The Rise of Defense Tech – Why VCs Should Pay Attention

efense-focused startups are drawing record venture investments as global threats mount, a boom that presents both big opportunities and complex questions for investors.

Once a niche backwater, defense technology (“defense tech”) has recently exploded into one of the fastest-growing areas of venture capital. Investors who long shunned military-related startups are now pouring capital into them amid rising geopolitical tensions and rapid advances in tech. Consequently, defense tech funding is surging, even as broader VC markets remain somewhat sluggish, suggesting this is more than hype: it’s a structural and cultural shift. For VCs, the message is clear: ignore this sector at your peril.

Behind the Surge

Security Incentives: Geopolitical instability has fundamentally changed the calculus for tech investors. Russia’s 2022 invasion of Ukraine was a turning point, convincing many in Silicon Valley to back “weapons of war” as they watched cheap drones and AI-driven systems alter battle dynamics. Conflicts from Eastern Europe to the Middle East, plus great-power tensions with China, have underscored the need for cutting-edge defence capabilities. National defence budgets are swelling (the U.S. is eyeing a near-$1 trillion budget, and global military spending rose by almost half a trillion dollars from 2020–2024), and governments are demanding innovation. This has created a powerful incentive for private capital: there’s real money on the table for anyone who can deliver modern defence solutions faster and cheaper.

Capital Flows & Market Structure: Where that money goes is shifting. Historically, the defence industry was dominated by a handful of giant contractors, and startups were largely shut out. Venture investors saw the sector as too slow, bureaucratic and ethically fraught. But today’s threats demand agility that big incumbents often lack. Governments are actively seeking new vendors “agile enough to deliver modern solutions” at the speed of emerging threats. NATO’s member states have even launched a €1 billion multi-national innovation fund to back defence and security startups. In short, the door has been kicked open for venture-backed firms. For investors, this sector has turned from fringe to mainstream: PitchBook data shows nearly 8% of all VC funding globally now goes into defence tech ventures as of late 2025. The question is no longer whether to pay attention, but whether and how to participate effectively in a market that’s maturing at record speed.

By the Numbers: A Rapid Surge

The scale of the defence tech boom becomes clear in the funding stats. Precise figures vary by source, subject to sectoral definition, but all tell a story of sharp growth:

• Steady Growth Despite VC Slump: In 2023, while overall venture funding fell, investment in defence-related startups held firm and even grew. According to Pitchbook, defence-tech investment was roughly equal in 2022 and 2023, compared to a significant broader VC downturn. By mid 2024, the trend was accelerating, with already $3 billion invested in defence startups in the first half. This bucks the trend. Globally, total VC funding was trending down in 2024, yet defence sector funding rose year-on-year.
  
  
• Recent Record Highs: 2024 marked a breakout. According to Crunchbase’s narrower definition (covering military, national security and law enforcement startups), venture funding to defence tech companies rose by 11% from 2023 to 2024. And 2025 is on track to dwarf those figures. By September 2025, VCs had already poured over $28 billion into defence tech startups that year, focusing especially on “dual-use” technologies (systems with both military and commercial applications like robotics, cybersecurity and space). Notably, in Europe, defence tech funding has roughly doubled year-on-year; NATO countries’ startups raised ~$9.1B in the first nine months of 2025, up from $6.5B in all of 2024.
  
  
• Outpacing Other Sectors: Relative to other industries, defence tech’s growth is striking. In Europe, it has become the fastest-growing category in venture capital, rising from virtually nothing to about 4% of all VC funding on the continent (and over 6% in the EU). By contrast, staples like fintech or consumer internet have recently stagnated, leaving GPs looking to alternatives.

Notably, this surge is not only led by small ventures, but also by massive industry titans. Anduril’s 2024 $1.5 billion Series F and Helsing’s 2025 €600 million round showcase significant late-stage action. The upshot is that, in addition to a flurry of smaller, innovative ventures, there is also substantial capital, talent, and top-tier firms that are now fully engaged in defence tech.

Implications for Investors and Founders

For venture capitalists and founders, the rise of defence-tech carries important implications:

• From Frontier to Core: Defense tech is no longer a fringe “frontier” allocation, it’s edging into the VC mainstream. Established firms like Andreessen Horowitz have launched dedicated practices (e.g. A16Z’s “American Dynamism” fund) explicitly to invest in national security sectors. Specialist defence VC funds are springing up in both the U.S. and Europe (the number of dedicated European defence-tech funds has more than doubled since 2022). Generalist VCs, too, are making room: major players such as Founders Fund, General Catalyst, Lightspeed, and Index have led sizable defence rounds. In practical terms, VCs should treat defence tech as a potential core allocation in portfolios, not just a novelty. Recent data suggests nearly one in every twelve VC dollars now goes to this sector in late 2025, a share that would have been unthinkable a few years ago.
  
  
• Strategic Positioning and Expertise: Succeeding in defence tech requires more than writing checks. Investors and founders in this space need to appreciate that defence is not a typical market. Selling to militaries involves navigating unique procurement processes, long sales cycles, and an alphabet soup of acronyms and regulations. This can be a nightmare, or a competitive moat. The complexity means casual tourist investors might get burned, but those willing to develop or attract deep expertise can gain an edge. We’re already seeing a cross-pollination of talent: ex-Pentagon officials and military officers are moving into venture roles to guide startups through the bureaucracy. For example, former U.S. Defence Secretary Mark Esper joined a venture firm to back military software startups. Startups themselves are hiring advisors with defence pedigrees and securing ex-generals on their boards. This all points to a need for specialised support through subject matter expertise, procedural familiarity and unparalleled access. Firms that cultivate this insider knowledge will be better positioned to pick winners and help their portfolio companies cross the finish line.
  
