Defense Start-ups Galvanize a Once Sleepy Sector

Key Risks

• Sector concentration – returns depend heavily on defense spending and may be volatile if budgets fall or political priorities change.
• Geopolitical and regulatory – export controls, sanctions or shifts in international relations can adversely affect defense companies.
• Liquidity – many defense technology firms are small or privately held; trading volumes may be limited, increasing price swings.
• ESG/reputational – restrictions on controversial weapons or negative public sentiment can depress valuations.
• Market risk – investors may lose some or all of their capital.

“In the dark waters off the west coast of Scotland, a slender submarine glider, like a torpedo with wings, slips under the surface and quickly disappears off into the murk.

“The SG-1 Fathom is on the prowl for intruders.”¹

That was how the UK’s BBC broadcaster introduced a feature about Atlantic Bastion, a UK program to bolster the security of its vital underwater infrastructure. Made by the German-UK defense startup Helsing, the SG-1 Fathom is being trialed by the Royal Navy as part of a network of gliders listening for threats from submarines.

Helsing is one of a number of startups capitalizing on the lesson of the Russia-Ukraine conflict – that speed and ingenuity are key in modern wars. Defense technology firms are emerging fast in the US, Europe, the UK and India, making cutting-edge equipment such as unmanned ‘wingman’ fighter jets, drone boats, drone submarines and AI-driven autonomous software.

Yet rather than replace the defense prime contractors like Boeing Lockheed, Martin and Bae Systems that have long dominated the defense business, they are teaming up with them. In doing so, they will aim to provide the defense primes with new technology for today’s fast-evolving warfare, while overcoming the difficulties of scaling up production.

Start-Ups proliferate

Venture capital (VC) funding for defense startups in NATO countries is surging and is set to reach $13.7 bn for 2025, according to an estimate from dealroom.co. That’s more than twice 2024’s level, fueled by large funding rounds for US companies such as Anduril, Saronic and Applied Intuition.²

VC Investment in NATO Defense Start-Ups Doubles in 2025

Source: Dealroom.co, September 2025.

Europe’s startups are forecast to attract $2.3 bn of this amount. Helsing has a funding round of $600 mn, accounting for over a quarter of that.³

Focusing on the US, the largest military spender worldwide, defense startups captured 1.3% of Pentagon contracts to defense firms in the first three quarters of 2025, according to data provided to Reuters by Govini, a Virginia-based defense software firm. The leading defense primes such as Boeing, Lockheed Martin and Northrop Grumman⁴ retained a stable 92% of Pentagon contracts. However, European defense firms’ share slipped to 6.6% from 7.4%.⁵

But that does not necessarily mean the big defense contractors will see their market shares slipping significantly. While defense primes have, broadly speaking, been slower to innovate, the defense tech startups often struggle to scale up, moving from design, to prototype to manufacturing at scale.

Alliances Inject Ingenuity

As major defense firms seek to speed up the production of advanced weapon systems, therefore, they are beginning to form partnerships with startups. In Europe, Helsing formed an alliance with Rheinmetall⁶, the German defense giant, to develop software-based platforms in 2022.⁷ The following year, Saab, the Swedish defense prime, acquired a 5% stake in Helsing as it secured a strategic cooperation agreement.⁸

There are many more examples elsewhere. In the United States, for example, Shield AI, a San Diego-based software and drone firm, announced in September a partnership to build autonomous vessels with HII, the largest US military shipbuilder.⁹

Looking forward, it seems likely that there will be still more alliances between startups and primes, with some acquisitions of startups likely as consolidation takes place. In terms of the nature of the sector, equipment such as the Scottish SG-1 Fathom submarine glider are helping to transform the sector from the low growth old-economy sector of a few years ago to something more like a high-growth tech sector. That said, it ultimately remains to be seen how these developments will play out and what the potential outcomes may be.