The defence technology market is experiencing one of the biggest booms in its history. What was once a closed niche for government contractors and major corporations such as Lockheed Martin and Raytheon is now rapidly opening to venture capital, private investors, and tech startups.
Defence tech is no longer synonymous with heavy tanks and nuclear warheads. It now encompasses artificial intelligence, unmanned systems, cyber defence, space reconnaissance, and biotechnology defence — sectors that are simultaneously transforming the military and civilian worlds. The question 'Should one invest in Defence Tech?' is no longer rhetorical — it is now a question of how and when to invest correctly.
Definition and main categories
Defence Tech is a broad term covering technological solutions primarily developed for defence, security, and the protection of state and critical interests. It includes software for real-time threat analysis, reconnaissance drones, secure communications systems, algorithms for autonomous decision-making on the battlefield, and solutions for cyber defence — protecting critical infrastructure, such as nuclear power stations and water supply networks.
Broadly speaking, the sector can be divided into several major categories.
The first category is cybersecurity and digital defence, which includes companies that protect government networks, military databases, and communication systems from cyberattacks.
The second category is autonomous systems and robotics, including drones, ground robots and underwater vehicles, which reduce human involvement in dangerous operations.
The third one is space defence and reconnaissance, which includes surveillance satellites, missile launch detection systems and protection against anti-satellite weapons.
The fourth variety is artificial intelligence and analytics, which includes platforms that process vast amounts of intelligence data, predict enemy movements, and optimise logistics.
And the fifth class is bio- and chemical defence, which includes technologies for the early detection and neutralisation of biological and chemical threats. Each of these categories operates within its own regulatory framework and offers different potential returns.
Why is this sector trending?
Whereas venture capital funds demonstrably shunned defence-related themes a decade ago, deeming them ethically ambiguous or too complex for exit strategies, the situation has now changed radically. There are several systemic reasons for this.
Firstly, geopolitical tensions. Russia’s full-scale invasion of Ukraine, the escalation of conflict in the Middle East and the competition between the US and China in the Pacific region have made defence spending a priority for governments worldwide. One after another, NATO countries are increasing their defence spending to 2% or more of GDP. Total global defence spending exceeded $2.718 trillion in 2024 and continues to rise.
Secondly, there is a technological gap between the commercial and military sectors. Historically, the armed forces were the driving force behind technological progress, funding the development of the internet, GPS, materials, and communications systems. Today, however, the situation has been turned on its head, with the private sector developing much faster. It means that the armed forces are now forced to purchase solutions from startups rather than the other way around. It creates significant opportunities for companies that understand the needs of defence clients.
Thirdly, there has been a shift in attitude in Silicon Valley. Following high-profile scandals, such as Google walking away from a contract with the Pentagon amid employee protests, attitudes have changed. Nowadays, companies such as Palantir, Anduril, Shield AI and many others are proud to collaborate with defence agencies and actively build their brand around this. It signals to the market that defence technology is legitimate and profitable.
Key differences from other startups
Regulation and the state
The main client in the defence technology sector is the state. Procurement procedures within the military and law enforcement agencies are strictly regulated and often transparent thanks to public tenders. However, they are also unpredictable in terms of timelines. Defence startups are required to hold the relevant licences, undergo security checks and comply with ITAR (International Traffic in Arms Regulations) requirements in the US, or equivalent regulations in other countries. Even hiring certain categories of foreign nationals can become a legal issue. The regulatory burden is real and substantial.
At the same time, however, the state is also the most stable client. Contracts with defence ministries are long-term agreements with predictable payments that are not affected by market conditions or consumer sentiment. If a startup is included in the register of suppliers and becomes part of the army’s critical infrastructure, its position becomes extremely secure.
A limited market
Unlike consumer products or B2B SaaS, the target market for defence technology is inherently small. There are only a few clients, such as governments, law enforcement agencies, private security firms and major defence contractors. Therefore, scaling does not come from attracting millions of users, but from expanding the customer base amongst this limited circle of clients. At the same time, this market is highly concentrated: winning a major government contract can instantly secure tens or even hundreds of millions of dollars in revenue.
Furthermore, it is worth noting that there are strict restrictions on the transfer of technology across countries in some defence technology sectors. For example, a company that has developed a cutting-edge system in the US may not be able to sell it to allies without special government authorisation. It restricts both geographical expansion and investors’ assessment of the potential market.
