The Neoprime Membership: Silicon Valley and The Rise of Protection Disruptors

OPINION — Right now, after a post-9/11 period outlined by world counterterrorism and uneven warfare, the U.S. is making ready for potential near-peer conflicts amid a brand new period of nice energy competitors, difficult by disruptive applied sciences. In response, a brand new wave of protection contractors is rising from the epicenter of American technological innovation: Silicon Valley. These firms are addressing essential expertise gaps in areas equivalent to synthetic intelligence, autonomous programs, area companies, cyber operations, small drones, and extra. They’re deploying cutting-edge options to fill functionality shortfalls the U.S. authorities has acknowledged—and so they’re scaling quick. Profitable high-profile contracts, they’re reshaping how the Pentagon engages with the non-public sector.

Amongst these within the protection tech trade, there’s been rising chatter in regards to the rise of those protection disruptors—what you may name the neoprimes. We—certainly one of us a expertise investor, the opposite a former portfolio supervisor on the DoD’s Protection Innovation Unit—are sometimes requested: Is the rise of neoprimes actual? What precisely is a neoprime? What defines one? We got down to reply these questions, utilizing knowledge to help our observations. We consider neoprimes are altering the tradition of protection acquisitions and creating applied sciences that may reshape how wars are fought. Shifts in protection spending and coverage are empowering neoprimes to develop and transfer quicker.

To grasp how we acquired right here, we are able to revisit a pivotal 1993 assembly now generally known as the “Final Supper.” Following the top of the Chilly Battle, U.S. protection spending plummeted, prompting a serious drawdown. The Division of Protection confronted intense strain to chop prices, with budgets falling by about 30%—from $772 billion in 1989 to roughly $531 billion by 1998 (adjusted for inflation). Towards this backdrop, then-Deputy Secretary of Protection William Perry convened a essential assembly with executives from the highest protection contractors. His message was clear: the Pentagon may not maintain a sprawling ecosystem of dozens of main corporations, and consolidation was inevitable. The trade responded accordingly—over 50 firms merged into the 5 dominant primes we all know as we speak. These survivors—Lockheed Martin, Raytheon, Northrop Grumman, Boeing, and Basic Dynamics—turned large, vertically built-in organizations that managed roughly 60% of DoD contracts by 2000. For many years, they dominated authorities contract spending to construct and maintain the nation’s safety equipment, supported by an enormous net of companions and subcontractors. However with predictable, annual funding streams and restricted aggressive strain, innovation inside these primes arguably stagnated.

Whereas many of those conventional primes hint their roots again over a century, a brand new tribe of Silicon Valley gamers has entered the sector. They’re accelerating deployment timelines and pioneering a distinct mannequin—outlined by speedy iteration, software-first architectures, and a higher urge for food for threat. They’re deploying operational programs in months somewhat than years or many years. They’re not simply constructing prototypes for demos and workouts—they’re scaling manufacturing and securing billion-dollar contracts. Whereas they might not but match the normal primes in whole contract quantity, they’re closing the hole yr over yr. A handful of key corporations are main the cost, with an increasing set of startups gaining traction. Backed by enterprise capital and supported by a rising community of influential advocates shaping coverage and public opinion, neoprimes are beginning to redefine how the federal government approaches the acquisition, fielding, and sustainment of recent applied sciences. They’re turning into mission-critical to the protection industrial base of America.

As this new technology of protection contractors positive factors momentum, what precisely is a neoprime? To reply that, we analyzed knowledge from USAspending.gov (the federal authorities’s official platform for monitoring public expenditures), reviewed SEC filings from public protection firms, and compiled press releases from non-public corporations. We additionally interviewed founders and enterprise capitalists targeted on nationwide safety innovation.

Via this analysis, we recognized a number of defining traits of neoprimes and rising market traits. Our evaluation focuses on a set of present neoprimes—SpaceX, Palantir, and Anduril Industries—alongside a cohort of rising firms like Protect AI, Skydio, Saildrone, Saronic, Hidden Degree, Epirus, Relativity House, Axiom House, HawkEye 360, Vannevar Labs, and others. These firms are starting to steer main protection packages with superior applied sciences and a essentially completely different method to hurry, software program integration, and supply.

Under, we define our findings and outline the traits that distinguish neoprimes. We consider these firms characterize the way forward for nationwide safety—and to protect America’s strategic edge, we should quickly undertake and scale their options throughout the protection industrial base.

Neoprimes are Racing Forward in Division of Protection’s Important Expertise Areas

At their core, neoprimes are constructed round rising, frontier applied sciences—fields like AI and autonomy, built-in networks, biotechnology, quantum science. In recent times, the Division of Protection has formally emphasised the significance of those applied sciences, figuring out fourteen Important Expertise Areas that replicate a rising urgency to meet up with and surpass world rivals.

