Startup investors are fueling a boom in U.S. defense tech as China standoff opens doors at home
Hadrian Automation CEO Chris Power
Hadrian Automation
When President Joe Biden announced an executive order last month limiting U.S. investment in critical technologies in China, the venture capital community hardly blinked.
That’s because many U.S. startup investors have already retreated from China, after years of political mudslinging between the world’s two largest economies led to increased sanctions and trade restrictions.
But with the door to the Chinese tech market closing, VCs are seeing new opportunities on their home turf. The U.S. government is actively promoting investments in semiconductors and broader industrial development, and investors are finding a widening talent pool invigorated to take on tough challenges in light of world events, with an explicit focus on protecting U.S. values.
“VCs are saying, ‘Where’s the most stable places to invest? And quite frankly, where’s the talent?'” said Gilman Louie, co-founder of venture firm Alsop-Louie Partners. He’s also CEO of America’s Frontier Fund, which says in its mission statement that it’s “committed to reinvigorating our nation’s innovation and manufacturing prowess in critical frontier technology sectors.”
“In uncertain times, when there’s unpredictability and global stress, whether you’re a U.S. investor or a foreign investor, you want to come to America to invest,” Louie said.
Once seen as a vast market of opportunity for U.S. tech companies and investors, China is now filled with more risk than reward and is increasingly viewed as a rival in developing key technologies, including advanced artificial intelligence and quantum computing, that will drive global markets in the decades to come.
Last year, the U.S. announced export controls aimed at limiting Beijing’s ability to produce advanced military systems, and more recently the Biden administration restricted the ability for U.S. investors to back critical tech in China.
Meanwhile, lawmakers passed the CHIPS and Science Act, which promised to pump tens of billions of dollars into semiconductor manufacturing in the U.S. The goal is to reduce international dependence on chips that are key to development of electronics, cars and medical equipment and are becoming more important to national security with the rapid evolution of AI.
Lindsay Gorman, senior fellow for emerging technologies at the German Marshall Fund’s Alliance for Securing Democracy, said she’s seen a “new crop of venture capitalists” in the last few years that prioritize U.S. tech competition with China and U.S. national security.
“Ten, 15 years ago, these geopolitical lines were not part of the equation,” Gorman said.
Louie added that he doesn’t “know of a single major fund out there that isn’t thinking about disruptive tech investing in the U.S., investing in defense tech, investing in microelectronics and AI in the next generation and next iteration.”
In Torrance, California, just south of Los Angeles, Hadrian Automation is building efficient factories to help space and defense companies get parts faster and cheaper. CEO Chris Power, who started the company in 2020, said he’s seeing increased interest from large growth funds that have typically invested in software.
“Everyone’s kind of standing up their own practices to support the market,” Power said. Hadrian’s early backers include Lux Capital and Peter Thiel’s Founders Fund, which have longer histories of investing in manufacturing and deep science.
Palmer Luckey, Founder @ Oculus VR Andutil Industries, during day two of Collision 2019 at Enercare Center in Toronto, Canada.
Stephen McCarthy | Sportsfile | Getty Images
VC funding in aerospace and defense tech has shot up in recent years, according to data compiled by PitchBook for CNBC. In 2019, 69 companies in the sector raised a total of $1.7 billion in value. In 2021, that jumped to 119 deals worth $6.4 billion. Last year, which was the worst for tech stocks since 2008, saw a slight slippage in the space to $5.6 billion, though the number of deals was the same as 2022, according to PitchBook.
The poster child for U.S.-focused defense tech is Anduril Industries, co-founded in 2017 by Oculus Rift designer Palmer Luckey. The company, which ranked seventh on the latest CNBC Disruptor 50 List and has been valued at $8.4 billion by private investors, develops autonomous technology for national security and warfare.
On Thursday, Anduril announced the acquisition of Blue Force Technologies, which develops autonomous aircraft for defense and commercial customers.
While Anduril started with a focus on military contracts, other startups have navigated their way there.
Not just about patriotism
Saildrone, which makes unmanned ships, was originally focused on monitoring environmental data for fisheries and agencies like the National Oceanic and Atmospheric Administration.
It later became clear to CEO Richard Jenkins that the company needed to expand its aperture to bring in more revenue, since the government wasn’t spending enough on science to make the business work. Bilal Zuberi, a partner at early investor Lux, asked the company if it would consider selling its products to the Navy or Coast Guard.
