The day before Valentine’s Day, rumors surfaced about a local company’s plans to raise a billion dollars.
Executives at the company didn’t respond to requests for comment. Industry insiders wouldn’t speak on record about the raise — but they didn’t display doubt about the deal either.
The billion-dollar buzz came to fruition a month later. In March, the defense tech startup, Shield AI, announced it had completed a fundraising round of $1.5 billion at a $12.7 billion dollar valuation.
That single raise accounted for more than half of the $3 billion San Diego startups pulled in this year, according to Pitchbook, an industry research firm.
This concentration of venture capital reflects a national trend: investors rattled by economic uncertainty are seeking safety in numbers. Now, billions of dollars are flocking to just a few companies positioned to capitalize on that uncertainty.
Shield AI is illustrative of this, poised to profit from the unrest in Ukraine and war in Iran.
The company builds AI pilots for aircraft, drones and other vehicles designed to operate in high-threat environments without GPS. The startup was founded in 2015 by former Navy SEAL Brandon Tseng and his serial entrepreneur brother, Ryan Tseng.
Neither responded to a request for comment, but one of their advisers did.
“This is the first time AI has been deployed in defense,” said Craig Lauer, San Diego angel investor who advises Shield AI, and a number of defense tech companies, including SkySafe.
Shield AI was able to recruit some of the top talent from SpaceX and Tesla, he said, because smaller startups allow “young ambitious engineers to dream up some of the greatest technologies,” and execute faster than the “slow moving” incumbents like GE Aerospace and Boeing.
“It makes VCs go ‘Oh wow, the market is opening up.’ It’s no longer an old boys club from the military industrial complex,” said Lauer.
Firestorm is another San Diego defense tech company that brought in over $40 million last quarter — and $82 million on April 29 — for its military manufacturing approach.
The San Diego company developed a high-tech 3D printing technology that allows troops to manufacture weapons on site, often at remote locations.
Think of it like a drone factory that fits inside a shipping container.
The need for Firestorm tech is visible in Ukraine, where cutting-edge defense technology has proven nearly impossible to deploy. “These main supply lines are really big fat targets for the enemy, so if you can get your manufacturing on site, that solves a huge problem,” said Jake Windle, investor at Harpoon Ventures, a San Diego-based defense tech venture capital firm.
From a venture perspective, Firestorm checks all the boxes. Its 3D-printing tech can be used commercially, it can upgrade to meet strict military standards, and it tackles a massive logistics problem that every modern military is trying to solve, Windle explained.
San Diego-based Fabric8 Labs is another 3D metal printing tech company that produces complex, dense metal parts without post-processing. The company pulled in over $56 million in the first few months of the year.
The company’s advanced manufacturing technology has generated millions for its potential to supply data center customers and computer processing chips.
Instead of just investing in a cool technology, venture capitalists are being careful with their cash, increasingly looking at how a specific problem could be solved — which in turn incentivizes innovation.
“There’s inherent pressures in the venture world that dovetail really nicely into the inherent gaps that the Department of Defense cannot tackle internally because they can’t incentivize people the same way the commercial market would,” said Windle.