Venture Capital Opportunities In Canada’s Defence Sector

Multiple funding solutions will be necessary to enable Canada to achieve the ambitious goals in defence and national security which have been outlined by the current federal government. A vital component of that funding mix is to activate venture capital investment in the defence and dual-use technology sectors.

With the release of Canada's first “Defence Industrial Strategy” (officially titled Security, Sovereignty, and Prosperity: Canada's Defence Industrial Strategy) in February 2026 and the announcement of significant government-backed investment vehicles, the Canadian defence ecosystem now presents a compelling landscape for institutional and private capital deployment.

The defence spending landscape

The Government of Canada has committed to historic levels of defence investment. Budget 2025 allocated CA$81.8 billion over five years to rebuild, rearm and reinvest in the Canadian Armed Forces (CAF). Canada recently announced that it had reached the NATO target of 2% of GDP in defence spending by end of March 2026 and has indicated that it will reach an ambitious 5% of GDP by 2035.

The Defence Industrial Strategy positions Canadian industry to benefit from approximately CA$180 billion in defence procurement opportunities and CA$290 billion in defence-related capital investment opportunities over the next decade, with an anticipated CA$125 billion in downstream economic benefits by 2035. This represents over half a trillion dollars in overall investment in Canada's security, sovereignty and economic prosperity.

Key government investment mechanisms

BDC defence platform

The Business Development Bank of Canada (BDC) has established a defence platform that has expanded from an initial CA$4 billion allocation to CA$6 billion, reflecting strong early demand from Canadian small and medium-sized enterprises (SMEs).

The platform is structured as a two-layer approach:

• Direct financial solutions: loans, venture capital and advisory services targeted at defence-focused SMEs.
• Ecosystem development: working with incubators, accelerators, universities and other organizations to support defence-focused businesses and connect them with mission owners and key stakeholders.

Since its December launch, the BDC has already provided CA$91.7 million in financing to 16 businesses and engaged an additional 16 businesses through its advisory services.

StrongNorth fund

A particularly significant development for the venture capital community is BDC's CA$300 million StrongNorth Fund, a dedicated venture capital fund supporting Canadian startups developing deep technologies with defence-focused or dual-use applications. The fund is expected to back 30 to 40 startups over the next four years, leading rounds and providing investments ranging from CA$1 million to CA$20 million.

NATO Innovation Fund (NIF)

The NATO Innovation Fund (NIF), launched at the Madrid Summit in June 2022, is the world’s first multi-sovereign venture capital fund. Backed by 24 Allied nations with a €1 billion mandate, it invests in early-stage startups developing dual-use deep technologies including AI, quantum computing, autonomous systems and biotechnology. Since its establishment, the NIF reports that it has made 19 investments in both startups and funds. European defence and security startup funding grew to a record over €5 billion in 2024 and over €8 billion in 2025, with the NIF widely credited as a catalytic anchor for this shift.

Canada has not participated in the NIF to date, but as the country reorients its defence posture, joining the fund could deliver meaningful and immediate benefits for the domestic venture ecosystem. Canadian startups would become eligible for NIF investment of up to €15 million with follow-on reserves, and would gain access to an allied procurement network spanning 24 nations and 90 NATO-affiliated test centres. Canadian fund managers pursuing a defence or dual-use thesis would similarly become eligible for indirect NIF investment, deepening the pool of risk capital available to domestic SMEs. NIF membership would also complement Canada's existing and growing engagement with NATO's Defence Innovation Accelerator for the North Atlantic (DIANA): while DIANA provides non-dilutive support at the early stage, the NIF provides equity capital at the scaling stage where DIANA's mandate ends, together forming a complete innovation-to-investment pipeline for Canadian dual-use companies.

Private-sector venture capital

While government-backed vehicles such as the BDC Defence Platform will anchor a significant portion of Canadian defence investment, private venture capital is increasingly active in the sector and is expected to play an important role in bridging the gap between public funding and the scale of capital required.

Early signs of a broader private capital ecosystem are emerging. Announcements of growing investments in Canadian defence and dual-use companies are starting to appear more frequently. Family offices are also entering the space: according to RBC and Campden Wealth's 2025 North America Family Office Report, defence was among the most popular sectors for family offices invested in public markets, with increasing appetite for private exposure as the policy environment clarifies. Globally, defence and dual use tech venture capital deal value reportedly reached over US$49 billion in 2025 (according to Pitchbook), almost double 2024 totals, and Canadian funds are beginning to position for a share of that growth.

The key structural challenge for private investors remains the tension between traditional venture capital timelines and defence procurement cycles, which can extend five to eight years or longer. The BDC's explicit commitment to patient, risk-tolerant capital is intended in part to de-risk the sector for private co-investors, and its planned indirect investments in private funds aligned with Canada's defence and sovereignty priorities will serve as an important signal of which domestic managers are best positioned to lead in this space.

