The Pentagon is claiming to make room for small businesses, but in practice it’s reinforcing a new class of giants, and propping up legacy companies. Despite policy shifts, the Defense Department’s appetite for consolidation remains as strong as ever, leaving small businesses on the menu, not at the table.
Today’s defense market consolidation mirrors the patterns that followed the infamous “last supper” of the 1990s. While emerging defense technology companies position themselves as disruptors, they follow remarkably similar consolidation playbooks to those used by the primes they claim to challenge. The result is not the diverse, resilient industrial base needed for future challenges, but rather a new revolving triangle of influence connecting Pentagon leadership, technology-focused contractors, and venture capital firms.
The Defense Department should enhance enforcement of its established small business policies, ensuring genuine opportunities for innovators while breaking the cycle that rewards past performance over fresh solutions, thereby maintaining the military agility essential for addressing evolving threats. To be sure, I am not a neutral party: I work for a firm called Defense Industry Advisors that helps small businesses succeed with the Defense Department. I believe in the mission and as a former servicemember I understand how vital it is for the most innovative companies to have a real shot at delivering capabilities to the warfighter.
The Post-Cold War Distillation
As the Soviet Union collapsed and the Berlin Wall fell, the Department of Defense faced a dramatically altered strategic landscape. The existential threat that had shaped American defense policy for nearly five decades had vanished almost overnight. The peace dividend promised reduced defense spending and, with it, a smaller industrial base. When Defense Secretary Les Aspin gathered industry leaders for the “last supper,” the message was clear: consolidate or disappear.
The merging of the defense-industrial base in the 1990s created clear horizontal market leaders defined by an era dominated by platforms: Lockheed Martin claimed the skies, General Dynamics commanded the land, Northrop Grumman secured space, Raytheon dominated missiles and electronics, and Boeing straddled commercial and military aviation. This horizontal segmentation mirrored the strategic realities of late Cold War military doctrine, where distinct domains of warfare operated with relative independence. Military operations were compartmentalized by service branches with distinct requirements, budgets, and acquisition processes, naturally leading defense companies to organize themselves around these same domain-specific structures.
The Military-Industrial Condition… I Mean Complex
Three decades later, history appears to be repeating itself, though with a crucial twist. While the Department of Defense’s small business strategy claims to lower barriers to entry, in practice, it’s reinforcing a new class of giants. Former disruptors like Palantir now drive the narrative championing the value of defense primes while posting record stock gains. Palantir’s status as a consistent top 5 stock performer, even in today’s market, underscores the irony that yesterday’s industrial base diversification solution has become today’s new defense establishment.
The irony is that today’s defense technology companies, while positioning themselves as disruptors, are following the same consolidation playbook that created the primes they claim to challenge. Anduril acquired Dive Technologies, Copious Imaging, and Blue Force Technologies. Shield AI purchased Martin UAV and Heron Systems. These acquisitions are much smaller than the big maneuvers that shored up market segments in the 1990s, like Lockheed acquiring Martin Marietta, Northrop merging with Grumman, or Boeing with McDonnell-Douglas. However, the purpose of capturing a new market segment is the same. It is mainly the scale and timeframe for return that are different.
The military’s doctrinal shift toward concepts like joint all-domain command and control recognizes that future conflicts will be won by forces that can operate across domains with speed and coherence. As warfare becomes more integrated across domains, defense companies are consolidating to mirror this integration. The result is not greater diversity and resilience in the industrial base but greater concentration, a trend that directly parallels the post-Cold War consolidation.
As the United States confronts this new era of great-power competition, the question is not whether today’s defense technology companies are different from their predecessors, but whether the resulting industrial base will be sufficiently diverse, resilient, and innovative to meet the challenges ahead. History suggests we should be skeptical.
Patriots and Venture Capitalists
Despite the consolidation trends, both past and present, I believe the fundamental motivation for those participating in the defense industry remains the strengthening of the warfighter. Today’s emerging market leaders, much like their predecessors, are not maliciously pursuing dominance for its own sake. Rather, they are positioning themselves as suppliers of relevant critical capabilities delivered at the quality and scale required by modern defense needs. In contrast to the earlier observation of Palantir’s promotional stance concerning the benefit of defense primes to the United States, Shyam Sankar began (and continues) to refer to a “first breakfast” phenomenon, arguing that established defense contractors habitually devour smaller innovative companies through acquisitions or by exploiting incumbent advantages, effectively stifling true innovation.
