Displacing Prime Contractors in Defense
Ross Fubini, Managing Partner at XYZ Capital, on the defense tech opportunity
Anduril is competing less against a better startup than against a defense buying system built to favor incumbents. The hard part is not inventing a stronger drone or sensor tower. The hard part is prying budget, trust, and program ownership away from primes that already sit inside long procurement loops, run cost-plus contracts, and know how to turn small footholds into decade long programs. Anduril broke in by self funding products, shipping fast, and proving them in live programs.
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The incumbents advantage is structural. Primes win because the government already knows how to buy from them, budgets around them, and tolerates slow custom development. A startup has to be step change better, not 20% better, because switching vendors means years of new approvals, testing, and political work.
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Anduril got around that by selling finished products instead of waiting for the government to fund custom R&D. It started with border surveillance towers, won an early $12.5M Marine Corps contract, then used the same software base to move into counter drone systems and larger programs, including billion dollar scale work.
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That is why companies like Shield AI or Forterra are better understood as adjacent next generation contractors than direct Anduril clones. Shield AI focuses on autonomy software for aircraft and drones. Forterra focuses on autonomy kits for ground vehicles. Anduril is broader, it is trying to become a new prime across multiple hardware and software categories.
The next phase is less about proving a wedge product and more about replacing prime level capacity. As Anduril scales factories, expands product lines, and bundles hardware with software across more programs, the contest shifts from winning demos to becoming a default procurement choice. That is when displacement stops looking symbolic and starts moving real budget share.