SIMI VALLEY, California, Dec 8 (Reuters) – U.S. defense technology startups have roughly doubled their share of Pentagon contracts over the past year, but they now face the challenge of evolving from hot, venture-backed innovators into large-scale producers capable of delivering weapons systems at scale.
Valuations for privately held firms developing everything from unmanned “wingman” fighter jets and drone boats to AI-driven autonomous software have soared this year. Small Pentagon contracts have also increased, driven in part by heightened interest in next-generation weapons after the success of drones in Russia’s war in Ukraine.
For example, Saronic Technologies, a drone boat manufacturer building a shipyard in Louisiana, was valued at $4 billion in February. Anduril Industries, the autonomous weapons startup led by Palmer Luckey, doubled its valuation to $30 billion in June. Chaos Industries, specializing in radars and sensors, recently doubled its valuation to $4.5 billion in a funding round.
The next hurdle for these Silicon Valley-backed companies is scaling production beyond research and prototype contracts to compete with established defense giants, according to executives interviewed at the Reagan National Defense Forum in Simi Valley.
“The defense tech space is booming. Many people are bringing commercial innovation into defense,” said Christopher Calio, CEO of RTX, the company behind the Patriot missile system and the F-35 engine. “But designing and innovating is one thing. Building a prototype is another. Scaling manufacturing is a completely different challenge.”
Silicon Valley Gains on Pentagon Contracts
Defense startups captured 1.3% of Pentagon contracts in the first three quarters of this year, up from 0.6% a year earlier, according to Govini, a defense analytics firm. Meanwhile, major “prime” contractors like Boeing, Lockheed Martin, RTX, and Northrop Grumman maintained 92% of contracts, while European firms’ share slipped to 6.6% from 7.4%.
“There will need to be more companies capable of winning larger contracts,” said Anduril Chairman Trae Stephens. “But this is a hard business. The DOD isn’t going to create 10 new primes—there isn’t enough money to go around.”
The Reagan forum brought together four-star generals, Washington defense CEOs, and startup founders in baseball caps, debating how to scale new technologies for modern battlefields against the rolling hills of Simi Valley.
U.S. Defense Secretary Pete Hegseth emphasized a shift away from a “prime-dominated” culture to one where nimble commercial companies accelerate weapons production to counter China’s growing military. “Our objective is simple, if monumental,” Hegseth said. “Transform the entire acquisition system to rapidly field capabilities and focus on results.”
Challenges in Changing Pentagon Culture
Executives warned that implementing Hegseth’s vision will be difficult due to entrenched political interests, a backlog of mega-projects, bureaucratic inertia, and powerful defense contractors with strong lobbying influence.
Most defense tech firms remain far from scaling prototype contracts worth $10 million–$30 million into major production programs traditionally handled by legacy defense firms, said Zach Shore, chief revenue officer at Hermeus, which is developing an uncrewed hypersonic jet. “That next layer of bureaucracy is the wall many companies will hit,” he said.
This year, the Pentagon awarded major programs—including Ukraine military aid packages, an Air Force fighter jet initiative, and the $175 billion Golden Dome missile project—to established defense contractors.
JPMorgan Chase CEO Jamie Dimon, who announced $10 billion in direct equity investments in defense, manufacturing, and tech companies, warned that legacy firms are not immune to disruption. “There’s a valley of death for big companies too, usually driven by complacency, arrogance, bureaucracy,” he said.
Newcomers and Legacy Firms Forge Partnerships
Many traditional defense companies are now open to partnerships with next-generation startups. “As the defense industrial base grows, we need to leverage both established companies and new entrants,” said Chris Kubasik, CEO of L3Harris Technologies.
Recent collaborations include San Diego-based Shield AI partnering with HII to build autonomous vessels, and Anduril teaming with South Korea’s HD Hyundai Heavy Industries to develop commercial and military ships.
Zach Mears, Anduril’s head of strategy, said the U.S. defense industry is reaching a tipping point after decades dominated by a small club of contractors. “The light switch is in the middle of being flipped,” he said.
