Defense is at an inflection point. After decades of consolidation around traditional defense primes, a new wave of venture-backed startups is reshaping how nations prepare for and conduct warfare. The reason: warfare itself is changing. Where once the biggest tanks and ships won wars, today speed, software, and coordination are proving decisive. This newsletter explores the forces reshaping modern defense, examines how the U.S., Europe, and China are positioned, maps the emerging defense-tech startup landscape, and highlights the companies redefining the next generation of military capability. With global defense budgets now exceeding $2.7 trillion, up from roughly $2 trillion in 2020, and new pathways opening doors for agile startups, defense tech has established itself as a compelling opportunity for venture capital.
DEFENSE: THREE CONVERGING FORCES
The renewed momentum in defense is not the result of a single trend, but the convergence of three structural forces reshaping how modern militaries build and acquire capabilities. For this first section, we will put greater focus on the US, as it is where most of the innovation is developing. That said, global powers are heading into similar patterns.
1. Geopolitics: The Rearmament Cycle Has Returned
Defense budgets are rising across many countries, driven by a mix of geopolitical pressures and the urgent need to modernize outdated capabilities.
The number of global conflicts has grown in recent years, from the war in Ukraine to rising tensions between the US and China, placing sustained stress on military readiness. Russia’s invasion of Ukraine revealed how quickly modern, high-intensity conflicts consume equipment: Europe’s stockpiles were depleted within months, exposing severe industrial bottlenecks. In response, European national rearmament plans could lift combined defense spending to nearly €800 billion annually by 2030.
But replenishing old stockpiles isn’t enough. Ukraine also demonstrated that warfare itself has changed: in one engagement, late 2024, roughly 400 drones, worth $200,000-$2 million, destroyed~40 Russian combat vehicles worth $40–$200 million. The math is striking, but what it really showed is that coordination of smaller systems can overwhelm traditional military assets. Countries are racing to adapt. The U.S., for example, aims to acquire 1 million drones by 2028, while China is already producing 8 million commercial drones annually and integrating them into military operations.
2. Technological Disruption: Scale, Software, and Dual-Use Models
There are three areas where governments need to stay ahead.
Going from Bespoke to Mass Production
Traditional defense production relies on small-batch, custom-built systems. For example, an F-35 takes 18–24 months to manufacture. A new industrial model is emerging, focused on producing large numbers of lower-cost systems at speed. Technologies like additive manufacturing and robotics make this possible. Instead of a few high-end platforms, militaries now aim to deploy coordinated fleets whose advantage comes from scale and rapid iteration. Companies like Saronic, for instance, are building facilities capable of manufacturing hundreds of autonomous vessels per year, compared with the handful produced by traditional shipyards.
Build The AI Command Layer
As militaries deploy growing numbers of autonomous systems, the challenge shifts from building individual platforms to ensuring they can sense, decide, and act as a coherent network. The goal is to achieve decision superiority, reacting faster and more accurately than an adversary. For example, the U.S. DoD’s Joint All-Domain Command & Control (JADC2) initiative aims to connect every sensor to every shooter across domains in seconds. What makes this possible now is AI: human decision-making occurs in seconds to minutes; machine-speed coordination occurs in milliseconds. With hundreds or thousands of autonomous assets, AI-enabled command systems are no longer optional, they are required for operational relevance.
Take Advantage of Dual-Use
In some domains, commercial companies now rival, or surpass, traditional defense contractors. AI, robotics, autonomous systems, space launch: capabilities once exclusive to government programs are increasingly coming from the private sector. The most obvious example is SpaceX, which lowered launch costs from $1.5 billion (traditional contractors) to $67 million, a 95% reduction.
For governments, this means access to better technology, faster. For investors, dual-use offers diversified revenue, faster iteration, and scale, but dual-use is not a prerequisite for success. It simply provides greater resilience and reduces reliance on government cycles.
