Tech bros are betting they can help win a war with China

About a year and a half after that conversation, Luckey left Facebook, freeing him to pursue a defense company with Stephens, whose venture firm, Founders Fund, would become a major investor.

Luckey, now 31, is a new breed of startup founder and defense-company executive. He is rarely seen wearing anything other than his trademark flip-flops and Hawaiian shirts, lashes out on social media against “idiots" who criticize his company, and says he models himself after a character in a Japanese anime series.

His company, Anduril Industries—named after a magical sword from J.R.R. Tolkien’s “Lord of the Rings" novels—is central to Silicon Valley’s quest to take on weapons makers like Lockheed Martin and Northrop Grumman. Since its founding in 2017, Anduril has raised $3.7 billion in venture funding, including $1.5 billion announced this past week. 

The newcomers’ hope is that the Pentagon will eventually kill off what Luckey calls “old legacy zombie programs," like expensive jet fighters and attack helicopters, and instead buy autonomous weapons, like drones and uncrewed submarines.

These weapons, Luckey argues, are needed for a potential conflict with China, which the Pentagon two years ago announced is the greatest danger to U.S. security. The U.S. military, Luckey and others say, needs large numbers of cheaper and more intelligent systems that can be effective over long stretches of ocean and against a manufacturing and technological power like China.

Anduril is so focused on a conflict with Beijing, Luckey says, that many teams inside the company are building only weapons that can be completed by 2027—the year Chinese President Xi Jinping has said his country should be prepared to invade Taiwan. The fictional sword for which Anduril is named is also called the “Flame of the West."

“We keep our eyes on the prize, which is great-power conflict in the Pacific," Luckey said in an interview at the company’s headquarters in Costa Mesa, Calif., south of Los Angeles.

The main building of the Anduril campus, a former Los Angeles Times printing facility, mixes tech-startup perks like a sleek gym and dimly lighted speakeasy-style bar with more typical weapons-industry paraphernalia, including displays of its drone aircraft and mini-submarine.

Anduril is part of one of the largest shifts to take place in the defense sector since World War II: the flow of venture-capital funding into defense-technology companies.

For decades, the U.S. government funded defense companies, like Lockheed Martin, to develop new weapons, ranging from stealth aircraft to spy satellites. But as the private-sector money available for research and development has outstripped federal-government spending, particularly in areas like AI, a new cohort of defense startups is using private capital to develop technology for the Pentagon.

The amount of private capital flowing into the venture-backed defense-tech industry has ballooned, with investors spending at least 70% more on the sector each of the past three years than any prior year. From 2021 through mid-June 2024, venture capitalists invested a total of $130 billion in defense-tech startups, according to data firm PitchBook. The Pentagon spends about $90 billion on R&D annually.

Riding a wave of private funding, hundreds of new companies have emerged in recent years, working on AI for the battlefield, drones, and even hypersonic missiles and aircraft.

There are now more than a dozen defense “unicorns"—privately held companies valued at $1 billion or more—including Anduril, Shield AI, Relativity Space and Epirus. Anduril is among the most visible and well funded of the group, and its success or failure will be a harbinger for the smaller defense and aerospace startups that have sprung up behind it.

Startups have so far captured just a tiny fraction of the Pentagon’s weapons-buying budget. Venture-backed companies for the past several years have received only about $5 billion annually in Defense Department awards, or roughly 1% of annual Pentagon contract spending, according to data compiled by defense-software company Govini.

One hurdle for the startups—perhaps the most significant—is proving they can manufacture weapons as well or better than traditional defense companies.

The grinding war in Ukraine, now more than two years old, and the threat of a widening conflict in the Middle East, may test whether betting on the Pentagon’s focus on a potential conflict in Asia is a winning strategy for startups. The U.S. industrial base has been slow to produce artillery shells and other heavy weaponry that a war with Russia requires, while startups with technology that could potentially help Ukraine, like drones, have struggled to adapt to a rapidly shifting battlefield.

