Startups

I’m a propaganda, and if I believe that is going to make people believe what I need them to think, I’ll twist the truth. I’ll just make my own version of it.

This is not a soundbite from a specially exuberant time in the hit television show Mad People. The CEO of Silicon Valley’s hottest company for military technology, Palmer Luckey, uttered these words.

Luckey’s business, Anduril Industries, specializes in unnatural intelligence-enabled systems, including automatic weapons techniques. Anduril is a darling of the defense startup scene and its newly emerging venture capital (VC ) ecosystem, where big promises, big bets, and a bias toward propaganda are a staple required for success, with a valuation of US$ 14 billion.

The integration of artificial intelligence ( AI ) into defense programs, let alone weapon systems, remains controversial. The UK Artificial Intelligence in Weapon Systems Committee has urged caution in regards to the sourcing of AI-enabled arms, but as is frequently the case with Silicon Valley products, the creation, purchasing, and implementation of AI protection programs have quickly accelerated in recent years.

Founded only in 2017, Anduril has already been awarded multiple multi-million dollar contracts by the US Department of Defense ( DoD ), as well as the UK Ministry of Defense ( MoD ). This may not seem like a amazing growth in light of the ongoing Russia-Ukraine conflict, the conflict in Gaza, and rising global stress.

In my latest research on defense AI, I identified that one of the key owners of the accelerated purchasing of military company products, such as automatic drones and another AI-enabled systems, is the influx of huge sums of venture capital money and influence.

These venture capital firms must adopt the speed and scale ethos of the technology sector and the appetite for risk and revolution in these venture capital firms. This makes these firms not only financial players but also political ones.

This trend toward creating defense in the vein of Silicon Valley, driven by venture capital interests, is likely to become more pronounced and pervasive, according to my research, which was published in Finance and Society. With this in mind, it’s worth looking more closely at the dynamics in play when venture capital sets its eyes on matters of life and death.

The new financial model for the military

The military AI industry and global defense spending are both booming. The global market for military AI was estimated to be worth$ 13.3 billion in 2024, with a projected growth of$ 35 billion over the next seven years, according to current estimates.

These numbers vary, depending on the market data services consulted, but they have been revised upward on a regular basis in the last 12 months. In the last 24 months, global defense budgets have also increased in response to ongoing conflicts and a general escalation in militarization.

Global defense spending reached a record level of just over$ 2 trillion in 2023. In 2023, the US accounted for nearly 40 % of global defense spending with an$ 877 billion budget. The NATO alliance will be spending US$ 1.47 trillion in 2024. For large tech and finance companies with plans to establish themselves in the defenSe market, these are significant, attractive numbers.

Meanwhile, defense organizations are starting to spend more money on cutting-edge technologies, including, inevitably, AI. According to a report from the Brookings Institute in 2024, defense contracts for AI-related technologies increased by nearly 1, 200 % in the 12-month period from August 2022 to August 2023.

For most new AI products, civilian or otherwise, some form of venture capital funding is often involved, especially if the AI venture in question might prove to be too risky to be funded through bank loans or other financial instruments. Venture capital is prepared to place bets on innovations that other investors would not be able or unwilling to accept.

In the past two decades, this type of funding has primarily focused on Silicon Valley products for the civilian market, where the dynamics have allowed for extraordinary gains to be made for investors.

However, those with large amounts of capital to invest see a new opportunity for huge gains in defense as the defense market is expanding and the opportunities for extraordinary venture capital returns in the commercial spheres diminish.

It is unsurprising, then, that in the past five years, venture capital investment in defense technologies has surged. US venture capital funding for military technology startups has doubled between 2019 and 2022, and since 2021, the defense technology sector has received an injection of$ 130 billion in VC funding.

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Private VC investments are projected to reach a record$ 1 billion, driven primarily by US venture firms, and are also at an all-time high for the European defense sector. There is a palpable buzz in the air about the possibilities for VC-backed endeavors and the possibility to reshape the defense landscape.

The Silicon Valley nexus between venture capital, military, and Silicon Valley

Venture capital has always been connected to the military sector in some way. In fact, venture capital defense investing is experiencing a boom since its infancy.