3. Government Procurement Reform: Startups Can Finally Compete
Historically, winning a government contract took forever. In the US, for example, traditional procurement cycles lasted 3–7 years, which causes issues for venture-backed companies that typically only have 18–24 months runway. The process was governed by the Federal Acquisition Regulation (FAR), thousands of pages of compliance requirements that only major primes could navigate. The core problem: FAR was designed for accountability, not speed. Every contract required competitive bidding, extensive documentation, and multi-year budget appropriations. For a startup, this meant burning capital for years before seeing revenue.
This structural mismatch reliably pushed early-stage innovators out of the market. Over the past decade, this has shifted. While the FAR framework remains central, the DoD has increasingly relied on alternative procurement pathways that enable nontraditional vendors to engage at something much closer to venture speed:
· Flexible contract agreements (OTAs): Allow startups to go from pitch to signed contract in 6–12 months instead of years. Critically, OTAs bypass traditional competitive bidding requirements, enabling the government to work with companies that demonstrate technical merit rather than procurement compliance.
· Government innovation grants (SBIR/STTR): Provide non-dilutive funding, up to $2M, to develop and prove technology before scaling. These programs de-risk early development and create a technical track record that supports follow-on contracts.
· Pre-approved vendor lists (IDIQs): Enable rapid follow-on orders once a company has demonstrated capability. Once on an IDIQ, a company can receive task orders in weeks rather than competing for each new contract.
These mechanisms reduce friction, shorten cycles, and make defense a viable market for early-stage companies.
THE GLOBAL DEFENSE LANDSCAPE
These forces are playing out differently across the world’s major defense powers. As of today, the United States is leading defense spending with approximately $900 billion annually. China’s official budget shows $250 billion, but credible estimates from the American Enterprise Institute suggest the real figure is closer to $700 billion when accounting for classified programs. Europe, collectively, spends around $440 billion, though that number is rising rapidly. But budget size alone doesn’t tell the full story. What ultimately matters is how effectively each region converts spending into capability, and whether they’re positioned for the new paradigm of warfare.
United States , A Unified Market
Since World War II, U.S. defense budgeting and acquisition have been largely centralized within the Department of Defense. In 1993, the “Last Supper” signalled that the government would support far fewer prime contractors, triggering a consolidation wave that produced today’s major primes: Lockheed Martin, Boeing, Northrop Grumman, Raytheon, and General Dynamics. This brought efficiency, but over time, less innovation. The emergence of alternative procurement pathways, OTAs, SBIR, IDIQs, has now created unprecedented opportunities for startups to compete alongside these established players.
Europe , Fragmented but Expanding
Europe’s defense market, in addition to being weakened by low investments, is fragmented. Twenty-seven sovereign states, each with its own military history and procurement culture, never unified their defense industries the way they integrated economic markets. France, Germany, Italy, Sweden, and the UK each built their own primes, standards, and doctrines. The result: approximately 180 different weapon platforms, including around nineteen tank types still in service. The US, by comparison, does the same job with fewer than 40 systems. This fragmentation creates a significant efficiency penalty. Without economies of scale, duplicate supply chains, and incompatible systems, Europe spends $440 billion annually but delivers far less capability per dollar than the US. Some estimates suggest fragmentation alone creates a 30–40% cost premium.
Despite planning to steeply increase defense spending, the industrial base built during decades of underinvestment cannot absorb that surge. Primes like Rheinmetall, BAE Systems, and Leonardo face multiyear backlogs. This creates immediate openings: countries rebuilding capabilities are increasingly willing to work with nontraditional suppliers because the legacy base cannot meet timelines alone.
Recent European initiatives signal a shift toward integration. The European Defence Industrial Program (EDIP), launched in 2024 with €1.5 billion in funding, and the Act in Support of Ammunition Production (ASAP) represent the EU’s first attempts to coordinate procurement across member states. While these programs are nascent, they create pathways for startups to access multi-country contracts through a single procurement process. However, structural fragmentation remains: national security concerns still drive countries to maintain domestic supply chains, and export controls between EU members continue to limit technology transfer. The question for investors is whether these reforms can overcome decades of path dependency, or whether Europe’s defense market will remain 27 separate opportunities rather than one integrated market.
