.S. defense industry. Defense tech giant Anduril pulled in at least $5 billion in funding this year, according to Crunchbase data. Shield AI, an increasingly prominent maker of AI software and autonomous drones, received at least $2 billion. Saronic, which makes drone boats such as the Corsair model used during the Iran war, raised $1.8 billion, according to Crunchbase figures.
That expanding pool of venture capital funding has coincided with the Pentagon scaling up programs such as its Defense Autonomous Warfare Group, the umbrella initiative to produce and field drones in huge numbers. The Defense Department wants $54.6 billion for that program in the next fiscal year.
Amid the rapid growth, some industry leaders caution companies against expanding too much, too quickly.
Instead, they should focus on actually demonstrating a capability the Pentagon needs today — not just the promise of a technology that will emerge sometime in the future.
“I think that businesses that are in this space have to be very careful, because regardless of what happens with the budget, what happens with either side of the aisle, who’s running Congress, who’s running the Senate, businesses just have to perform, they have to execute,” Chris Spagnoletti, CEO of the aerospace and defense company Ursa Major, said in a recent exclusive interview with “Threat Status.”
“If businesses are solving the major challenges that the department has, and they demonstrate that like we’re doing, then and they follow the line to budgeting, then they have a better, secure future,” he said.
Has consolidation already begun?
On Wall Street, there is an expectation that the “primes” of the U.S. defense industry — Lockheed Martin, RTX and others, buoyed by high demand for their fighter jets, vehicles, munitions and other tools needed in the Iran war and other missions — could begin making plays for smaller, tech-centric firms.
“Strengthened stock prices for traditional defense players could fuel a new wave of deals in the defense sector. Incumbents may target promising startups to quickly boost their technological capabilities,” Iuri Struta, a senior research associate at S&P Global Market Intelligence, wrote in an analysis of the defense technology sector earlier this year.
That trend could accelerate if the Trump administration’s “commercial first” strategy eventually hits a breaking point. The strategy centers on finding companies that produce capabilities with a commercial application, such as an AI tool usable by the public that can also be employed for military, law enforcement or intelligence missions.
Proponents say this approach helps the Pentagon integrate new technologies more quickly.
The problem, according to some industry leaders, is that a growing number of up-and-coming commercial companies are zeroing in on defense technology and building tools with few conceivable customers in the private sector. That would leave them financially vulnerable if they cannot secure the expected Pentagon contracts.
“If you’re in [Silicon] Valley, everybody will tell you, ’Be a defense tech startup. Oh, are you building defense tech? We will buy you.’ Aren’t we going back to the same loop again?” said Sampriti Bhattacharyya, founder and CEO of Navier, a leading electric boat company.
“There’s a bit of a contradiction there, right?” she told the “Threat Status” podcast earlier this year. “They’re saying that we want something that’s commercial, but if you go to Silicon Valley, build a defense tech startup, because there is money in defense.”
Mergers and acquisitions have two distinct trend lines, but both seem to point to the same outcome.
S&P data show that mergers and acquisitions between established defense companies have slowed dramatically in recent years. At the same time, recent analyses from PricewaterhouseCoopers, citing data from the London Stock Exchange Group, said that broader merger-and-acquisition activity across the aerospace and defense sector expanded in 2025, “with deal announcements hitting an all-time high and total deal value up 60% year on year.”
In other words, an emerging trend of deals involves up-and-coming defense companies and new entrants.
In July, the leading advanced defense technology company Leonardo DRS announced it was acquiring the defense software company Raft in a $450 million deal. In March, Anduril said it was buying ExoAnalytic Solutions, a company that operates a network of telescopes and provides space observation data.
Last year, the leading drone maker AV bought the counter-drone and defense tech company BlueHalo in a $4.1 billion deal, among other recent signs of potential consolidation across the defense technology marketplace.
Contact the author
Please read our comment policy before commenting.