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Cailianshe News, August 26 (Editor: Shi Zhengcheng)Faced with the increasingly unstable global situation in recent years, Y Combinator, the flagship of Silicon Valley's science and technology capital, has also begun incubating weapons manufacturers.

Based on reports from multiple science and technology media and information from the YC official website,Ares Industries, a missile manufacturer founded last week, became the first arms manufacturing startup in YC's history。

The original intention of the two founders, Alex Tseng and Devan Plantamura, to "start a missile company" was precisely the military conflicts that have occurred in eastern Ukraine and the Middle East in recent years. Not only are American weapons active at the forefront of the conflict, but they also expose a problem:In order to destroy a drone/unmanned ship that costs only a few thousand or tens of thousands of dollars, it is often necessary to use missiles worth millions of dollars.

They both thought thatMissiles designed for warfare of a previous era are too large and too expensive for modern warfare.Their first product is to make an anti-ship cruise missile compatible with existing launch platforms, which is designed to be 10 times smaller and 10 times cheaper than the current competitor's product that costs $3 million per round.

The developmental missile, designed to deliver a small payload at high subsonic speeds, is designed to strike "ships hundreds of miles away." Land- and ship-based versions of the missile will be released initially, with air-launched, extended-range and different-load versions to follow.

They said they have tested prototypes in California's Mojave Desert and plan to deliver the missile system to the first customers in mid-2025.

(Founders testing prototypes, source: YC, Ares Industries)

US venture capital pours into arms race

As military conflicts in Europe and the Middle East continue to refresh people's understanding of modern warfare, the emergence of defense technology start-ups has also led venture capital to begin to get involved in this unfamiliar and money-filled track.

YC partner Jared Friedman said YC began encouraging military technology startups to apply for funding earlier this year. He said: "Why now? Simply because good companies like this are starting to apply now."

Take the United States as an example. For a long time in the past, the defense budget of up to $800 billion was often dominated by several military oligarchs such as Raytheon and Boeing, including fighter jets with a unit price of hundreds of millions of dollars and large missiles with a single launch costing millions of dollars.A series of military conflicts in recent years have continuously demonstrated the effectiveness of small, low-cost, and automated military equipment, which has also provided opportunities for start-ups to enter the field.

Palmer Luckey, the founder of VR glasses company Oculus (now Meta Quest), founded Anduril Industries, a technology arms manufacturer, after leaving Meta. The core goal is to produce“As simple an autonomous weapon system as possible”. Consistent with Tesla’s creed, the company’s business logic is to eliminate “unnecessary materials, parts and production processes” in arms manufacturing.

Earlier this month,Anduril Industries completes latest round of financing of US$1.5 billion, with a corresponding valuation of US$14 billion. The investor lineup includes Founders Fund founded by Peter Thiel and others, Fidelity, Baillie Gifford, and Franklin Templeton's VC department.

Earlier this year,Anduril Industries beats out Lockheed Martin, Northrop Grumman and Boeing for US Air Force collaborative fighter contract。

Similar to YC, Sequoia Capital, another venture capital representative in Silicon Valley, also completed its first investment in the defense weapons field last year, supporting hydrogen weapons manufacturer Mach Industries and drone manufacturer Neros.

It is not difficult to see that these start-ups are all committed to "low-cost weapons and drones that can be mass-produced." This is probably also the venture capital boom brought about by the new pattern of modern warfare.

Defense contractors' cash flow surge sparks speculation of mergers, acquisitions, buybacks

While arms start-ups are emerging one after another, established arms dealers have also become big winners in the disputes in recent years - according to statistics, the amount of government defense orders in Europe and the United States has approached historical highs, which will also greatly boost the cash flow level of military giants.

According to the research organization Vertical Research,The free cash flow level of 15 major defense contractors in Europe and the United States will reach $52 billion by fiscal 2026, almost double that of 2021.The main growth comes from several military giants in the United States. In Europe, free cash flow of companies such as BAE Systems, Rheinmetall and Sweden's Saab will also increase by 40%.

Faced with a steady influx of funds, how to spend this money has also aroused heated attention in the capital market.

Last year, Lockheed Martin and Raytheon Technologies repurchased nearly $19 billion of stock, and as their share prices continued to rise, they also raised questions about whether they were using defense orders to boost share prices. BAE Systems recently completed a three-year £1.5 billion buyback plan and immediately began a further £1.5 billion buyback.

Some companies have set their sights on mergers and acquisitions. Earlier this month, European armored vehicle manufacturer Rheinmetall announced that it would spend $95 million to acquire U.S. military vehicle parts manufacturer Loc Performance in order to gain a share of the U.S. Army's $60 billion tank and tactical truck market.

(Rheinmetall daily chart, source: TradingView)

Rheinmetall CEO Armin Pappager told analysts very vividly that even if the deal was not enough to allow them to "catch big fish" in the United States, they would still catch some "small fish," which could be worth billions of dollars.

Moreover, given the special circumstances of arms manufacturers, it is very unlikely that any country will allow a super-large merger and acquisition, so only some small and medium-sized mergers and acquisitions are likely to be promoted. This logic also leaves a smoother potential exit path for science and technology VCs.