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Defense Tech’s Rise

  • Nov 8, 2024
  • 3 min read

Updated: Feb 25, 2025




The unfortunate rise of global conflicts in the 2020s has created a boom for new startups in the defense industry. According to research from S&P Global Market Intelligence, nearly $2.6 billion has been invested in the defense sector by venture capital and private equity funds through August 2024, already surpassing the total from 2023[1]. While this has primarily been concentrated in the U.S., the trend has gone global with firms in Europe and China also raising large amounts of capital - notably German startup Helsing raised $490 million in July 2024 at a $5.38 billion valuation.

 

The renewed funding for defense sector firms has a couple of main drivers. First, the rise in conflicts has led to a philosophical change. Katherine Boyle, a general partner at Andreesen-Horowitz, has noted that “firms have grown more comfortable with the defense mission, which was once taboo”[2] which has opened opportunities for the industry to attract capital. But investors have a monetary motivation also. Outside of AI, tech startups have struggled in a global economy characterized by high interest rates and uncertainty since the COVID fueled boom in 2020 and 2021. Meghan Welch, a managing director in KPMG's corporate finance practice, notes "These VC funds have to put money to work somehow, and they see defense as a really opportunistic area to do that."[3]

 

These nascent defense firms have a wide variety of focus, from aerospace and autonomous drones to AI-backed software and advanced materials. The rise in investment in these companies has also provided an opportunity for ex-military personnel to join the action as defense tech startups are increasingly hiring veterans and former Department of Defense officials[4]. These trends all come with a major caveat however, which is the growing question of exits for these firms. The defense industry has lower multiples than the overall technology sector, which means these firms need to grow revenue quickly to justify the investment. However, this can be challenging, as the primary customers for these firms are governments, and startups must compete with established players like Lockheed Martin for contracts. Additionally, governments often have more deliberate processes for adopting new technology compared to the private sector, which can make it more difficult for startups to demonstrate revenue quickly.

 

But, there are signs of these two headwinds being counteracted, particularly in the US. Last month, the Financial Times reported that Palantir and Anduril were in talks with several companies to form a consortium with the aim of taking more share of U.S. defense spending.[5] This could be the beginning of a larger shift away from traditional contractors, such as Lockheed or Boeing, and accelerate the investment into newer defense tech companies. And the U.S. government has announced a number of initiatives to fund ‘critical technologies’. Among these are announcements by the Office of Strategic Capital to lend nearly a billion dollars to private companies for technology development, and the Pentagon’s plans to award $40 million in Small Business Innovation Research.[6] [7]

 

Whether this boom leads to a new era of sustained defense tech investing remains to be seen, but the successes of SpaceX and Palantir provide a window into the best-case scenarios. This outcome aligns with the historically cyclical nature of venture capital, where periods of concentrated investment in specific sectors often reflect broader industry trends.


 
 
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