Meanwhile, venture-capital enthusiasts worry the U.S. is moving too slowly to fund the sort of weapons needed—and companies to build them—for a potential war with China. Michael Brown, a former Pentagon official who was involved in early efforts to work with Silicon Valley, says the U.S. government isn’t spending nearly enough to pay for weapons needed to fight in Asia.

“I fear we would look back and say, what time did we squander?" said Brown, now a partner at the venture firm Shield Capital. “Because we should be rebuilding our munition supply. We should be getting more vendors in the fight."

A subterrene and other crazy ideas

The Pentagon is credited with helping to create Silicon Valley by plowing money into tech companies in the 1950s and ’60s, investing in electronics and buying microchips used in nuclear-missile guidance systems, satellites, and computers. That investment, says Paul Bracken, an emeritus professor of management and political science at Yale University, led the Defense Department to become, in effect, the “mother of all venture-capital firms."

But starting in the 1980s, Silicon Valley rode a massive wave of venture-capital investment in the commercial computer and software industries that overshadowed military work.

Interest in military work revived slowly. In 2015, Elon Musk settled a lawsuit with the U.S. Air Force that would pave the way for his rocket company, SpaceX, to compete in the military-launch market. That same year, the Pentagon opened a Silicon Valley outpost, called the Defense Innovation Unit Experimental, to work with tech startups.

The venture capitalists were initially reluctant, but Luckey had good timing and a compelling, if unusual, story. Luckey says he’s dreamed of starting a defense company since he was 7 years old, inspired by the anime character Seto Kaiba from “Yu-Gi-Oh," who developed virtual-reality tech for videogames, ran a weapons maker, and traveled in a dragon-shaped jet fighter.

“I someday would love to fly on my own fighter jet shaped like a dragon that I have designed and built, wearing a VR headset to pilot," Luckey said.

Luckey frequently quotes his fictional hero: “You said technology has limits. Wrong." Luckey leaves off the rest of the line, which ends “…when you’re as brilliant as Seto Kaiba."

Luckey followed closely in Kaiba’s footsteps. At 19, he was living in a camper trailer in his parents’ driveway in Long Beach, Calif., building virtual-reality headsets for videogamers.  In 2014, Facebook—now known as Meta Platforms—bought Luckey’s company, Oculus VR, making him a billionaire.

In 2016, at the height of the presidential campaign, Luckey, a longtime supporter of Donald Trump, donated to an anti-Hillary Clinton group. Months later, Mark Zuckerberg, Facebook’s CEO, fired him. Some people close to Luckey attribute the ouster to his political views, an explanation the company has denied. Regardless, it freed Luckey to start Anduril, just as venture firms were starting to show interest in the defense business.

One of Anduril’s early contracts was a deal worth up to $400 millon to help secure the southern and northern U.S. borders with sentry towers that can automatically detect incursions. The company says it now has about 300 of these towers installed along the border with Mexico. In 2022, it won a contract with Special Operations Command worth nearly $1 billion to build counterdrone systems.

Anduril executives are aiming higher, targeting the kind of multibillion-dollar weapons programs now dominated by established defense contractors. Earlier this year, it took a step into that league, scoring one of two contracts to develop uncrewed jet fighters for the Air Force.

Luckey encourages even more ambitious pursuits, including in a freewheeling exchange on a company Slack channel called “Crazy Ideas."

His own crazy idea: a weapon for underground warfare.

“The next warfighting domain is the subterranean domain," Palmer said. “I’m talking about the full three-dimensional volume of at least the upper crust of the planet as a place that you can move through and fight in."

To prepare for this possibility, Luckey has Anduril looking at something called a subterrene—essentially an underground submarine that tunnels through the earth using electricity or an onboard nuclear reactor. Luckey learned about this vehicle in technical concept papers from the Cold War he found online. The underground vehicle has never been built, and when it was studied in the past, was found to be prohibitively expensive and of questionable value to the military.

Even Anduril’s top executives acknowledge that this sort of project is far-fetched, but say it reflects the sort of unconventional thinking that makes Luckey successful.

