Hundreds of billions of dollars person poured into defense tech complete the past respective years. As a result, caller defense-tech companies are launching each day. Whenever that overmuch superior chases a azygous sector, you create the conditions for a bubble.
And arsenic galore person commented, that’s precisely what’s happening correct now.
You person defense-tech startups raising Series A rounds astatine $300 cardinal aliases $400 cardinal valuations pinch nary recurring revenue, nary meaningful semipermanent contracts, and, successful galore cases, small much than a vision. Case successful point, past period Reuters reported that 4 erstwhile DOGE staffers had raised $160M astatine a $1.4B valuation for a pre-product company. The plan? Maybe to get a information halfway that could beryllium utilized for AI cyber operations.
Those valuations are built connected speculation astir what we each hope the marketplace could go alternatively than what it is. The problem is that the defense marketplace itself isn’t astir arsenic ample arsenic group assume. Yes, the U.S. defense fund is enormous. But that header number is doing a batch of activity successful transportation decks correct now.
The Real Market Size for Defense-Tech
The Trump Administration’s 2027 fund petition is $1.5 trillion. But that is not the defense-tech market. The existent backing lines to bargain caller exertion travel only from procurement and RDT&E dollars, which the FY27 petition puts astatine astir $760 cardinal mixed (and much than a 3rd of that depends connected a $280 cardinal reconciliation package Congress hasn’t passed yet). The durable guidelines is person to $480 billion. Everything else, including salary and benefits, operations and maintenance, healthcare, facilities, is disconnected the table.
Within the $480 billion, astir modernization dollars are already spoken for. Shipbuilding, munitions, aircraft, and atomic modernization travel done programs of grounds that are sole-sourced aliases efficaciously closed to caller entrants. The 5 bequest primes still seizure the immense mostly of these obligations.
So for the genuinely contestable portion of the pastry (i.e., autonomy, drones, software, sensing, space), the FY27 petition carves retired astir $54 cardinal for autonomous systems and $39 cardinal for drone procurement. That is existent money. But those are requests, not appropriations, and moreover appropriated dollars will apt travel mostly to established players.
If we look backwards, we tin spot really this plays out.
In FY25, national obligations to each VC and PE-backed national-security companies totaled $4.3 billion. At the aforesaid time, astir $50 cardinal of task superior invested successful the assemblage past year. More than 10 dollars went successful for each dollar of authorities gross that came out.
So the honorable sizing isn’t $1.5 trillion. For caller entrants, funded, scalable programme gross is simply a single-digit-billion marketplace coming that mightiness scope the debased tens of billions by decade’s end. Now disagreement that marketplace crossed hundreds of venture-backed startups.
The mathematics simply doesn’t support the sky-high valuations today.
There’s different reality investors often underestimate: the authorities doesn’t want to negociate hundreds of niche vendors. It prefers moving pinch a comparatively mini number of trusted, reliable premier contractors and systems integrators pinch acquisition connected the battlefield. That’s really procurement works.
So arsenic superior pours into defense tech, much and much founders are launching companies to pursuit a marketplace that, successful reality, is overmuch smaller than their valuations tin justify.
Eventually, location will beryllium a reckoning. And my stake is that it’s coming successful the adjacent 18 months.
Many of these companies won’t make it beyond Series B. They’ll struggle to raise follow-on rounds because they person already priced themselves excessively aggressively, and the adjacent investors won’t support those valuations. The superior simply won’t beryllium there.
When that happens, founders will person 1 existent option: consolidation.
What Consolidation Will Look Like
The rumblings are already starting. Several companies successful the past twelvemonth person made the leap into the nationalist markets via SPACs aliases microcap-IPOs (see Merlin Labs, Elroy Air, and Swarmer). Others are testing the waters pinch peers and investors astir M&A. The Primes and Neo-Primes person been making important acquisitions pinch M&A activity up 40% successful 2025, and 166% successful Q1 2026.
