The Warfighter’s Pipeline: Fixing Defense Tech’s Biggest Bottleneck

Defense tech is no longer a niche—it’s a strategic frontier, and venture capital is all in.

But there’s a catch: the biggest customer, the U.S. Department of War, still operates on timelines and procurement models that clash with the fast-moving, risk-tolerant nature of venture-backed startups. While investors are ready to fund bold innovation, the DoW’s incremental contracting and slow adoption cycles often leave promising technologies stranded in the Valley of Death.

That’s exactly why The Warfighter’s Pipeline: A Blueprint for Aligning Defense Acquisition with Venture Capital by Dan Berkenstock and Jon Chung is so timely and important. In this paper, the authors propose a smarter funding structure designed to help defense startups escape the notorious “Valley of Death.”

But before diving into their recommendations, it’s important to know why these recommendations are crucial to the ongoing landscape of defense innovation.

When Nontraditional Players Get in – Venture Capital Meets Defense Innovation

Defense tech is having its breakout moment. Venture capital investment in the sector skyrocketed to $19.1 billion in Q2 2025—more than double the previous quarter and up 200% year-over-year, according to PitchBook. While traditional VC markets cool, defense startups are red-hot, pulling in record funding, soaring valuations, and a wave of mainstream attention. With $28.4 billion already raised this year, the industry is on track to shatter previous highs.

Companies like Anduril Industries and Palantir have proven the sector’s profitability, attracting both seasoned and first-time defense investors. Anduril, valued at $30.5B after a $2.5B raise, exemplifies how non-traditional firms are disrupting legacy defense primes like Lockheed Martin and Raytheon by taking on risk and driving innovation.

Defense tech now spans far beyond weapons, covering AI, satellites, cybersecurity, semiconductors, renewable energy, and supply chain resilience. In 2023, global VC funding in defense tech reached nearly $12B, matching record highs. Key deals included World View, Anduril, and Helsing.

The U.S. Department of War’s slow, Cold War–era procurement process remains a barrier, but efforts like the Air Force’s Collaborative Combat Aircraft program and Trump’s executive order on acquisition reform aim to include more innovative players. VCs argue the future lies in asymmetric, low-cost, autonomous systems rather than expensive legacy platforms.

Investment is broadening under the label “national security,” which includes infrastructure such as energy grids, water systems, and space. AI, machine learning, and dual-use technologies are central, with firms like Sands Capital and Booz Allen Ventures funding startups that serve both commercial and defense markets.

The growing theme is resilience and redundancy—whether through small, affordable satellites or new semiconductor designs. Many VCs now view the government as a valuable first customer and proving ground, while scale and long-term growth may come from commercial markets.

However, there are some problems. Even with VCs fully onboard, it’s incredibly difficult when the way the government operates doesn’t align with the landscape of defense tech right now.

The Challenges that Venture Capital Face in DOW procurement.

The first major problem is the lengthy and complex process of government procurement.

Lengthy Procurement

Unlike commercial markets where startups can iterate quickly and scale fast, defense tech companies face a slow-moving system filled with red tape. From initial engagement to contract award, the process can take years. This includes navigating proposal requirements, compliance checks, security clearances, and multiple layers of review.

For venture-backed startups, this timeline is often incompatible with the expectations of investors who seek rapid growth and returns. The result is a frustrating bottleneck where promising technologies stall—not because they lack merit, but because the system isn’t built to move at startup speed.

The U.S. government, especially the Department of War has taken meaningful steps to address the slow and complex procurement process that hinders defense tech startups. Through initiatives like the Adaptive Acquisition Framework and expanded use of Other Transactions Authority (OTA), the DOW is enabling faster, more flexible contracting.

The Defense Innovation Unit (DIU) has also played a key role by awarding hundreds of contracts to non-traditional vendors and launching prize challenges to accelerate innovation.

Additionally, recent executive orders and reforms in the National Defense Authorization Act (NDAA) aim to modernize acquisition workflows, prioritize commercial solutions, and align government timelines more closely with the pace of venture-backed innovation.

Even as the government makes efforts to open the door wider for nontraditional players, a deeper issue persists—the fundamental misalignment between venture capital expectations and the way that the DOW buys products from vendors.

Fast Money, Slow Contracts – The Venture Capital Misfit in Defense

In The Warfighter’s Pipeline, Dan Berkenstock and Jon Chung argue that one of the central obstacles for defense startups is bridging the “valley of death,” where investor expectations and government demand signals are badly misaligned.

