US military-civil fusion creates risks as well as rewards
Venture capital investors and high-tech start-ups are discovering an appetite for the defence sector
The symbolism could hardly be starker. Two American astronauts, who flew to the International Space Station in June on a Boeing Starliner spacecraft, may be stuck in space for months because their return vehicle has sprung a leak in its propulsion system. Nasa is now considering whether a SpaceX Dragon spacecraft can pick them up in February.
This unhappy incident highlights the extent to which the innovative, private space company run by the maverick Elon Musk has gained primacy over the problem-plagued, 108-year-old government contractor, in spite of Boeing’s glorious history in the US space programme. It is a lesson unlikely to be lost on the Pentagon as it allocates its $800bn-plus budget in future. Like Nasa, the US Department of Defense relies increasingly on a new generation of Silicon Valley start-ups to sharpen its edge. Traditional defence contractors, including Boeing, Raytheon, Lockheed Martin and General Dynamics, known as the primes, are being disrupted.
This month, one of the highest-profile of those disrupters, Anduril Industries, raised $1.5bn from venture capital investors, valuing the company at $14bn. Anduril will now build out Arsenal-1, a state-of-the-art factory to “hyperscale” the production of thousands of autonomous combat drones as part of the Pentagon’s Replicator programme. This initiative aims to deploy thousands of autonomous systems within 18 to 24 months.
Anduril was founded in 2017 by Palmer Luckey, who made a fortune from selling his virtual reality start-up Oculus to Facebook and is now intent on reimagining the defence industry. This year, Luckey told the FT that Anduril’s (immodest) aim was to “save western civilisation”. It would also save taxpayers billions of dollars a year. “The intent is to go toe to toe with the major primes and try to fight our way to an equal footing,” he said.
Russia’s full-scale invasion of Ukraine in 2022 and tensions with China have led to renewed scrutiny of US military preparedness. The use of cheap, effective drones by Ukrainian and Russian forces and the vulnerability of traditional hardware have riveted the attention of defence chiefs. Would one more aircraft carrier or 18,000 drones be more effective in defending Taiwan?
The Pentagon’s critics argue that US technological supremacy has been compromised by its failure to embrace the potential of modern software, cloud computing, commercial space and artificial intelligence quickly enough. “It’s a story of the US getting ambushed by the future,” according to Christian Brose, former staff director at the Senate Armed Services Committee, who is now Anduril’s chief strategy officer.
VC firms, which had long steered clear of defence tech, are also rediscovering an appetite for the sector. Having the Pentagon as a massive customer of first resort certainly adds to the appeal. According to PitchBook, VCs invested more than $120bn globally in the defence sector over the past three years, even though this has slowed this year.
On a lesser scale, defence tech is taking off in Europe. In July, the German AI defence start-up Helsing raised €450mn at a valuation of almost €5bn. Nato has launched a €1bn Europe-focused innovation fund to promote defence start-ups as well as the Diana accelerator programme. The European Investment Fund, the EU’s private finance wing, has prioritised defence investments. But a big drawback for European start-ups is the fragmentation of national defence procurement. “Europe is very good on the supply side but not very good on the demand side,” says a European policymaker, supporting the creation of a European Iron Dome-style air defence system. “If we were to provide such a demand signal it would be transformative.”
In their book Unit X, Raj Shah and Christopher Kirchhoff describe the cultural battles they fought with the Pentagon to change “the largest and possibly most bureaucratic organisation” in the world with its roughly 3mn employees. In 2015, Ash Carter, then US defence secretary, created the Defense Innovation Unit Experimental (DIUx) to deliver commercial innovations to the military and asked the two authors to lead the effort.
In a video interview, Shah, a former F16 fighter pilot now managing partner of the VC firm Shield Capital, says it was difficult to get serious venture capital investors interested in defence in 2016. “Now it’s the exact opposite. There really has been a sea change here in Silicon Valley. We’ve all watched the invasion of Ukraine with absolute horror.”
But Shah accepts that the reliance on start-ups creates “new dependencies”. He also flags the risk of bubbles and busts in VC investment cycles, meaning the government might have less control over the “R&D spigot” in future.
Luckey and Musk have been outspoken supporters of Donald Trump, which may stir some political sensitivities with any future Democratic administration. Given his significant business interests in China with Tesla, how would Musk’s satellite communications service Starlink respond to an attack on Taiwan?
The Chinese Communist party’s strategic priority is to create world-class armed forces through “military-civil fusion”. Although very different in conception and execution, the US version of military-civil fusion offers a good shot at reasserting military supremacy. But the more dynamic military-technological complex that is emerging carries new risks and vulnerabilities, too.
