We believe that the growing Department of Defense budget ($863B in FY24) can support multiple venture-scale outcomes; that key modernization initiatives have laid the foundation for tech transformation; and that the growing number and influence of innovation units inside the DoD, along with startup-friendly policy precedents, will propel startups to fill the vacuum of modern technology in the DoD. More recently, the DoD has shown strong initiative to drive efficiency through technology which will require the Department to work hand-in-hand with Silicon Valley. In fact, the DoD has proactively called out areas it is looking to prioritize—which therefore maps closely to our key investment themes—including in modern infrastructure, operationalizing data and AI and autonomous systems.

To understand where defense tech is headed, we need to understand how we got here. In this post, we’ll share why we’re excited about defense tech, frameworks we use to understand the landscape and themes we find the most compelling. Additionally, we’re sharing a more in-depth presentation that has guided our thinking on defense internally at Battery Ventures.

Framing the opportunity

The opportunity is clear: the DoD has a ginormous budget ($863B in FY24) and spends billions per year on IT alone ($64B in FY24). This level of IT spend has already eclipsed other major American industries like retail ($51B) and transportation ($29B) and approaches others like insurance ($77B) and banking ($78B) (source: Gartner). Moreover, the defense budget is likely to increase in the next National Defense Authorization Act (NDAA) by $150B to ~$1T, which is making its way through the Senate at time of writing.

Note: Defense metric represents the DoD’s 2025 budget request for information technology and cyberspace activities. Industry vertical metrics represent Gartner estimates for 2024 total enterprise IT spend, excluding spend on consulting and business process services. Source: U.S. DoD 2025 Budget Request, Gartner 

With its massive budget, the DoD effectively created the dominant prime contractors—RTX, Lockheed Martin, Boeing, General Dynamics and Northrop Gruman—whose collective market cap exceeds $500B (source: Capital IQ). However, these prime contractors, all founded in the early-to-mid-1900s, have become deeply entrenched, leading to lackluster innovation.

But the status quo is changing fast. Over the last decade, we’ve seen the remarkable success of a new cohort of companies targeting the DoD as their primary buyers, namely Palantir, Anduril and SpaceX. Palantir, now the largest ‘prime’ by market cap (~$300B), became the first new defense contractor to join the S&P 500 in the last 46 years. These successes have both demonstrated to the DoD the value of embracing new technology and forged a path for the many new defense startups we’re seeing today.

Source: Capital IQ as of 06/04/2025

Why the tide has turned

The DoD appears not only aware of its need to modernize but is actively investing in doing so. Many view heightened foreign adversary competition as the main driver, but this overlooks a simpler explanation: The DoD and our warfighters recognize how far behind their technology is.

For example: cloud adoption. Cloud migration has been on the roadmap for the DoD since 2012. After a decade of delays and hiccups (e.g. the JEDI lawsuit and subsequent cancellation), the Joint Warfighting Cloud Capability (JWCC) program made strides in 2022 with a multi-cloud approach powered by Amazon, Microsoft, Google and Oracle. Meanwhile in the civilian world, 90% of enterprises were already using cloud technologies before JWCC was even created.

Another example is drone technology. Many view the Ukraine war as the first modern war given that both sides are technically advanced. We’ve seen high-volume, low-cost drones win out over exquisite and expensive systems that are more limited in quantity.

Over the last five years the DoD has established several initiatives to modernize its technology, which we view as a strong signal of its desire to enable and accelerate comprehensive tech transformation.

Source: JCWA, Marines Force Design, CJADC2, ADA, JWCC, Generative AI Task Force, Replicator Initiative

Heading into the current Trump Administration, initiatives have accelerated and made their way further into both policy and application. In December 2024, Chairman of the Senate Armed Services Committee Roger Wicker introduced his FORGED Act which would reshape DoD acquisition to compress acquisition timelines, empower users to be decision makers, and strengthen America’s industrial base generally. In March 2025, Secretary of Defense Pete Hegseth released his Modern Software Acquisition and Modernizing Defense Acquisitions memos, each with similar goals to the proposed FORGED Act, with the former memo focused specifically on breaking down barriers to put software into the hands of military personnel.TT

These initiatives and others power the DoD’s mission to advance battle management, improve logistics, deliver autonomous capabilities and fulfill the potential of technology adoption.

The foundation is set

How might these initiatives translate into practical business opportunities for commercial companies? We see two core drivers laying the foundation for the DoD to work with younger companies to deliver the technology it so desperately needs.