To raised perceive this pattern, we evaluated the highest 5 mostly used Product Service Codes (PSCs) for a set of presidency contractors from 2018 to 2023. PSCs are utilized by the U.S. federal authorities to explain the merchandise, companies, and analysis being bought by way of contracts, and we gathered this knowledge from USAspending.gov’s contract award summaries by vendor. For Palantir, SpaceX, and Anduril, we then recognized the preferred PSCs throughout all three. We carried out the identical evaluation to find out the highest PSCs among the many conventional protection primes—Lockheed Martin, Raytheon, Northrop Grumman, Boeing, and Basic Dynamics.

Palantir’s high PSCs had been predominantly within the data expertise class, in line with their core energy in knowledge platforms and software program integration. Many of the PSCs related to Anduril had been concentrated in engineering companies.

In distinction, for conventional primes equivalent to Basic Dynamics, Boeing, Lockheed Martin, Northrop Grumman, and Raytheon, the commonest PSCs had been closely concentrated in {hardware} classes—masking objects like airframe structural elements, helicopter rotor blades, and shock absorbers. In comparison with newer entrants, their portfolios featured far fewer PSCs associated to software program or IT companies.

High PSCs Throughout Neoprimes and Conventional Protection Corporations (2018-2023)

Neoprimes

Conventional Primes

Whereas conventional primes proceed to supply legacy platforms just like the F-18, B-2, and AMPV, even when Silicon Valley’s protection startups develop superior {hardware}, their programs are essentially software-driven. These platforms typically depend on swarms of unmanned programs powered by cutting-edge AI and autonomy. They are not simply assemblies of metallic—they characterize advanced software program and programs integration challenges, being solved in actual time with applied sciences that did not exist a decade in the past. Notable examples embody Anduril’s Lattice platform; small tactical drones from Skydio and Teal Drones; bigger programs like Protect AI’s V-BAT, autonomous floor vessels from Saildrone and MARTAC; and Palantir’s choice making and analytics platforms that proceed to unfold throughout the Division of Protection.

Neoprimes are additionally targeted on interoperability. Conventional contractors are infamous for proprietary programs that require their very own distinctive management programs and restricted third-party integrations—like drones that may solely be operated with particular controllers, computer systems, or subject kits. However proprietary every part does not scale on a battlefield more and more full of robots, sensors, and drones, particularly as troopers are restricted by the variety of management programs they will carry into the sector. In distinction, neoprimes are designing software program with interoperability in thoughts from the beginning—constructed to combine seamlessly with legacy programs and ingest any knowledge the federal government permits.

General, the options neoprimes are creating are particularly related as we speak, as many Chilly Battle-era instruments are failing to scale to the calls for of the trendy battlefield. For instance, Ukrainian troopers at the moment are utilizing low-cost drones to disable costly Russian platforms—within the current Spider’s Net operation, 117 drones struck 4 Russian army airbases and focused no less than 40 warplanes. The operation dealt a major uneven blow to the Russian army and broader economic system, with estimated losses reaching as much as $7 billion.The inevitable shift towards extra reasonably priced, extra attritable platforms is forcing governments to rethink how they develop and fund main protection programs. Neoprimes and the Division of Protection are racing to develop low cost-to-kill applied sciences—whereas additionally creating defenses towards them—as these small deadly platforms grow to be more and more widespread on fashionable battlefields world wide.

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Prototyping and Collaborating Immediately with Servicemembers

Neoprimes construct working prototypes shortly and make a behavior to iterate with finish customers in actual time—making adjustments on the fly, within the subject. We’ve got noticed that these firms do not essentially anticipate the Division of Protection to fund their R&D as an alternative, they develop options they consider are apparent solutions to present urgent issues and discover methods to get them into the fingers of warfighters—typically nicely earlier than any massive procurement orders have even been positioned.

These firms will ship prototypes “downrange” with prepared servicemembers, generally years earlier than extra formal procurement contracts materialize. Protect AI, for instance, deployed working prototypes of their AI-enabled drones to Particular Operations Forces in fight within the Center East, gaining essential suggestions whereas additionally delivering real-world outcomes for these early adopters. Different firms have taken comparable approaches: ship cutting-edge expertise to warfighters first—even earlier than any formal requirement exists—refine it within the subject, and let the paperwork catch up later.

Delivering On Time and Inside Price range

Neoprimes typically prioritize outcomes over processes. As an illustration, Palantir was not too long ago awarded a $178 million contract by the U.S. Military to develop the TITAN system, beating RTX Company in a aggressive choice course of. Remarkably, Palantir delivered the challenge on time and inside price range—historically a uncommon feat in protection contracting.

As one instance of neoprimes’ outcome-first method, we’ve noticed a rising choice for fixed-price contracts over the normal cost-plus mannequin. Below a fixed-price construction, firms are incentivized to innovate effectively, as they’re paid a set quantity no matter overruns. This stands in stark distinction to cost-plus contracts, the place incumbents are reimbursed for all bills and earn a revenue margin on high—eradicating a lot of the strain to function leanly.

