What VCs Get Wrong About Defense

A lot of new venture capital is flowing into defense startups now. Most of it will probably be wasted. Not because the founders are bad or the tech isn’t real, but because investors are using the wrong playbook.

I’ve learned this from raising money for SensusQ, a startup building AI tools for NATO. That meant talking to hundreds of VCs, and many later came back for advice on how to invest in defense. From that front-row seat, I’ve seen that investing in a company that sells to the military is fundamentally different from investing in one that sells to consumers or even businesses. The rules are different. The timelines are different. The customers are different. If you apply the “growth at all costs” model, you won’t just fail to get a 10x return; you’ll be lucky to get your money back.

Here are some things you have to understand if you want to invest in it.

Investors often get excited by sci-fi. Hypersonic drones, AI-powered robot dogs, exoskeleton suits. It makes for a great pitch deck. But the people who actually fight wars are relentlessly pragmatic. They don’t care about what might be possible in 2040. They care about what will give them an edge tomorrow, with the budget they have today.

One of the most transformative weapons in the Ukraine war so far is the FPV drone. It’s not futuristic tech. It’s a simple, cheap, off-the-shelf drone with explosives strapped to it. It became a game-changer because it solved an immediate problem with brutal effectiveness.

But this reveals a common trap for investors new to defense. Seeing the success of FPVs, they rush to fund a dozen copycats, all making nearly identical drones from the same components. The market gets saturated overnight. The real lesson isn’t to fund what’s working today. It’s to find the next thing that solves an immediate problem. You’re looking for tomorrow’s FPV drone, not yesterday’s.

Pragmatism over polish

Military buyers have high stakes and fixed budgets. They will almost always choose a 10% improvement in an existing, critical capability now over a hypothetical 10x improvement that requires them to change everything.

So when a founder starts talking about their grand vision, ask them: what problem does this solve for a soldier, right now? Does it make them more accurate, better protected, or faster at making decisions? If the answer is fuzzy, or set far in the future, be wary. Hype doesn’t win contracts.

Militaries are like giant, complex legacy software systems. To get a new feature adopted, you have to work with the existing codebase. You can’t just tell them to rewrite the whole thing.

A common way for defense startups to die is to build something technically brilliant that doesn’t integrate with anything. It doesn’t use the right data link, doesn’t fit on the standard rail, or doesn’t meet the cybersecurity protocols. It’s a non-starter. The customer won’t rip out their comms network just for your cool gadget.

It’s not just about technical standards. It’s about procurement. Militaries buy things that fit into predefined boxes called “programs of record.” If your tech doesn’t fit an existing need on their roadmap, it can fall into an administrative black hole, no matter how good it is. You need a champion inside the system who can attach your solution to an existing budget line.

Pictured: hundreds of interoperability standards

The founders who succeed know this. They talk about MIL-STDs, STANAGs and open architectures. They pitch their product not as a revolution, but as an upgrade to an existing platform — a new sensor for a fighter jet, or a software module for a command system that’s already in the field. They find the path of least resistance into the machine. Ask founders how they plan to integrate, not just what they plan to build.

In the world of SaaS, a company that hasn’t found product-market fit in 18 months is probably in trouble. In defense, you might be two years in before you sign your first meaningful contract. And that first contract might only be for a small pilot project.

The sales cycle is long. Brutally long. It’s not a cycle; it’s a multi-year gauntlet of demos, trials, testing, and paperwork. This period, between having a working prototype and getting a large-scale order, is famously called the “valley of death.” Many startups run out of money and die there.

Illustration from U.S Army AL&T

This means you have to model these companies differently. Early revenue isn’t about growth; it’s about survival and validation. A $200k R&D contract is a huge win, because it means the customer is serious. It’s a signal. You have to be prepared to fund a company through long periods with little to show on the P&L.

This long timeline is a filter. It weeds out the tourists. The founders who survive are the ones who are fanatically dedicated and who have investors that understand the game. Don’t ask a defense startup why their ARR isn’t growing 20% month-over-month. Ask them how much runway they have to survive until the big contracts land.

It’s common to see defense startups with retired generals on their advisory board. This makes sense. Who knows the user’s problems better than someone who spent 30 years in the field? They are invaluable for product design and credibility.

But don’t mistake product-market fit for a go-to-market strategy. The skills that make a great officer don’t always make a great salesperson. A general might be able to get a meeting with an old friend and open the right doors, but enterprise sales in this world is a grind. It requires relentless follow-up, navigating bureaucracy, and a willingness to be annoying.

A founder who tells you “the generals love it, so it will sell itself” is waving a huge red flag. A decorated officer might not be comfortable chasing down a mid-level contracting agent or cold-calling a MoD program office.

Successful teams have both: the domain expert who ensures they’re building the right thing, and the sales hustler who will knock on every door to get it sold. When you talk to a defense startup, figure out who is the salesman. Who wakes up every morning thinking about pipeline? You need that person. Credibility gets you in the door. Hustle gets you a contract.

Militaries don’t buy products; they buy capabilities. A new drone is useless until you have a concept for how to use it, a plan for training pilots, and a system for maintaining it.

A startup that just sells a piece of hardware often gets stuck in pilot purgatory. Why haven’t robotic ground vehicles been widely adopted, despite being technically feasible for years? Because armies are still figuring out the doctrine. How does a platoon with three robots fight differently than one without? Until that question is answered, they won’t buy 10,000 of them.

Where do these things fit?

The best founders understand this. They don’t just sell a tool. They sell the whole workflow. If they build an AI targeting software, they also provide the training on how to use it and show how it fits into the analyst’s existing day. They are, in effect, writing the manual for their own technology.

Ask the founder: what larger capability does your product enable? How does it change the way the customer operates? If they can’t answer that, the military won’t be able to either, and the product will remain a cool demo that never gets deployed.

In consumer tech, there are a dozen ways to exit. In defense, there are really only two: go public, or get acquired by a prime contractor like Lockheed Martin or Rheinmetall or in recent times a neo-prime like Anduril or Helsing.

An IPO is the goal for the most ambitious companies, but it requires massive scale — hundreds of millions in revenue. Given the long timelines, very few will get there.

The more common exit is selling to a prime. But you have to understand how they think. Primes are mostly public companies that trade at low revenue multiples, maybe 1–2x. They can’t justify paying a typical venture multiple, like 20x revenue, for a startup. The math would destroy value for their shareholders.

The only reason a traditional prime will pay a premium is if your startup is the key to them winning a much larger, multi-billion dollar program. They’re not buying your revenue; they’re buying a strategic advantage. This means the startups that get acquired are usually the ones that build a critical component that a prime needs to complete a larger offering.

This creates a clear, if narrow, path. You either build a company so big it can become a prime itself, or you build something so critical that an existing prime has to buy you. There isn’t much of a middle ground. As an investor, you have to ask which path they’re on. And you need an honest answer.

Investing in defense requires a different mindset. It’s a long game. You’re betting on the team’s ability to survive years of trials to build something that lasts. The companies that succeed won’t just make money for their investors; they’ll become the arsenal of democracy for the next generation. The next Anduril, Palantir or General Dynamics is out there, but it will be built by founders who understand these rules, and backed by investors who have the patience to see it through.

P.S: For investors building their thesis in defense and for the founders working on these challenges, I’m always happy to connect and share insights. You can find me on LinkedIn or X.