Hundreds of billions of dollars have poured into defense tech over the past several years. As a result, new defense-tech companies are launching every day. Whenever that much capital chases a single sector, you create the conditions for a bubble.
And as many have commented, that’s exactly what’s happening right now.
You have defense-tech startups raising Series A rounds at $300 million or $400 million valuations with no recurring revenue, no meaningful long-term contracts, and, in many cases, little more than a vision. Case in point, last month Reuters reported that four former DOGE staffers had raised $160M at a $1.4B valuation for a pre-product company. The plan? Maybe to acquire a data center that could be used for AI cyber operations.
Those valuations are built on speculation about what we all hope the market could become rather than what it is. The problem is that the defense market itself isn’t nearly as large as people assume. Yes, the U.S. defense budget is enormous. But that headline number is doing a lot of work in pitch decks right now.
The Real Market Size for Defense-Tech
The Trump Administration’s 2027 budget request is $1.5 trillion. But that is not the defense-tech market. The actual funding lines to buy new technology come only from procurement and RDT&E dollars, which the FY27 request puts at roughly $760 billion combined (and more than a third of that depends on a $280 billion reconciliation package Congress hasn’t passed yet). The durable base is closer to $480 billion. Everything else, including pay and benefits, operations and maintenance, healthcare, facilities, is off the table.
Within the $480 billion, most modernization dollars are already spoken for. Shipbuilding, munitions, aircraft, and nuclear modernization flow through programs of record that are sole-sourced or effectively closed to new entrants. The five legacy primes still capture the vast majority of these obligations.
So for the genuinely contestable slice of the pie (i.e., autonomy, drones, software, sensing, space), the FY27 request carves out roughly $54 billion for autonomous systems and $39 billion for drone procurement. That is real money. But those are requests, not appropriations, and even appropriated dollars will likely flow mostly to established players.
If we look backwards, we can see how this plays out.
In FY25, federal obligations to all VC and PE-backed national-security companies totaled $4.3 billion. At the same time, nearly $50 billion of venture capital invested in the sector last year. More than ten dollars went in for every dollar of government revenue that came out.
So the honest sizing isn’t $1.5 trillion. For new entrants, funded, scalable program revenue is a single-digit-billion market today that might reach the low tens of billions by decade’s end. Now divide that market across hundreds of venture-backed startups.
The math simply doesn’t support the sky-high valuations today.
There’s another reality investors often underestimate: the government doesn’t want to manage hundreds of niche vendors. It prefers working with a relatively small number of trusted, reliable prime contractors and systems integrators with experience on the battlefield. That’s how procurement works.
So as capital pours into defense tech, more and more founders are launching companies to chase a market that, in reality, is much smaller than their valuations can justify.
Eventually, there will be a reckoning. And my bet is that it’s coming in the next 18 months.
Many of these companies won’t make it beyond Series B. They’ll struggle to raise follow-on rounds because they have already priced themselves too aggressively, and the next investors won’t support those valuations. The capital simply won’t be there.
When that happens, founders will have one real option: consolidation.
What Consolidation Will Look Like
The rumblings are already starting. Several companies in the past year have made the leap into the public markets via SPACs or microcap-IPOs (see Merlin Labs, Elroy Air, and Swarmer). Others are testing the waters with peers and investors about M&A. The Primes and Neo-Primes have been making significant acquisitions with M&A activity up 40% in 2025, and 166% in Q1 2026.
Here is what I think the consolidation wave will look like:
- At the top of the market, there will be mergers of mutual convenience among well-positioned peers. This will look like two or more venture-backed companies combining complementary technology and contract bases to reach production scale neither could hit alone. These conversations are already happening, and the best companies are initiating them from positions of strength.
- Next, recapitalizations driven by excessive valuations. Companies with real technology but broken cap tables will take structured rounds or outright recaps that reset valuations and wash out preference stacks so new capital can come in clean. While painful for earlier investors, these may be the only path to survival for companies that pushed valuations up too high too fast.
- Then acquisitions by the primes and by the new mega-startups. These giants will function as acquirers of last resort for high quality teams, technology, and contracts, which have no other options.
- Then the rollups. Several private-equity firms are already assembling capital to build platforms around scaled anchor companies, which can then tuck-in niche vendors for component parts, test infrastructure, sustainment, and software. Expect much more of this as prices fall (see Carlyle, Capital Meridien, and Advent).
The companies that survive won’t necessarily be the ones with the biggest valuations today. They’ll be the ones that reach a meaningful scale. And increasingly, the fastest path to scale won’t be organic growth — it will be mergers.
A Test For Who Survives
Here are five questions that I would be asking:
- Do you have real revenue?The color of money matters here. Startups that have a funded program of record, an appropriated line, or production orders with follow-on demand behind them count are in a good position. A pilot, SBIR, prototype OTA, or strategic partnership may be useful, but it is not the same thing. Most defense startups can show that the government likes their product. Far fewer can show that the government has made room in the budget to buy it at scale.
- Do you own your customer relationships?A company with its own prime contract has leverage and a path to expand. A subcontractor that depends on another company to carry its product into the program is in a precarious position. That intermediary can squeeze margins, replace the technology, or bring the capability in-house. If your product reaches the warfighter through someone else’s contract, you may have revenue, but you do not control it.
- Does your technology work reliably in the field?Defense-tech has to deliver in the harshest conditions reliably for the warfighter. Demonstrations are a good step, but your tech has to be deployed in the field with proven results to be relevant.
- Do your unit economics scale?Venture capital can subsidize early units and make weak economics look better than they are. Fixed-price production removes that cushion. It exposes the true cost of labor, materials, rework, supplier risk, and working capital. The test is whether the fiftieth system arrives on time, carries a real margin, and comes from a supply chain you can rely on.
- Do you have enough runway?Good businesses get stranded by bad structures. If the company is priced too high to fund and too encumbered to merge, operating progress may not be enough to save it.
Four or five yeses, and you’re in a great position to scale. Two or three, and you should be looking to take aggressive action now, and potentially to merge from strength. Fewer than two, you’re selling a story, and that story is likely to be repriced by the market sooner than later.
Experienced founders already understand this. They recognize that today’s window isn’t about maximizing valuation; it’s about building something durable. They’re taking action now, before the market forces the issue. Because eventually, many of today’s venture-backed defense startups won’t disappear. They’ll simply be recapped, merged, and absorbed into a much smaller number of companies.
Jordan Blashek is a deep tech, defense, and space ventures investor, operator, author, and Marine Corps veteran. He is a general partner at Overmatch Ventures, the chairman 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 in Building Our Future. Reproduced with permission.
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