Venture Capital Is Fueling Next-Generation Aviation Defense Technology
- Andy Coen
- May 1
- 6 min read
By Andy Coen
Andy Coen is a Venture Fellow at AIN Ventures and is a Naval Flight Officer on the P-8A Poseidon reconnaissance aircraft with deployment experience to the Middle East and the Red Sea.
AIN Ventures is a venture capital firm that invests in deep technology startups with dual-use technology applications. We have been tracking the changing landscape of aerial warfare, including the effect that venture capital has had on this domain. This paper is designed to highlight these changes and what the future may hold.
Case Study: The Houthi Rebels
The Houthi Rebels are an Iranian-backed Yemeni extremist group. Despite the Houthis’ limited resources and geographic isolation in Yemen, they have disrupted one of the world's most critical maritime chokepoints: the Bab el-Mandeb Strait. This narrow waterway between Yemen and Djibouti connects the Red Sea to the Suez Canal, a crucial artery for global trade, with approximately 12% of global trade passing through it annually. The Houthis' weapon of choice to disrupt global trade? The humble yet highly effective Shahed-136 one-way attack Unmanned Aircraft System (UAS).
The Shahed series UAS is low-cost, rapidly deployed, and attritable. The Houthis have leveraged this technology to launch persistent one-way attacks on merchant vessels traversing the Bab-el-Mandeb Strait between the Horn of Africa and Yemen. The following image depicts reported one-way Houthi attacks in recent years.
The impact of these attacks has been profound. They’ve disrupted global trade, forcing many shipping companies to reroute their vessels around the Cape of Good Hope, adding up to six weeks and 4,400 nautical miles to their journey. Shipping delays in the Red Sea significantly contribute to global inflation, and if these attacks continue, they could add up to a whole percentage point to global inflation (Schwarzenberg).
The success of the Houthis' drone strategy lies in their capitalization on rapid innovation to achieve cost asymmetry. By using inexpensive, replaceable, yet highly effective UASs, the Houthi Rebels have been able to sustain a campaign of harassment and disruption against vastly superior military forces and global shipping interests.
DoD Programs: Cost Asymmetry
In the United States, expensive and lengthy programs have historically dictated the pace of aviation defense technology development.
The F-35 Lightning II is one of the stealthiest combat machines on the planet. But aerial warfare has transformed in the 25 years since the program’s conception. In the Red Sea Crisis, low-cost, attritable, and rapidly manufactured UAS have unleashed global terror using UAS technology diametrically opposed to that of the F-35 program: low-cost, rapidly manufactured, and expendable.
A single F-35 costs approximately $177MM USD with an estimated $2 trillion USD lifecycle program cost and 94 94-year platform lifecycle (U.S. Government Accountability Office). In contrast, the Shahed-136, an Iranian-manufactured kamikaze drone used in both the Red Sea and Russia-Ukraine crises, has an estimated lifetime cost ranging from $100,000 - $300,000 USD and a life cycle ranging from days to several months. Additionally, current counter-UAS methods involve using tactical aircraft like the F/A-18 air-to-air missiles or exorbitantly expensive surface-to-air missiles. While small UAS and the F-35s accomplish different theater mission objectives, the cost asymmetry of the programs is clear.
A strong need exists for sustainable (on a cost-adjusted basis) aviation technology to maintain air superiority at all levels of airspace. The Houthis have shown that with current technology, the cost of maintaining US air superiority in sub-1000 ft airspace is unacceptable. Therein lies a key question: How can the US ensure sustained, complete dominance of airspace at all altitudes?
To solve this problem, startups and VCs are pushing to revitalize the government procurement process to develop sustainable UAS and counter-UAS solutions for air superiority at all levels of airspace.
How Venture Capital is Accelerating Next-Generation Aerial Warfare
Venture Capitalists have pumped billions into the defense technology ecosystem, with $35 billion flowing from Silicon Valley in 2023. UAS are one of the biggest beneficiaries of AI and chip technology advancements, primarily due to these technologies' ability to enable autonomy. AI and chip advancements have been rapidly fueled through VC-backed companies alongside larger, public technology companies that were VC-backed at one time.
Because AI and chips underpin UAS advancements, the speed of private innovation has far outpaced that of the military. This has opened up the ability of VC-backed startups to win government contracts and disrupt the defense-prime monopoly. The chart below depicts the ten highest-funded private AI drone and drone-adjacent companies in the United States since 2014.
