In today's Finshots, we look at how venture-backed startups and tech giants are reshaping the traditional business model of defence and why that convenience comes with a catch.

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The Story

During the Second World War, the US government realised something few governments before them did.

Winning a war required more than a large army. It needed an industrial complex capable of producing fighter jets, aircraft carriers, tanks, radar systems and ammunition at an unprecedented scale. But the US government wasn’t equipped to do that. Their strength was in raising armies and directing military operations, not building factories or owning the means of production.

So, naturally, it turned to private companies, universities, and research laboratories, pouring billions of dollars into developing new military tech, perfecting it, and then getting contractors to manufacture it.

The deal was simple. The government paid for every dollar spent building the weapon, plus a guaranteed profit on top. In return, they owned the intellectual property and the finished weapon.

Over time, this became the template. Whenever the US military needed a new fighter jet or missile system, state agencies drew the blueprint and funded the research upfront. In fact, this state-backed funding is what gave us GPS, the internet, and much of modern Silicon Valley.

Sidebar: We recommend reading Valley of Death by Sharon Weinberger, which illustrates this point in great detail.

But today, that decades-old model is being turned upside down.

This is because modern warfare relies heavily on artificial intelligence and cloud computing. And because commercial tech companies innovate much faster than the state, the private sector has stopped waiting for government research grants and started innovating on its own.

So, a new breed of defence-tech firms like SpaceX, Palantir, and Anduril raised billions in private capital to build satellites, AI targeting software, and autonomous weapons in-house. To recoup the money, rather than handing the blueprints to the state, these companies keep ownership of their designs, code and intellectual property, and sell or rent their capabilities to militaries, much like an enterprise software subscription.

And it isn’t just specialist defence startups entering this market. Some of the world’s largest tech companies are also competing for military contracts.

Google and Amazon, for example, landed a $1.2 billion cloud contract called Project Nimbus for the Israeli government. On top of that, the defence forces increasingly rely on cloud storage and AI tools from Microsoft, Amazon, and Google to process battlefield intelligence.

Then in 2025, senior executives from Meta and OpenAI joined a US Army Reserve initiative to bring technology expertise into the military. And earlier this year, the US Department of War signed agreements with eight major technology companies, including OpenAI, Nvidia, Microsoft, Amazon, and Google, to deploy their AI capabilities on military networks.

So, in other words, Big Tech is increasingly becoming part of the systems militaries use to process intelligence and support operations.

Now, at first glance, this shift seems like a win for everyone, right?

Private investors take on some of the early-stage risk, and militaries get access to newer tech without spending years building everything themselves.

Well, yes, but there’s a catch. 

When a country buys a tank or a fighter jet, it owns the machine outright. However, when a military rents cloud servers, AI models, or satellite links from a private vendor, it is the ‘company’ that still operates the underlying network, not the military.

Researchers call this the distinction between the equipment layer and the permission layer. Simply put, the military may own the drones, missiles, and other hardware, but the software, satellite connections, and underlying infrastructure that actually make them useful remain under private control.

A good example of this playing out in real life is in Ukraine.

Since 2022, Ukraine's military has relied on more than 50,000 Starlink satellite terminals (and its militarised version, Starshield), built by Elon Musk's SpaceX, because Russian electronic warfare jams regular radio signals on the front line.

Out of nowhere, in October this year, Starshield links in Ukraine suddenly stopped working whenever a terminal moved faster than 100 mph. Reports cited officials saying Elon Musk ordered the speed cap.

This shows us that a single software tweak on a privately run network disrupted an active air defence system overnight, which raises a new question for countries: how much of your defence system do you actually own?

The challenge, then, is not simply to develop more defence technology, but to ensure that countries retain control over the technology their militaries depend on. And that becomes particularly relevant when governments begin opening up defence production to private companies.

For India, that question comes down to who gets to build the technology. The government is trying to bring more private companies and startups into a defence industry long dominated by state institutions and large established manufacturers.

This is because for decades, domestic defence startups struggled to convince investors and the armed forces that they could build equipment reliable enough for military use. Many startups faced uncertain demand and the challenge of developing expensive hardware without any assurance of large orders. As a result, promising drone and deep-tech ventures were often treated as experimental projects rather than serious suppliers to the armed forces.

That perception began to change during Operation Sindoor in May 2025, which demonstrated the value of indigenous defence tech such as drones, counter-drone systems, and surveillance equipment.

Startups supported through initiatives such as the government's Innovations for Defence Excellence (iDEX) programme also saw their tech get more attention, as the armed forces looked to integrate homegrown systems alongside equipment developed by the DRDO and PSUs.

This also sparked an immediate boom across India's defence markets. Indian drone startup Zuppa saw its order book jump tenfold after the operation, while venture capital funding into Indian defence-tech startups more than doubled from $135.2 million in 2024 to $282.5 million in 2025.

But here’s the thing.

Raising capital and assembling drones locally do not automatically make a country self-reliant in defence technology. So, to help local startups scale and build truly indigenous hardware, the government rolled out the Defence Acquisition Procedure (DAP) 2026. Under the new rules, a successful startup prototype can automatically trigger an immediate pilot order, followed by five years of guaranteed government contracts.

The government is also trying to make more of DRDO's technology available to private industry. By transferring technologies and involving private companies in development and production, it hopes to expand the manufacturing base beyond state-owned defence enterprises.

And here’s why this shift makes sense.

Bringing Big Tech and venture-backed startups into the heart of defence is more of an economic necessity. State laboratories and traditional defence contractors, with their lengthy procurement cycles and dependence on government funding, often struggle to keep pace with technological advancements. Private companies, meanwhile, bring capital, specialised talent and faster innovation to the table. 

But that doesn't mean governments should surrender control of the infrastructure that keeps their militaries operational. The answer probably lies somewhere in the middle. 

Governments don't necessarily need to own every satellite, server, or AI model their armed forces use. But they should retain control over how the tech is deployed, who can access it, and whether a private company can switch off critical services at its discretion. 

That means building contractual safeguards, requiring companies to maintain service during conflicts, and retaining the ability to operate independently without the service provider's help, if necessary.

Because when it comes to national defence, efficiency and innovation matter, but so does the ability to act independently when it matters most.

Until then…

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