Ironically, as newer entrants gain market share, they increasingly face the same strategic pressures toward consolidation they once criticized. These companies recognize that addressing complex, multi-domain challenges demand integrated solutions that smaller, fragmented organizations struggle to provide. The consolidation we observe is less about eliminating competition and more about creating entities capable of delivering comprehensive capabilities that meet increasingly sophisticated military requirements. This consolidation results in vendor lock, where only one integrated entity possesses the capability to address complex requirements. This dependency creates significant downstream challenges for the government. When a single prime contractor owns and manages an entire program without viable competitors, sole-source contracting becomes inevitable. The absence of competitive alternatives severely undermines the government’s negotiating position, making it extraordinarily difficult, if not impossible, to secure fair and reasonable deals. The prime contractor wields disproportionate leverage, dictating terms, timelines, and costs with minimal accountability. Without built-in mechanisms to challenge these consolidated entities or plans for potential replacement, the government becomes perpetually captive to the prime’s demands. This imbalanced power dynamic ultimately compromises both cost-effectiveness and innovation in defense procurement, reinforcing the very inefficiencies the system initially sought to eliminate.
Today’s complex battlespace seems to necessitate the quick injection of cash to maneuver from prototype to production. Venture capitalists have filled this void of government research and development funding. The result is a new revolving triangle of influence. Where power once flowed between Defense Department leadership, traditional consulting firms, and defense primes, today’s triangle connects departmental leadership, technology-focused defense contractors, and venture capital/private equity firms. The players have changed, but the game remains remarkably similar.
A System Built for Repeat Winners
The consolidation within the defense industry, both among established primes and emerging players, responds to complex military requirements demanding integrated solutions. Yet this creates a paradox within Small Business Innovation Research programs supposedly designed to foster innovation. As consolidation absorbs smaller innovators to meet Defense Department needs, Small Business Innovation Research simultaneously reinforces this concentration by favoring repeat players, creating a system where established relationships trump fresh ideas and leaving truly innovative small businesses caught between market pressures and systemic entry barriers.
Despite rhetoric about supporting small business innovation, the statistics tell a different story. Detailed analysis from the National Academies of Sciences, Engineering, and Medicine and the Government Accountability Office reveals that small business innovation research programs have become a revolving door of familiar faces. These companies, sometimes referred to as “SBIR Mills,” have drawn scrutiny from lawmakers like Sen. Joni Ernst, who has sponsored legislation to address this issue of perpetual funding that diverts resources away from truly innovative non-traditional companies and new entrants.
The National Academies report shows that the Department of Defense’s small business innovation funding shows troubling incumbency bias, with 40 percent of awards from 2016 to 2020 going to just 11 percent of companies. Firms with five or more prior awards see success rates nearly triple those of first-time applicants. The Government Accountability Office’s analysis reveals similar figures, with first-time awardees representing less than 15 percent of recipients while 20 percent of funding goes to companies with 30 or more previous awards. The top 1 percent of awardees, about 50 companies, capture 12 to 15 percent of total funding, and firms with prior awards are 3 to 4 times more likely to receive new ones.
Transition Programs That Reinforce Barriers
The problem extends beyond initial awards to the transition programs meant to help companies commercialize their innovations. Programs like the Navy Transition Program, the Army Applied Small Business Innovation Research Program, the AFWERX Project Small Business Innovation Research Open Topic Program, and the Navy Transition Assistance Program all claim to support innovation, but their selection criteria heavily favor those already in the system.
The Small Business Innovation Research program operates in phases, with Phase I providing initial funding to test the feasibility of innovative ideas. Phase II awards are much larger and are meant to further develop promising concepts from Phase I into potential products or services for government use. The Phase II conversion rates (the percentage of Phase I awardees who receive the more substantial Phase II funding) highlight this bias. According to the National Academies, companies with three or more prior awards have Phase II conversion rates approaching 70 percent, while first-time awardees hover around 25 percent. This disparity exists despite independent technical evaluations showing no significant difference in the quality of proposals.
A Closed Ecosystem
These statistics reveal a fundamental truth: The Small Business Innovation Research program has evolved from its original purpose as an innovation pipeline into something resembling a closed ecosystem of preferred vendors. Programs like the Navy Transition Assistance Program and the various service-specific small business innovation research initiatives have become gateways that few newcomers can pass through, regardless of the merit of their ideas.
