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| The Daily Pitch |
| VC, PE and M&A |
| Your edge on global private capital markets |
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| Welcome to the new week. Today's Daily Pitch features deep dives into defense tech and stablecoin dealmaking. And in case you missed it, our latest PitchBook-NVCA Venture Monitor is out and shows AI still leading the way. |
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| The Iron Bubble: Is defense tech overhyped? |
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By Leah Hodgson, Senior VC Reporter
VC funding for defense tech has climbed so high this year that even the term "record-breaking" feels inadequate.
According to PitchBook data, global VC defense tech deal value has already hit $7.7 billion this year. The rapid growth of VC funding has caused concern that enthusiasm may be outrunning fundamentals. But according to investors active in the vertical, the surge reflects a structural shift rather than a fleeting trend. |
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"I do not believe defense tech is in a bubble," said Lital Leshem, co-founder and managing partner of Protego Ventures. "What we are seeing is not speculative hype but rather an overdue rebalancing where capital is finally aligning with the strategic and societal importance of the sector."
Structural demand for defense tech suggests that there is substance beneath the hype. Global military expenditure is ramping up, while procurement timelines are shortening. Governments are increasingly awarding contracts to startups as they rectify years of underinvestment.
Recent exits are also proving that the vertical can yield financial returns for investors and their LPs.
"If we go back a few years, the market was flat and there was low defense spending across Europe," Sille Pettai, CEO of Estonian LP SmartCap, said. "We didn't see growth, and that's what we as investors are after. That's all changed, and financially, it's an attractive sector now."
Although Archangel GP Nicholas Nelson disputes the idea of a bubble, he does acknowledge that defense tech is in a hype cycle with valuations that are, in some cases, "out of control".
Certain market areas, like drones, are becoming overcrowded, and the influx of generalist investors in the space is blurring the lines between genuine innovation and adjacent technologies.
But as geopolitical tensions continue to rise, defense innovation and the capital that follows are not slowing down.
"We're starting from zero," Pettai said. "A few years ago, there was nothing, and now, a whole sector has emerged and to some, that might feel overwhelming or rushed. To say that it is mature or inflated, I would say no. Like any other sector in VC, not everyone is going to survive, but that doesn't mean that a bubble is emerging." |
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| A message from AlixPartners |
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| Be part of AlixPartners’ 11th annual leadership survey results |
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• Motive Partners rode a consolidation wave in the financial data and business intelligence sector to secure the $1.8 billion exit of With Intelligence. Bob Brown, founding partner of Motive Partners, talked to PitchBook about what's next for the sector. Read more
• European PE dealmaking gained momentum in Q3, with total value rising 25% quarter-over-quarter, driven by a rebound in mega-deals. Go deeper
• "When you see one cockroach, there are probably more," JP Morgan chief Jamie Dimon said, warning lenders to be cautious following the blowups of subprime auto lender Tricolor and auto parts maker First Brands. Read more |
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| Stablecoins' trillion-dollar rise meets the friction of traditional finance |
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By Michael Bodley, Senior VC Reporter
As stablecoins rapidly become indispensable to traditional financial institutions, their limitations are also becoming increasingly difficult to ignore, according to our latest analyst note.
To deliver on the technology's promise of minimal-cost transactions, stablecoins will need more liquidity and lower currency conversion costs to gain market share, according to the research.
"The whole narrative, broadly speaking, has been like, 'Oh, stablecoins are gonna' disrupt fintech and [traditional finance], and [decentralized finance is] going to take over everything," said Rudy Yang, a senior emerging technology analyst at PitchBook and author of the research. "That's not really the case—every stablecoin transaction is initiated from a bank account."
The market capitalization of all stablecoins grew more than 66% year-over-year to nearly $290 billion as of Oct. 1, according to the research. And adjusted annual transaction volume reached more than $7.2 trillion—more than half of Visa's annual payments processed. |
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| (Adriana Hansen/PitchBook News) |
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For financial institutions, transaction bottlenecks are emerging at the so-called on- and off-ramps to fiat currencies. Most banks have regulatory arrangements facilitated by clearinghouses that permit counterparties to exchange only net fiat transactions, rather than gross payment values.
For example: Bank A owes Bank B $10 million, and Bank B owes Bank C $10 million. Bank C, meanwhile, owes Bank A $10 million. The clearinghouse recognizes that all three transactions cancel out, and the banks don't have to earmark reserve capital. But in the case of stablecoin transactions, the absence of such clearinghouses means banks must handle them individually, which puts a strain on their balance sheets.
Private market investors are monitoring whether dipping interest rates and broader interest will lead to more M&A as corporates seek to catch up.
"Rates have gone down, and markets have stabilized, leading to better balance sheet forecasting, and that's also enabled more general dealmaking," Yang said.
The recently passed Genius Act did not address all questions, including responsibilities for a dispute related to a purchase completed via stablecoins. Traditional financial institutions have clear rules about this.
"There's just not a lot of protections on the payment side, especially for consumers," Yang said. "The financial services industry is an industry built off of trust at the end of the day." |
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Smart reads that caught our eye.
• Has AI broken the job interview? Job seekers submit floods of AI-curated resumes. Employers use AI to screen those resumes and even to conduct interviews. Now, applicants are using AI assistants during Zoom interviews. At what point is it cheating? [The Atlantic]
• Congrats. You’ve lived long enough to see the age of flying cars—privately owned, solo piloted, free to operate in unrestricted airspace. They're electric. And they're here. [ | | | | | | | |
