Burgeoning Hedge Strategy Amplifies Commercial Technology In Defense

Advancing the Mix of Defense Capabilities

The President’s defense budget, released in June, embraces a vision of balancing traditional platforms with new digital technologies—a “Hedge Strategy”—at a pivotal moment for military modernization. This “high/low” approach, enables the U.S. military to complement its arsenal of (high) expensive defense platforms of ships, tanks and planes with new capabilities such as small, inexpensive, AI-enabled and upgradeable unmanned systems (low). Hedge Strategy is a term coined by Rear Admiral (retired) Lorin Selby and me in a paper we co-authored in 2022. Later that year, Rep. Ken Calvert, Chairman of the House Appropriations Committee—Defense (HAC-D), called for adopting new technologies—predominantly commercial technologies—as a hedge strategy and provided increased funding for the concept. Today, the vision is becoming a reality on a much larger scale.

America’s military arsenal now includes an increasing inventory of unmanned systems across air, sea, and ground, along with a proliferated constellation of small satellites. Harnessing leading commercial technologies, these capabilities weren’t mature enough to be on the battlefield a decade ago but have proven instrumental in Ukraine and other recent conflicts. In fact, in describing the War in Ukraine a few weeks ago, former Undersecretary of Defense for Policy, Colin Kahl, observed that this war is a surprising mix of the trenches and artillery shells of World War I with World War III. We haven’t left the industrial age of armaments behind, but armaments are now complemented by drones and emerging digital technologies which, in combination, are game-changing capabilities a modern military cannot live without.

Recognizing this, Congress has strongly supported the organizations within the Defense Department which focus on commercial capabilities such as the Defense Innovation Unit (DIU), whose budget has increased ten-fold in the last three years to $2 billion for FY26, and the Office of Strategic Capital, which now can offer up to $4 billion in loans for component technologies like batteries and rare-earth magnets that are critical for defense.

The Defense Department must pivot quickly to adopt new capabilities to augment what’s in place and do so with more cost-effective technologies. In other words, our military must shift from expending the U.S. Navy’s multi-million dollar missiles to neutralize Houthi low-cost drone attacks. Additionally, we must embrace more nimble and asymmetric warfare like Ukraine’s recent Operation Spider’s Web. Systems that provide low-cost, attritable mass, better tactical situational awareness, and optimized decision-making by fusing multi-modal data in real-time all reinforce the mix shift towards new capabilities. Traditional primes like Lockheed Martin and L3Harris, along with emerging primes like Anduril, are advancing lower-cost, mass produced munitions to improve defense-offense cost ratios.

$1 Trillion for Defense

The appropriations landscape today is multifaceted. For the current fiscal year—FY25–Congress did not pass a defense budget, so the Defense Department operates under a Continuing Resolution which is less efficient than an on-time budget since a CR usually means no annual spending increases (regardless of inflation) and no new program starts. For next fiscal year—FY26, which begins this October—the President submitted his budget four months late which puts a burden on Congress to appropriate funds on time. The FY26 budget request at $831.5 billion is only slightly larger than last year’s $825 billion.

However, Congress recently passed the Big Beautiful Bill (or Reconciliation) which includes $150 billion of additional and multi-year defense spending for the next five fiscal years with $133 billion planned in FY26. Defense spending in FY26 might include the regular appropriation of $831.5 billion plus $133 billion plus around $40 billion for nuclear refurbishment executed by the Department of Energy. This combination pushes top-line defense spending to a record $1 trillion. However, this level of spending, as a percentage of U.S. GDP (estimated at $30 trillion for 2026), is only 3.4% of the economy. Historically, the U.S. has spent much more on defense: 6% in the Reagan build-up, 9% in the Vietnam War and routinely 8-10% in the 1950s. The cost of fighting (and potentially losing) a major war with China is far more costly than what the U.S. spends on defense. With a nod to Ronald Reagan, President Trump’s “Peace through strength” policy means the U.S. must continue to invest to deter adversaries from initiating future wars.