The origins of venture capital are &nbsp, typically traced back&nbsp, to the American Research and Development Corporations ( ARDC ) founded in 1946, just after the Second World War, in which the US was buoyed by a victory achieved, at least in part, by cutting-edge technologies.

One of the first businesses to consistently raise money from institutional investors to finance start-up businesses with a lot of potential but too risky for bank loans was ARDC.

With this approach, ARDC was the first venture capital outfit to create investment portfolios that often relied on one or two extraordinary successes in order to offset the majority of companies that only made very modest returns or, indeed, losses. In this way, ARDC was the first “unicorn” company to exist.

Unicorns are young companies that receive a valuation of US$ 1 billion or more (up until recently an exceedingly rare occasion for a startup and something every investor covets in their portfolio ). This is at the heart of investing in venture capital: it is risk-based with potential very high returns.

In the early days, especially just after the Second World War, many investments went toward supporting startups that would deal with&nbsp, military innovation and technologies. This resulted in the development of various analytical tools, high-voltage generators, radiation detection technology, as well as early mini-computer manufacturers, such as the Digital Equipment Corporation.

The digital landscape, as we know it today, has its roots in the military. In the 1950s, advancements in communications theory were intended for military missile technology, and the grandfathers of AI were almost entirely involved in military projects that spanned the course of the internet.

Many Silicon Valley firms remained entangled with the military sector over the decades and, as the anthropologist Roberto Gonzales has written, almost” all of today’s tech giants carry some DNA from the defense industry, and have a long history of cooperating with the Pentagon”. This relationship is then incorporated into the DNA of venture capital.

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But, it is worth stressing that traditionally it was the needs of the military organizations and the governments that largely dictated the pace, structure and process for technological innovations.

A progressively vocal and influential technology startup industry and their funding partners have now launched a raft of” Patriotic capital” initiatives, including American Dynamism, the Special Competitive Studies Project, Rebooting the Arsenal of Democracy, and America’s Frontier Fund.

These enterprises were conceived by a handful of prominent companies and individuals in the new defense tech domain to shape defense and military priorities and make good returns while doing so.

In addition to unicorn companies like Anduril Industries, Shield AI, Skydio, Scale AI, and Palantir ( Palantir is technically no longer a startup since it went public in 2020, but it is still one of a cohort of new military technologies ), unicorn companies are proliferating in the defense sector thanks to large amounts of venture capital funding.

This is a recent development. The venture capital sector concentrated its efforts on a thriving civilian technology landscape over the two decades from the mid-’90s to 2014, where the sky was the limit for returns from technology startups like Google, Microsoft, Facebook, and PayPal.

The defense market, in contrast, was considered mature and consolidated, with strict acquisition rules and regulations and too little opportunity for outsized returns on investments. It would typically take several years for a government contract to be completed.

Defense was also dominated by a handful of key industry players – the so-called primes which include Lockheed Martin, RTX Corporation, Northrop Grumman, Boeing, General Dynamics and BAE Systems.

These primes split up the lion’s share of the defense market among themselves, and there appeared to be little room for tech startups to expand without significant investment.

For example, companies like SpaceX and Palantir sued the US Air Force and US Army in 2014, respectively, for the opportunity to bid for certain contracts. Since then, it has become more common to break open defense for military startups.

In addition to these structural hurdles for VC investment in the defense sector, there was a greater nominal moral cost associated with the idea of profiteering from war. There was a perceived reluctance to be viewed as investing in” a defense portfolio” or, to put it another way, in instruments of death because venture capital investors are frequently endowments, foundations, insurance companies, universities, and pension funds. European venture capital investors were particularly cautious.

However, the remarkable speed with which this trepidation appears to have subsided in less than a decade is remarkable, suggesting either that the investors supporting venture capital firms come from diverse backgrounds that might have less hesitation when it comes to gaining from the business of war or that it was always just a matter of math rather than morals.

Unicorns and hypergrowth

Everyone wants to invest in a unicorn today because its valuation potential is so high.

