The Tool Desk
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Why is prototype funding different from funding production?
Building and demonstrating a product can be a discrete project; producing it for government use requires a buyer and a way to pay for continued development, manufacturing and adoption. The Defense Innovation Board (DIB) describes this as a difficult transition for nontraditional vendors: they can struggle to access dedicated capital while investing resources to move prototypes toward production.
In its January 2025 report, Scaling Nontraditional Defense Innovation, the DIB identifies several factors behind that gap in the U.S. system:
- Budget complexity: The Planning, Programming, Budgeting, and Execution (PPBE) process can make it difficult to connect a promising prototype to the funding needed to buy and field it.
- Unclear follow-on contracting: The report identifies a lack of clear guidance and support for using Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Phase III contracting.
- Uncertain funding after an award: An SBIR/STTR award does not by itself establish how a company will finance the next stage or obtain a production purchase.
These are connected obstacles: a company may need to keep developing its product while waiting for a customer organization and budget to take responsibility for the next step. Private investment can support that work, but it is not itself a government purchase commitment.
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Does substantial private investment mean startups can count on DoD contracts?
No. Private investment, government contract awards and a national defense budget allocation are different measures. The figures below illustrate why they should not be treated as interchangeable or as a single trend line.
| Measure | Reported figure | What it describes |
|---|---|---|
| Private investment in defense technology startups | More than $130 billion invested since 2021, according to the U.S. Department of Defense Defense Innovation Board’s 2025 report. | Venture and other private capital allocators investing in areas including advanced computing and software, sensing, connectivity and security, biomanufacturing, and autonomous systems. It is not a measure of DoD procurement or investment in 2026. |
| Venture-backed companies’ share of DoD contracts | Less than 1 percent of $411 billion in DoD contracts in 2023, according to the Center for Strategic and International Studies (CSIS) in 2025. | A reported share of U.S. contract dollars awarded in that year, not a measure of private investment. |
| Ukraine’s drone-procurement allocation | 1 percent of Ukraine’s acquisition budget in FY2024 and 6.7 percent in FY2025, as reported by CSIS in 2025. | A separate country’s acquisition-budget allocation. CSIS presents stable demand as an incentive for private investment; these percentages are not U.S. figures and do not establish that an allocation guarantees a company’s success. |
The comparison highlights a commercial challenge: investor interest in a technology category does not guarantee that a startup will win a contract, or that a contract will provide the stable repeat demand needed to scale.
Why can a successful demonstration still fail to become a fielded product?
A demonstration proves something about the technology; it does not automatically resolve who will adopt it, which acquisition authority will buy it, or where the money for production will come from. The Government Accountability Office (GAO), in its February 27, 2025 report on the Defense Innovation Unit (DIU), describes long DoD acquisition timelines and difficulty transitioning commercial solutions to DoD users for production and fielding.
The handoff needs an accountable buyer and a funding route
After a prototype or demonstration, the startup needs a customer organization prepared to adopt the product, an acquisition route that can result in a purchase, and a budget and plan for transition. If one of those pieces is missing, a company can have a working product without a clear route to production. GAO also reported that DoD had not documented how DIU would assess its progress in coordinating commercial technology adoption. That points to a coordination and measurement challenge, not proof that DIU or every innovation pathway cannot help connect companies with users.
How does demand stability affect a startup’s ability to scale?
Production investment is harder to plan when future government demand is uncertain. A company weighing whether to build capacity needs a credible route from an initial adoption to ongoing purchases; a prototype award or demonstration alone does not establish that route.
CSIS’s Ukraine example shows how a dedicated budget allocation can signal demand to suppliers. It is a comparison, not evidence that a particular procurement policy alone caused company growth or that the same approach would produce the same result in the United States. The broader issue for a startup is whether a customer has both a reason and a budget to buy beyond an initial trial.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What extra barriers can appear when a startup seeks allied or export markets?
International growth can widen the customer base, but it may also add compliance and coordination work. In its July 1, 2025 analysis, Overcoming the Barriers to Forward Deterrence, CSIS reports that allied partners described International Traffic in Arms Regulations (ITAR) and technology-security and foreign-disclosure requirements as particularly challenging. Partners also cited unclear and lengthy Foreign Military Sales (FMS) approval times, multiple U.S. stakeholders, and compliance delays and costs.
These are possible scaling frictions, not burdens that can be assumed to apply identically to every startup or product. Their relevance depends on the technology and the markets a company is pursuing; a business focused on U.S. customers does not face the same international sales pathway as one seeking allied procurement.
Best Value
How can investors and founders assess whether a startup has a credible path to scale?
Look beyond the prototype and ask whether the company has connected technical progress to a plausible customer, budget and production path. The following framework synthesizes the barriers described by the DIB, GAO and CSIS; it is a set of questions, not a tested ranking or a guarantee of success.
- Is there a funding path beyond the prototype? Identify how development and transition are expected to be funded, including what happens after an SBIR/STTR award.
- Is a specific government user identified? Establish which organization is expected to adopt the technology and who can move it through an acquisition route.
- Is there a budgeted transition or repeat-buying route? A demonstration is not a production plan; look for a credible link to a purchase and continuing demand.
- Can production meet the expected demand? A plan to scale needs to connect the expected purchases with production capacity and supply.
- Do target markets fit the compliance pathway? For planned allied sales, consider export, foreign-disclosure and procurement requirements alongside the U.S. route.
A startup is better positioned when these parts reinforce one another: a user can adopt the product, an acquisition and budget route can fund it, and the company can deliver at the required scale. The cited reports describe systemic obstacles, not a rule that every defense startup will encounter every barrier.
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