China , Scale and Integration
Visibility into China’s defense capabilities remains limited, but available evidence suggests it holds advantages across all three technological shifts identified earlier.
In mass production, China has leveraged its position as the world’s manufacturing base. For example, DJI controls roughly 90% of the global consumer drone market, supported by a supply chain clustered within kilometers. China also controls key inputs, rare earth elements, battery materials, permanent magnets, that Western manufacturers must source through fragile global channels. The result: Chinese military drones’ cost on average $1–2 million versus $4+ million for Western equivalents.
In AI and data, China has built formidable capabilities through civilian surveillance infrastructure. Hundreds of millions of cameras feeding AI systems with direct military applications.
And in dual-use integration, China formalized its approach in 2014 with Military-Civil Fusion, a national policy treating the entire economy as serving both civilian and military purposes. Military-Civil Fusion creates formal pathways for commercial technologies to serve military purposes and vice versa. While Chinese companies maintain distinct commercial and defense operations, the policy framework enables rapid technology transfer in both directions, effectively treating the entire industrial base as accessible for national security priorities. This gives China structural advantages in dual-use technologies that Western competitors cannot easily replicate.
The Bottom Line
These structural differences, America’s procurement reform creating startup pathways, Europe’s capacity constraints opening doors to new suppliers, and China’s integrated civil-military ecosystem, define not just where defense dollars flow, but where emerging technologies can most rapidly translate into deployable capability.
THE DEFENSE TECH STARTUP LANDSCAPE
To map the defense tech startup ecosystem, we reviewed over 2,500 companies in the defense sector, narrowing them down to 815 innovative companies with direct defense applications. The following mapping is organized across four domains, from space, passing through air and land to maritime.
Space
The space domain is composed of 216 companies divided into three layers. First, orbital access, the manufacture of components and launch systems that get satellites to orbit. Then earth observation, satellites that handle communication and observation from space to Earth. Finally, in-orbit capabilities, everything from ground infrastructure that receives satellite data, to space control systems that track objects and prevent collisions, to orbital servicing that maintains and extends satellite missions.
Now that launch costs have significantly decreased, most innovation in space focuses on ISR, intelligence, surveillance, and reconnaissance, and the infrastructure to support it: manufacturing satellites, ground stations, and orbital services. However, few players are purpose-built specifically for active defense or attack applications.
Air, Land, and Maritime
These three domains share a common structure. The progression moves from human-operated equipment (protection, weapons), to crewed platforms (manned aircraft, vehicles, vessels), to unmanned systems (drones and missiles for air; autonomous ground vehicles for land; autonomous surface and underwater vehicles for maritime), and finally to the infrastructure layer (advanced materials, avionics, mission support systems).
Air leads with 467 companies, and the innovation story is fundamentally about drones. Over the past decade, an average of 17 new drone companies have been created every year, driving the sector’s 2.6x growth rate. Meanwhile, startups supplying components for manned aircraft have remained flat at just two per year. Aviation electronics and advanced materials show moderate activity, but the momentum is unmistakably concentrated in autonomous aerial systems. The five most funded companies control 82% of total investment ($11.8B), with Anduril dominant at $6.8B. While Anduril now operates across domains, autonomous air systems remain core to their business.
Land has 114 companies split between vehicle platforms and human-centric systems. On the vehicle side, investment concentrates in unmanned ground vehicles deployed for strike operations, surveillance, and logistics. These autonomous platforms show the clearest path to startup entry, similar to drones in air. However, manned vehicles face structural constraints where incumbents dominate, and innovation is limited to incremental improvements with no disruptive breakthroughs. Human-centric systems show mixed dynamics. Smart equipment focused on situational awareness and simulation training is gaining traction, driven by demand for better soldier preparation and real-time battlefield intelligence. But traditional categories like firearms and protective gear see minimal innovation, reflecting entrenched suppliers and high barriers to displacing established equipment in these critical safety domains.
