Strategic minerals, semiconductors and solid rocket motors continue to struggle for funding
Investment in defense technology companies has surged, but critical areas such as strategic minerals, advanced semiconductors and solid rocket motors remain underfunded.
That is the conclusion of a new study by the Aerospace Industries Association and Bain & Company. The report found that venture capital investment in defense has increased tenfold since 2019, while other major sources of capital, including private equity, remain largely underutilized by defense companies.
“Defense does not face a shortage of capital. It faces barriers that make expanded investment, particularly in critical bottleneck areas, more difficult,” the study states.
The authors argue that the central challenge is creating the conditions that allow capital to flow toward the infrastructure, technologies, workforce and production capacity needed to strengthen the defense industrial base.
Study aims to shape federal policy
The Aerospace Industries Association commissioned the analysis to help Washington policymakers better understand how private investment can be directed toward defense companies.
“There’s a misunderstanding of how much private capital is in defense, how you incentivize it, and the things you do that inadvertently create barriers to that type of investment,” AIA President Eric Fanning said.
Venture capital firms, private-equity funds and retirement funds pursue different objectives, he noted. Policymakers therefore need to create a mix of investment opportunities and potential returns capable of attracting a broader range of capital.
Bain conducted 50 interviews with major defense contractors, startups, investors, banks, Pentagon officials and other industry participants. AIA also provided member-survey results and supporting data analysis.
Public-market value has nearly doubled
Investment in publicly traded aerospace and defense companies has grown substantially. The market capitalization of U.S. aerospace and defense firms reached approximately $1.6 trillion in 2025, nearly twice the 2019 level.
The study nevertheless warned that private capital is unevenly distributed, leaving numerous “unseen gaps” in the industrial infrastructure that supports defense production.
One such gap is domestic refining of critical minerals such as gallium and germanium. These materials are used in defense products ranging from missiles and radar systems to specialized magnets.
Mining and processing critical minerals is capital-intensive and vulnerable to global commodity-price fluctuations. Some of the machinery required for the industry is also manufactured overseas, creating additional risks for investors.
Although recent policies have increased attention to strategic-input challenges, projects in the sector remain long-cycle and high-risk investments.
Government steps in to support strategic minerals
The Pentagon has taken the unusual step of acquiring stakes in U.S.-based critical-minerals companies.
One example is a $400 million direct equity investment in MP Materials made last year.
The study did not directly assess whether government equity investments are likely to attract additional private capital. Fanning said, however, that public funding is essential to maintaining U.S. access to strategic minerals.
“If that is considered a national security priority, which I think everybody agrees on, being able to reshore some of this critical-mineral availability, there isn’t enough demand from the defense industrial base to justify fully private investment to reshore that capability,” he said.
Lower-tier suppliers remain vulnerable
Another major weakness lies among second- and third-tier suppliers that manufacture critical components, including:
- castings and forgings;
- advanced semiconductors;
- energetics;
- sensors;
- solid rocket motors.
Many of these companies are privately held and may allocate most of their production capacity to commercial contracts, which are often more lucrative.
Rapid increases in demand can place significant pressure on smaller suppliers. Their access to capital is more limited because of their size, particularly when they lack a firm order or signed contract.
Companies operating in less densely populated regions may also lack the infrastructure needed to recruit and train workers quickly.
The study did not outline a detailed plan for strengthening these lower tiers of the supply chain. Suppliers interviewed by AIA and Bain said, however, that demand signals from the Pentagon are essential to securing financing and making investments.
One recommendation called for long-term contracts, which could encourage supplier investment and improve productivity.
Venture capital has expanded sharply
Venture capital investment in defense grew from approximately $1 billion in 2019 to around $10 billion in 2025.
The success of companies such as Palantir and SpaceX has encouraged investment in other defense-technology startups, particularly in space, artificial intelligence, drones and software.
Even so, U.S. venture investment in defense remains low compared with the technology sector and overall global venture activity. Only about 5–6% of global venture capital funds flow to defense companies.
Investors and startups identify the transition from research and development to production as one of the sector’s biggest financing challenges.
Companies in the research phase can attract venture capital because their high-risk profiles are matched by the possibility of significant returns. Mature production companies are attractive because of their lower risk.
Between those stages, however, there is a funding gap. A technology may be promising but not yet fully demonstrated or ready for industrial-scale production.
Private equity participation remains limited
In contrast with venture capital growth, private-equity participation in defense remains relatively small, at approximately $1 billion to $3 billion annually.
Most private-equity funding flows toward companies with substantial commercial operations in areas such as aerospace and industrial manufacturing.
Private-equity firms generally seek established businesses with predictable cash flows, opportunities for operational improvements and clear exit strategies. The most attractive targets are companies whose future production volumes can be forecast with confidence using reliable data.
Historically, many defense companies did not meet those criteria. Private-equity leaders interviewed for the study nevertheless said the situation is beginning to change as the market expands and acquisition reforms take effect.
