The Rise of Venture Capital Investments in Defence

Historically generalist venture capital (VC) funds have been cautious and reserved over investments into the defence sector due to LP investment restrictions, regulatory complexity, reliance on governmental customers and historically restricted UK and European defence spending. As such, the defence sector has been dominated by a smaller number of specialist funds. However, in line with geopolitical developments, sentiment is shifting for both regulators and private investors as demonstrated by the FCA’s announcement in March 2025 providing reassurance to financial institutions that sustainable finance rules do not prevent investments into or the financing of defence companies.[1]

As the global geopolitical landscape evolves and global security concerns increase, defence tech has emerged as a critical sector attracting significant interest from institutional investors. Globally, countries are increasing defence spending by record amounts. For example, Poland has increased defence spending by 31% to $38bn,[2] and Germany has increased defence spending to more than $70bn as part of a $547bn infrastructure fund supported by new laws to exempt defence spending from Germany’s debt rules.[3][4]

In the UK, the government has set out a commitment to increase defence spending to 2.5% of GDP from April 2027 and highlighted the intersectionality of two core objectives for the government: (i) ensuring national security and (ii) securing economic growth.[5] These political moves have put the defence sector and the potential for innovation in the spotlight, with many noting the pivotal role venture capital will play.[6] In particular, innovations in artificial intelligence, cybersecurity, autonomous systems, and advanced materials are driving growth in the defence sector and present promising opportunities for investors.

Current Trends and Investment Opportunities

Defence tech has seen a surge in VC funding, with deals at more than 100x revenue multiples,[7] and prominent VC funds such as 8VC and FoundersFund[8][9] raising war chests to invest into the capital intensive sector. This combined with the range of innovative startups and established companies developing cutting-edge technologies to enhance national security and defence capabilities creates significant opportunities for investors and creators alike. Notable areas receiving substantial investments include:

• Artificial Intelligence (AI): Applications of AI in defence range from predictive analytics to autonomous drones and vehicles, improving operational efficiency and strategic decision-making.
• Cybersecurity: As cyber threats become increasingly sophisticated, investment in advanced cybersecurity solutions has become paramount to protect sensitive defence data.
• Autonomous Systems: Development of unmanned aerial vehicles (UAVs) and autonomous ground systems has gained traction, offering new dynamics in reconnaissance and combat scenarios.
• Advanced Materials: Innovations in materials science are paving the way for stronger, lighter, and more resilient defence equipment.

Institutional Restrictions and Key Considerations

While the defence sector presents many investment opportunities, there are key considerations for investors in navigating defence investments:

• Regulatory Framework: Investments in defence often face regulatory scrutiny, requiring adherence to national security laws and foreign direct investments regimes such as under the National Security and Investment Act 2021 in the UK. In addition, investors should be aware of additional regulations governing defence contracts such as under the Defence Reform Act 2014, the Single Source Contract Regulations 2014, the Procurement Act 2023 and other specific regulations and frameworks (including the Facilities Security Clearance regime, the Crypt Key Company Standard etc.).
• Export Controls: Defence technologies are also subject to export controls to prevent proliferation, necessitating careful evaluation of potential markets and partnerships.
• Long Development Cycles: Defence projects typically have longer development cycles and require substantial upfront investment, posing a challenge for investors seeking quicker returns.
• Classified Material: Certain key contracts (or parts thereof) and other target company information may well be classified. As a consequence investors will need to consider in detail their ability to diligence the target company and while security cleared individuals (including specialist lawyers) may be able to undertake a ‘black-box’ review of certain classified material, the approach to diligence will need to be carefully considered.
• Government Contracts: Given the likely reliance on government and quasi-governmental customers, investors will need to understand the nature of contract procurement processes, the likely pro-government terms of such customer contracts and the ability of the target to navigate the internal processes of their governmental customer base.    
• Institutional Investor Policies: Some institutional investors are precluded under the terms of their arrangements with limited partners from making investments in defence-related sectors.
• Exit considerations: The exit landscape is likely to be heavily influenced by the appetite of the defence Primes which may impact the ability to generate competitive tension in any sale process. In addition, the suitability of any potential bidder and the execution risk associated with that bidder will of course need to be viewed in the context of any potential national security concerns and specifically the National Security and Investment Act 2021.

Conclusion

Venture capital investments in defence tech are on the rise, driven by innovative advancements and heightened security needs. However, companies and investors alike must remain mindful of the regulatory environment and unique aspects of the defence sector to effectively navigate defence investments.

Burges Salmon has extensive experience in the defence sector, providing legal advice to both the government and private organisations. Our expertise spans across maritime, air, land, and communications & cyber domains. We offer specialist legal advice on UK government defence contracts, defence procurement law, defence infrastructure, mergers and acquisitions, investments and regulatory matters.

If you would like any further information, or advice related to any of the information in this article, please contact Alex Lloyd, Eleanor Furlong or your usual Burges Salmon contact. 

[1]Our position on sustainability regulations and UK defence | FCA

[2]Unprecedented rise in global military expenditure as European and Middle East spending surges | SIPRI

[3]Germany votes for historic boost to defence and infrastructure spending - BBC News

[4]Exclusive: German defence minister seeks annual budget hike to over 60 billion euros, sources say | Reuters

[5]Prime Minister sets out biggest sustained increase in defence spending since the Cold War, protecting British people in new era for national security - GOV.UK

[6]Buyout groups and VCs ready to play role in Europe’s rearmament

[7]As Hegseth cozies up to Silicon Valley, VCs' defense tech investing is getting frothy - PitchBook

[8]Trump ally Joe Lonsdale targets $1B for his new 8VC fund - PitchBook

[9]Peter Thiel’s Founders Fund closes $4.6B venture fund to back growth-stage giants like SpaceX, Stripe, and Anduril - Tech Startups