  
• Dual-Use and Diversification: Another strategic consideration is the dual-use nature of many defence technologies. Startups that can serve both military and civilian markets (e.g. satellite tech, AI analytics, cybersecurity) often have a stronger hand. They can tap commercial revenue streams while awaiting military contracts, and they appeal to a broader set of investors. Many defence-tech founders now pitch their companies not just as arms makers, but as platform tech businesses with multiple addressable markets. This isn’t just buzz: AI and cybersecurity startups in defence often find clients in finance or manufacturing too. For VCs, backing dual-use tech can be a way to hedge bets and justify investment even if the pure defence TAM (total addressable market) is hard to gauge. It’s also a way to navigate ethical considerations, since a dual-use product (like an AI platform) can be framed as having positive civilian uses alongside defence applications.

Risks, Challenges and Controversies

No sector surge comes without scepticism. It’s essential to address the risks and counterpoints that surround the defence tech boom:

1. Ethical Dilemmas: The most obvious pushback is moral. Critics argue that profiting from warfare tech is a dangerous path, raising questions about whom these innovations ultimately harm or protect, and how they do so. There’s also a reputational risk. Today’s celebrated defence startup could tomorrow be linked to a controversial military action. We saw a flash of this debate in 2018, when Google faced an employee revolt over assisting a Pentagon AI drone project (Project Maven), leading the company to pull out of the contract. Such incidents highlight a real unease: some technologists and investors fear enabling lethal autonomous weapons or oppressive surveillance. While much of Silicon Valley’s outright resistance has “melted away” since the Ukraine war, these ethical questions linger in the background.

As such, VCs entering the space need to “say the quiet part out loud” and acknowledge the moral complexity up front. At minimum, investors must be prepared to justify how they reconcile backing defence ventures with their values (e.g. some frame it as investing in deterrence and safety rather than aggression). However, ideally, more would be done here. Limited partners may also scrutinise defence-heavy funds for alignment with their own ESG policies.

2. Procurement and Scaling Challenges: From a business perspective, defence tech startups face a brutal uphill climb in converting innovation into revenue. Selling to militaries involves navigating red tape that can stretch sales cycles to years, not months. The U.S. DoD isn’t a monolithic “customer” but hundreds of different offices, each with its own budget and bureaucracy. A startup might win a small pilot contract or R&D grant, only to languish before it ever lands a big production deal. This has historically stymied many would-be “defence disruptors.” It’s telling that fewer than 1% of U.S. defence department spending has gone to startups historically; the vast majority still flows to established players. Founders in this space often describe catch-22 dilemmas: you need a government contract to prove your product, but you can’t get one without a proven product. There are signs of improvement; the Pentagon has introduced initiatives to streamline startup procurement, and officials publicly encourage working with tech innovators. Still, any VC backing a defence startup must price in the likelihood of longer runways and the need for patient capital. The flip side is, once a young company does break into a program of record, the contracts can be large and enduring, and the very bureaucracy that was a barrier can become a moat against new competitors. It’s a high-bar, high-reward equation.

3. Exit and Return Uncertainty: There remains scepticism around whether these defence startups actually deliver venture-scale returns. There have been only a handful of big exits so far, like BlueHalo’s $4.1B’s acquisition and a few public listings in related sectors. According to PitchBook, the defence tech space saw 39 exits totalling just $2.2B in 2023, though 2024 was on track to beat that, with 35 exits worth $8.3B by mid-year (a number boosted by a few larger deals). Another concern is valuation: many defence startups are raising money at tech-like valuations (10-20x revenue projections), yet their most likely exit is to a large defence contractor that typically pays far lower multiples. Whilst Palantir and Rocket Lab’s public performance can help assuage doubts here, these concerns persist. As such, VCs need to be clear-eyed about exit strategy (e.g. have corporate/strategic investors on board who might acquire) and not simply assume every defence bet will have the same exit options as a SaaS company.

4. Geopolitical and Regulatory Risks: Finally, macro risks cannot be ignored. Defence tech fortunes rise and fall on geopolitical currents. If, say, a major conflict driving urgency were to resolve or a political administration shifted priorities away from modernisation, the funding tide could recede. Export controls or security regulations could also impact startups, e.g. limits on selling certain tech abroad might cap market size. Internationally, not all countries view defence VC the same way; a startup operating in Europe faces a patchwork of regulations on tech transfer and a generally smaller defence market per nation (though EU-wide initiatives are trying to change that). These factors add uncertainty, but also underscore why many investors view defence tech as a hedge against exactly these turbulent times. In a sense, the risk of conflict is the reason this sector exists, and that risk isn’t going away in the foreseeable future.

Throughout all these counterpoints, one thing remains clear: the defence tech sector is not a free lunch. It demands conviction and careful navigation. But for those willing to engage with its challenges, it also offers something unique, a chance to fund companies that matter on a societal level (for better or worse) and that are tied into some of the largest spending pools in the world (governments). That combination of potential impact and capital flow is hard for VCs to ignore.

The Takeaway

Defence tech’s rise from pariah to priority is a defining shift in today’s venture landscape. A confluence of global instability, government willingness to spend on innovation, and technological leaps (in AI, autonomy, space, cyber) has created an environment where building the “next gen” of defence companies is not only possible but well-funded. For VCs and founders, this means new opportunities to earn outsized returns, to solve critical national-security problems, or both. However, those opportunities come wrapped in unusual challenges: ethical landmines, procurement hurdles, and uncertain exit paths. The bottom line is that defence tech can no longer be dismissed. Investors should pay attention and approach with eyes wide open, balancing excitement with due diligence and a healthy respect for the sector’s unique responsibilities. In an era when technology and global security are deeply intertwined, defence tech is here to stay, and the savviest players in venture capital are already gearing up for the long mission ahead.

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