The new warlords of Silicon Valley

America could ultimately learn many lessons from the Iran war. One it learned the hard way is the devastating economics of using conventional weapons against cheap Iranian drones. “The dynamics of the world have changed,” says Emil Michael, a former Silicon Valley executive who is now a senior Pentagon official. “You don’t want to spend a million-dollar missile to shoot down a $50.000 drone.”

That’s one reason the Trump administration is turning to a new group of defense “outsiders” who are reinventing the way war is fought. They are led by Palantir, a software giant that provides intelligence systems; SpaceX, whose Starshield satellite network provides reconnaissance and connectivity; and Anduril, a rising favorite that makes air and sea drones, along with anti-drone weapons. This trio of new military contractors, the so-called “neo-primes,” have close ties to hawks in the Trump administration. They are making the giants of the military-industrial complex increasingly nervous.

Traditional American prime contractors (primes), the government says, have become sluggish, overpriced and risk-averse due to their lucrative and secure positions. “If [the newcomers] are good and if they get established, they will take over some of the work that would otherwise go to traditional prime contractors,” Mr. Michael says.

This year, challengers have picked up some important accolades. In January, Pete Hegseth, the US Secretary of Defense, used SpaceX’s Texas base as a backdrop to unveil a new artificial intelligence strategy, promising that the Department of Defense would draw inspiration from Elon Musk’s management style and “speed it up like hell.”

In March, it was announced that Palantir’s AI-powered command and control system, called Maven, would become a “program of enduring significance,” securing funding for years to come (albeit with a lot of red tape). That same month, the U.S. military consolidated multiple contracts with Anduril into one, worth up to $20 billion over ten years.

Such commitments may seem modest compared, say, to the F-35 stealth fighter program, led by Lockheed Martin. The F-35 could ultimately cost the U.S. government more than $2 trillion over several decades. Last year, the three largest traditional U.S. prime contractors—Lockheed Martin, RTX, and Northrop Grumman—collectively generated about eight times the combined sales of the three new entrants, with SpaceX and Palantir making a large portion of their profits from customers outside the Pentagon.

Still, investors are bullish. The trio of newcomers are worth three times more than the largest traditional contractors, reflecting expectations that they could shake up the arms industry. SpaceX is expected to go public in the coming months in the largest initial public offering in history. Anduril, which makes almost all of its revenue from defense contracts, is reportedly raising funds at a valuation of $60 billion, despite having only $2 billion in revenue last year and operating at a loss.

The momentum is also being fueled by President Donald Trump’s ambitious plan to persuade Congress to increase the defense budget by more than two-fifths in the next fiscal year, to $1,5 trillion. The plans include increased spending on drones, counter-drone systems and artificial intelligence, among other things. While traditional prime contractors will continue to receive the lion’s share of procurement funding, Michael hopes that the 1 to 2 percent earmarked for innovative challengers will grow by “a few percentage points” each year to encourage greater competition.

From the Pentagon’s perspective, one of the biggest advantages of the new players is that, unlike traditional prime contractors, they tend to eschew “cost-plus” contracts, in which the government reimburses all costs and adds a profit margin on top. While this model may be appropriate for large, complex projects where costs are difficult to estimate in advance, it often leads to inertia. Instead, challengers are more likely to opt for fixed-price contracts, in which they bear the upfront costs of research and development and earn high margins if they complete the work on time and within budget.

This contract structure helps them stay efficient and provides an incentive to quickly improve solutions, rather than developing weapons and systems from scratch each time. Speaking of speed, just eight months after SpektreWorks, an Arizona startup, unveiled a prototype of the LUCAS suicide drone, US forces were already using it in Iran. (Ironically, LUCAS is actually a copy of the Iranian Shahed drone.)

The excitement about the Pentagon’s change of approach is palpable. “It’s huge,” says Matthew Steckman, who oversees a significant portion of Anduril’s operations. “Every day you come to work and you’re basically responding to a new version of how the Department of Defense wants to speed things up.” The bureaucracy around defense procurement is shrinking. “They’re cutting paperwork like there’s no tomorrow,” says Steve Blank of Stanford University.

However, there are concerns that too much rush could backfire in a number of ways. For new players, the risk is that they take on too many commitments in too short a time and fail to keep up with the growth as contracts get bigger.

There are risks for the state, too. The Pentagon wants to move toward interoperable weapons systems, rather than the stand-alone platforms traditionally offered by large contractors. But some fear it could become too reliant on SpaceX’s launch and satellite services or the battlefield management systems being developed by Palantir and Anduril.

An additional risk is that the Department of Defense, enamored with the advantages of drones and similar systems, could neglect traditional weapons systems that would be crucial in a possible future conflict with China, due to their ability to travel long distances and penetrate advanced defenses.

For society at large, the Trump family’s growing ties to “neoprime” companies are also a cause for concern. When Palantir shares came under fire this month from bearish speculators, the president unexpectedly defended the company, even citing its ticker symbol: “Palantir Technologies (PLTR) has demonstrated extraordinary capabilities and equipment for waging war. Just ask our enemies!!!,” he wrote on Truth Social. Donald Trump Jr., his son, is a partner in the investment fund 1789 Capital, which invested in Anduril.

“Every investor on the planet is an investor in Anduril,” Stekman counters. Still, any perception of political bias could undermine the otherwise strong support that defense startups enjoy among many Democratic politicians, putting the companies at risk if Republicans lose control of the federal government.

Prepared by: NB