Maritime is the smallest domain with just 18 companies but the fastest growing at 6x, driven by autonomous underwater and surface vehicles. The harsh ocean environment, expensive testing requirements, and complex regulations create substantial barriers to entry, company formation averages less than one per year across all maritime subcategories, a rate lower than any other defense domain. This means early movers like Saronic hold significant advantages in a sector that’s growing but still in its earliest innings.
Distribution Across Domains
This chart shows how defense tech startups are distributed across mission domains and how each has grown over time. In absolute numbers, the air domain has the largest concentration of startups, followed by space, land and maritime. This reflects the historical concentration of defense innovation in aviation and aerospace systems.
However, the growth rates reveal a different dynamic. Maritime has expanded the fastest at 6x, driven by rising interest in naval autonomy and undersea systems. Space follows at 4.3x, fueled by national security priorities and reduced launch costs. Air grew at 2.6x, a reflection of its maturity as a domain, but sustained by the shift toward autonomous aerial vehicles and drones that continue to attract new entrants. Land trails at 1.8x, facing similar incumbent dominance but without the same technological catalyst to drive a wave of new startups.
Distribution Across Regions
This chart illustrates the geographic distribution of defense tech startups and the flow of capital across regions. The United States dominates with 437 companies, followed by Europe at 211 (including the UK).
However, the disparity between company formation and capital allocation is striking. Europe accounts for nearly half as many startups as the United States, yet captures only 11% of total funding compared to 84% for the U.S. While the US is leading, these dynamics indicate that Europe’s primary constraint is not lack of talent or innovation, but access to capital. Asia, on the other hand, represents just 4% of tracked funding, though this figure likely highly underestimates actual activity given limited data visibility in markets like China.
Investor Analysis
To understand who is funding this ecosystem and in which categories, we looked at who invested in our 815 companies. We identified more than 3’500 investors, including 142 with more than 5 investments in defense tech. The following chart showcases the 15 largest investors:
Taking a closer: The significant number of government entities comes as no surprise given the sector’s nature. That said, this pattern becomes less pronounced further down the list, where the mix of investor types broadens. On the venture side, there’s a healthy mix of specialized defense VC funds like Seraphim Space, Silent Ventures, and Balerion, alongside generalists like Andreessen Horowitz, who has built a dedicated team, and Soma Capital, showcasing the space is maturing. Defense corporates like Lockheed Martin Ventures and Airbus Ventures are also active investing in new technologies.
CASE STUDIES
Anduril: Building at Silicon Valley speed, operating at pentagon scale
How a seven-year-old startup became a $30.5B defense giant
Anduril started with a simple but revealing problem: the Pentagon struggled to buy software, even when it clearly outperformed humans. Their first product, autonomous border surveillance towers replacing 24/7 human monitoring with an autonomous AI system, worked flawlessly, and Marines validated it immediately. But because it didn’t fit the DoD’s hardware-centric procurement model, adoption stalled. The Pentagon is still far more comfortable purchasing physical assets such as aircraft carriers, fighter jet, systems with clear unit economics than standalone software. So, Anduril made the strategic shift that would define the company: if software needed hardware to get through the door, they would build it themselves.
That decision unlocked their trajectory. Anduril now has over ten hardware products, each powered by the same software foundation. Anvil, their autonomous counter-drone system, proved capability in weeks rather than years and won programs traditionally dominated by incumbents. Ghost enabled one operator to control ten autonomous aircraft simultaneously; Roadrunner introduced reusable missile-like interceptors; and the acquisition of Dive Technologies secured a $100 million contract with the Australian government for autonomous underwater systems. All of these systems run on the same autonomy software stack, allowing the company to operate like a modern prime while moving with startup speed.