But in order to get a foot in the door with an unproven product or concept, some startups can be motivated to make big, bold claims about the revolutionary, change-making nature of their products. The ethos of overpromising is frequently maintained even after a company has secured funding in order to maintain success toward hypergrowth.

In the worst-case scenario, overpromising is done at such scale that it amounts to criminal fraud, as it was the case with the notorious blood testing startup Theranos, which went from being one of the most exciting healthcare startups, valued at$ 10 billion at its peak in 2015, to a complete bust in four short years.

In the Theranos case, the charismatic founder of the business had overpromised the capabilities of the technology, claiming that it would make it possible to perform a number of tests using only one tiny drop of blood. This ground-breaking technology” could revolutionise medicine and save lives the world over“.

Although the technology was a promise made in the future, it was a lie that the company claimed to already have a functioning testing device. Theranos folded in 2018 and the charismatic founder, Elizabeth Holmes, went to prison.

Selling a fantasy

There are many other, less dramatic stories that play out in a similar, although not fraudulent way: companies that promise to revolutionize the way we do mundane things with ground-breaking technology, which turn out to be unsustainable, unworkable, or simply fizzle out.

However, the outcome is that investors lose money and that, more importantly, that those who have come to rely on the promise of technology suffer.

In the defense context, the promises of new military technology revolve around selling powerful deterrence, of protecting democracy, of being able to have comprehensive, accurate, real-time knowledge, of a fully transparent globe, and, first and foremost of a clean, swift and decisive victory with smooth and effortless connectivity.

This can foster an unrealistic vision of omniscience and omnipresence at worst, and at worst, it fosters a desire for an unthinkable revolution in warfare that is too appealing to resist, which ultimately draws an even wider audience into its wake.

These narratives are often underwritten by a general hype that a future with AI is inevitable. This creates a compelling narrative that mythologizes and valorizes a technology that may never deliver what is promised. It is a potent mix that often resists more sober voices that urge caution.

Although the claims made by defense unicorns frequently seem plausible, they are typically untrue because they relate to the future. And often that future reflects a vision shaped by fiction and science-fiction, which is always some degrees removed from the social and political challenges of reality.

Programs that strive to achieve global transparency and reach quickly are influenced by this temptation to overpromise and the mythologize of potential technology. The Joint-All-Domain Command and Control ( JADC2 ) program is one such effort initiated by the Pentagon. For “predictive analysis” and “high-speed battle,” it aims to unite all domains, including land, air, sea, space, and cyber, into a single network.

To make the program palatable to Congress, JADC2 is often likened to the ride-sharing platform Uber, promising seamless interaction between systems and platforms for speedy interventions.

This brings attention back to AI as a fundamental requirement for all military equipment and platforms. Without expanding military AI, this vision will be impossible. The opportunity for military startups is located here.

Two prominent military tech companies are contractors for JADC2 – Anduril and Palantir. Both businesses keep their ambitions to disrupt the defense sector, unseat the current leaders, and carve out a monopoly share of the market in order to increase profits.

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Palantir has set its eyes on “becoming the central operating system for all US defense programs”, Anduril has declared that it will be going” after everything that’s on the]Defense Department’s ] list” in order to dominate in the sector. This is the battle for growth for both businesses.

As Anduril’s Luckey says: “you have to fight and win across multiple areas“. ( He refers to that in terms of corporate strategy, not actual battlegrounds. ) Similarly, CEO and co-founder of Palantir, Alex Karp, acknowledged that, in order to break defense as a market wide open, he is proud to “have dragged and kicked and cajoled and humiliated” various lawmakers, policymakers and government to help further this goal. Move quickly and damage things.

Making a unicorn requires a concerted effort and an aggressive posture on the part of those who stand to gain the most financially in this domain. It is best to work together with like-minded individuals. In the current defense venture capital landscape, there is a close entanglement of founders and funders.

For instance, Peter Thiel is the co-founder of Palantir. He also oversees the Founders Fund VC company, which has investments in Space X, Anduril, and Scale AI, among others. The VC company Andreessen Horowitz also funds SpaceX, Anduril, Shield AI and Skydio.