First, DoD innovation groups have proliferated over the last decade, specifically designed to support and acquire innovative technologies. Unlike Program Executive Offices (PEOs), these innovation units are tasked with finding innovative technologies that can play a crucial role in future capabilities, even if they aren’t fully developed and productized for battlefield use today. There are so many innovation units now—over 100!—that rumors now suggest the Trump Administration is looking to consolidate them to maximize efficiency. Notably, we’ve also seen the rise of non-DoD groups looking to build bridges between modern technology and warfighters including the House Defense Modernization Caucus led by Rob Whitman and Pat Ryan, the Reagan National Security Innovation Base Summit from the Ronald Reagan Institute, and the Silicon Valley Defense Group.

It’s worth calling out an important contribution DARPA made to the DoD, which was the introduction of Other Transaction Agreements (OTAs). These flexible contracting vehicles substantially compress the time it takes for the DoD to onboard new vendors. In recent years, OTA use has grown and now underpins much of the newer DoD technology adoption.

Source: Defense Innovation Unit, AFWERX, KesselRun, NavalX, DARPA, Defense Innovation Board, Air Force Life Cycle Management Center, Johns Hopkins Applied Physics Laboratory

Second, important policy precedents have been set that promote new vendor consideration in DoD procurement and ‘buy vs. build’ decisions—namely, SpaceX’s 2015 suit against the USAF, Palantir’s 2018 suit against the U.S. Army and the cancellation of the JEDI program which was replaced with JWCC. U.S. Code’s Preference for Commercial Items (Section 2377 of Title 10), part of the 1994 Federal Acquisition Streamlining Act (FASA), requires the DoD to evaluate commercial solutions before building in-house systems and was, importantly, reinforced by Palantir’s successful suit against the Army in 2018. More recently, Secretary of Defense Pete Hegseth has cited the importance of this law to the services when looking to procure new technology.

Source: U.S. DoD, The Washington Post

All of these precedents support competition from new vendors in the defense market. Perhaps no contract better exemplifies this progress than the $260M Program of Record deal recently won by Red Cat, a decade-old drone manufacturer based in Utah, relatively unknown at the time, to deliver approximately 6,000 drones to the Army.

Importantly, the DoD already has a track record of working with third party vendors to execute on their goals. Last year, 58% of the DoD’s budget was spent on third-party vendors. While this spending has historically been services-oriented, we expect it to become increasingly software-oriented as the technical capabilities the DoD requires become more specialized and advanced.

Frameworks for the defense software landscape

To distill the large and diverse defense-tech ecosystem, we use a categorization framework with two overarching criteria: end-market focus and user engagement mechanism.

End-market focus. Defense companies can be broadly bucketed into two categories:

1. Single Use: These companies only sell their products only to government and defense.
2. Dual Use: These companies sell their products primarily to government and defense but also the commercial sector.

User engagement mechanism. There are three primary ways users can engage with defense software:

1. Workflow Execution: These products are most similar to application layer vertical software, which is designed as a system of record and execution for workflows.
2. Data-Informed Decision Assistance: These products harness data from existing systems to inform decision-making and analysis.
3. Infrastructure Support: These products are the core infrastructure that supports other applications and systems used by military personnel.

Here is a non-comprehensive view of the emerging defense software landscape based on these criteria. As you see below, AI can be embedded across the entire stack. Many infrastructure layer companies have been built to support AI applications; decision assistance platforms are leveraging computer vision for situational awareness; and many workflow applications are using LLMs to automate their end user’s “job to be done.”

For a full list of all Battery investments and exits, please click here.

Emerging themes in defense tech

We are focused on four emerging themes that map to the DoD’s technology modernization efforts Secretary Hegseth and others have laid out for the Department.

1. Modern Infrastructure

We believe it’s critical for the DoD to adopt modern infrastructure software to support modern applications and AI. This includes security, monitoring and observability, data and storage, foundation models as well as edge capabilities. One of the biggest unique challenges for DoD software adoption is that many defense use cases require maximal security, support for edge or air-gapped environments, or both.

On the security side, Wraithwatch provides AI systems that explore system vulnerabilities and attack strategies to develop proactive defensive security strategies. Another example is Second Front*, whose DevSecOps platform helps companies streamline the development and accreditation processes for software deployed into the DoD.

2. Operationalizing Data & AI

We believe that the DoD must adopt technologies that harness data across systems and enable the scalable deployment of AI for analysis, informed decision-making and automation. The DoD currently manages large amount of data of varying types (structured, unstructured, geospatial, time series, etc.) that are cross-department and cross-application. In order to effectively leverage this data and realize the potential of AI, new systems will be required.

For example, Vannevar Labs analyzes large volumes of cross-language data from multiple sources (first-party reconnaissance data, open source data streams, etc.) to help the DoD analyze and assess threats. Another example is Shift5, which elegantly extracts messy data from legacy hardware systems, transforms it and runs an observability stack over the data for cybersecurity, predictive maintenance and other purposes.