This model reshaped the entire defense ecosystem. What used to be a closed industry is opening: experienced founders from both commercial tech and legacy defense programs are spinning out to build the next generation of companies, driven by the rise of dual-use technology and the validation that commercial innovation can directly apply to national security. Anduril sits at the center of this shift. In just eight years, they’ve raised more than $6 billion, reached a valuation above $30 billion, grown to over 2,000 employees, and secured $2 billion in active government contracts. They’ve become the reference company inspiring the new wave of defense startups, and their rise showed founders that full-stack, software-defined systems built at startup speed can win major programs.
Saronic — Building autonomous naval fleets at shipyard scale
How an ex — Navy Seal built a $4b autonomous vessel company in under three years
Saronic is the clearest expression of how the Anduril model is spreading across domains. Maritime defense is the smallest sector by company count but the fastest growing, driven by the rise of autonomous surface and underwater vehicles. The ocean is a harsh environment where testing is expensive, regulations are slow and early movers gain a meaningful advantage. Saronic is bringing Silicon Valley speed to naval manufacturing, and the results are striking. The company reached unicorn status in under two years and now stands at a $4 billion valuation. Across 18 maritime defense companies, Saronic alone has raised $845 million to date, capturing roughly 85% of total capital raised.
The strategic challenge driving this growth is clear: China is building ships faster than America can respond, while traditional U.S. shipbuilding timelines stretch across decades. The Navy doesn’t need a handful of exquisite vessels but hundreds of autonomous platforms that can deploy quickly and operate persistently.
Founder Dino Mavrookas, a former Navy SEAL, built Saronic around two core ideas. First, true autonomy: vessels that launch, sense, maneuver, network, and recover without human intervention, even in jammed environments. Second, production at scale. Saronic now operates 114 acres of purpose-built shipyards with output of 200 vessels per year, targeting 500. Unlike companies retrofitting autonomy onto existing hulls, they design six vessel classes around AI from day one. The centerpiece is Port Alpha, a $2.5 billion mass-production shipyard built upfront, betting that autonomous fleets will define the future of naval power. Where traditional defense contractors build infrastructure incrementally over decades, Saronic is investing upfront expecting demand to justify the scale in the near future.
Northwood Space: Building the data highway between earth and space
How Northwood turned a forgotten piece of 1960s satellite infrastructure into a next generation ground network company
Space defense increasingly hinges on ground infrastructure, which has quietly become one of the sector’s most acute bottlenecks. Satellite capacity is exploding because launch costs have collapsed, yet the systems responsible for moving data back to Earth have barely evolved since the 1960s. With roughly fourteen thousand satellites in orbit and more than seventy thousand expected by 2030, the imbalance is growing rather than stabilizing. Northwood Space is solving exactly this problem.
Traditional ground stations rely on giant parabolic dishes that swing tons of metal to track a single satellite at a time. They are slow, maintenance-heavy, and economically misaligned with the scale of modern constellations. Northwood replaces these mechanical systems with software-defined phased-array ground terminals that can track about ten satellites simultaneously, hand off between them in microseconds, and operate with no moving parts at a fraction of the cost.
The approach is already proving itself. In October 2024, Northwood completed a successful pilot with Planet Labs and moved into full deployment. To date, they’ve raised $37 million from investors such as a16z and Founders Fund, and secured $50 million in DoD contracts. The company’s valuation now stands at $104 million, with more than $10 billion in potential ground-segment programs emerging globally. Northwood is positioning itself as the next-generation infrastructure layer for the satellite economy, modernizing the communications backbone that orbiting constellations depend on.
EXIT STRATEGIES: M&A VS IPO
Over the past five years, exits in defense have matured into two distinct paths: M&A, the most frequent, and IPOs.
M&A , The Workhorse of Defense Exits
M&A has become the default route to liquidity. Between 2020 and 2025, the sector averaged over 240 acquisitions per year, with an average deal size of roughly $405.66 million, reflecting the pace of consolidation across the ecosystem.
Two types of buyers shape the landscape:
· Traditional primes are absorbing technologies they cannot build fast enough internally, particularly in software, autonomy, and sensing.