Long development cycles
While a medical startup may wait years for FDA approval, a defence company may wait years simply for standard field-trial clearance. It often takes three to seven years from the prototype to signing a contract. Sales cycles are measured in quarters, not weeks. It poses a challenge for venture capital, which is accustomed to quick exits.
Furthermore, defence technology often requires significant capital expenditure on equipment, certification and security. Developing expensive hardware, physical systems or complex software with specific encryption requirements is costly. However, it is precisely this high barrier to entry that protects the market from excessive competition.
How investing in defence tech works
The defence technology investment ecosystem differs significantly from the traditional venture capital market. It operates according to its own mechanisms for closing deals and its own valuation logic.
Who is investing?
There are several main categories of investors in defence technology. The first comprises specialised venture capital funds such as Shield Capital and Founders Fund, which have made notable investments in Palantir and Anduril. Other investors include In-Q-Tel (the CIA’s investment arm), the European Defence Fund, and state funds from NATO countries. These investors not only possess capital but also have access to restricted tenders, government contacts, and an understanding of the regulatory environment, which is often more important than the money itself for defence tech.
The second category comprises major defence contractors acting as strategic investors; examples include Lockheed Martin Ventures, Boeing HorizonX, and Raytheon Technologies Ventures. They invest in startups whose technologies can complement or expand their own product lines. Such an investor is often a startup's first real customer or partner.
The third category comprises traditional VC funds that are gradually lifting internal restrictions on defence-related investments, including Andreessen Horowitz (a16z), General Catalyst, and Sequoia. Between 2022 and 2024, several major funds established separate 'defence-thesis' investment strategies dedicated specifically to this sector. It signals to the market that mainstream venture capital has arrived in defence tech to stay.
How are the deals structured?
Deals in the defence technology sector have their own specific characteristics. Firstly, due to the sensitive nature of the subject matter, a significant proportion of companies and funding rounds are not publicly disclosed — startups avoid excessive media attention to prevent competitors or hostile states from discovering their technological capabilities. It makes it difficult for retail investors to access the market.
Secondly, deals often begin with government contracts, such as the US's SBIR (Small Business Innovation Research) programme, or equivalents in other countries. It effectively provides early-stage government funding for R&D. A start-up that wins such a contract receives validation from the government client and funding, which makes it significantly easier to attract private investment.
Thirdly, funding rounds in defence tech are often larger than in the consumer sector at similar stages; a Series A round can amount to $50–150 million, as the capital requirements for development and certification are high.
Types of startups in the defence technology sector
Not all companies in this sector are the same. Depending on their business model, the market in which they operate, and the technological nature of their products, there are several fundamentally different types of business within this sector.
‘Military-first’ solutions
These are companies that develop products exclusively or primarily for military use, such as guidance systems, tactical drones, combat robotic platforms and secure communication networks for the armed forces. Their market strategy depends entirely on their relationships with defence ministries and major defence contractors.
Anduril Industries is the most striking example: Palmer Luckey’s company creates autonomous border security systems, interceptor drones, and integrated combat management systems exclusively for security forces.
Dual-use technologies
It is perhaps the most attractive category for private investors. These are technologies that work equally well in both military and civilian contexts. A classic example is GPS, which originated as a military development and now underpins navigation in smartphones, aviation, and logistics.
Other modern examples include computer vision-based object recognition systems (used in both military drones and industrial automation), secure communication systems (required by intelligence services, corporations, and banks alike), and AI-based analytical platforms (valuable for intelligence and business analytics). A dual-use company has a broader customer base, reducing risk and expanding its potential market.
Infrastructure and deep tech projects
These are companies developing fundamental technological solutions, such as new materials for armour protection, quantum encryption systems, hypersonic engines, and nuclear micro-reactors for field use. Investments in this area are the most capital-intensive and have the longest development cycles, but the barriers to entry for competitors are virtually insurmountable. A successful deep tech company can dominate its market segment for decades.
Potential return on investment
Defence Tech has already proven its ability to generate exceptional returns. For example, in 2024, Anduril closed a funding round with a valuation of over $14 billion. By June 2025, the company had doubled its valuation to $30.5 billion in a $2.5 billion Series G round. Meanwhile, shares in traditional defence giants such as Lockheed Martin, Northrop Grumman and L3Harris showed steady growth amid geopolitical upheavals from 2022 to 2024, often outperforming broader markets.
According to analysts at McKinsey and PitchBook, venture capital investment in defence tech exceeded $30 billion in 2023 — a record figure. At the same time, the internal rate of return (IRR) in leading defence tech funds exceeds the market average over a 7–10-year horizon. The key reason for this is structural demand: governments never stop spending on security, regardless of the economic cycle.
