The defense technology landscape is experiencing unprecedented momentum, driven by a perfect storm of technological advancement and robust government spending. With the Department of Defense earmarking $145 billion for R&D and $170 billion for procurement in FY2024, the signals are clear: defense tech is entering a golden era for venture investment.

While many VCs are chasing pure-play AI investments, In-Q-Tel's vice president Barry Leffew highlights a more nuanced opportunity: AI as a force multiplier across the defense technology stack. We're seeing AI capabilities accelerate innovation in:

• Energy and battery technology
• Biotechnology advancements
• Cybersecurity solutions
• Enterprise technology infrastructure

This cross-pollination effect creates multiple paths to exits and broader market opportunities for startups in our portfolio focus areas.

Where Smart Money is Moving

Our analysis of In-Q-Tel's investment patterns reveals several high-potential areas for venture deployment:

The market is shifting from traditional security approaches to AI-driven solutions that can:

• Conduct real-time device and network topology mapping
• Analyze software bills of materials (SBOM) for vulnerability assessment
• Enable predictive threat detection and response

While full-scale quantum computing may still be years away, In-Q-Tel's focus on post-quantum encryption signals an immediate investment opportunity. The government's need to protect against future quantum threats is creating a market for solutions today.

With the DoD's push toward edge computing, startups that can help process and analyze massive amounts of data at the edge are particularly well-positioned.

Perhaps the most interesting insight from In-Q-Tel's approach is the persistent "translation gap" between startups and defense agencies. While DoD has improved its requirements communication, startups still struggle with the complexities of defense contracting and Federal Acquisition Regulations (FAR).

This creates an opportunity for firms like Other People's Capital to add value beyond capital by helping portfolio companies navigate the defense marketplace and acquisition process.

In-Q-Tel's focus areas align closely with our thesis at Other People's Capital. The government's clear commitment to technological advancement, demonstrated through both budget allocations and strategic planning, validates our focus on defense tech startups.

Looking Ahead

As we evaluate investment opportunities in 2025 and beyond, we're particularly excited about:

• Startups working on post-quantum encryption solutions
• Companies developing AI-enabled cybersecurity tools
• Innovations in edge computing and data processing
• Dual-use technologies that can serve both commercial and defense markets

The defense tech sector is experiencing a rare alignment of government need, technological capability, and capital availability. For investors who can help bridge the gap between innovative startups and defense customers, the opportunities have never been more promising.

Other People's Capital invests in early-stage defense technology companies. If you're building innovative solutions in cybersecurity, AI, quantum computing, or other defense-related areas, we'd love to hear from you.