SHARPE Focus: Emerging Growth Opportunities in Defense Industry

The world is changing rapidly, and all branches of the U.S. military are making fundamental shifts in how they address a dynamic threat environment. The 2023 Department of Defense Presidential Budget Request indicates a sustained focus on modernization, particularly on breakthrough technologies sourced from a more diverse and agile industrial base.  

Over the last year, four defense technology start-ups raised capital at $1 billion-plus valuations. This group of companies is part of a broader cohort of defense unicorns that we refer to as the “SHARPE” cohort: Shield AI, HawkEye 360, Anduril, Rebellion Defense, Palantir (now public), and Epirus.  

Here, we discuss this emerging growth opportunity for defense industry investors. 

When did investor interest in defense technology start to intensify?

Interest in defense technology startups was intensified by the commercial success of SpaceX and Palantir Technologies.  These West Coast technology companies rocketed to private valuations of over a billion dollars, and then later to orders of magnitude larger (and in Palantir’s case, public market) valuations.   

This reframed how investors viewed startups that focused on the U.S. Government as a primary customer, and space and national security as end markets.  In much the same way that Tesla’s success continues to inspire follow-on surges of bold auto technology startups, SpaceX and Palantir helped trigger a new and growing wave of entrepreneurs and venture capital firms focused on business models and technology relevant to security, national defense, and space. 

What does the emergence of SHARPE mean for companies in the defense industry and for investors in the space?

For startup and early-stage companies in the defense industry, it means better access to larger volumes of growth capital than any time in history.  And substantial capital is needed to establish viable starting positions on a playing field that today isn’t at all level.  Defense is a market that has undergone massive consolidation since Silicon Valley was last meaningfully focused on the sector. Today, the 10 largest defense contractors account for over 80% of sector revenue.  The defense prime incumbents benefit from massive advantages, which are further reinforced by extensive government bureaucracy, complex contracting rules, and political gamesmanship. To compete, new entrants need to offer disproportionately better capabilities as well as be sufficiently capitalized to survive competition.  Both Palantir and SpaceX had to sue their government customers multiple times to ultimately earn the opportunity to compete for and win large contracts.  

The good news is that the payoffs for these daunting and capital-intensive challenges are worth it. Defense budgets, both in the U.S. and abroad, are both massive and positioned for big future increases. In addition, the U.S. Government is increasingly serious about streamlining the ways it contracts with commercial technology companies. 

What does it mean for new companies entering the defense space?

For new defense technology companies, the emergence of SHARPE is contributing to the network effects of a high-energy entrepreneurial ecosystem that helps all its sector participants. This means that top-tier commercial technology minds 1) are now being drawn to the unique and significant challenges of the national security market being showcased in real time by the SHARPE cohort; and 2) today have a broader than ever set of high-potential companies in the sector to consider for potential career paths.  

This also means powerful opportunities for teaming and collaboration amongst the new market entrants. National defense is not a zero-sum game. Each company in the SHARPE cohort has a compelling origin story, fantastic talent, and a growing list of contract milestones and lessons learned that provide valuable case studies for others that will follow down the path that these pioneers and thought leaders are now clearing and marking. 

Has investor interest continued this year? What are the factors impacting the space?

With the Russian invasion of Ukraine, 2022 has highlighted to the world in real time the disruptive effects that militarizing innovative commercial technology can have upon a numerically superior and more conventionally organized aggressor. Examples include the proliferation of unmanned air, ground, and maritime systems, low-cost and AI-enabled loitering munitions, space-based communications, software-defined radios and electronic warfare capabilities, cyberwarfare tools, and intelligence overmatch from advanced commercial satellite imagery and sensor integration and analysis.  

As the U.S. and its allies are now forward focused on peer and near-peer threats, the imperative for fast-tracking commercial technology innovations has never been greater. At the same time, China is moving at a pace of adopting advanced commercial technologies into its own military plans and weapons systems procurement that the U.S. is finding difficult to match. 

The good news is that a growing set of established U.S. and European venture capital and private equity investors now recognize the strategic significance and size of the national security technology market opportunity – and investor demand and available capital to deploy remain at record levels.  The big question is whether the U.S. Government - and our allies - can adapt to this new world order in how we budget, identify capability needs, and shape future contract competitions. 

How do you expect things to go moving forward?

First and foremost, we expect the market momentum of the SHARPE cohort to continue focusing attention on the imperative for a more competitive, agile, and innovative U.S. defense industrial base. Within Congress, the need for change is now on a short list of topics that seems to have a reasonable level of bipartisan consensus. For its part, the DoD has identified 14 technologies as critical to the future of our national security, 11 of which are commercially led technologies. The good news is that there is now an increasingly substantive discourse within government about how to adapt (and eventually redesign) a highly antiquated U.S. defense budgeting and procurement process that is a relic of a different industrial age.   

Since the late 1960s, this system has focused on large programs of record, characterized by massive production contracts for exquisite systems whose development is predominantly funded by taxpayers on a time and material basis.  This practice fails to incentivize competition and innovation and has an abysmal track record of fielding systems on time and on budget. More importantly, it is ill suited to acquire software or keep up with technology’s blistering pace of innovation led by the commercial sector in areas like artificial intelligence, autonomy, and computer vision.   

Other nations are already adapting to this reality. The SHARPE cohort, reinforced by the billions of private and public equity growth capital now backing it, is clearly demonstrating the imperative for the U.S. to follow suit.  It is also creating real competitive pressure on the large incumbent primes to adapt themselves and to leverage their deep benches of engineering talent and resources to become more responsive, cost-effective, and relevant to 21st century defense sector leadership.  Again, national defense is not a zero-sum game, and this is good for everyone.  

Looking forward, the U.S. Government’s capacity to effect change and to procure differently will ultimately be a critical determinant of the defense technology sector’s future trajectory. Our team is encouraged that recent investor demand for big bets on defense innovation bode incredibly well for continued growth, depth, and dynamism within the U.S. national security innovation base. 


The Harris Williams Aerospace, Defense & Government Services Group works with investors and high-growth companies worldwide to realize growth potential in a complex space. Our clients depend on our deep understanding of the M&A market in their industry to unlock value in their businesses. 

We have a strong track record advising companies in sectors across the industry, including maintenance, repair, and overhaul; aviation services and support; defense electronics; logistics services and more. 

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