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Limited partners invest in venture capital funds, which, in turn, invest in companies. While there has been a surge in defense tech investment over the last six or seven years, the competition for limited partners is fierce among venture capitalists seeking to raise funds. One challenge that fuels competition for limited partners is that they have yet to see major returns on their original investments, which typically happen through acquisitions or initial public offerings. We asked three experts to answer the question: When will defense tech limited partners start seeing returns?
Read more below.
Lauren Bedula
Managing Director at Beacon Global Strategies
Limited Partner at First In
Co-host of the “Building the Base” podcast
Trends around mergers and acquisitions (M&A), such as AeroVironments’ recent $4.1 billion acquisition of BlueHalo, along with demands for consolidation, have arguably already shown investors in defense tech-related funds the opportunity for returns. I believe returns will still favor M&A strategies and not initial public offerings in the short term, but we will likely see a couple of significant initial public offerings in this space over the next three years. The Trump administration has made it clear that it will prioritize providing non-traditional technology companies with a level playing field for government contracts. This environment will help strengthen emerging defense technology businesses to be prepared to go public and increase the rate of returns we see in this space.
Jeff Crusey
General Partner, 7percent Venture
While significant capital has recently flowed into defense tech, limited partners should temper expectations about returns. The procurement landscape is shifting — not because cycles are inherently longer, but because disruptors like Anduril are redefining the market. Their ability to rapidly corner capital, secure contracts, and dominate early-stage defense innovation puts immense pressure on competitors. Many founders today are understandably as apprehensive about working with Anduril as any of the traditional primes.
This dynamic concentrates value at the top and limits the diversity of potential exits for funds, creating challenges for those deploying large amounts of capital in defense. Limited partners should look for funds with first principal technical insights into overlooked niches, foster deep government relationships, and maintain a disciplined approach to portfolio construction to navigate these shifts and realize returns in the evolving defense tech ecosystem.
Stephen Rodriguez
Founder of One Defense
Senior Advisor at the Atlantic Council
The Federal Reserve’s policy of increasing its benchmark interest rates at the beginning of 2022 marked the end of readily available capital, leading limited partners to redirect their available capital into investments that produce more immediate returns. This context is important, because general partners seeking to raise fresh capital were naturally drawn to “defense tech” as a new thesis to pitch to limited partners. This coincided with conflicts in Ukraine and Israel.
However, these events drove venture capital funds and their increasingly impatient limited partners into another long-term payoff category: “defense tech.” Anyone familiar with the defense ecosystem would not characterize its technology development or its production contract awards process as rapid. Moreover, the valuations that these companies trade at are an order of magnitude less than their pure-play commercial technology counterparts. This is all exacerbated by a fundamental question: Who is going to buy all these highly valued “defense tech” companies? In creating a pure-play “defense tech” ecosystem, we must account for larger companies, who are financially able to pay attractive multiples to make the venture model worthwhile.
Clear category winners like Palantir and Anduril offer encouraging signals to the market, but they are public (or soon to be). Until major primes or service providers start acquiring venture capital fund portfolios, especially at enterprise values of $250 million or more, it will be at least a decade before limited partners are made under the current model.
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