3. Autonomous Systems

Autonomous technologies have the potential to become the future of advanced warfare due to their increased safety and risk mitigation, cost efficiency and enhanced operational effectiveness. The DoD has signaled its interest in and focus on autonomous technologies through several initiatives like the Unmanned Systems Roadmap, the Replicator Initiative (2023), and the Marines Force Design 2030. We believe companies that facilitate the operation of autonomous systems—whether through system interoperability, multi-modal data integration capabilities, human-machine interaction systems or edge compute capabilities—will be critical for this transformation.

As an example, PicoGrid provides a unified platform to connect data, command and control autonomous systems and sensors at scale.

4. Workflow & Applications

Lastly, we believe that the DoD currently utilizes legacy software, in-house builds or manual processes for many workflows that can be significantly streamlined with modern software, much like what we have seen in enterprise software over the last 20 years.

One vector of this theme is replacing legacy in-house builds—for example, OpsLab provides an asset management platform for the Air Force to oversee its aerial fleet, replacing the use of a decades-old homegrown solution that is maintained by outsourced contractors.

Another vector is replacing horizontal solutions with verticalized software purpose-built for defense. For example, OneBrief*, a company providing collaborative mission planning software used across the chain of command, is replacing the use of PowerPoint and Word documents, enabling the DoD to work collaboratively and more efficiently.

Battery is excited to support the defense tech ecosystem

We’re very excited about the innovation happening in defense and the market tailwinds we think will accelerate it. Battery is no stranger to defense technology. We made our first defense-related investment in Insitu*, an early pioneer in small tactical unmanned aircraft vehicles. Founded in 1994, the firm was subsequently acquired by Boeing in 2008. More recently, in 2024, we announced our Series C investment in Second Front*, a company helping software companies accredit, deploy and monitor software onto DoD networks, and last week announced our investment in Onebrief*, which is helping to accelerate military planning by enhancing collaboration.

If you are a founder building the next big defense tech software company, email michael@battery.com and aneil@battery.com. We would love to chat.

You can also download our full defense tech thesis presentation, outlining why we are excited about defense tech, frameworks for investing and Battery’s expertise in the space here:

The post Investing in strength: The case for modern defense tech appeared first on Battery Ventures.

As in previous quarters, we surveyed 100 CXOs who collectively represent over $35 billion in annual technology spending. Our goal was, as always, to gauge the budget planning and overall sentiment of large, enterprise technology buyers.

Note: We conducted the survey in late March 2025, prior to the Trump administration’s tariff announcement on April 2. While the subsequent market volatility may impact buyer sentiment score—particularly in sectors with greater exposure to tariffs—most enterprise IT budgets aren’t subject to major revisions due to macroeconomic factors. In some categories, IT spending may be actually accelerated by such forces—for instance, investments in AI or cloud for modernization and reducing risk to future development. The technology sector’s tariff risk is also not yet known.

To catch up on previous reports, check out what we published in March 2023, September 2023, April 2024 and September 2024.

A few highlights from the survey:

• Cloud migration is accelerating as enterprises modernize infrastructure, creating fresh opportunities for AI-driven innovation and agile operations. While 54% of enterprises still run a majority of their compute on-premises, momentum is shifting fast. With 73% accelerating or continuing their move to public cloud, the opportunity for cloud technology providers is expanding rapidly.
• VMware’s recent pricing hike appears to be driving a once-in-a-generation push from on-prem to cloud infrastructure.
• In another major move, enterprises are refreshing core systems like ITSM, ERP, and CRM systems now to gain next-gen functionality like AI and automation. In good news for software vendors, they’re largely looking to new software players to meet those needs.
• Generative AI and LLMs have overtaken cloud infrastructure as the #1 priority for CXOs.
• Production AI use cases more than tripled since our last survey, jumping from 5.5% to 16%. Similarly, the agentic AI wave is building: 46% of enterprises are either actively deploying or in R&D for agentic AI.
• Other trends the survey revealed include a nascent trend towards decoupling SIEM and shifting to more modular security architectures.

We see a lot of fresh opportunities for early-stage technology startups in these survey findings. Check out the full report here to learn more:

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The post Survey Says: Tech Spending Slows Slightly, AI Tops CXO Priority List appeared first on Battery Ventures.

The answer, according to our Battery Ventures 2024 “State of the OpenCloud” report, is yes—to a point. Our research finds there’s still a big gap between expectations and reality when it comes to actually deploying generative AI inside enterprises. But those deployments are increasing, we found.

