Valley of Value Destruction

The “Valley of Death” describes the period it takes the Department of War (DoW) to transition from prototype to contract. Companies caught in this valley often run out of capital before contract awards are announced.

However, surviving the Valley of Death is only a small part of the problem. Structural features of the defense market create the potential for a much larger challenge further down the road — the Valley of Value Destruction.

Valleys of DoW

Source: Marlinspike Research

Current efforts to reform and accelerate the acquisition process do not solve the deeper structural issues in the defense market. Even if the Valley of Death were reduced to a short ditch lasting only a few months, a larger problem remains: DoW procurement volumes are inherently limited, creating existential risks for companies once initial production ends.

Consider a simplified example.

Assume the DoW is procuring a new fleet of autonomous aerial tankers. The department determines it requires 100 tankers and awards a Program of Record immediately after production-ready prototypes are available. Assume further that DoW awards a five-year contract for all 100 aircraft at once.

Key assumptions:

• Tanker sale price: $5M

• Units ordered: 100

• Contract length: 5 years

• Sustainment cost: $5M per tanker over its lifetime

• Tanker life: 10 years

We modeled the company’s revenue trajectory below.

Source: Marlinspike Research

During the first five years, as the platforms are manufactured and delivered, the company experiences rapid revenue growth. However, once production is complete, revenues drop sharply and shift almost entirely to sustainment.

This collapse in revenue often occurs at the worst possible moment:

• The DoW has fully integrated the capability into its operational plans.

• The company begins shutting down or scaling back manufacturing lines.

• Investors suddenly see a steep decline in revenue.

• Raising new capital becomes significantly harder.

Investors who once celebrated a $500M contract now realize that exiting their investment may be extremely difficult.

The company has entered the Valley of Value Destruction.

While DoW contracts can be large, growth can plateau very quickly. Commercial markets face similar limits — for example, Tesla’s car sales cannot double indefinitely simply by selling more cars.

However, even if Tesla’s vehicle sales were to decline, the revenue drop would not approach the 80–90% collapse that many DoW suppliers can experience once procurement ends.

Primes Are Technology Companies

To understand how prime contractors avoid the Valley of Value Destruction, we must look at how DoW procurement actually works.

The DoW generates requirements, and primes convert those requirements into products. In effect, primes operate as long-term R&D organizations for the DoW.

Successful primes treat their capabilities as a portfolio of technologies that can be reused across multiple programs.

For example, Northrop Grumman’s nuclear technology expertise enables the company to dominate nuclear-related programs. Once platforms are delivered, sustainment revenues follow and typically represent 15–20% of company’s total revenue.

These revenues are relatively stable because:

• Nuclear systems are rare and highly specialized

• Few competitors invest in the necessary R&D

• Other primes focus on different technological domains

This dynamic explains why 70–80% of DoW contracts are often awarded to a single bidder. The outcome is not corruption — it is a natural consequence of technological specialization.

Defense Tech Companies Are Product Companies

Most venture-backed defense technology companies operate as product companies.

They build a product and attempt to sell it to the DoW — mirroring the model used in commercial markets. In those markets, growth comes from selling more units of the same product.

But defense markets operate differently.

• Missiles remain in service 15–20 years

• Submarines remain in service 40+ years

• Annual replacement rates are only 5–10% of total inventory

As a result, recurring revenues for DoW suppliers are relatively small compared with initial procurement purchases.

Prime contractors therefore behave very differently: they are constantly pursuing new R&D programs, almost functioning like long-term consulting firms for the DoW.

They continuously search for the next program, rather than relying on scaling a single product line.

If the United States wants to build a self-sustaining defense industrial base, the underlying business model must change.

Capability-as-a-Service (CaaS)

Consider the same tanker example — but purchased as a capability rather than a product.

A simplified contract might look like:

• $1M annual payment per platform for leasing and sustainment

• Five-year contract with five one-year extensions

• All additional costs passed through to DoW at cost, making total lifecycle cost roughly equivalent to outright procurement

Source: Marlinspike Research

Under a CaaS model, revenues stabilize rather than collapse.

After ten years, the DoW’s total cost may be similar to the procurement model. However, from a capital markets perspective, the difference is enormous.

Instead of facing a revenue cliff, the company maintains stable recurring revenue and can command a significantly higher valuation.

The CaaS model creates:

• Financially viable defense companies

• Predictable cash flows

• A stable base from which companies can fund R&D

Tesla, for example, uses cash flow from its automotive business to fund the development of Optimus robots. Similarly, stable tanker revenues could fund development of new robotic platforms across air, ground, sea, and space.

Operations & Maintenance vs Procurement

CaaS offers another important advantage.

It allows the DoW to rapidly deploy new sensors, payloads, and software systems because contracts would focus on capability delivered, not specific hardware configurations.

With innovation cycles accelerating, the current procurement and budgeting process (PPBE) is increasingly misaligned with technological progress.

For example:

• NVIDIA releases new chips every 12–18 months

• The PPBE budgeting cycle operates on 2–3 year timelines

This mismatch almost guarantees that the DoW remains permanently behind the technological frontier.

As AI shortens industrial product development cycles even further, the gap will only widen.