As President-elect Donald Trump narrows in on potential picks for deputy secretary of defense, the defense industry is speculating what significant shifts in policy and priorities might be in store.
Trump’s history of favoring financiers and innovators over entrenched bureaucracy suggests his selection could disrupt the traditional dynamics of the military-industrial complex. For small businesses—especially venture-backed startups—this potential shake-up offers both challenges and unprecedented opportunities to redefine their role in the sector.
The Old Guard vs. Agile Innovators
The defense industry has long been dominated by legacy contractors like Lockheed Martin, Boeing, and Raytheon. These incumbents thrive on established procurement models, multiyear contracts, and deep institutional relationships with the Department of Defense (DoD). However, this traditional structure has often been criticized for its rigidity, high costs, and slower pace of innovation.
In recent years, venture capital investors have targeted this gap by funding startups offering cutting-edge solutions in fields like artificial intelligence, cybersecurity, autonomous systems, and space technology. These smaller firms, unburdened by legacy systems, bring agility and disruptive innovation to a sector desperately needing modernization.
However, these startups have struggled to take market share from the powerful incumbents.
Why Venture Investors Could Gain Influence
On Monday, The Wall Street Journal reported Trae Stephens and Stephen Feinberg are top picks for deputy secretary of defense. Both are veteran investors and Stephens has several investments in defense startups.
These picks compliment Trump’s leadership style which often leans toward less government regulation and more market-driven solutions. By appointing deputy secretaries of defense with financial expertise and deep private-sector roots, his administration would likely prioritize cost-effectiveness and rapid innovation over the entrenched incumbents. Venture-backed startups, which thrive on proving their value quickly, align closely with these goals.
Potential Impacts on the Military-Industrial Complex
A pivot toward venture-backed innovation would inevitably disrupt the status quo for traditional defense contractors. These firms and their supply chain, while formidable, may struggle to compete with the speed and cost advantages of smaller competitors.
However, this transition is unlikely to be seamless. Legacy contractors possess decades of expertise in large-scale systems integration, which remains vital for projects like aircraft carriers or missile defense systems. Not to mention a powerful political lobby in all 50 states.
Nevertheless, if new leadership emphasizes modular, interoperable solutions over monolithic systems, startups could outpace incumbents by offering technologies that are more adaptable and less resource intensive.
Implications for Small Businesses
For venture-backed startups, a leadership change at the Pentagon presents a window of opportunity to expand their footprint in the defense sector. Here’s how this shift could materialize:
- Easier Entry Points
A shake-up might lead to reforms in the procurement process, making it simpler for startups to bid on defense contracts. Programs like the Small Business Innovation Research (SBIR) initiative could see renewed emphasis, providing startups with essential funding and resources. - Increased Collaboration with DIU
The Defense Innovation Unit (DIU) already bridges the gap between Silicon Valley and the DoD. A leadership team that values private-sector solutions could expand DIU’s reach, allowing more startups to pilot their technologies with the military. - Broader Role for Public-Private Partnerships
Policies encouraging public-private collaboration might open new pathways for venture-backed firms to co-develop solutions with the DoD. This could be particularly impactful in areas requiring rapid technological adaptation, such as cybersecurity. - Accelerated Technology Adoption
Startups offering niche solutions—such as autonomous drones or AI-powered analytics—may find a receptive audience if new leadership prioritizes speed and capability over legacy preferences.
At the same time, thousands of small suppliers for Raytheon, Lockheed Martin, Boeing, etc. may encounter surprise volatility in their normally long, predictable backlog. If you are part of the incumbent supply chain, now is a great time to diversify your customer base. For example, aerospace and medical device clients, who often demand the same rigorous quality and domestic supply chain, are a natural fit for defense suppliers.
Challenges Ahead
Startups and incumbent defense businesses must overcome several hurdles to capitalize on the changing landscape. Compliance with defense shifting regulations, navigating the complexities of federal contracting, and scaling operations to meet military requirements are significant challenges.
Regardless of which camp your business sits in, the message is clear: Stay agile, focus on value, and be prepared to seize the moment as the DoD redefines its priorities. While uncertainties remain, the possibilities for growth and innovation have never been greater.
This article was written by a CFOshare employee with assistance from generative AI for rhetoric, grammar, and editing. The ideas presented are a combination of the author’s expertise, original ideas, and industry best practices.