“One core challenge in bridging the valley of death is aligning increasing expectations of private investors with stronger demand signals from government customers. If venture-backed startups could raise $500 million in a single financing round, or if the government could provide early, pre-product companies with a $500 million multiyear guaranteed contract, this problem wouldn’t exist. But the reality is different: Both startups and the government operate incrementally,” they argued.

The authors point to the STRATFI program as a case study in both the promise and limits of current reforms. A typical defense tech startup needs about $75 million to build a testable prototype and another $100–$250 million to reach full operational capability. By Series C, investors expect $30–$40 million in annual revenue, yet most startups fall short because government procurement is too slow and fragmented to generate the revenue signals private capital requires.

“Yet, many venture-backed defense companies struggle to meet these benchmarks because their primary customers—government agencies—lack procurement mechanisms that match the pace and expectations of venture investors,” they said.

The Demand Signal is Too Weak and Fragmented

Early-stage defense startups often rely on small revenue streams such as Phase I and II SBIR awards, some international sales, and early agreements with distribution partners. While these milestones help demonstrate initial progress, they are not large enough to meet the revenue expectations of venture investors. By the time companies approach their Series B funding round, many have only proven individual components rather than a fully integrated, testable prototype.

Because of this, revenues typically fall short of investor benchmarks. To continue raising money, companies must rely on selling their vision, gathering endorsements from potential future customers, and securing backing from investors who understand national security needs. Falling short of targets usually forces startups to raise less capital under worse terms, which slows their ability to refine prototypes and prepare for full-scale production.

The STRATFI program was designed to help bridge this gap by providing strong demand signals that could attract additional private investment. In practice, however, it often underdelivers. A typical “$60 million STRATFI award” usually includes private capital raised earlier, not new money spurred by the award.

Government contributions can take years to arrive, if they arrive at all, and even the best-case funding scenarios barely meet the thresholds investors look for in the next financing round. As a result, companies spend more time chasing incremental funding through demos and exercises than focusing on operational deployment.

Program constraints add further challenges. Only about 20 percent of the Air Force’s SBIR budget goes toward STRATFI, which limits the number of awards to roughly 25 per year, many of which are directed to the higher-cost space sector. Each award requires multiple approvals and waivers, and the process from application to receiving revenue can take a year—an eternity for cash-strapped startups.

“These limitations result in fewer operationally deployed capabilities and, from a startup perspective, more distraction through the process of raising the financing required for full-scale deployment,” the authors said.

Small SBIR Phase I and II awards can help a company raise early pre-seed and seed rounds, but when it comes time for larger financings—Series A ($15–25M), Series B (~$50M), and Series C ($100M+)—investors need to see strong, timely demand signals in the form of substantial contracts from acquisition program offices, not just R&D groups.

At each stage, startups require contracts of roughly $20M, then $40M, then $40–60M annually to justify continued private investment, but procurement is usually too slow and fragmented to deliver these commitments before the company’s cash runway runs out.

The result is that many firms stall in the “valley of death” or look abroad for buyers, underscoring the structural misalignment between incremental venture capital milestones and the defense acquisition system.

How Venture Capital Strengthens the Defense Industrial Base?

According to Dan Berkenstock and Jon Chung, a new generation of entrepreneurs has emerged who combine Silicon Valley startup know-how with an understanding of Washington and warfighter needs. These leaders could have the same transformative impact as past defense pioneers like Kelly Johnson (Lockheed’s Skunk Works), Hyman Rickover (father of the nuclear Navy), and Gene Kranz (NASA flight director).

This is why Dan Berkenstock and Jon Chung suggested a new defense industrial base that is made up of roughly two hundred venture-backed startups that have raised their first investments since the mid-2000s, with defense or intelligence as either a primary or secondary focus. These firms sit within a broader group of about six hundred venture-backed aerospace and defense companies created over the same period.

Startups in defense tech typically raise around $300 million over multiple funding rounds before delivering an operational product. Early funding (e.g., $5 million seed rounds) can be secured with a strong team and idea, but larger rounds ($50–$100 million) require significant customer traction, often measured in tens of millions in annual recurring revenue.

As funding grows, so do team sizes—from about 10 employees at seed stage to up to 500 at later stages, mostly engineers. Over five years, each startup contributes roughly 500,000 hours of engineering effort, often blending talent from Silicon Valley and traditional defense. For hardware-focused companies, 5–10% of capital goes to suppliers, generating $15–$30 million in supply chain activity.

By working outside classified environments, these companies can integrate the most advanced commercial technologies more quickly into defense designs.

They attract talent that has experience building large-scale software and computing systems in fast-moving environments. They also bring in a workforce that might otherwise never contribute to defense challenges.