Zuberi said Jenkins came to him with a key concern. He was unsure how his team would react if the environmental company they joined began selling to the defense sector. Zuberi talked about how he sees the opportunity differently. Saildrone’s technology can help prevent greater human casualty by, for example, learning of certain precise moves by the Chinese government in advance so the U.S. could send a warning signal and avoid a greater conflict.
Jenkins decided to make the pitch to his team. He told staffers he had a “pretty firm line on not weaponizing the platforms,” and keeping the focus on data collection tools. He also said the company wasn’t forgoing its climate work.
Saildrone didn’t lose any employees as a result of the shift.
Saildrone autonomous boats rove the seas, collecting data about weather, ships, fish and more.
“There was a perception that the technology industry doesn’t understand the importance of national security and what it takes to protect our democracy,” Zuberi said. “And then the military doesn’t care about the technology that we’re developing. I think that perception has somewhat been shattered.”
Zuberi said that for industry leaders it doesn’t have to be about patriotism. They can just look at the untapped potential in defense tech.
“It’s not like the last five years, suddenly investors woke up more patriotic than they used to be,” Zuberi said. “I think they just realized that there’s a big business opportunity here that they want to access.”
‘To work in defense was certainly taboo’
Paul Kwan, managing director of venture firm General Catalyst, had a similar observation.
“What’s changed around tech the last few years is people want to work on stuff that makes a difference and has a bigger impact on the world,” said Kwan, who has written about the firm’s “renewed” focus on “modern defense and intelligence.”
While tech workers at companies including Google and Salesforce have made headlines in the past for protesting their employers’ defense contracts, the topic is more nuanced now in the startup world.
“As a technologist, to work in defense was certainly taboo,” said Kyle Harrison, general partner of Contrary Capital. “I think the conversation has been more open. I think there’s still people that feel very strongly about it, for and against. But it used to be nobody really talked about it, where now people are acknowledging that it’s really difficult to protect a lot of the values that you think are important if your defense apparatus is from the ’80s.”
Part of the movement is driven by an awareness of the Russian war in Ukraine, several VCs said, which has highlighted the role defense can play in protecting values of democracy.
US President Joe Biden arrives to speak on rebuilding US manufacturing through the CHIPS and Science Act at the groundbreaking of the new Intel semiconductor manufacturing facility near New Albany, Ohio, on September 9, 2022.
Saul Loeb | AFP | Getty Images
“You have an aggressor nation, taking land and causing death and destruction to civilians,” said Raj Shah, managing partner of Shield Capital, adding that tech workers “want to do something to help and they want to have meaning in their lives. And photo-sharing apps are only so important.”
As Lux co-founder Josh Wolfe said, “Do you want to build software that has people clicking on ads, or do you want to do things that have a lasting impact on the safety and security of the American people and helping to reduce human suffering around the world?”
It’s not just shifting sentiment within the tech community. There’s also a growing openness from the U.S. defense community to procuring technology from newer players.
“The government’s becoming a better customer,” said Shah, who previously served as managing partner of the Defense Department’s Defense Innovation Unit, which seeks to accelerate the use of emerging technologies. “It actually makes business sense to solve important security problems.”
Power, CEO of Hadrian, said the narrative of “Silicon Valley hates the government and the government hates Silicon Valley” is gone, even though he says “I don’t think it was ever true.”
“People are viewing selling software to the government as a real market opportunity versus something that may or may not happen or would take them 10 years,” Power said.
One area where the shift in mindset has become abundantly clear in the past year or two, Power said, is in recruiting. In the past, some potential prospects expressed little interest in manufacturing, but now Power said he finds many more people who are compelled to solve these problems.
Wolfe said that trend permeates throughout his portfolio.
“Money follows talent,” Wolfe said. “And talent is going into hard tech.”
WATCH: Chipmaking nations such as the U.S. are teaming up against China
Technology
Rippling valued at $16.8 billion as HR software startup raises $450 million, says IPO not imminent
From left, Parker Conrad, co-founder and CEO of Rippling, and Kleiner Perkins investor Ilya Fushman speak at the venture firm’s Fellows Founders Summit in San Francisco in September 2022.
Rippling
Human resources software startup Rippling said Friday that its valuation has swelled to $16.8 billion in its latest fundraising round.
The company raised $450 million in the round, and has committed to buying an additional $200 million worth of shares from current and previous employees. The company’s valuation is up from $13.5 billion in a round a year ago.
Rippling said there was no lead investor. Baillie Gifford, Elad Gil, Goldman Sachs Growth and others participated in the round, according to a statement from the San Francisco-based company.