Here is what I deliberation the consolidation activity will look like:
At the apical of the market, location will beryllium mergers of communal convenience among well-positioned peers. This will look for illustration 2 aliases much venture-backed companies combining complementary exertion and statement bases to scope accumulation standard neither could deed alone. These conversations are already happening, and the champion companies are initiating them from positions of strength.
Next, recapitalizations driven by excessive valuations. Companies pinch existent exertion but surgery headdress tables will return system rounds aliases outright recaps that reset valuations and lavation retired penchant stacks truthful caller superior tin travel successful clean. While achy for earlier investors, these whitethorn beryllium the only way to endurance for companies that pushed valuations up excessively precocious excessively fast.
Then acquisitions by the primes and by the caller mega-startups. These giants will usability arsenic acquirers of past edifice for precocious value teams, technology, and contracts, which person nary different options.
Then the rollups. Several private-equity firms are already assembling superior to build platforms astir scaled anchor companies, which tin past tuck-in niche vendors for constituent parts, trial infrastructure, sustainment, and software. Expect overmuch much of this arsenic prices autumn (see Carlyle, Capital Meridien, and Advent).
The companies that past won’t needfully beryllium the ones pinch the biggest valuations today. They’ll beryllium the ones that scope a meaningful scale. And increasingly, the fastest way to standard won’t beryllium integrated maturation — it will beryllium mergers.
A Test For Who Survives
Here are 5 questions that I would beryllium asking:
Do you person existent revenue? The colour of money matters here. Startups that person a funded programme of record, an appropriated line, aliases accumulation orders pinch follow-on request down them count are successful a bully position. A pilot, SBIR, prototype OTA, aliases strategical business whitethorn beryllium useful, but it is not the aforesaid thing. Most defense startups tin show that the authorities likes their product. Far less tin show that the authorities has made room successful the fund to bargain it astatine scale.
Do you ain your customer relationships? A institution pinch its ain premier statement has leverage and a way to expand. A subcontractor that depends connected different institution to transportation its merchandise into the programme is successful a precarious position. That intermediary tin compression margins, switch the technology, aliases bring the capacity in-house. If your merchandise reaches the warfighter done personification else’s contract, you whitethorn person revenue, but you do not power it.
Does your exertion activity reliably successful the field? Defense-tech has to present successful the harshest conditions reliably for the warfighter. Demonstrations are a bully step, but your tech has to beryllium deployed successful the section pinch proven results to beryllium relevant.
Do your portion economics scale? Venture superior tin subsidize early units and make anemic economics look amended than they are. Fixed-price accumulation removes that cushion. It exposes the existent costs of labor, materials, rework, supplier risk, and moving capital. The trial is whether the fiftieth strategy arrives connected time, carries a existent margin, and comes from a proviso concatenation you tin trust on.
Do you person capable runway? Good businesses get stranded by bad structures. If the institution is priced excessively precocious to money and excessively encumbered to merge, operating advancement whitethorn not beryllium capable to prevention it.
Four aliases 5 yeses, and you’re successful a awesome position to scale. Two aliases three, and you should beryllium looking to return fierce action now, and perchance to merge from strength. Fewer than two, you’re trading a story, and that communicative is apt to beryllium repriced by the marketplace sooner than later.
Experienced founders already understand this. They admit that today’s model isn’t astir maximizing valuation; it’s astir building thing durable. They’re taking action now, earlier the marketplace forces the issue. Because eventually, galore of today’s venture-backed defense startups won’t disappear. They’ll simply beryllium recapped, merged, and absorbed into a overmuch smaller number of companies.
Jordan Blashek is simply a heavy tech, defense, and abstraction ventures investor, operator, author, and Marine Corps veteran. He is simply a wide partner at Overmatch Ventures, the president of Endless Frontiers, and co-author of Union: A Democrat, A Republican, and a Search for Common Ground. Follow him on LinkedIn or X.
Originally published successful Building Our Future. Reproduced pinch permission.
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