In addition, their outside perspective provides a kind of “red teaming”: if American entrepreneurs can identify new technologies, adversaries almost certainly can as well.

Finally, because private investors absorb much of the early risk, taxpayer dollars stretch further, enabling more experimentation at lower public cost.

How Risk-Sharing Approach Can Accelerate New Defense Technologies?

Technological progress inherently involves risk, but in government acquisitions, risk is seen almost entirely as a liability—carrying career consequences like lost promotions or public scrutiny, as stated in The Warfighter’s Pipeline.

By contrast, venture capital thrives on risk, using it as the basis for growth. Venture funds typically invest in dozens of startups with the expectation that only a few will succeed, some returning the entire fund and one or two delivering outsized gains.

This model requires investors to double down on the most promising ventures and let weaker ones fail, concentrating resources where success is most likely.

Government acquisition takes the opposite approach. In the past, programs like the U-2 relied on close relationships and flexibility, but over time the system became dominated by layers of requirements, oversight, and risk avoidance.

The C-17 program, for example, generated thousands of pages of specifications, driving up costs and delays while stifling innovation. This cycle of overprescription has made the system slower, more expensive, and ironically more risky.

In recent years, venture-backed companies have introduced a new model for defense innovation. Instead of government shouldering the entire financial and technical risk, private investors share the burden by funding early-stage development.

These startups often pursue unconventional, cost-effective “80/20” solutions—meeting most mission needs quickly while leaving room for adaptation. Once proven, such solutions can scale through continued private funding or partnerships with established defense contractors.

For government, this approach stretches taxpayer dollars—sometimes multiplying them tenfold—while speeding up innovation, strengthening the industrial base, and improving adaptability against emerging threats.

The key question is whether government leaders will embrace this risk-sharing paradigm or remain stuck in a risk-averse system ill-suited to the pace of modern technological change.

Recommendations to Expand and Improve the SBIR/STTR Framework

According to the authors, The U.S. defense ecosystem needs to adapt to the pace of technological change by broadening its industrial base. Instead of relying solely on a few large primes or trying to create only a handful of “new primes,” the focus should be on continuously nurturing new entrants—particularly venture-backed startups—that can rapidly design and scale new capabilities.

The key is to align government funding structures with the natural rhythm of venture capital, giving companies predictable milestones that encourage both private co-investment and long-term DOW adoption.

To unlock the full potential of emerging, venture-backed defense companies, the SBIR/STTR reauthorization should create a DOW-wide program modeled on the Air Force’s STRATFI program.

The new program would expand funding caps, allow multiple incremental awards that align with venture capital cycles, standardize rules for matching private and government funds, dedicate a minimum share of the R&D budget to these awards, and improve transparency through better reporting. It also recommends giving agencies more administrative resources to manage these programs effectively.

Beyond reauthorization, it proposes that the 2025 NDAA establish a reliable funding stream, similar to SBIR’s existing levy, to support STRATFI-like and Phase III commercialization awards.

On the implementation side, the essay calls for multiphase, 24-month awards tied to investor expectations, a larger share of SBIR budgets (30–50%) directed toward these programs, clear incentives for program officers to adopt them, stronger guidance from senior acquisition leaders on using Phase III contracts, and better tracking of award speed and payments.

Together, these changes would give startups the funding runway and demand signals they need to scale technologies from prototypes into fielded capabilities.

A Two-Phase STRATFI Model

The authors propose a two-phase STRATFI model. In the new model, the STRATFI program would be split into two phases instead of one long four-year award, aligning better with the two-year financing cycles of venture-backed startups.

• STRATFI-1: A two-year contract designed to help a company reach $10M in annual recurring revenue (ARR). It would provide $10M in non-SBIR government contracts and $10M in SBIR funds, but only if the company raises $20M in new private capital after the award.
• STRATFI-2: A follow-on two-year contract awarded after STRATFI-1, intended for companies at the Series B stage (around $20M+ ARR). It would require private investors to contribute at least $40M, matching the larger government award.

This two-step structure creates two major milestones: first, to secure new private funding and customer validation at STRATFI-1, and second, to trigger a larger investment round at STRATFI-2. It also gives the government a checkpoint to decide whether to continue based on company performance.

To support this, the model proposes dedicated transition funding (via an SBIR-like levy or separate line items) so agencies can budget for Phase III commercialization from the start.

This approach calls for higher overall government funding levels to reflect the true costs of scaling from prototype to operational capability. Without this, companies risk stalling, turning to foreign defense or commercial markets, or never reaching full deployment. The benefit to the government is significant leverage: for every $1 it invests, private capital may put in $6, reducing government risk while accelerating delivery of cutting-edge systems to warfighters.