These VC companies ‘ managers have close ties to one another. Similarly, there is interlacing between companies. For instance, former Palantir employees who founded Anduril, who applied their knowledge gained from Palentir to the company. Palmer Luckey, formerly of Oculus Rift, was installed as its charismatic and outspoken CEO.

The America’s Frontier Fund is being led by Eric Schmidt and Peter Thiel, who were formerly the CEO of Google and the head of the US National Security Commission on Artificial Intelligence.

There is a tightly knit and very well-connected network of financiers and startups that all work to double down on the key driving message: the defense sector is in need of disruption and we are the ones to shake things up.

Representatives of five newly established military organizations were present at a recent panel giving evidence to the US Armed Services Committee. Every single one of the five was either funded by the VC firm Andreessen Horowitz or otherwise affiliated with the firm.

At the US Armed Services Committee hearing, Palantir’s Chief Technology Officer, Shyam Sankar, testified in favor of “letting chaos reign” and “more crazy” in the military acquisition and procurement process so that the necessary incentives can be forwarded for innovation through inter-departmental competition.

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Regulatory limitations, he thinks,” constrains you to oversight” and he “would gladly accept more failure if it meant that we had more catastrophic success”. Although it is unclear what kind of success this might lead to or what might happen if it fails, Palantir’s CTO makes it abundantly clear that he speaks with venture capital logic in mind.

And, according to a recent US Defense Innovation Board report, it seems the government is ready to embrace more risk and provide top cover for such “mavericks”.

The” crisis” narrative

Besides cultivating startups with high potential, there are a number of ways to bend the defense sector to the needs of Silicon Valley contractors and their VC backers. Here, too, storytelling has a lot of power.

Venture capital managers and their startups often pen high-profile op-eds in which the poor state of ( US) defense is lamented, in which the need for accelerated innovation is emphasized, and in which the possibility that the US might “very likely” become embroiled in” a three-front war with China, Russia and Iran” is conjured up. In essence, the urgency is conveyed, which encourages the promotion of businesses that are aware of the coming crisis.

A second pillar in the structural overhaul of defense is to employ an intricate network of former government employees who serve either as lobbyists or as advisers with close links to the government.

For instance, in August 2024, former Republican Congressman Mike Gallagher assumed the role of Palantir’s head of defense operations, and H. R. McMaster, former National Security Advisor, is senior advisor to Shield Capital.

There are many more such “revolving door” moments in which credible experts lend their authority to the new startups. Like most Silicon Valley creations, the military tech startup scene has a certain reputation, and the money is also appealing.

Anduril, having learned from Palantir, hired a slew of lobbyists in the first week, spending more money on “lawyers and lobbyists than engineers” as Luckey noted in a recent interview with The Economist.

With this, Anduril adopts a relatively traditional method of shaping the defense industry, which is also employed by top defense contractors, who are “investing heavily on teams of lawyers and lobbyists to shape program requirements in line with the company’s existing technology,” as Anduril acknowledges in a 2022 blog post.

Anduril, and its backers, are now doing the very same, tailored to their own suite of technologies. The attorneys are frequently employed as a means of using the law as a tool to compel reform as well as to oversee mergers, acquisitions, and partnerships.

The primary goal of the SpaceX and Palantir lawsuits against the US Army and Air Force, which I mentioned earlier, was not necessarily to win ( Space X’s lawsuit was not successful, Palantir’s was ) but to pry open space for acquisitions overhaul and both lawsuits achieved just that.

A strategy of promoting a sense of urgency, working with lobbyists, and creating the structural potential for a defense overhaul is now well underway. To be clear, I am not arguing that the defense sector would not benefit from modernization or restructuring.

I don’t want to say that all new military products are unsustainable or irrelevant. I am also not seeking to pit the primes against the new venture capital dynamics and their focus on growth.

But what I believe is worth looking into are the dynamics at play with these new businesses and their implicit priorities and interests, since they will influence how practices and priorities are decided. And where disruption is at work, some level of breakage is to be expected. In terms of life and death, this has a different tone.

Disruption debris

The disruption in the defense sector is already well underway, and efforts to remake it in the style of Silicon Valley have had a number of positive effects in recent years. The JADC2 program mentioned earlier is one.

