Silicon Valley startups are challenging a defense industry long dominated by large contractors, cost-plus deals and procurement cycles that can stretch for decades.

The relationship between technology companies and the military has deep roots: government-backed semiconductor sales helped build Silicon Valley in the 1960s, and after the industry consolidated into the “Big Five” in the 1990s, the government again backed early-stage firms, including the CIA’s 2005 investment in Palantir.

Now, venture investors increasingly see defense as an application of robotics, artificial intelligence and edge computing, bringing private capital and commercial development practices into the sector.

The opportunity is growing alongside record military spending: SIPRI put global expenditure at $2.887 trillion in 2025, including $864 billion in Europe and $681 billion in Asia and Oceania.

The market is also expanding beyond conventional weapons to the data centres, cloud services, chips, AI models and software that help militaries process information and act.

That shift brings traditional contractors together with cloud providers, semiconductor firms, model developers, data platforms and autonomy startups, including Palantir, Microsoft, Google, Amazon and Anduril.

Military demand is moving toward large numbers of lower-cost autonomous drones and counter-drone systems connected through AI, rather than relying only on expensive weapons developed through lengthy procurement processes.

Traditional weapons will still matter, but their effectiveness will increasingly depend on connected digital systems, giving firms that control data, computing resources and algorithms more influence over how militaries interpret events and deploy weapons.

The Pentagon has agreed with seven AI companies to deploy advanced capabilities on classified networks, while GenAI.mil was reportedly used by more than 1.3 million personnel within five months; procurement increasingly covers computing power, models, data access, integration and evolving software, not just finished weapons.

Palantir’s US government revenue rose 84% year on year to $687 million in the first quarter of 2026, as the Pentagon moves to institutionalise Maven, which combines satellite, drone, radar, sensor and intelligence data and could make suppliers difficult to replace.

Defense ties with technology companies are also deepening: Anduril signed a multibillion-dollar Navy contract in 2026, Google and Microsoft agreed to integrate AI into classified defense networks, and Palantir expanded its work on automated Pentagon targeting capabilities.

Private investment has surged, with Anduril reporting $2.2 billion in 2025 revenue and discussing a valuation of about $100 billion; Germany’s Helsing raised $1.8 billion at an $18 billion valuation, and Quantum Systems raised $1.2 billion.