Among the top ten, it’s clear that Anduril Industries dominates the private aviation defense technology market, having raised more than the rest of the top ten combined. Interestingly, Anduril’s founding date, 2017, is two years later than the average founding date among the rest of the top ten: 2015. This suggests that in aviation defense technology, startup maturity is not necessarily linear, but rather a reflection of other foundational tenets of the company, such as founder experience and expertise, go-to-market strategy, key partners, regulatory navigation, and the team’s ability to rapidly iterate solutions to achieve product-market fit.
Each company in the top ten has a dual-use application. Dual-use is a common strategy for early-stage (pre-seed through Series C) startups to de-risk their go-to-market strategy. If the startup strikes out on government contracts or DoD grants, commercial applications can serve as a lifeline (or vice versa). DoD program offices, government contracts, and grants can be notoriously competitive and complex, so hedging a commercial target market along with the government is an effective strategy for early-stage aviation defense tech startups. Expanding a company’s total addressable market (TAM) also creates diverse revenue pipelines, and increasing ARR (Annual Recurring Revenue) can dramatically increase a company’s appeal to VCs.
The prevalence of AI, Machine Learning, and automation in the top ten is also apparent. Every company in the top ten uses AI in some form, and some business models, like that of Scale AI, are entirely dependent on its development. In military aviation, AI is an effective mission planning, debriefing, and in-flight optimization tool that can be applied to many mission sets. While still nascent, the application of AI and ML to aviation combat, intelligence, unmanned technology, and electronic warfare is evolving each day, and its responsible development is critical to national security. In this pursuit, VC funding is empowering startups to lead the charge, particularly in the technology innovation hubs of America (see Appendix A).
Venture funding played a critical role in the rise of each of the top 10 highest-funded aviation defense tech startups in the United States. VCs amplify network access as many hold strong ties to government agencies and programs, provide introductions to customers and contracts, and provide resources for navigating complex defense procurement processes. This enables rapid contract wins and a competitive edge in pursuing non-dilutive funding such as SBIRs and STTRs. VCs can also connect startups with established players in aerospace and defense, enabling startups to attract the top engineers, business developers, and executives with defense expertise. Many VC firms also capitalize on the power of investor syndication, which brings in co-investors with complementary expertise to facilitate diverse dual-use applications. The depiction below shows the ten most prevalent VCs among the US's 100 highest-funded aviation defense tech startups.
For startups in aviation defense technology, raising funding from venture capitalists in the pre-seed and seed stages is a powerful growth signal. For Anduril Industries, early support from top-tier VCs like Founders Fund enabled rapid R&D and government contract acquisition. For Shield AI, VC backing allowed the company to develop AI-powered drones, secure defense contracts, and expand its dual-use applications. For Skydio, leveraging VC funding enabled the company to transition from consumer drones to enterprise and government markets, driving ARR growth. In all three cases, raising VC funding signaled to other investors and partners that the company was driving meaningful impact in the pursuit of their mission, allowing the company to progress through the critical juncture of Seed stage through Series A. We are experiencing a paradigm shift where, in select cases, UAS private startups are bringing technology to the warfighter more rapidly than traditional defense primes and procurement processes.
The nature of aviation defense technology is changing. The complexity of DoD contracts is a significant barrier to entry for aviation defense technology innovators, but venture capital is empowering startups to break through by providing strategic funding, mentorship, and network access. The next generation of aviation defense technology is here, but startups and venture capitalists are leading the way this time.
Appendix A: VC-backed aviation defense-tech HQ locations (United States)
Sources
“Lloyd’s List” Reported Houthi attacks in the Red Sea and Gulf of Aden., https://www.lloydslist.com/hot-topics/red-sea-risk/map-and-list-of-attacks.
Rubin, Uzi. “Russia's Iranian-Made UAVs: A Technical Profile | Royal United Services Institute.” RUSI, 13 January 2023, https://www.rusi.org/explore-our-research/publications/commentary/russias-iranian-made-uavs-technical-profile
Schwarzenberg, Andres B. “Red Sea Shipping Disruptions: Estimating Economic Effects.” CRS Reports, 8 May 2024, https://crsreports.congress.gov/product/pdf/IF/IF12657.
U.S. Government Accountability Office. "The F-35 Will Now Exceed $2 Trillion As the Military Plans to Fly It Less." GAO WatchBlog, 16 May 2024, https://www.gao.gov/blog/f-35-will-now-exceed-2-trillion-military-plans-fly-it-less
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