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Venture capital is transforming the defense ecosystem and accelerating the shift toward software-led, dual-use technologies with rapid deployment cycles. Here we explore how investors are deploying capital earlier and across the full growth lifecycle, and how political risk demands a more nuanced, thesis-driven approach to value creation.
Summary
- Venture capital (VC) has become a major driver of defense innovation, with investment in 2025 nearly doubling to USD49 billion.
- Investor interest is shifting from traditional hardware to software, AI, robotics, drones, and cybersecurity, with Ukraine serving as a proving ground for new solutions.
- In the U.S., VC and private equity (PE) funds often target small businesses qualified under the SBA 8(a) program, which provides preferential access to defense contracts.
- Private capital strategies include minority control deals and joint ventures, reflecting increased involvement of PE firms with VC arms throughout the growth lifecycle.
- Defense innovators’ cap tables feature diverse governance arrangements, with a mix of active and passive investors.
Venture capital is now a significant force in the defense supply chain. In 2025, USD49bn of venture capital investment flowed into defense and dual-use assets, almost double the total for the previous 12 months.
The structural shift in the sector from hardware-oriented munitions to software, AI- and data-driven technologies has powered investor interest. Robotics, drones, cybersecurity, and autonomous systems offer a range of opportunities to enter a sector experiencing historic levels of investment.
Ukraine has served as a testing ground for these cutting-edge innovations, while their dual-use potential offers a broader universe of potential buyers for fund managers focused on their exit path. However political risk remains a live issue for investors, as Anthropic’s ongoing dispute with the U.S. Department of War demonstrates.
Financial sponsors target early investment in businesses primed for acquisitions
In the United States, many VC and PE funds frequently target businesses that are qualified small business entities under the U.S. Small Business Administration (SBA) 8(a) Business Development Program, a designation that gives them preferential access to defense contracts.
U.S. prime manufacturers are given certain set-asides in their contracts to use 8(a) suppliers, and once these businesses grow to the point where they are no longer classed as legally “small,” primes will often look to acquire them. For financial sponsors, investing early in these companies gives a clear route to liquidity.
These strategies echo the early internet and social media era, when VC firms targeted founder-led startups that were positioning themselves for a buyout by one of the U.S. tech giants. Forming joint ventures with primes, or accepting minority investments carrying acquisition rights, offer alternative routes for private capital investors to de-risk their exit paths, although these approaches may also compress valuations.
Minority control deals on the rise
One of the more notable recent trends we have seen has been the growth of minority control deals, whereby early-stage private capital investors acquire between 20% and 30% of a company’s share capital but also negotiate veto rights and other governance controls that more closely resemble controlling investments.
This reflects the rising number of PE firms with VC arms that are investing across the growth lifecycle. The same firms that support seed or series A financing rounds will continue deploying through to the pre-initial public offering phase, often investing a round or two before the typical PE entry point.
Other private capital investors, particularly sovereign wealth funds, provided they can navigate potential FDI restrictions (an issue we explore in more detail here), remain passive. The spectrum of governance arrangements among defense innovators’ cap tables is therefore unusually wide.
As with other VC-driven industries, for every Anduril or Helsing, there are many businesses that fail to reach their potential. But the risks in defense investments are arguably greater than in many other sectors given that once a new capability appears on the battlefield, efforts will immediately begin to neutralize it.
As a result, innovations may have short lifespans and can go from viable to obsolete almost overnight. For this reason, experienced defense investors invariably look not for the latest system to gain adoption on the front line, but for the businesses developing ways to counter it.
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.
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