Matthew Steckman, Anduril’s chief revenue officer, says the company’s work on the subterrene concept doesn’t cost much, but if it does pan out, it would be “really freaking cool."

Deep pockets and an iron grip

Startups like Anduril largely focus on weapons to deter China, because the Pentagon has defined it as the primary threat, and because a war with Beijing, they argue, would require the kinds of weapons that tech companies build. China has moved forward more quickly than Russia with advanced military technology like hypersonic missiles and AI-controlled weapons.

But when Russia, which the Pentagon regards as a secondary threat, launched its full-scale invasion of Ukraine in 2022, a number of the new Silicon Valley startups rushed to help Kyiv. Palantir Technologies CEO Alex Karp traveled to Ukraine personally just months after the invasion. A number of American startups sent drones, including Anduril, which provided Ghost, a small autonomous aircraft.

Most of those efforts failed to gain traction.

In Ukraine, American drones were frequently jammed, failed to fly or suffered other setbacks on the battlefield. Palantir, which makes software used for targeting, has yet to score any major contracts in Ukraine, and Anduril’s Ghost had difficulty coping with Russian jamming, according to people familiar with the matter. It took Anduril about a year to produce an improved drone.

Palantir, like Anduril, derives its name from “The Lord of the Rings," and shares a common investor: Founders Fund, the venture firm launched by PayPal co-founder and libertarian firebrand Peter Thiel.

The problem with Silicon Valley’s attempts to field weapons in Ukraine is that startups had, for the most part, never deployed their technology into a war zone, said Andrey Liscovich, the head of the Ukraine Defense Fund, which raises money to help send drones and other equipment to Kyiv’s military forces. “They’re not close to the end users," he said, “and they can’t really test things in comparable environments, unfortunately."

Another challenge for the tech companies is that the Ukraine war is heavily dependent on the mass production of artillery and ammunition. In 2022, Pentagon acquisition chief Bill LaPlante lashed out at traditional arms companies for slow production and defense startups for focusing on technology that couldn’t be used anytime soon. “The tech bros aren’t helping us that much in Ukraine," he said.

In a statement to The Wall Street Journal last year, LaPlante said that he was criticizing “aspirational, often elusive technology," and he lauded companies, including Palantir and Anduril, that had delivered tech to the battlefield, as well as SpaceX, whose Starlink satellites have been critical for Ukraine’s military.

For the startups, proving they can mass-produce will be critical. Anduril on Thursday announced plans for a series of new factories that it said could produce weapons in the tens of thousands. Rival executives have said such plans won’t make supply-chain problems go away.

“We don’t shy away from competition," Chris Kubasik, CEO of defense giant L3Harris Technologies, told investors earlier this year when asked about the challenge of Anduril to its rocket-motor business. Kubasik said new entrants still rely on the same set of suppliers, many of whom are struggling to meet demand.

Anduril will also need to convince its investors that it can eventually win enough Pentagon business to support its valuation, which is currently at much higher multiples of revenue than traditional defense companies.

The $1.5 billion funding round that Anduril announced this past week values the company at $14 billion—around 28 times the approximately $500 million people familiar with the matter say was its revenue last year, a figure the company doesn’t disclose. By comparison, Lockheed Martin, the Pentagon’s top defense contractor, is currently valued at about $131 billion, slightly less than twice its annual revenue.

Therein lies the difficulty for startups like Anduril, which says it wants to go public in the next five years. The billions of private capital dollars flowing into defense are subsidizing R&D in anticipation of big payoffs. If those startups go public, the companies will face pressure from investors to minimize costs and maximize profits, cutting into their ability to fund their own R&D.

Asked how Anduril would maintain its ability to plow money into innovation once it is subject to some of the same market forces that large defense companies face, Luckey points to the role of founders like himself, and Musk: big personalities with deep pockets and an iron grip on their companies. They can bend companies to their wills, he said, even if their investors are pushing for faster returns.

“I want my investors to get a return, but I am clearly not doing this because I think it’s the best way for me to make money," he said. “There’s way easier ways to make money than to drag it out of the government."

Doug Cameron contributed to this article.