--- title: Private Investors Have Put $7 Into Top Defense Start-Ups for Every $1 of Federal Commitments description: Bain & Company and AIA find US defense has ample capital, but little reaches production lines, mid-tier suppliers and critical minerals. author: Darie Nani (Editor-in-Chief) date: 2026-09-29T15:15:08.410Z updated: 2026-09-29T15:15:08.421Z canonical: https://www.sovereignmagazine.com/article/defense-investment-gap-bain-aia-report image: https://cdn.nanimediahouse.com/pexels-two-factory-workers-skillfully-pouring-molten-metal-in-an-in-37363926.jpg categories: Markets content_type: News region: United States publication: Sovereign Magazine schema_type: Article --- The 100 leading venture-backed US defense and dual-use technology companies have raised about $7 in private capital for every $1 the federal government has committed to them, according to a study released on Sept. 28 by Bain & Company and the Aerospace Industries Association (AIA). The two organizations conclude that the US has plenty of capital for defense but too few investments whose returns justify the risk, above all in the production lines, mid-tier suppliers and raw materials the military needs to replenish its stockpiles. The ratio comes from the Silicon Valley Defense Group's NatSec100 report, which tracks those companies: they raised $118 billion in private capital from 2020 to 2025, excluding OpenAI, against $16 billion in total lifetime federal obligations as of fiscal 2025. Defense venture capital as a whole grew from roughly $1 billion in 2019 to around $10 billion in 2025. Bain and AIA warn that promising technologies can stall "not because they failed technically, but because the risk of failed transition is deemed too great for investors and customers." AIA, the trade association for the country's major aerospace and defense manufacturers, with more than 340 member companies, asked Bain to survey the market. Bain partner Michael Sion and Colin Leslie wrote the report, "The State of Investment in Defense: Unlocking Growth," drawing on 50 interviews conducted between April and August 2026 with prime contractors, new entrants, mid-tier suppliers, venture capital and private equity investors, investment banks and customers, plus an AIA member survey and data analysis. > "There is ample capital and pent-up investor interest, but needed funding will flow only when conditions make business cases easier to close." > — Michael Sion, partner, Aerospace and Defense practice, Bain & Company ## Investors Value the Big Defense Contractors Like Utilities Most private investment in defense comes through the stock market, far more than venture capital and private equity combined, according to Bain's analysis. The market value of publicly traded US aerospace and defense companies reached about $1.6 trillion in 2025, nearly double its 2019 level. Nineteen aerospace and defense companies went public between 2021 and 2025, compared with four between 2016 and 2020. Shareholders still value the large prime contractors at enterprise-value-to-EBITDA multiples similar to those of utilities, which Bain and AIA take as evidence that investors are pricing the sector for low risk and stable, capped returns rather than growth. Companies with that kind of shareholder find it harder to take on the up-front risk of adding capacity for munitions and other high-demand systems, the authors write. Large defense companies spend around 3% of revenue on their own research and development. John Deere, which Bain treats as a closer comparison for defense hardware makers than tech companies, spends 4% to 5%. Nominal defense budgets are growing roughly 3% to 5% a year while inflation runs at 3% to 4% and interest rates are above 4%, Bain and AIA note, and defense profit margins are already among the lowest of any large US capital-goods industry. Continuing resolutions, which freeze new starts and limit production increases, have occurred in 37 of the past 49 fiscal years. "Uncertainty kills capital," one private equity investor said. ## Venture Investors Need Exits Within Eight Years, and Major Defense Programs Take More Than 12 Venture investors typically need a path to exit within six to eight years of first investing, Bain and AIA note, while the average major defense program takes more than 12 years to deliver an initial capability. As a result, defense venture capital has gone mainly to software, autonomy, attritable systems and other shorter-cycle work, and most of it is concentrated at the earliest stage of company formation. Even after the tenfold rise, defense companies received only 5% to 6% of global venture funding in 2025. "There are all these great mechanisms to fund early venture tech ideas, but there isn't [yet] a good mechanism to help with the transition from prototype to scaled product," one venture investor told the researchers. Bain and AIA say there is no "fit-for-purpose" investment model for the stage between a working prototype and full production. Government officials interviewed told the researchers the demand signal is already more than strong enough before contracts are awarded and that suppliers need to be bolder. "New companies want production orders when all they have is a prototype. They