· Next-generation players like Anduril and Voyager are acting as modern primes, rolling up complementary capabilities to build vertically integrated platforms.
In practice, M&A functions as the sector’s “liquidity engine”: fast, repeatable, and aligned with how defense capabilities are integrated.
IPOs , Rare, but the Headlines Everyone Remembers
Public listings remain rare, roughly a dozen per year, and are reserved for companies with scale, predictable revenues, and often a dual-use story. The IPOs that succeed often achieve substantial valuations:
· Palantir — IPO in 2020 and currently valued at $394B
· Hensoldt — IPO in 2020 and currently valued at $9.1B
· Renk — IPO in 2024 and currently valued at $5.6B
· Firefly Aerospace — IPO in 2025 and currently valued at $3.1B
These outcomes reflect what public markets reward: recurring government contracts, defensible technology, and long-term revenue visibility.
The Bottom Line
While IPOs attract the spotlight, M&A remains the dominant exit path, driven by primes modernizing their portfolios and next-gen companies building the foundations of a new defense industrial base.
INVESTMENT OUTLOOK & CONCLUSION
Defense technology represents a distinct investment category, one defined by extreme power law outcomes, government as the ultimate customer, and barriers to entry that favor those who understand both technical and procurement realities.
The opportunity requires accepting constraints that traditional VC models typically avoid. Government budgets surge during threat periods, then contract during peacetime, creating cyclical risk that compounds the challenge of 18–24 month startup runways. Procurement remains hardware-centric: governments know how to buy tanks and ships but struggle with standalone software, which is why successful software companies often build or integrate with hardware to fit within existing frameworks. These constraints are real, but they also create moats. For investors who can underwrite longer timelines and accept binary outcomes, these same frictions become barriers that protect returns.
Over the past two decades, only 10–12 defense tech companies have reached major IPO scale. The next wave will produce perhaps 2–3 more neo-primes, likely from companies that are already demonstrating Anduril-like traction, not dozens. Most successful exits follow a different path: acquisition under $1 billion, where companies are absorbed as integrated components within larger prime contractors. Historically, defense M&A valuations have been capped at 2–4x revenue due to customer concentration risk. However, recent transactions suggest this ceiling is rising for companies with differentiated technology and multi-program traction, with select acquisitions reaching 5–8x revenue.
The opportunities we see are concentrated in areas where technological shifts intersect with urgent national security priorities. Autonomous systems that can scale to production volumes traditional primes cannot match. Space infrastructure where launch cost reductions have created bottlenecks in adjacent layers. AI-enabled command and control where commercial capabilities significantly exceed what legacy systems can deliver. What wins in these domains is not technical brilliance alone, but rather a program of record or a clear path to one, vertical integration that captures more of the value chain, hybrid models that combine software and hardware, and commercial traction that reduces dependence on government timelines. We remain cautious in areas where incumbent primes hold structural advantages: manned systems where safety certification and legacy integration create moats, overcrowded categories where dozens of startups are chasing single-digit procurement slots, and pure component plays where limited differentiation constrains exit multiples.
The investment criteria that matter are; 1. Procurement fit through mechanisms like OTAs and IDIQs, 2. Field-proven credibility rather than lab demonstrations, 3. Policy alignment with strategic priorities that command sustained funding, and 4. Dual-use models where commercial revenue de-risks government dependency. 5. Founder profiles with deep institutional fluency, typically with experience inside companies like SpaceX, Palantir, or Anduril, providing sufficient exposure to DoD procurement to navigate it effectively.
Defense technology is not a market for those seeking deployment pace or broad portfolio diversification. It is, however, one of the few sectors where multiple tailwinds, geopolitical tension, technological disruption, and procurement reform, align simultaneously to support companies that can navigate its unique constraints. The power law dynamics are extreme: a handful of companies will capture the majority of value, while most will exit modestly or fail. For those willing to underwrite longer timelines and accept binary outcomes, success depends on identifying the few companies that will define the next generation of national security infrastructure, before their trajectories become obvious.
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