In 2022, next-generation battery company SES AI listed on the New York Stock Exchange and announced a major milestone: its lithium-metal batteries were undergoing verification testing by three major automakers 鈥?General Motors, Honda, and Hyundai. These three companies were also investors in the Massachusetts-based startup.

By last year, due to weak consumer demand in the electric vehicle market, all three automakers decided against using SES's batteries in their EVs. SES AI CEO Qichao Hu concluded that the company had to pivot away from the EV sector and find new applications for its batteries.

Hu stated last week that the surge in demand for drones, driven by the war in Ukraine, has created a massive opportunity for SES AI's battery business. The company is rapidly expanding production capacity at its Korean plant, planning to increase drone battery output fivefold by October to an annual production of 1 million cells, enough to power 100,000 drones. He noted that all cells comply with U.S. Department of Defense regulations, avoiding the use of raw materials sourced from China in American military equipment.

Even at this scale, production is still "insufficient to meet demand." Hu revealed via text message that the company is seeking additional manufacturing partners to fulfill orders for drone batteries that meet U.S. military standards.

SES's business boom in the drone sector reflects a potential turning point for the next-generation battery industry. Over the past three years or so, many battery startups have been trapped in the "valley of death": unable to secure a stable paying market, burdened by high costs, and generating minimal or no revenue. Several European and American battery companies have declared bankruptcy during this period.

However, in the last two weeks, the market has moved beyond sporadic drone and AI data center battery contracts. A surge of major deals has emerged, with numerous surviving startups and their backers entering the fray.

A wave of financing has followed: Form Energy, an iron-air battery manufacturer, completed a $750 million funding round; home energy storage battery company Base Power raised $1 billion; and silicon anode material company Sila Nanotechnologies secured a $1.4 billion conditional loan from the U.S. Department of Defense.

Additionally, silicon anode company Amprius Technologies raised its full-year revenue forecast from $130 million to $140 million and its expected gross margin from 25% to 28%. SES AI projects revenue of approximately $30 million this year.

These U.S. battery startups have not yet fully emerged from their difficulties. Amprius is expected to achieve positive EBITDA for the first time this year, but the others have not provided profitability guidance. Furthermore, according to Axios, Form Energy's valuation in its latest funding round was reduced to $1.75 billion, down from approximately $3 billion in its previous round in October 2024. The company declined to comment.

These developments suggest the industry is seeing the light at the end of the "valley of death." Simultaneously, investors have had to lower their previous expectations for revenue and profitability. In short, while drones, AI data centers, and potentially robotics in the future can generate substantial revenue and profits, the scale of battery production capacity required for these sectors is far less than that for electric vehicles.

Despite this, most investors believe there is a significant difference between a company with no commercial revenue and one generating millions in sales from its products.

The drone sector has been the first to generate cash flow for battery manufacturers, with conflicts in Ukraine and Iran reshaping battlefield and military strategies, serving as a key catalyst. Various unmanned systems have become a focal point, and lower costs are increasingly advantageous.

"Ukraine and Iran have shown the world the immense potential of autonomous systems," said Hallie Cheeseman, a former senior program director at the U.S. Department of Energy's Advanced Research Projects Agency-Energy and a battery expert. "Everyone is focused on drones, but Ukraine is also using autonomous water vessels and unmanned ground vehicles to attack Russian forces and evacuate wounded soldiers. From military leaders and politicians to the general public, everyone realizes that electricity and batteries are essential needs, making them critical areas for investment."

The drone boom has also improved the prospects for startups in the broader battery-powered vehicle sector. Several electric vertical takeoff and landing (eVTOL) companies have invested billions in R&D but remain far from commercial passenger profitability. Last week, several companies announced acquisitions to generate their first commercial revenue streams.

Aircraft manufacturer Archer Aviation last week acquired three Boeing subsidiaries, including Insitu. Archer stated that Insitu is already profitable as a standalone entity, selling $200 million worth of drones annually to the military. Joby Aviation agreed to acquire defense electronics company Resonant Sciences for $500 million, a company that saw 40% revenue growth last year to $100 million. Combined with the $100 million in annual revenue from its acquisition of Blade's air mobility helicopter passenger service last year, Joby Aviation is further diversifying its revenue streams.

Currently, eVTOL companies are still mid-sized customers for the battery industry, as none of their aircraft models are in commercial operation. However, the market expects that if the U.S. Department of Defense places large orders for hybrid military aircraft later this year or in 2027, these companies could grow into major battery buyers in the future.

Some battery startups still pin their hopes on the continued expansion of the U.S. EV market, which would drive demand for next-generation batteries. Yet, even if this expectation materializes, the market size is unlikely to reach the levels projected from 2020 to 2021 for at least the next five years or more.

But compared to being stuck in the "valley of death," the current environment of recovering battery demand and renewed capital attention is a welcome improvement. Cheeseman noted, "Both the policy climate and the business environment have shifted."