Optimus to Optimist: The Next Generation of Primes Pt. 2

This is the second in a two-part series on innovation in the defense industry. For a history of the modern military innovation process, see here.

Why the future will win.

Despite deep-rooted challenges (see part 1), the past decade has helped to put a necessary evolution in motion, laying the foundation for a new wave of defense technology startups to shine through.

Most important has been the success of early innovators like SpaceX, Palantir, and Anduril who have helped catalyze the burgeoning defense innovation ecosystem. The hard work that these companies (and others) have done in not only building superior platforms but navigating the maze of process and bureaucracy has helped show that building enduring standalone next generation platforms is even possible at scale. These companies have gone on to raise $B’s of dollars in venture capital, be valued at many multiples of those amounts, and show incredible promise even as they move from private to public markets.

Structurally, the creation of the DIU, the Air Force’s Rapid Capabilities Office, and Army’s Rapid Capabilities and Critical Technologies Office, have helped early-stage companies win meaningful contracts and get next generation tools into the hands of warfighters more quickly.

This, plus the transition from FAR to OTA contracting and from purely cost-plus to fixed-price contracts has helped make it possible for these innovators to compete. (With fixed-price contracts, the government and contractor agree on a fixed price for the build, with the liability of any additional expenditure falling on the company. By doing so, these contracts help to realign incentives, prioritizing efficiency over bloated CAPEX).

All of these advancements are underpinned by a truly generational amount of talent flowing into the defense tech ecosystem.

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The Next Generation of Primes

We’ll preface this by saying we do not view the future of defense procurement as one of legacy primes versus upstarts.  The DoD doesn’t care if you’ve been around for 50 years or 5 - they care about innovation and they care about outcomes. The solutions that will win the large contracts today and tomorrow will be those that best serve warfighters in preserving American sovereignty.

That said, we do believe that because of the government’s increasing appetite for risk / incentive realignment and inherent structural challenges with legacy contractors we are very much in an environment for new entrants to compete and win. Therefore as the DoD seeks to upgrade their systems to meet the needs of today, there is an incredible opportunity for a handful of companies to become the next generation of primes.

These primes, and the systems they produce, will look fundamentally different from those of the contractors of old, and we’re starting to see a few archetypes emerge that we are incredibly excited about:

Verticalized Platforms

Historically, because of the 30+ year oligopoly that legacy primes have had on the market, they had decades of time to grow - organically and through significant M&A - into providers of technology across all domains and branches.

Fast forward to today, and every branch of the military has its own discrete needs, stacks, and preferences for what their future hardware and software should look like to get back to US superiority.

Given the complexity of these requirements and the sheer size of the opportunity (and procurement budgets) within each department we are starting to see leading verticalized platforms emerge within each threat vector.

In some areas, the work to be done is bringing legacy systems into the 21st century. In these spaces, we see opportunities for AI-powered software first companies like Helsing, Forterra, and Overland AI, providing the intelligence layer on top of legacy hardware. 

Though broadly, new things need to be built, full stop. Therefore, the bulk of the value and some of the largest opportunities lie within a combination of the worlds of atoms and bits - for teams building intelligence into revolutionary hardware systems.

We are incredibly excited about these companies designing vertical focused proprietary software enabled hardware - building specifically to department specs from day one, working towards programs of record.

Companies like Shield AI and Neros for the air, Saronic and Salidrone for the sea, Swarmbotics for the land, and True Anomaly for space.

And while these solutions will look very different in form factor, we see major similarities in their design, representative of the tectonic shifts underway in how wars are and increasingly will be fought. 

In line with the DIU’s Replicator Initiative and request for ADA2 systems, leading innovators within the space are designing their platforms to be:

• Autonomous
• Attritable
• Cheaper
• Scalable
• Modular
• Vertically integrated
• At the edge

This is all to say, the systems that these new primes produce will be smarter, cheaper, more flexible, infinitely more scalable, and all while putting less human lives in danger.

Horizontal Enablers

Equally as exciting as companies building vertical specific solutions, are those leveraging breakthrough technologies to provide value across horizontal domains.

AI & ML

One area where we have seen the most innovation is within companies utilizing advanced AI and ML to expedite decision making and generate the overmatch required to win the next fight. The DoD released its strategy for AI adoption last year which centered around six explicit goals living within an adoption framework dubbed ‘The AI Hierarchy of Needs’.