need to take risk and be ready to produce," one customer said. ## Private Equity Firms Spend About $1 Billion to $3 Billion a Year on Defense-Focused Buyouts Buyout volume in majority-defense companies has held at around $1 billion to $3 billion a year, a small fraction of the sector's public-market value, and most private equity exposure to defense comes through companies that mainly sell to commercial aerospace or industrial markets. Buyout firms look for predictable cash flows and usually need to return cash to their own investors within five to seven years, a profile defense work has often not matched. "Profitability is capped," one private equity investor said. Many of the private equity leaders interviewed said defense deals are starting to meet their criteria, citing market growth and acquisition reforms. Private equity buyers are also one of the main ways venture-backed defense tech start-ups cash out. "There's nobody waiting to buy," one venture capital investor said, adding that "primes won't pay for 100x revenue." Bain and AIA warn that without viable exit routes, defense will become less attractive for further venture investing. ## Suppliers of Castings, Forgings and Precision Parts Report Some of the Most Acute Capital Shortages Stakeholders named castings and forgings, advanced semiconductors, energetics, solid rocket motors, sub-tier precision components and sensors as the tightest spots in the defense industrial base. The F-35 program alone draws on more than 6,000 global vendors, many of them small businesses with uneven access to capital, and 150,000 parts. Fiscal 2027 requests for three major munitions programs were more than 800% higher than the year before. Mid-tier suppliers typically borrow at about one percentage point more than the large primes, and new entrants find debt harder to get at all, according to Bain's analysis. Lenders want a contract to lend against, so a supplier that needs money to add capacity before it wins an award has little to borrow on. Further upstream, the US depends entirely on imports for 16 critical minerals, and most refining is done abroad. Approval for a domestic critical minerals project can take at least 10 years. One industry leader said investors in such projects find that "with just equity, there isn't enough juice in their model to get the required return." ## JPMorganChase, Carlyle and Specialist Lenders Have Started New Financing for Defense Companies JPMorganChase announced a 10-year, $1.5 trillion Security and Resiliency Initiative in October 2025, covering four industries including defense. Bain and AIA note that most of the $1.5 trillion is financing the bank plans to arrange for others, not its own capital at risk, and that up to $10 billion is direct investment. The report also lists the Carlyle Group's newly announced Defense and Reindustrialization Fund and lenders such as Leonid Capital Partners, which lend against signed government contracts. ## Bain and AIA Want Defense Contracts to Pay Returns That Match the Risk Bain and AIA set out six priorities: back clear priorities with funding, directly link risk and reward, reduce buying and selling friction, grow market volumes, develop flexible sources of capital, and improve performance. On risk and reward, the authors write that if a company can earn at most 8% to 12% returns on capital, any project that needs a higher return to offset higher risk does not take place. "The defense investment gap will not close through enthusiasm alone," they write. "It will close when business-case conditions make private investment rational." Bain and AIA also say suppliers must spend more time and money improving schedule, quality and cost performance, and many of those interviewed stressed that funded commitments should not reward poor performance. The Pentagon has announced its intent to begin rulemaking so that "negotiated margins reflect value delivered, risk carried, and private capital invested." The full report is available on [AIA's website](https://www.aia-aerospace.org/publications/the-state-of-investment-in-defense/). ## FAQ **Q: What is the defense industrial base?** It is the network of companies that supply the US military, from the large prime contractors that integrate whole systems such as aircraft and missiles, down through mid-tier and sub-tier suppliers of components, materials and parts. New entrants backed by venture capital are a growing part of it. **Q: What is the difference between a cost-plus and a fixed-price defense contract?** Under a cost-plus contract, the supplier's profit margin is fixed as a fee on top of its disclosed costs, so it bears less risk if costs change. Under a fixed-price contract, the margin is not set explicitly, but Bain and AIA say it is often capped implicitly through negotiation and regulation, while the supplier carries more of the risk of cost changes. **Q: What is an Other Transaction Authority?** An Other Transaction Authority, or OTA, is an alternative way for the Pentagon to buy a product or service outside a traditional, heavily regulated negotiated contract. Stakeholders interviewed by Bain cite it as a lower-friction route, but OTAs make up a very small share of overall defense procurement spending.