Hundreds of billions of dollars have poured into defense tech over the past several years, creating conditions for a bubble. New defense-tech startups are launching daily, raising Series A rounds at $300 million or $400 million valuations with no recurring revenue or meaningful contracts. Last month, four former DOGE staffers raised $160M at a $1.4B valuation for a pre-product company. These valuations are built on speculation rather than market reality.

The actual defense-tech market is much smaller than assumed. The Trump Administration's 2027 budget request is $1.5 trillion, but only $760 billion comes from procurement and RDT&E dollars, with a durable base closer to $480 billion. Most modernization funds flow through existing programs controlled by five legacy primes. The contestable market for new entrants is a single-digit-billion market today.

In FY25, federal obligations to VC and PE-backed national-security companies totaled $4.3 billion, while nearly $50 billion was invested in venture capital. More than ten dollars went in for every dollar of government revenue. This math doesn't support current sky-high valuations.

Consolidation will come through mergers of peers, recapitalizations, acquisitions by primes and mega-startups, and PE-backed rollups. Companies with real revenue, owned customer relationships, reliable field technology, scalable unit economics, and sufficient runway will survive. Others face a reckoning within 18 months.