Pentagon's equity push draws VC backlash
The Pentagon's move to take direct equity stakes in defense companies is colliding with a core assumption underpinning the rise of venture-backed defense startups: that private capital, not government ownership, should determine which firms scale.
At issue is a planned $1 billion investment in L3Harris Technologies' missile propulsion business, structured as convertible equity. The deal would give the government a financial stake in a supplier of solid rocket motors, a part of the supply chain that has struggled to keep pace with demand.
Pentagon acquisition chief Michael Duffey has framed the approach as a way to "build resilience and reduce fragility" in the industrial base, part of a broader push by the administration to accelerate production and pressure contractors to reinvest in manufacturing rather than stock buybacks.
But the strategy is facing resistance from venture investors who have spent the past several years directing private capital into defense and space startups.
David Ulevitch, a general partner at Andreessen Horowitz, said he is skeptical that taking a stake in an established supplier will meaningfully speed production.
"I think if L3Harris wants to ramp up production, I'm not sure what the government taking a stake in that will do to accelerate it," Ulevitch said on Semafor's business podcast.
Ulevitch leads a16z's "American Dynamism" investment practice, which targets defense, aerospace and industrial companies. He is among the investors backing firms such as Anduril Industries, Skydio and Air Space Intelligence — companies positioned as alternatives to traditional defense primes.
His critique reflects a broader concern inside the venture community: that government capital directed at incumbents risks reinforcing the existing industrial structure rather than opening space for new entrants.
He suggested the Pentagon should instead expand funding for startups that are "highly motivated," arguing that increasing their share of defense spending would send a stronger signal to the market.
"Startups occupy a tiny amount of the overall defense spending today … and if you just doubled or tripled that, it would be a massive demand signal to startups who would actually take advantage of that and respond in kind with high rates of production," he said. "Giving more money to the primes is not going to help them move faster, because if that were the case, they would have been moving faster."
The disagreement goes to the heart of how the defense industrial base should be rebuilt.
From the Pentagon's perspective, expanding capacity through an established supplier is faster and carries less risk than waiting for a startup to mature.
Investors see a different constraint
Venture capitalists argue the problem is not a lack of capital, but a lack of consistent demand signals and slow procurement cycles. Clearer requirements and faster contracting, they say, would unlock private investment without the government having to take ownership stakes.
The equity approach has raised concerns on Capitol Hill. Lawmakers are questioning whether the Pentagon can remain a neutral buyer if it holds financial interests in suppliers, and are pressing for details on how those stakes would be managed and eventually unwound.
Critics warn the model begins to resemble a form of state-directed industrial policy, where the government influences which companies scale. Supporters counter that decades of consolidation and underinvestment have left critical supply chains too thin to rely on market forces alone.
"The primes are not in a high rate of production, and are getting yelled at aggressively by the Pentagon for that and by the president for that matter, for focusing on share buybacks instead of manufacturing," Ulevitch said. "It's not like the share buybacks are the reason they're not in a high rate of production. They could be in a high rate of production if they have the capability, but they don't. They don't have the capability, and they have no existential necessity."
Startups, he insisted, operate under different incentives.
"They are completely fixated and working all hours of the day," Ulevitch said. "Are they going to get to a high rate of production first? I would make that bet every single day of the week."
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