When analyzing authorities spending knowledge, we noticed that almost 100% of Palantir and SpaceX’s contracts are fixed-price, whereas 65-80% of Anduril’s contracts comply with the identical mannequin. Among the many conventional primes, Basic Dynamics has steadily secured an growing variety of fixed-price contracts, and the pattern is much less clear for others.

That stated, each neoprimes and conventional contractors proceed to depend on cost-plus contracts, as they continue to be the prevailing norm throughout a lot of the protection trade. We additionally acknowledge that ongoing debate surrounds the usage of agency fixed-price versus cost-plus fashions in protection procurement. Whereas advocates of fixed-price contracts view them as the simplest means for the federal government to make sure worth and accountability, critics argue that fixed-price fashions will be too dangerous for advanced scopes of labor. A typical argument in favor of cost-plus is that it gives the required flexibility when challenge necessities are unsure or evolving.

Fraction of Mounted-Value Contracts (2012-2024)

Maximizing Income and Contract Worth per Worker

Neoprimes function with small, agile groups—typically with only a fraction of the headcount of conventional protection contractors. However what they lack in measurement, they make up for in velocity and output. Many of those firms are producing greater income or contract worth per worker.

SpaceX and Anduril have outperformed a number of main conventional protection contractors by way of obligations per worker, exceeding the ratios of Raytheon, Northrop Grumman, Boeing, and Basic Dynamics. And whereas Lockheed Martin has outperformed all in absolute phrases, which may be attributed to its considerably bigger income—roughly $51 billion in comparison with SpaceX’s $3.8 billion.

Observe that as a result of Anduril and SpaceX are nonetheless non-public firms, we based mostly their worker counts on estimates from public stories. Palantir and all conventional primes report worker numbers of their SEC filings.

Obligations per Worker (FY 23)

Rising Use of OTAs in Protection Contracting

Whereas Palantir, SpaceX, and Anduril are main neoprimes, a number of different firms are quickly rising on this class. Protect AI, which started with AI-powered quadcopters for U.S. Navy SEALs and different particular operations forces, is now fielding its V-BAT unmanned aerial car in Ukraine, Japan, and Brazil. Firms like Saildrone and Saronic are deploying a variety of autonomous drones above and beneath the water. Cybersecurity leaders equivalent to Palo Alto Networks, Fortinet, and Crowdstrike have gotten key gamers in areas like trusted networks and digital protection. Industrial area firms like Varda, HawkEye 360, and Astranis are constructing capabilities for on-demand area entry, persistent satellite tv for pc protection, and high-speed space-based knowledge switch.

With the rise of neoprimes, the Division of Protection has considerably elevated its use of Different Transaction Agreements (OTAs) lately, reflecting a strategic shift towards extra agile and versatile procurement strategies. OTAs, which aren’t certain by the normal Federal Acquisition Regulation (FAR), enable the Division of Protection to collaborate extra simply with nontraditional contractors, together with startups and analysis establishments. When correctly executed, we consider that OTAs can result in higher, quicker, cheaper outcomes for everybody concerned—saving time, cash, and energy.

Additional evaluation exhibits that OTA utilization is clearly trending upward throughout the Division of Protection. Though OTA awards have elevated tenfold since 2017, nevertheless, they nonetheless account for less than about 0.01% of the whole contracts awarded by the Division of Protection—it is nonetheless removed from mainstream within the broad acquisition group. Given what OTAs have already delivered, we are able to solely think about the impression if extra contracts had been accelerated this manner.

OTAs Awarded vs Whole Contracts Awarded (FY17-FY22)

The Street Forward: Partnering with Neoprimes to Meet Rising Nationwide Safety Wants

Right now, we consider the U.S. authorities is starting to acknowledge the strategic worth of neoprimes in addressing essential functionality gaps. The Division of Protection has acknowledged its lag in a number of key expertise areas and has taken deliberate steps to shut the hole. Along with encouraging the companies to broaden their use of OTAs, the Division of Protection launched the Industrial Options Opening (CSO) framework to draw non-traditional distributors. It additionally launched the Workplace of Strategic Capital to offer extra versatile financing choices and created the Nationwide Safety Innovation Capital initiative to help dual-use {hardware} improvement. Over the previous twenty years, the Division of Protection has invested greater than $20 billion in small enterprise initiatives—all promising indicators of progress, however extra work stays.

Throughout the nation, dozens of rising expertise firms are profitable contracts that might have defaulted to conventional primes only a few years in the past. These startups should not merely disrupting the protection industrial base; they’re actively shaping the way forward for warfare. Their applied sciences are starting to affect army doctrine, operational planning, and frontline techniques.

This shift displays a broader transformation in nationwide safety priorities—one we strongly help and consider have to be accelerated. As these threats grow to be more and more software- and technology-driven, we’re inspired to see Silicon Valley and its neoprimes emerge as pure leaders in enabling the following technology of army readiness. Now could be the time to double down.

Editor’s Observe: The authors of this text are affiliated with Courageous Capital and MVA (MilVet Angels), which have invested in nationwide safety firms like Anduril Industries, Protect AI, Aetherflux, Hermeus, Ursa Main, and others.

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