$4.1 Billion Record Venture Capital Investment in Military Startups; Defense Giants Bet on New Technologies

Source: Global Markets Broadcast

This year, top global defense enterprises have set a new record for investments in military industry startups, as major defense giants proactively adapt to the ever-evolving nature of modern warfare.

According to data compiled by investment and financing agency Dealroom, established defense leaders such as Lockheed Martin and the UK’s BAE Systems—which have long collaborated closely with Western governments and militaries—have participated in venture rounds totaling $4.1 billion so far this year, a new high.

PJT, an investment bank specializing in aerospace and defense, partner Gwen Billon said, “The multiple recent conflicts have demonstrated that modern warfare requires the coexistence of new and legacy equipment systems. Traditional, mature combat platforms must be paired with disruptive, emerging technologies.”

“The new generation of defense technologies is an inevitable trend; all major defense giants are hoping to make early arrangements and seize these relevant technologies.”

Farnborough International Airshow, held on the outskirts of London and one of the world’s top aerospace and defense industry events, displayed this industry shift directly this year. The show hosted 1,636 exhibitors in total, with more than half from the defense sector—a record high; previous editions were traditionally dominated by civil aviation manufacturers.

Numerous defense technology startups used the airshow to display their new products, while banks and various investors—including many of the world’s leading defense manufacturers—actively sought connections.

Driven by various conflicts in recent years, notably the Russia-Ukraine conflict, governments worldwide have continued to increase military spending. The Russia-Ukraine war has made nations aware that whether it’s missile interception or autonomous drones, faster production and lower-cost weaponry are essential.

According to Dealogic, global defense-related transactions (including M&A and corporate financing) this year have surpassed $40 billion, and the annual total could far exceed the previous peak of $59 billion in 2019.

Traditional defense industry giants now must compete on the same stage with agile, lightweight, frontier technology-focused startups—these newcomers have rapidly grown, riding the waves of soaring military budgets and swift industry transformation. Dealroom data shows total funding raised by defense and security startups this year has reached $39.8 billion.

In the past, leading defense corporations could rely on their core business—fighter jets, warships, small arms—but now must shift to a strategy akin to venture capital, backing startups.

French defense group Thales announced the acquisition of Paris-listed Exail Technologies, an ocean-going robotics and navigation equipment company valued at 3.9 billion euros in the deal, beating Safran to secure the purchase. On the same day, Lockheed Martin outbid rivals including Thales to acquire maritime defense company Ultra Maritime from private equity firm Advent for $3.45 billion.

The succession of bidding wars shows that large defense groups are increasingly keen to use acquisitions and large equity investments to perfect their own defense technology value chains.

This year’s Farnborough Airshow also set a record for financial industry attendance, with more than 650 financial professionals present, covering investors, investment banks and funds from 350 firms, according to the organizers.

Earlier this month, German drone manufacturer Quantum Systems completed a new $1.2 billion financing round, putting its post-investment valuation at about $8 billion with Airbus among the investors; British maritime defense firm Kraken Technology closed a $175 million round on July 9, reaching a $1 billion valuation and joining the unicorn club, with Rheinmetall among the backers.

An executive from a leading European defense company and an aviation consultant said investors are now most focused on a company’s defense technology capabilities and the future war trends deduced from the Russia-Ukraine and US-Iran conflicts—drones and countermeasures have an increasingly important role in naval and aerial combat.

The major defense players are simultaneously increasing self-driven R&D investment and also setting up venture funds targeting highly profitable early-stage technologies. Analysis by Vertical Research Partners shows that, between 2021–2026—excluding Airbus and Boeing, where commercial aviation dominates—internal R&D investment across the world’s top 13 defense firms will increase by more than 25%, reaching a total of $11.6 billion.

UK’s BAE Systems recently committed 50 million euros to two funds under Europe’s top defense investment institutions Lakestar and Expeditions.

Lockheed Martin, the world’s largest defense company by revenue, announced last week that it will invest at least $100 million in UK and European defense technology startups. The company previously planned to expand the scale of its startup investment fund from $400 million to $1 billion.

Lockheed’s Chief Operating Officer Frank St. John said in an interview that there is substantial untapped potential in Europe’s defense technology sector, and that the company intends to stay deeply engaged in this market to cultivate quality technology.

He explained that the fund will promote in-depth cooperation between startups and Lockheed’s own engineering teams, enabling the adaptation of new technologies to Lockheed’s existing defense product lines.

Airbus’s German defense and space division announced last week that it has become a cornerstone investor in a new dual-use technology fund, E2D, which is targeting a 500-million-euro raise to focus on the aviation, maritime, and space fields.

This European aerospace and defense group has already established partnerships with several defense tech startups, including Ukrainian company SkyFall and Estonian missile manufacturer Frankenburg Technologies.

Andreas Linek, Head of Sales for Digital and Cybersecurity at Airbus Defence and Space, stated that conflicts in Ukraine and elsewhere fully highlight the rapid pace of technological iteration in modern warfare.

He said that for Airbus, building a mature system for collaboration with small and medium-sized innovative firms is crucial; only by leveraging agile, flexible startup partners can the company keep pace with swift technological advancement.