Strategic investment areas: Sovereign capabilities

The Defence Industrial Strategy identifies ten "sovereign capabilities" that represent priority investment areas where the Government aims to maximize strategic autonomy and reduce supply chain vulnerabilities. These capabilities should guide venture capital investment thesis development:

• Aerospace: platforms, avionics and aircraft communications
• Ammunition: common ammunition, battle-decisive munitions, small arms, missiles and bombs
• Digital systems: secure cloud, artificial intelligence, quantum computing, integrated command systems and high-assurance communications equipment
• In-service support: naval, land and air maintenance and sustainment
• Personnel protection: medical countermeasures
• Sensors: marine sensors, quantum sensors and electronic warfare
• Space: space-based intelligence, surveillance and reconnaissance, satellite communications and space launch
• Specialized manufacturing: land vehicles, surface ships, icebreakers and marine systems
• Training and simulation: naval, land and air applications
• Uncrewed and autonomous systems: land, aerial, underwater and surface autonomous platforms

The Build–Partner–Buy framework

Under the new Defence Industrial Strategy, the Defence Investment Agency will apply a "Build–Partner–Buy" framework to all future defence acquisitions.

• Build: in areas of key sovereign capabilities, new defence procurements will be directed to Canadian firms as part of the policy.
• Partner: where Canada lacks domestic capability, it will pursue partnerships with trusted allies and multinational firms.
• Buy: when domestic production or partnership is not feasible, Canada will acquire from allies with strong conditions requiring reinvestment into Canada's defence industrial base.

This framework signals a clear preference for domestic capability building and should inform venture capital investment strategies towards Canadian-headquartered companies.

Market opportunity and investment thesis considerations

Current market dynamics

Canada's defence sector comprises, by various measures, over 600 firms contributing over CA$7.4 billion in GDP across the defence value chain and supporting 61,200 jobs. The sector is characterized by a foundation of SMEs, which account for 92% of all firms and 40% of sector employment. This presents significant opportunities for venture capital to support the scaling of Canadian SMEs into anchor firms within the defence industrial base.

The commercialization gap

Early‑stage startups developing defence‑focused or dual‑use technologies frequently struggle to progress beyond the “valley of death” between R&D and commercialization, where risk is high and capital is limited. As these companies grow, many SMEs encounter significant obstacles in navigating defence procurement requirements, integrating into complex supply chains, and managing lengthy procurement cycles that can extend five to eight years or longer. This creates both challenges and opportunities for patient capital providers willing to support companies through extended development and procurement timelines.

R&D intensity and innovation potential

The Canadian defence sector is one of the most R&D-intensive, spending CA$440 million in 2022, with the vast majority invested by industry itself. The sector is more than three times as R&D-intensive as Canadian manufacturing overall, and its share of employees in high-end STEM positions is more than 2.5 times as great.

Export and international partnership opportunities

The Defence Industrial Strategy positions Canadian firms to compete globally through strengthened export promotion, deeper integration into allied supply chains, and a renewed focus on intellectual property ownership and control. Canada is prioritizing partnerships with the European Union, United Kingdom and Indo-Pacific nations (particularly Australia, New Zealand, Japan and South Korea). Several recent agreements have materially expanded the international market opportunity for Canadian defence and dual-use companies. The most significant is Canada’s participation in the EU’s Security Action for Europe (SAFE) instrument, making Canada the first and only non-European country to secure preferential access to the program. SAFE, adopted by the EU in May 2025 as the centerpiece of its Readiness 2030 plan, provides up to €150 billion in loans to EU member states for common procurement of priority defence capabilities. The Canada-EU SAFE agreement was formally signed on February 14, 2026, and built on the Security and Defence Partnership signed at the Canada-EU Summit in June 2025. Under the agreement, Canadian companies are eligible to participate as suppliers in SAFE-funded procurement contracts, subject to a component origin requirement. For Canadian defence and dual-use companies, particularly those developing capabilities in categories aligned with SAFE priority areas such as ground combat systems, air and missile defence, strategic enablers and space assets. This development represents access to a procurement market of a scale previously unavailable to non-European suppliers.

Separately, Canada has been identified as a candidate for collaboration under AUKUS Pillar II, the technology-sharing component of the Australia-UK-US trilateral security partnership focused on advanced capabilities including AI and autonomy, quantum technologies, cyber, hypersonics and undersea systems. In September 2024, the AUKUS leaders announced that consultations with Canada, New Zealand, and South Korea were underway to identify possibilities for collaboration on specific Pillar II projects. Canada has not yet formally joined, and the AUKUS partners have indicated they are not currently able to consider full expansion, but the active consultation signals a pathway that could unlock technology-sharing and co-development opportunities in areas directly relevant to Canada’s sovereign capability priorities.

Together, the SAFE agreement and the AUKUS Pillar II engagement represent a material broadening of Canada’s allied defence industrial network, creating new export pathways and co-development opportunities that increase the addressable market for portfolio companies in relevant technology categories.

Conclusion

Canada's defence sector transformation represents a generational investment opportunity for venture capital. The combination of substantial government commitment, dedicated investment vehicles such as the BDC Defence Platform and StrongNorth Fund and clearly articulated sovereign capability priorities creates a uniquely favorable environment for strategic capital deployment.

Investors should consider developing defence-focused investment theses aligned with the ten sovereign capabilities, with particular attention to dual-use technologies, companies positioned to benefit from the Build-Partner-Buy framework, and opportunities to support the scaling of Canadian SMEs into anchor defence firms. The sector's R&D intensity and the Government's commitment to patient capital suggest this represents a long-term structural opportunity rather than a cyclical trend.

Much of what makes this opportunity compelling, including allied procurement access, international co-development and cross-border M&A exits, is inherently multi-jurisdictional. With offices in more than 80 countries and integrated teams across Canada's key defence partners, Dentons is well positioned to support Canadian funds and their portfolio companies as they scale into these markets.

About Dentons

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.