There are two linked narratives driving the private capital inflow into defense technology. The first is a demonstrable market signal: battlefield performance in Ukraine and the conflagration in the Middle East have reoriented threat assessments and procurement priorities toward autonomy, sensors, sustainment, and rapid manufacturing. The second is a macro shift in venture markets that has concentrated dry powder into AI and hard tech, creating a tailwind for defence-oriented startups that can promise rapid capability improvements at scale.
Measured growth is uneven but clear. By late 2024 private equity and venture investors had already increased deployments into defence-focused companies versus 2023, with S&P Global reporting that investment into the sector through September 2024 had exceeded the full-year total for 2023. That increase came even as broader VC activity softened, showing that defence tech has decoupled — at least partially — from the general venture slowdown.
At the same time the overall VC rebound around generative and foundational AI in 2024 pushed aggregate US venture funding higher, concentrating capital in areas that are immediately relevant to national security customers, including autonomy, perception stacks, and edge compute. The combination of sector-specific demand and abundant AI-focused capital is changing the capital stack for defence companies: larger late-stage rounds, strategic corporate participation, and more growth-equity plays are now routine.
The deal-size tail is already visible. Large late-stage financings for defence-focused firms scaled materially in 2024. A prominent example is Anduril, which raised a major round in 2024 as it invested in manufacturing and scale, demonstrating investor willingness to write big checks for companies that combine hardware, software, and a pathway to recurring government revenue. Those late-stage financings are a structural change: investors are betting not just on tech but on near-term production and fleet-level economics.
Strategic investors and primes are migrating from selective partnerships to direct balance-sheet participation. That shift has two effects. First, primes and strategic corporate VCs lower customer-adoption friction for startups that can integrate into existing platforms. Second, these same strategic checks compress competitive differentiation if incumbents selectively bankroll potential competitors. The result is a market where capital is not only chasing technology risk but also transactional and industrial risk. Recent reporting around high-profile autonomy companies shows both private venture participation and strategic investor interest converging in the same rounds, underscoring this hybridisation of the investor base.
Public sector instruments are explicitly designed to harvest this private appetite and redirect it into national-security critical areas. The Small Business Investment Company Critical Technology Initiative, a joint Department of Defense and SBA program, licensed a first cohort of funds in 2024 that together plan to mobilize several billion dollars into startups working on DoD critical-technology areas. The program’s mechanics — pairing private capital with SBA-guaranteed debentures and DoD programmatic support — are a deliberate attempt to de-risk long-horizon industrial bets that traditional VCs often avoid. For investors this has lowered the cost of patient capital; for the DoD it creates an on-ramps ecosystem to channel commercially shaped solutions into defense procurement.
Where capital is concentrating. The bulk of investment interest converges on a handful of subdomains with near-term battlefield utility: AI-enabled autonomy and swarm management, resilient navigation and GPS-denied operations, sensor fusion and multi-intelligence data chains, and scaled manufacturing for munitions and platform production. Investors are also chasing “industrialised” propositions — companies that pair software with factory-capable hardware roadmaps — because governments are now asking for production timelines and unit economics, not just prototypes.
Market structure risks and frictions are real. Export controls and dual-use regulatory regimes can suddenly curtail addressable markets for startups that depend on commercial supply chains. Procurement rhythms and certification timelines remain a fundamental mismatch with venture horizons. And the exit environment is not guaranteed: while some defence-adjacent companies can exit via strategic M&A to primes or via government-backed revenue streams, the IPO window remains uneven. That fragility amplifies the importance of late-stage strategic and corporate investors who can provide industrial follow-through.
For policymakers and fund managers the implications are concrete. Policymakers must continue to make public capital instruments predictable and operationally sensible; the SBICCT model is useful because it reduces fund-level risk without imposing rigid technical procurement choices. For fund managers, the playbook that succeeds blends technical validation with demonstrable production plans and a clear path to recurring, mission-aligned revenue. Investors that insist on rigorous demonstration milestones and that understand platform integration costs will outcompete those that bet only on algorithms.
Short term outlook. Expect more dollars to flow into defence-oriented AI and autonomy companies in 2025, with larger late-stage rounds and more prime-led strategic investments. That will accelerate consolidation around a small number of scale-capable platform providers and widen the gap between companies that can scale hardware production and those that cannot. The consequence for capability adopters is mixed: governments gain faster access to cutting-edge tools, but they also become dependent on a narrower set of private providers whose strategic incentives may not always align with public objectives.
Bottom line. Private capital is not just funding experiments in defence tech anymore. It is financing industrial transformation. That is good for speed of innovation and bad if scale and governance are neglected. The coming challenge for both investors and national security customers will be aligning financial incentives, industrial policy, and ethical guardrails so the force-multiplying promise of autonomy and AI is realised without systemic fragility.