With the tech IPO market mostly dormant over the past three-plus years, and President Donald Trump’s new tariffs on imports leading several companies to delay planned offerings, the most high-profile late-stage tech startups continue to tap private markets for growth capital. Rippling co-founder and CEO Parker Conrad told CNBC in an interview the the company isn’t planning for an IPO in the near future.
Conrad also highlighted a change that’s taken place in public markets in recent years, since inflation began soaring in late 2021, followed by higher interest rates. With concerns about the economy swirling, many tech companies downsized and took other steps toward generating and preserving cash.
“It does look a lot like, in order to be successful in the public markets, your growth rates have to come down so that you can be profitable,” said Conrad, who avoided enacting layoffs. “And so for us, that sort of pushes things out until the company looks profitable and probably slower growing, right?”
At Rippling, annual revenue growth is well over 30%, Conrad said, though he didn’t provide an updated sales figure. The information reported last year that Rippling doubled annual recurring revenue to over $350 million by the end of 2023 from a year prior.
Given the pace of expansion, Conrad said he isn’t fixated on profits at the moment at Rippling, which ranked 14th on CNBC’s Disruptor 50 list.
Rippling offers payroll services, device management and corporate credit cards, among other products. Competitors include ADP, Paychex, Paycom Software and Paylocity.
There’s also privately held Deel, which Rippling sued in March for allegedly deploying a spy who collected confidential information. Conrad suggested that the publicity surrounding the case may be boosting business.
“I think it’s too early to say, looking at the data, how all of this is going to evolve from a market perspective, but certainly we see some companies that have said, ‘Hey, we’re talking to Rippling because of this,'” Conrad said.
WATCH: The IPO market is likely to pick up near Labor Day, says FirstMark’s Rick Heitzmann
People walk past a neon sign advertising a Bitcoin and Ethereum crypto currency exchange in Warsaw, Poland on 19 May, 2024.
Jaap Arriens | Nurphoto | Getty Images
Cryptocurrencies extended their rally to end the week, with bitcoin holding steady above the $100,000 level while ether rallied to its best week since 2021.
The price of bitcoin was higher by 2% at $103,249.99 on Friday, according to Coin Metrics. Earlier, it rose as high as $104,324.65, its highest level since Jan. 31. For the week, bitcoin is up more than 6% and on pace for its fourth positive week in a row – and first four-week win streak since November.
“This move above $100,000 should be viewed as more than mere euphoria, but rather as evidence of a flows-driven shift,” said Gadi Chait, head of investment at bitcoin-native Xapo Bank. “Whales have been accumulating on-chain, ETF demand continues to set new records, and investors seek ‘neutral’ assets amid a tariff-shadowed macro environment. Meanwhile, the announcement of a U.S.–U.K. ‘mini-deal’ and hints of tariff relief with China have reduced overall risk aversion, lifting equities, oil, and, notably, Bitcoin.”
The risk-on sentiment bled into altcoins, or cryptocurrencies that aren’t bitcoin, most of which have struggled to keep pace with bitcoin’s gains this year. Ether, one of the biggest stragglers, jumped 10%, bringing its two-day gain up to 29%. A 6% increase in the token tied to Solana brought its two-day gain to 16%.
This week the Ethereum network also completed its latest technology upgrade, dubbed Pectra, which enables lower network fees, streamlined ether staking and support for smart wallets.
Ether heads for its best week since 2021
Ether is up 25% week to date and on pace for its best week since May 2021. The Solana token has added 14.3% this week, which is on track to be its best week since January.
Year to date, however, ether and other major altcoins – with the exception of XRP – are still deep in the red compared to bitcoin. While the flagship crypto is up 10%, ether and the Solana token are down 31% and 12%, respectively.
Bitcoin’s market structure changed after the introduction of spot bitcoin ETFs in 2024, with demand now coming from retirement accounts, macro funds, and corporate bonds such as Strategy. By contrast, altcoins still rely on crypto-native, risk-on capital, which hasn’t shown significant growth alongside the greater tech sector due to the current interest rate environment, according to Eric Chen, Co-Founder of Injective.
Bitcoin is likely to keep outperforming until broader capital flows into altcoins, he added, given their steady supply and lack of a structural buyer base, which are likely to take prices lower until they attract speculative interest.
“For us, there remains one singular strategy for crypto investors: stick to BTC until risk on headwinds dissipate,” Wolfe Research analyst Read Harvey said in a note this week. “The coin is one of just two in our basket positive on the year and it continues to dominate the rest of the space on a relative basis. The question now shifts towards if it can maintain recent outperformance vs. equities, or if Gold was right all along.”
—CNBC’s Nick Wells contributed reporting
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