A $1 Trillion defense budget is likely to become the norm as geopolitical tensions suggest we will be in a great power competition with multiple capable adversaries for years to come. Our adversaries, especially China, recognize that new technologies can deliver battlefield advantage and our adversaries are sharing military technology and strengthening each other’s supply chains. As a result, the race is on to invest in new capabilities and adopt them rapidly to yield a military edge. In addition, the U.S. must rebuild with its allies the ability to sustain manufacturing for the materiel needed in a conflict.

Golden Dome, All Types of Unmanned Systems, and AI

Specifically, there are several initiatives fueling large spending increases that should benefit commercial technology vendors. Perhaps most visible is the President’s Golden Dome estimated at three years and $175 billion or more to develop. The FY26 down payment on this initiative is $25 billion with two-thirds for more and better sensors from space that could detect enemy missiles, improvements in standardized satellite manufacturing, and better ways to search and process the increasing amount of space-based imagery. DoD will heavily leverage commercial solutions in delivering Golden Dome.

For the first-time, there are large, dedicated budget lines for aerial, ground-based, maritime surface and underwater autonomous systems, totaling $16 billion including AI-based software to control them. A partial list includes $1.4 billion for small unmanned aerial vehicles like the first-person view drones in Ukraine, $2 billion for medium maritime surface autonomy, $.7 billion for underwater autonomy, $1 billion for one-way aerial attack drones, and $3 billion for systems to counter drones.

In AI-based software, spending will increase 50% from $1.5 billion to $2.2 billion according to defense data provider, Obviant. This should significantly expand the military’s adoption of AI-based commercial applications such as modeling and simulation for logistics, analyzing the electromagnetic spectrum, code generation and modernization, and other AI-native applications like agentic workflows. The Pentagon’s Chief Digital and Artificial Intelligence Office recently awarded four contracts (each worth up to $200 million) to the leading large language model providers so that, analogous to the Department’s multi-cloud strategy, the Pentagon can make use of multiple models for better decision making.

So What?

The upshot of this shifting mix of capabilities is a much more favorable environment for commercial technology adoption with opportunities for new vendors. The defense primes have consolidated 90% over the last 30 years to only five companies. While there are only one to three primes competing for major weapon systems, there are dozens of companies producing unmanned systems, software. and space solutions. As the Department buys these new capabilities, there is a much-needed opportunity to expand the supply base.

In addition, both the Congress and the Administration have been rapidly ordering changes to streamline the requirements, budget and acquisition processes that underlie the historically long timeframes to deliver new warfighter capabilities. The SPEED Act and FoRGED Act will include some of the biggest reforms in decades much of which will be incorporated in this year’s National Defense Authorization Act. The President has already issued six Executive Orders to modernize defense acquisition, realize American drone dominance and rapidly increase shipbuilding capacity. The process changes incorporated in these Orders reinforce existing law that the military should buy commercial first wherever possible (rather than unique military items) and emphasize commercial methods of procurement (leveraging Other Transaction Authority vs. Federal Acquisition Regulations). Additionally, the Department should use a modular open-systems approach when designing large platforms that allows for substituting more capable subsystems on a faster cycle (rather than buying a set specification from a single vendor for decades). These changes create an inflection point for commercial technology adoption.

In an increasingly dangerous world, we are entering a new era of record defense spending and the adoption of commercial technologies to augment current capabilities. The Trump Administration is striving for real reform in what’s being bought and how it’s being bought—doubling down on acquisition tradecraft pioneered by the Defense Innovation Unit as described in the book Unit X. Consequently, these process simplifications make it more attractive for venture-backed companies to develop a defense business.

Hedging existing military capabilities with solutions from defense tech vendors not only complements what defense primes can do with large platforms (ships, planes and tanks) but also brings more competition to defense procurement with companies that can ramp manufacturing quickly. Today’s arsenal of democracy needs to not only be better stocked but also stocked with more modern capabilities. Additionally, the arsenal should include companies that can iterate capabilities with warfighter feedback since improvements on the battlefield now happen in hours not years. Ukraine demonstrates that wars are never won as rapidly as aggressors imagine before the conflict. Consequently, success requires new capabilities that evolve rapidly plus sufficient industrial capacity to sustain a war effort for years.