Guvendemir | E+ | Getty Images
The Iran war is redefining modern combat for the U.S. and driving demand for lower-cost tech.
It’s the exact situation Defense Secretary Pete Hegseth warned against a few months ago.
“We cannot afford to shoot down cheap drones with $2 million missiles,” Hegseth said in December. “And we ourselves must be able to field large quantities of capable attack drones.”
Two days into the war, the U.S. used up a reported $5.6 billion in munitions. Meanwhile, Iran has wreaked havoc on military bases, tourist centers and data centers used by America’s largest tech giants with swarms of low-cost Shahed drones that cost between $20,000 and $50,000, according to public estimates.
This is the moment defense tech and Silicon Valley have been waiting for.
For years, defense tech has fought to prove itself in Washington and grab a chunk of the ballooning Pentagon budget snatched up by defense primes like Lockheed Martin, RTX and Northrop Grumman.
The war, coupled with President Donald Trump‘s military reindustrialization efforts, could offer that long-awaited catalyst.
“The world is more dangerous,” said Mike Brown, partner at Shield Capital. “Technologies that were on the drawing board a decade ago have now proven themselves on the battlefield.”
Proving ground for drone tech
The U.S. has deployed its own version of the Shahed in Iran called the Low-cost Uncrewed Combat Attack System, or LUCAS. The drone, built by Arizona-based SpektreWorks, costs about $35,000 per unit according to industry estimates.
The Department of Defense is also reportedly in the market to buy more.
Tara Murphy Dougherty, CEO of defense software startup Govini, said LUCAS is one of the only major new systems emerging in the Iran war, but production is modest. Most U.S. air capabilities in Iran have been with traditional fighter jets and bombers.
In counter-drone tech, Aerovironment this week announced the Locust X3 laser system, which the company claims will cost under $5 a shot. Contractors Lockheed Martin, RTX and Leidos also offer solutions.
Taser maker Axon entered the sector in 2024 with its Dedrone acquisition. Startups Anduril and Epirus are also scaling counter-drone warfare capabilities.
Despite their real-world applications, these tools accounted for only $4.7 billion of the fiscal 2026 budget. That’s according to data from Obviant, an intelligence startup that focuses on defense acquisition, contracting and budgeting data.
“America was built on competition, so let’s be competitive,” said Brett Velicovich, co-founder of Powerus, a drone company backed by Trump’s sons. “Let the companies that have the best technology win, because it’s only beneficial to our country.”
Major defense tech winners so far include Oculus-creator Palmer Luckey’s Anduril and software AI company Palantir. Both recently signed multibillion-dollar-ceiling contracts with the Pentagon.
Palantir’s tools are already deeply ingrained in the DOD, and CEO Alex Karp alluded to the fact that the U.S. and its Middle East allies are using the company’s Maven platform.
The sector has seen a surge in popularity in Silicon Valley, with deal value nearly doubling to $49.9 billion last year from $27.3 billion in 2024, according to Pitchbook data.
Despite that excitement, spending on the sector accounted for less than 1% of contract dollars in 2025, according to data from the Ronald Reagan Presidential Foundation and Institute. Anduril, Palantir and Elon Musk‘s SpaceX account for 88% of that.
Anduril flies its unmanned drone YFQ-44A for the first time at an unspecified location in California, Oct. 31, 2025, in this handout image.
Anduril | Via Reuters
Reindustrializing the military
The push to advance the military’s tech capabilities began well before the war in Iran, and Trump stepped up efforts to rebuild aging military systems early in his first term with a series of executive orders.
Trump’s signature $185 billion “Golden Dome” missile defense system will also provide new opportunities for startups, including shipbuilding and drone companies.
Several defense tech startups CNBC spoke with for this story said demand has skyrocketed from DOD customers since the U.S. and Israel first struck Iran at the end of February. Many of those customers have offered to buy out capacity or asked firms to ramp production, the businesses said.
“We’ve had very clear demand signals coming out of this administration and the Pentagon,” said Ryan Tseng, president and co-founder of Shield AI, which hit a $12.7 billion valuation this week. “People are more ready than they ever have been.”
Gauging demand is a difficult task for any business, but particularly critical for firms reliant on venture funding to keep factories running. At the same time, the government hasn’t offered a steady enough flow of contracts to rationalize scaling for some of these businesses.
That’s leaving defense tech firms divided over whether to hike capacity to win deals and risk profitability, or hold off and potentially miss opportunities.
John Tenet, CEO of radar and communications tech maker Chaos Industries, said his manufacturing team is building day and night to meet customer demand signals. The company recently raised $510 million at a $4.5 billion valuation.
“If you’re waiting for the contract to scale production, you’re already too late,” he said.
Many of these businesses are already operating at a faster clip than in previous years.
One counter-drone startup, which asked not to be named due to the nature of the company’s work with the government, told CNBC that this year it’s on track to double the number of systems created since it first launched its tool.
The startup said that all those systems have been sold to customers, and it would only increase capacity if given a contract by the U.S. government.
That’s the tricky part of working with the government.
Chaos Industries’ Vanquish Prime radar system.
Courtesy: Brett Cummings | Chaos Industries
Demand appears insatiable, but some defense firms told CNBC that they want contracts before shelling out on new systems. That’s even more critical for businesses building multi-million dollar tools with intricate supply chains.
Businesses could stockpile to get ahead of demand, but rapid innovation could quickly outpace their tech. That’s why focusing on a single product is a “very dangerous game,” said Accel partner Ben Quazzo.
“If you wake up one day and that’s obsolete, your business is in trouble,” Quazzo said.
The Pentagon plans to funnel billions over the next few years into defense technology, with Trump calling for a $1.5 trillion military budget in 2027. However, a budget managed by Congress with limited long-term visibility, coupled with a slow contracting process hindered by bureaucracy, creates some roadblocks.
“The Pentagon is the only company in the globe that is bound up by procurement and sales rules that somebody else is writing,” said Morgan Plummer, vice president of policy design and delivery at Americans for Responsible Innovation.
Even as tech companies ramp up production, experts said few of these tools are actually reaching battlefields abroad, and the production scale is far too low to cause a significant impact.
Hegseth’s acknowledgment of the drone-missile cost disparity came with a call for the industry to build 300,000 drones “quickly and inexpensively.”
The effort would deliver “hundreds of thousands of them by 2027,” Hegseth said.
Weeks after the first phase of the program started, the Iran war began.