And with the market’s mega-cloud computing providers continuing to invest massively in AI infrastructure—particularly since the second quarter of 2023—we see growing capacity to handle a coming AI “supercycle”, a technology platform shift just as big as previous mobile and cloud-computing revolutions led by Apple and Amazon Web Services, respectively. Our estimate is that $4 trillion or more in market value is up for grabs as AI moves toward disrupting software, services and certain labor markets in the coming years.

Some of our other, specific findings:

• Led by AI chipmaker Nvidia, big-name cloud computing and infrastructure companies are laying the groundwork for the AI revolution—and are driving the stock market to new highs. So far this year, Nvidia shares are up 168%, as of Oct. 31, while the S&P 500 is up 20%.
• AI is dramatically lifting the fortunes of the public cloud providers, namely AWS, Microsoft Azure and Google Cloud. We estimate that by 2030, cloud providers could capture an extra $2 trillion in cumulative revenue from AI. Other cloud-software application and infrastructure companies will benefit, too.
• After marked volatility in the software market through 2021 and much of 2022, valuation multiples for a basket of software-as-a-service (SaaS) companies we track has stabilized. BUT: The software industry remains challenged, with ARR increases lagging continued spending on sales and marketing at many companies. Private software companies continue to trade at a premium—which is likely not broadly sustainable.
• This means there are still gobs of B2B software cloud unicorns that may never grow into their ZIRP-era valuations. By our estimates, the backlog of these U.S. based unicorns has grown three times since 2020. AI may not be able to save them, as large-scale software IPOs and M&A events aren’t keeping up.

In this environment, we still remain optimistic about the potential for founders to build durable cloud companies—with an AI twist.

Best practices for founders today run the gamut from focusing on product design and user experience—which we view as an offensive force to drive fast product adoption—while simultaneously doubling down on product innovation and R&D to unlock new market opportunities and fuel growth. One example is ServiceNow, which has seen a 38% compound annual growth rate in the last 10 years as it’s focused on “product velocity”. Other recommendations from our team include:

• Focusing on value-based pricing, whether that’s per-seat, consumption-based or tying pricing directly to the cost of displaced human labor.
• Adopting new, AI-focused product metrics, in addition to traditional SaaS metrics. Some of these new metrics include the percent of valid or accurate AI responses your product delivers, and the specific revenue your product added, or the time/cost it saved.
• Re-thinking your sales compensation models to align with new, AI value-based pricing. This might require a higher base salary versus traditional models and reducing variable comp to offset delayed revenue realization.
• Using AI agents to automate high-value, professional work, including inside call centers, law office and architecture/engineering/construction workflows.

AI represents a profound technology-platform shift, but overall we view it as a major catalyst for cloud software and infrastructure. We look forward to partnering with forward-thinking entrepreneurs who are pushing the edges of AI innovation.

For more insights, please see our full 2024 State of the OpenCloud report below.

Download PDF

The post Inside the Coming AI “Supercycle” and How Cloud Startups Can Benefit: The Battery Ventures 2024 State of OpenCloud Report appeared first on Battery Ventures.

As in previous quarters, we polled 100 CXOs who collectively represent over $35B in annual technology spending; our goal was, as always, to gauge the budget planning and overall sentiment of large enterprise technology buyers. To catch up on previous reports, check out what we published in March 2023, September 2023 and April 2024.

A few highlights from the survey:

• Buyer sentiment rose significantly relative to prior quarters, indicating a rebound in technology spending from buyers across industries.
• Overall budgets are trending upward with 74% this quarter vs. 55% in Q1’24 expecting an increase over the next year. With 59% of those increasing budgets seeking to invest in experimental initiatives and new tech, we see strong opportunities for startups in 2025
• Tech employment is leveling out. ​​The number of organizations looking to slow down or freeze hiring has dropped 19 percentage points from 46% in Q1 2023 to 27% in Q3 2024. Moreover, 42% of respondents expected to increase tech hiring over the next year.
• The AI wave is still building, but the future has been slower than anticipated. Today only 5.5% of identified AI use cases are in production, a sobering reality check on respondents’ Q1’24 projection that 52% of identified use cases would be in production over the next 24 months.
• That said, enthusiasm for, and continued investment in, Generative AI remains high. Our survey reveals some interesting trends on which use cases will deploy next, preferred AI model deployments, and what other tech priorities are emerging downstream in light of more AI production rollouts.

We see a lot of fresh opportunities for early-stage technology startups in these survey findings. Check out the full report here to learn more:

Download PDF

The post Survey Says: Tech Spending Is Up, But AI Rollouts Slower Than Expected appeared first on Battery Ventures.