Using Private Capital to Deliver Real-World Capabilities
The defence venture boom is real, but capital is an input, not an outcome. The important question is whether private capital can translate innovative concepts into demonstrated capability and a broader industrial renaissance
For much of the past two decades in Europe, venture capital and defence occupied different worlds. Defence was considered too slow, too regulated and, for many investors, politically too difficult. Venture capital preferred markets where companies could scale quickly and reach liquidity within a fund’s life. Defence, by contrast, was dominated by a small number of sovereign buyers, long procurement cycles and established industrial champions.
That separation is now ending, as private capital, particularly venture capital, has moved decisively towards national security technologies. And while we are in a hype cycle, this is most assuredly not a bubble. Instead, it is part of a longer-term structural shift.
So, what’s driving this? Firstly, Russia’s invasion of Ukraine accelerated a reappraisal of security that was already under way as competition with Russia and China intensified. In response, defence budgets have risen and are still rising across the Nato Alliance. Nato members agreed in 2025 to move towards spending 5% of GDP on defence and defence-related security by 2035, while the EU’s Readiness 2030 plan is designed to enable up to €800 billion of additional defence expenditure.
In essence, governments are telling the market that defence demand will continue growing, and will become broader and
more enduring.
At the same time, the institutional environment is changing too. Investment restrictions as well as the misguided application of environmental, social and governance (ESG) criteria, which once made defence difficult for many funds, are shifting, albeit slower than would be ideal. An example of this is the European Investment Bank, which is broadening eligibility for security and defence and has made it a permanent public-policy goal. Specialist defence funds are multiplying, while generalist investors, or ‘defence-curious’ funds that once categorically avoided the sector are increasingly participating.
In a similar vein, a second major driver is technological evolution. Artificial intelligence, autonomy, advanced sensing, robotics, space systems, secure communications, semiconductors and cyber capabilities are increasingly central to military and decision advantage writ large, while much of the underlying research and development sits in the private sector. This is a trend I argued Europe needed to adapt to several years ago: governments are no longer the sole, or necessarily the primary, source of emerging technology. Ukraine has since demonstrated how comparatively inexpensive technologies can change battlefield economics when they can be iterated and deployed at speed.
Thirdly, defence tech as a sector effectively now has a track record. This includes Anduril’s May 2026 $5 billion raise at a $61 billion valuation and Germany’s Helsing subsequently raising $1.8 billion at an $18 billion valuation, while German scale-up, Quantum Systems, raised $1.2 billion, putting its worth at about $8 billion. These are different companies at different stages, but together they demonstrate that investors now believe defence technology businesses can reach significant scale.
Investor interest is fundamentally always the strongest when rapid technological change overlaps with significantly scalable market sizes. A clear example of this is that AI represented almost 44% of the European defence, security and resilience funding in 2025. Autonomous assets across the four physical warfighting domains – air, land, sea and space – combine software, sensors and, increasingly, low-cost hardware in ways familiar to technology investors. The same is true of intelligence, surveillance and reconnaissance (ISR); command-and-control software; secure communications; cyber defence; simulation; electronic warfare; and certain space technologies.
More interestingly, appetite is moving beyond the safest definition of ‘dual-use’, even in Europe. Investors with the right experience and conviction are increasingly willing to fund systems that are defence-first, meaning their primary customer from inception is their respective government or defence ministry/department, including counter-drone technologies, strike systems and air defence. This shift in mentality is critical, as a technology may have both civil and military applications, but a company still needs to be clear about the end-user it is building for: the warfighter. As such, defence requires a differentiated approach when it comes to both technology roadmaps and go-to-market motions.
Investor interest is always strongest when rapid technological change overlaps with scalable market sizes
The impact on defence innovation is readily apparent. Venture capital allows founders to finance and indeed derisk technology development before a government customer is ready to fund a full programme. It attracts engineers and entrepreneurs who might previously have chosen consumer or enterprise technology. It rewards speed, iteration and cost discipline, and creates companies able to challenge assumptions about how quickly a capability can move from prototype to production.
This is not to suggest that start-ups can or even should replace established primes or ‘national champions’: the strongest and most resilient national and alliance-wide operating and business model combines the two. Start-ups can bring software, new architectures and rapid iteration, while established companies bring manufacturing depth, deep integration expertise, and long-standing customer relationships and trust.
In the UAE, for example, the local EDGE Group and venture-backed Anduril established a joint venture to develop and produce autonomous systems, with an initial UAE purchase creating a production base
for the partnership. This is how venture-backed innovation can connect with sovereign industrial capacity rather than sit outside it.
At the same time, credible new entrants are also changing market behaviour. Established incumbents, such as the above-mentioned primes and national champions, face pressure to invest in software, shorten development cycles, and partner with external innovators. As a result, governments have more options and talent has more places to work. The result can be a more dynamic defence industrial base. However, the venture-backed model is not without risks.
Chief amongst these risks is herding: venture capital moves quickly once a thesis becomes accepted, but is decidedly less
good at resisting fashionable categories. In short, venture firms, particularly the ‘defence-curious’, are skating to where the puck is, rather than where it is going. Examples of this include drones, autonomy and AI-enabled ISR, which have attracted disproportionate attention, while areas such as propulsion, energetics, advanced materials, electronic warfare and logistics remain comparatively underfunded. Capital can create duplication without addressing or filling the key capability gaps that matter most to the warfighter. Inexperienced investors and those without domain knowledge rush to where the demand is most visible, rather than anticipating where the next operational requirement will emerge.
The second risk – as we are seeing across even the most mature defence tech market, the US – is confusing financing with adoption. Funding rounds do not generate military capability, which is a lesson well-capitalised and over-marketed start-ups and scale-ups seem to keep needing to learn. These companies still need access to users, test environments, security clearances, export licences, integration pathways and, ultimately, production contracts.
This is where government behaviour and follow-through matter most; predictable procurement is one of, if not the, strongest signals a country can send to private investors. Venture capital can accept technological risk; however, it struggles with indefinite customer uncertainty. Small grants and pilots are useful only if successful companies can see a credible path towards longer-duration, larger-value contracts. Governments that want private capital to support sovereign capability must provide clearer demand signals, faster testing and transition pathways, and multi-year procurement where appropriate.
The third challenge is that not every defence problem needs or should seek venture capital; in fact, most should not. Venture capital is designed for companies capable of rapid growth and outsized outcomes. Some strategically essential technologies will only have relatively small markets, long development cycles, high capital requirements and/or highly classified customers. Other sources of finance – commercial banks, government funding, private equity, corporate investment and strategic partnerships – all have crucial roles to play.
Finally, the sector has to manage its own success. High, growing valuations can create expectations that government procurement cannot satisfy. Investors without defence expertise often mistake interesting technologies for actual operational relevance. Similarly, founders can begin building for the funding market rather than the end-user.
The most important question, therefore, is not how much venture capital flows into defence, but what this capital produces in terms of the development and deployment of improved or net new capabilities. A mature defence investment ecosystem should be measured by whether it creates companies that solve real operational problems, reach production, integrate into existing forces and build industrial capacity that can endure, and not just by how large its last funding round was. This requires specialist investors who understand the customer, governments willing to act as credible market-makers, and an industrial system capable of taking successful technologies to scale.
The defence venture boom is real, and its strategic foundations are stronger than those of a passing investment fashion. It is a long-term structural trend, but the ecosystem, investors and founders would do well to remember that capital is an input, not an outcome. The opportunity that presents itself is to convert this period of extraordinary investor interest into something more durable: technological advantage providing real-world, credible deterrence while also generating prosperity across Nato and its allies.
Read more