Others are evident in programs like the US Department of Defense’s Replicator Initiative, which incorporates the aims, timelines and products that Silicon Valley military startups have to offer.

Defense officials are repeating the venture capital industry’s talking points, and various acquisition programs have changed to accommodate the required speed and scale. These companies have the ear of policymakers and the demands for a quasi-spiritual” Defense Reformation” are finding a growing audience.

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What are the possible effects, then?

When Uber disrupted the private transport industry, it left in its wake a raft of eroded labor laws, worker’s rights and healthcare provisions for drivers. When AirBnB’s industry boomed, rental costs increased in well-known tourist destinations. When you try to create a monopoly, there are always social and political consequences. These effects are frequently predictable, but occasionally not.

Disrupting the defense acquisitions process comes, at the very minimum, at the expense of greater oversight of the acquisitions process. The technology industry is not known for being aware of the limits of regulations. Quite the contrary. Some of the most well-known investors in the new military startup scene are most vehemently opposed to any form of regulation.

VC heavyweight Marc Andreessen, for example, famously penned a Techno-Optimist manifesto in which he names risk management, trust and safety measures and the precautionary principles as” the enemy”.

Less regulation results in less oversight and accountability for spending, as well as for how and where specific technologies are used, and what effects are caused by them. This much is evident.

However, the rapid deployment and deployment of military technologies for battle may have many other, highly plausible, unforeseen effects. One is the refocusing on risk and experimentation.

The most recent crop of military startup technologies, such as AI-enabled drones and AI decision support systems, are being tested and improved both live and during ongoing conflicts, such as the Russia-Ukraine war, as well as in Gaza. This is a form of prototyping which is becoming increasingly prominent and which needs an active battlefield for effective testing, iteration and optimizing of the technologies.

This also means that it is possible to use outdated technologies that will only be tested and improved as you go along. It normalizes, if not promotes, the launch and sale of flawed and possibly inadequate AI products, which will inevitably cause harm to innocent civilians caught in the crosshairs of conflict.

We can already see this as a result of technology companies ‘ efforts to sell their large language models to military organizations. Scale AI, for example, has teamed up with Meta to sell an LLM product, Defense Llama, for defense purposes. The organization claims that the system needs “absolutely to involve people.”

But given the well-known fact that LLMs are prone to what are known as hallucinations, the chances that such technologies will work exactly as advertised are slim for a context so complex and dynamic as warfare. People who are in the middle of this experimentation, fine-tuning, and live testing may suffer as a result.

It is a key concern that the technology might not be suitable for the unexpected, for the less calculable or less foreseeable elements in warfare. That includes potential new terrorist threats or actions by those nations that are frequently viewed as irrational, like North Korea, for instance.

Anduril CEO, Luckey, admitted as much in the interview I opened with. He acknowledged that potential enemies who reject the game’s theoretical foundation on which much of the AI logic for defense rests:” Each of whom is responsible for the logic on which his weapons are built falls apart.”

” It’s very hard to engage in game theory with people who pursue the non-game theory optimal strategy…It’s like playing monopoly with the person who is going to drop out and give all their money to somebody else”.

A significant impediment to something that is so rife with chance as warfare. There are also second and third-order effects that emanate from this shift toward venture capital logic.

By presenting an imminent threat, the global risk and security landscape may change, by placing greater emphasis on weapons technologies, funding for alternative approaches to conflict might be restrained, and by dedicating more money to technologies that are still being tested and may not have permanence, significant amounts of money that would be better spent elsewhere might be wasted.

But this is a land of make-believe and unicorns, where such considerations are as speculative as the much-hyped promises of AI weapons as the defenders of democracy.

The “move fast and break things” motto in Silicon Valley implies that issues that arise during the development of the technology can always be addressed and resolved later. In the world of defense and war, the harm produced by this kind of risk-taking cannot so easily be undone.

Elke Schwarz is a lecturer at Queen Mary University of London’s Political Theory program.

This article is republished from The Conversation under a Creative Commons license. Read the article’s introduction.

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