Silicon Valley wins few government contracts

The gap underscores the discrepancy between the surge of venture capital funding for defense technology and the U.S. government’s spending on substantial contracts to startups. The new numbers come from a report released Thursday by Silicon Valley Defense Group, a nonprofit that started a decade ago with the aim of bringing more startup innovation to the Defense Department.

According to the report, the top 100 venture capital-backed national security startups have raised a combined $53 billion in private funding since their inception, $11 billion of which has come in the past 12 months.

Those same startups have collectively earned $22 billion in revenue from federal awards, $6 billion of which came from the Defense Department. The organization ranked the startups based on head count growth, total capital raised and other factors.

Traditional defense contractors receive hundreds of billions in awards every year.

The continued lagging investment by the federal government in startup technologies threatens to curtail the venture-capital boom in defense tech at a crucial time for U.S. competitiveness around warfare as the geopolitical landscape grows ever more unstable.

Defense Department officials have said they want to move more swiftly and be less risk averse when adopting commercial technologies, and that their own entrenched bureaucracy can get in the way. Lawmakers have pushed the department to embrace innovation.

Silicon Valley Defense Group calculated the 100 startups’ government revenue from their inception through mid-June, and the figure covers only awards that are unclassified. The average age of the startups on the list is seven years. The report acknowledges that government award data suffers from “absolute opaqueness."

A spokesman for the Office of the Secretary of Defense said the gulf between private capital funding and Defense Department spending isn’t as wide as the report suggests because it doesn’t factor in awards that are classified, which aren’t publicized. He said the department is spending tens of billions of dollars to adopt new technologies at a faster clip.

Most of the defense tech startups in the report make technology they also sell to commercial customers, and nongovernment revenue isn’t factored into the report.

Self-driving trucking startup Kodiak Robotics, named in the report’s top 100 companies, in 2022 received a two-year, $50 million contract to work on self-driving ground vehicles for the Army. The project has gone well, Chief Executive Don Burnette said, but there isn’t a guarantee when Kodiak will get another contract, how much it would be for or when they would get paid, because Congress has the final say on budgets.

“It’s a slog," Burnette said.

The report says the data raise questions about what sort of returns venture capitalists can expect from their investments, and whether the U.S. government is playing “innovation theater."

“Startups are either purposely being kept out, or the DOD has just not figured out how to take advantage of them," said Tara Murphy Dougherty, chief executive of defense software company Govini. Venture-backed companies have consistently received around 1% of total Defense Department award spending annually going back through 2018, despite throngs of new companies joining the defense-tech field, according to Govini data.

The groundswell of techno-patriotism, supercharged by the prospect that artificial intelligence will change the way wars are fought, has led to a venture-capital spending spree in defense of about $130 billion from 2021 through mid-June this year, according to data firm PitchBook.

Government agencies have reason to be cautious about embracing startups. Most fail. Most haven’t proven they can manufacture the large quantities the military would require. Some of them build tech that is completely impractical for warfighters or isn’t durable enough for a battlefield.

American drones that startups brought to Ukraine largely failed to perform on the front lines, revealing inadequacies in the technology that couldn’t withstand battlefield conditions.

Jacqueline Tame, executive director of Silicon Valley Defense Group, said she is discouraged by the government’s incremental, small-dollar investments in new technologies despite numerous Defense Department policies and strategies to prioritize the adoption of emerging tech. “Our call to action is literally, ‘Put your money where your mouth is,’" Tame said.

A spokeswoman for the Defense Innovation Unit, a Silicon Valley branch of the Defense Department focused on adopting new technologies for the Pentagon, said the unit has awarded more than $7 billion in contracts to startups since 2016.

“That said, far more needs to be done" by the Defense Department, the spokeswoman said.

Some venture-backed companies have notched successes, supplying the government with autonomous aircraft, drone-defense systems, artificial intelligence and space-launch technology.

The biggest winner is Elon Musk’s SpaceX, which has cornered the rocket-launch business and is a major vendor to U.S. intelligence and military agencies. The report shows SpaceX has received 81% of the total government funding awarded to venture-backed companies and 65% of the total Defense Department awards.

The 22-year-old SpaceX was funded for years by its billionaire founder until it could break into federal contracting. Now it competes for contracts with large defense vendors such as Northrop Grumman and Lockheed Martin, said Carissa Christensen, a space industry expert and chief executive of analytics and engineering firm BryceTech.

When SpaceX awards are excluded, the remaining 99 startups in the report share just over $4 billion in government revenue.

Joe Laurienti worked as an engineer at SpaceX in its earlier years before founding his startup Ursa Major, which is building rocket engines to power hypersonic aircraft and weapons. He knew it could take years before he won meaningful contracts from the government.

“This is survival. This is not ‘We are going to spend all our money on a big fancy office,’" Laurienti said.

Ursa Major, founded eight years ago and included in the report’s top-100 list, has raised $250 million from venture capitalists. In March, it got a $4.7 million contract with the Navy, which followed an Air Force research contract for $14.6 million.

James Cross, founder of Silicon Valley Defense Group and head of the venture-capital practice at Franklin Templeton, said there are reasons to be optimistic. Among them: Congress is pressuring the Defense Department to adopt more startup technology and has approved larger budgets for innovation programs.

“The DOD is not making a ton of progress," Cross said, but “I think we are moving in a positive direction."

Write to Heather Somerville at heather.somerville@wsj.com