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National security startups are raising and winning unprecedented amounts of capital, but that’s no guarantee these businesses will succeed in the long run. 

Because market enthusiasm and government priorities are always shifting, investors and founders say, there are some steps defense tech companies can take to ensure durability.

The investment ramp-up is undeniable: Natsec-focused private companies last year raised $46.3 billion across nearly 1,900 deals, according to PitchBook data. That’s almost 900% growth in under a decade. And federal spending is on the rise: Congress in December passed a record $901 billion defense budget to fund “critical technology areas” like AI and quantum, with President Donald Trump proposing a boost to $1.5 trillion next year. 

But more money does not necessarily equate to healthier companies. With these historic funding levels, there’s more risk the cash could be wasted or misused, said Michelle Urben, general partner at the VC fund Synergos. 

Startups can also get stuck in the pilot stage due to a lack of product-market fit or lack a path to real revenue, she said, no matter how much capital is raised. 

“The influx of capital, both private and government, I think it’s a double-edged sword,” Urben told Technical.ly. “Where we come in is really to make sure that the founders are building, (and) mobilize that funding.”

More money = more pressure

Synergos primarily invests in national security-focused companies in energy, agriculture and manufacturing, and Urben said government funds have been essential for boosting R&D. As an example, she cited nuclear recycling portfolio company Curio, which recently benefited from a five-company, $19 million Department of Energy award. 

These kinds of non-dilutive funds, where no equity is exchanged, give early-stage companies a much-needed “lift” as they’re building their product, she said. When it comes time to scale, larger private rounds can help, but Urben said natsec founders ultimately should find diverse revenue streams. 

To help them smartly handle large cash infusions, portfolio companies at Synergos receive their investment in escrow, per Urben. Money is released when the startup meets milestones. The process serves as a layer of protection for the VC firm and encourages intentionality, she said. 

“They have the comfort that it’s meant for them,” she said. “We want them to continue to build, stay lean and mean.” 

757 Collab, a startup studio with entrepreneurial programming in Norfolk, Virginia, educates founders about different funding paths. Kali Luthra, director of the organization’s defense tech accelerator, stresses that founders need to remain hyperaware of what equity shares they’re trading for investments, and to have specific plans for the money. 

Sometimes, private investment just isn’t the right fit, she said. “A lot of them will just take on private capital,” Luthra told Technical.ly, “and not realize the numbers behind it.”

Keeping ownership and jumping to contracts 

Austin-based Striveworks, for example, didn’t take private investment until six years after its founding in 2017, according to Co-founder and CEO Jim Rebesco. Instead, it was bootstrapped — the founding team maintained ownership. 

The company focused on achieving revenue first and found customers early on who provided honest feedback on its software that helps organizations in highly regulated industries safely deploy machine learning and AI models. That includes the U.S. Army, where Striveworks first inked a contract in 2019.

“We wanted to be in a situation where the negative thing we heard was, ‘Your product isn’t worth what we’re paying for it,’” Rebesco told Technical.ly. It has since expanded across government agencies.   

A year ago, the company applied for and received non-dilutive funding from the federal Small Business Innovation Research program, known as SBIR, which was just renewed after a historic lapse in funding. Because of the program’s focus on research and development, Rebesco was initially hesitant to take part because he felt like it would slow growth — paying customers have more to lose. 

“The best thing you can get is somebody who loves your thing,” he said, “but the second best thing is somebody who cares enough to tell you why they hate it and that you can improve.” 

Striveworks closed its first fundraising round in 2023 at $33 million. It raised a second round, amount undisclosed, this past March. The recent VC funds are being used for R&D to build out the existing software, per Rebesco, who is also debating pursuing SBIR again. 

How startups can future-proof 

Making sure products and services have commercial viability in addition to national security value is a way to guard against shifting government priorities, Luthra said. That’s one of the factors 757 Collab looks at when recruiting companies for the defense tech accelerator, according to Luthra. In case there’s a lapse in funding or a government contract is delayed, that’s how firms can stay afloat. 

The record-length government shutdown made this clear, she said. None of the companies in that cohort have contracts yet, and several mentors who were government employees had to stop working with them during the shutdown. 

“It was hard to like to see that, see it go dark for a little bit, but we all knew it was temporary,” Luthra said. “They (were) working on their commercial things as well.”

A shutdown isn’t the only possible government lapse. The ”Valley of Death,” the gap between initial funding and achieving commercialization, is often where startups fail — and it can be especially intense with hardware and national security-sector companies, said Urben from Synergos. 

“The more that you can demonstrate that what you do really meets and helps your customers achieve their absolute highest No. 1 priorities,” Striveworks’ Rebesco said, “the more resilient you know you are going to be.”