Another argument in favour of returns is the unique competitive advantage of defence tech companies. Once a technology has been integrated into a military's critical systems, replacing it is extremely difficult, as it requires retraining personnel, upgrading infrastructure, and obtaining new certifications. In other words, once a defence tech company has secured a client, they retain them for years.
Key risks
Despite the promising outlook, defence technology is not risk-free. Those entering the sector without a clear understanding of the risks may be in for an unpleasant surprise.
The first and most significant gamble is dependence on the state budget. Changes in government, budget crises or shifts in security priorities could lead to contracts being cancelled or put on hold. A notable example of this is the US defence budget sequester in 2013, which had a severe impact on dozens of contractors. One way to address this issue is to diversify across several government clients and countries.
The second risk is technological. The military often requires technologies that have not yet reached a sufficient level of development. A startup may spend years developing a technology, fail to obtain certification and exhaust its capital before securing its first contract. It is particularly critical in deep tech, where the gap between a laboratory prototype and operational deployment can be enormous.
The third stake is reputational. Some investors, particularly in Europe, face pressure from Environmental, Social and Governance (ESG) agencies and public opinion regarding investments in weapons. Although attitudes towards defence technology are gradually changing, certain categories of funds and limited partners (LPs) still restrict such investments. For start-ups, this can mean a smaller pool of potential investors.
The fourth bet is geopolitical. A startup that relies on contracts with a single country or region is vulnerable to diplomatic crises, sanctions, and changes in alliances. A strategic partner today may find itself subject to a trade embargo tomorrow.
When is the right time to invest?
Defence technology is not a market for short-term thinking. The optimal investment horizon here is between five and ten years. However, there are several entry points within this timeframe, each with its own characteristics.
The greatest growth potential lies in the early stages, such as seed funding and Series A funding, when companies are formed that could become the next Palantir or Anduril in 7–10 years. However, the risks are also high, as most startups do not survive long enough to achieve commercial success. Investing at this stage is therefore only advisable for experienced investors with in-depth knowledge of the defence market, or for investors via specialised funds with the necessary expertise.
For a wider range of investors, the public market offers a more accessible route. Shares in Palantir, L3Harris, Kratos Defense, TransDigm Group and other publicly listed defence technology companies can be purchased through standard brokerage accounts. There are also thematic ETFs, such as the iShares U.S. Aerospace & Defense ETF (ITA) and the SPDR S&P Aerospace & Defense ETF (XAR), that provide diversified exposure to the sector, eliminating the need to select individual companies.
A key entry signal is growth in defence budgets in specific countries or regions. For example, if the parliament of a NATO country were to increase defence spending sharply, this would virtually guarantee demand for defence tech companies serving that market. Keep an eye on budget cycles and geopolitical triggers.
The future of the industry
The defence technology sector is on the verge of an unprecedented, transformative period. Several megatrends will influence its development over the next decade.
The first of these is the increasing autonomy of the battlefield. Unmanned systems have already altered the nature of modern warfare, and this is just the beginning. The next step is fully autonomous swarms of drones capable of performing complex tactical tasks without human intervention. Companies developing swarm-control platforms and autonomous decision-making algorithms are already prime targets for investment.
The second megatrend is the centralisation of artificial intelligence in defence. AI is currently being utilised to analyse satellite imagery, predict enemy movements, and optimise logistics. In the coming years, AI will become integral to command and control systems, directly influencing decision-making at all levels of the military. It represents a substantial market opportunity for defence-oriented AI companies.
The third area is cyber warfare as the primary theatre of conflict. Attacks on critical infrastructure, such as power grids, transport networks and the banking sector, are becoming a standard means of geopolitical pressure. Demand for cyber defence and cyber intelligence solutions will grow as society digitalises. The cybersecurity market is already worth hundreds of billions of dollars and shows no signs of saturation.
Fourthly, there has been a democratisation of defence technology in Eastern Europe and the Global South. The conflict in Ukraine has shown that smaller countries can develop and implement advanced defence technologies faster than larger, more bureaucratic organisations. It creates new investment opportunities beyond the traditional hubs of the US, the UK and Israel.
Defence tech represents a structural reorganisation of how states protect their interests and how private capital participates in this process. For investors willing to understand the specifics of the industry, accept its risks, and adopt a 7–10 year outlook, this is one of the most promising sectors of the coming decade.