The result is predictable: True disruption rarely emerges from within this system. Instead, the most innovative defense technologies of the past decade have come from companies that initially bypassed the small business innovation research process entirely, securing private capital to develop their offerings before approaching the Department of Defense.
If the Pentagon genuinely wishes to harness small business innovation, it should confront these statistics honestly. A program where past performance trumps potential, where familiarity outweighs novelty, and where the same companies win year after year is not designed to produce the breakthroughs needed to address emerging threats. It is, rather, a subsidy program for established players masquerading as an innovation initiative.
Finding Solutions in Existing Ecosystems
While defense giants have historically dominated military contracts through their mastery of complex federal acquisition regulations, the Department of Defense’s growing emphasis on Other Transaction Authorities could fundamentally reshape this landscape for small businesses. Recent executive orders establish “a first preference for commercial solutions” in defense acquisition, creating streamlined pathways that enable non-traditional contractors to bypass the bureaucratic hurdles that previously secured the incumbents’ advantage. Evidence of this success is clear: 68 percent of Other Transaction Authorities contracts through the Defense Innovation Unit have gone to small businesses, directly challenging the oligopoly that has long characterized defense procurement.
The Commercial Solutions Opening process developed for Other Transaction Authorities enables the Department of Defense to establish “fast, flexible, collaborative” contracts with innovative companies outside the traditional defense sector. The previously mentioned executive order on defense acquisitions strengthens this commitment by directing procurement officials to prioritize commercial solutions while restructuring performance evaluations to reward employees who implement these approaches.
As discussed in these virtual pages, the defense secretary’s recent memo on software represents a paradigm shift in defense procurement. Beyond merely changing contracting methods, this memo could revolutionize the defense industrial base by attracting commercial technology companies that traditionally avoid working with the Defense Department. The defense secretary’s directive creates an unprecedented opportunity to harness the $43 billion in private capital currently being invested in dual-use technology companies.
These reforms could eliminate some of the bureaucratic hurdles that previously prevented smaller companies from competing effectively. As the Defense Innovation Unit explains, “After a successful prototype, the relationship can continue and grow,” allowing small companies to build credentials through initial contracts and compete for larger opportunities. This creates a practical solution to the Catch-22 that previously trapped small businesses, establishing a clear path from initial engagement to sustained defense partnerships.
Defense Department officials have highlighted how this approach opens doors for smaller companies. The results speak for themselves: Since 2016, Defense Innovation Unit has awarded over 500 Other Transaction Agreements, with 88 percent going to non-traditional contractors and 68 percent to small businesses. Their transition rate from prototype to production has improved from 35 percent to approximately 50 percent in recent years. To date, the Defense Innovation Unit has delivered more than 80 prototypes, with 52 successfully transitioning to the warfighter. These innovations have attracted over $30 billion in private investment and include technologies rapidly deployed to meet urgent national security challenges.
A More Expensive and Convoluted Dinner Party
Three decades after the original “last supper,” the Department of Defense finds itself hosting another gathering, one in which the table is larger, the menu pricier, and the guests still too few. The department claims to want innovation, diversity, and agility, yet continues setting places only for those who already know the seating arrangement. The risk is clear: An industrial base defined by consolidation and incumbency may be convenient, but it is neither agile nor adaptive enough to address the threats of the modern battlespace.
For small businesses seeking meaningful participation, survival often depends not on the strength of their ideas, but on the strength of their connections. Mandates and instructions offered in new memos and executive orders offer genuine promise, but success depends on whether the Defense Department fully commits to leveraging them at scale rather than as token gestures.
Meeting the challenges of future threats will require more than reshuffling seats around a familiar table. It demands many tables, where a larger number of fresh companies shape the future. Only then will the Defense Department ensure its industrial base remains resilient enough not just to replicate past victories, but to achieve those yet to come.
Nicholas Hooper is director of growth and strategy at Defense Industry Advisors. He is a former U.S. Army intelligence officer, with past roles at Boeing as a senior strategy analyst and business development representative. Hooper’s core experience is in analyzing defense acquisition trends, competitive market dynamics, and strategic consolidation patterns across the defense industry.
Image: Midjourney
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