We have been excited by the speed at which the DoD is embracing AI across systems - both at the infrastructure and application layers. These include solutions like Scale and Labelbox providing the necessary infrastructure for horizontal AI deployment and applications like Vannevar Labs and Modern Intelligence for cross-mission AI powered intelligence.

Intelligence & Telecom

In the ‘drone war’ future, victory lies with the side that can more quickly close the kill chain - a process reliant on real time intelligence and communication. Next gen solutions are increasingly leveraging advanced sensors on satellites, drones, and ground systems to collect vast amounts of data, from enemy movements to environmental shifts, transmitting it instantly across secure networks. Integrating edge capabilities - where data is processed closer to the source - further enhances real time decision making, improving coordination speed and situational awareness.

We are excited about companies like CHAOS, Spire, and Aalyria, building intelligence across threat vectors, as well as those like Umbra, Northwood, and Capella Space, building necessary space infrastructure for real time Earth insights.

Advanced Manufacturing (With US Only Supply Chains)

None of these solutions are any good if you can’t produce them at scale and America is severely bottlenecked by our manufacturing capabilities. While some novel platforms are vertically integrating - designing for scaled manufacturing from Day 1 - the vast majority of legacy contractors still rely on small ‘mom-and-pop’ component suppliers to build their systems. This dynamic, plus an aging workforce and over-reliance on tribal knowledge, presents a massive opportunity. As the DoD looks to upgrade their systems - we have seen companies start to emerge to fill this gap leveraging automation to “be the factory” powering America’s industrial base.

American manufacturing is behind on nearly all fronts - therefore we are excited about companies like Hadrian, Layup, ICON, and Salient Motion, bringing U.S. manufacturing into the 21st century.

Energy

The DoD is America’s largest energy customer, thus improving energy efficiency and resiliency is a global need, and one that matters greatly to the future of defense. From securing supply chains to reducing fuel dependence, next generation energy system adoption is critical for enhancing military capabilities and operational effectiveness. The U.S. defense sector is increasingly turning to distributed energy systems, renewables, and advanced batteries / energy storage to ensure military operations can progress, even in contested environments. The government is also one of the largest supporters, and future buyers, of nuclear power - recognizing the need for all forms of carbon-free electricity. Given the ubiquity in need across private and public sectors, these solutions are often dual-use with the DoD leveraging advancements from the commercial sector.

This includes renewable and nuclear upstarts like Fervo Energy, Radiant, and Antares, as well as directed energy solutions for electronic warfare like Epirus and Aurelius.

Cyber / Software Enablement & Security

Software modernization is crucial for the DoD in improving production capabilities and maintaining operational readiness. As highlighted, many of these legacy systems have become outdated, fragmented, or inflexible, and are inadequate in supporting the speed and complexity of modern warfare. Put simply, without next generation software, building intelligence into these legacy systems, we risk falling further behind. Further, in the age of information as we (and our adversaries) increasingly leverage AI and innovative software-derived intelligence, new powerful and sophisticated threats have emerged. It is therefore paramount that we continue to build and invest in advanced cybersecurity for both proactive and responsive protection against legacy and novel attack surfaces. We are excited about these next generation companies providing the software layer for enablement and advanced protection of the DoD’s networks, systems, and infrastructure.

This includes leading cybersecurity and data protection generalists like Virtru and Strider and those providing industrial control systems (ICS) and operational technology (OT) for industrial system protection like Dragos, Galvanick, and Shift5. This also includes hardware production intelligence solutions like Nominal and Epsilon3 and those helping streamline operations and better respond to governmental RFPs like Quindar and Vultron.

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At Ensemble, we’re actively investing in the future of defense, and are proud partners to Saronic, ICON, and CHAOS.

We believe that we are still in the early innings of the defense tech revolution, and as the future continues to unfold before us, we’re looking to continue to partner with the select group of outlier builders shaping this future. 

If you or someone you know is building this future, please shoot us a note.

‍Collin West (collin@ensemble.vc)

Conrad Shang (conrad@ensemble.vc)

Ian Heinrich (ian@ensemble.vc)

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