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Once considered a taboo sector to funnel money into by venture capitalists, defense tech has seen a remarkable shift over the past few years.
It raised just $869 million globally in 2020, according to deal-counting platform Dealroom — a figure that rose more than tenfold to hit $11.2 billion in 2025.
A lot can change in five years.
Rising geopolitical tensions across the world have led states scrambling to modernize militaries and increasing commercial opportunities for new defense startups.
Russia’s war in Ukraine has given rise to a new kind of drone warfare. It also provided a test bed for new defense technology developed by startups, and now tech companies have their sights set on opportunities brought about by the conflict in the Middle East.
Over the past week, defense tech startups in the U.S. and Europe have told reporters at CNBC that they’re seeing increased demand and are eyeing commercial deals as a result of the conflict.
Frankenburg Mark I interceptor missile live-fire test. Credit: Frankenburg.
Rising demand
The Iran war is the “moment defense tech and Silicon Valley have been waiting for,” my colleague Samantha Subin wrote last Saturday.
For years, the sector has sought to compete with primes for a chunk of the ballooning Pentagon budget, and the U.S. campaign in the Middle East has provided an opening, startups told CNBC.
Several defense tech startups Subin spoke with for the story said demand had risen from Department of Defense customers since the U.S. and Israel first struck Iran at the end of February.
Many of those customers have offered to buy out capacity or asked firms to increase production, the businesses said.
In Europe, defense tech execs told me they’ve been ramping up commercial discussions with Middle East governments since the start of the war. Another defense CEO said interest from Gulf states was “skyrocketing” as they raced to bolster measures to counter drone and missile attacks.
More than 3,000 drones and missiles have been fired on the United Arab Emirates, Saudi Arabia, Bahrain and Kuwait since the start of the conflict, according to data compiled by think tank the Center for Strategic and International Studies.
Meanwhile, staff numbers in the Middle East at European headquartered defense startups are set to rise. Estonian drone and missile interceptor startup Frankenburg technology and Ukrainian-UK Uforce both told me they were stepping up hiring plans in the region as a result of the Iran war.
Challenges ahead
But hurdles remain.
The U.S. government hasn’t offered a steady enough flow of contracts to rationalize scaling for some of the businesses trying to sell into the DoD, Subin wrote.
“That’s leaving defense tech firms divided over whether to hike capacity to win deals and risk profitability, or hold off and potentially miss opportunities,” she said.
In Europe, where startups are typically more capital constrained than their U.S. counterparts and therefore have fewer resources to play with, decisions will have to be made over whether to double down on the opportunity in the Middle East.
That risks pulling resources from markets in Europe and the U.S. to meet potential demand in the Gulf. Time will tell whether that turns out to be the right bet.
Latest updates
Elon Musk’s SpaceX has confidentially filed for an IPO with the Securities and Exchange Commission, sources told CNBC’s David Faber on Wednesday, bringing the rocket company one step closer to what’s expected to be a record public offering.
OpenAI announced it closed a record-breaking funding round on Tuesday, at a post-money valuation of $852 billion.
Oracle started telling employees that it’s cutting thousands of jobs, CNBC confirmed on Tuesday, as the software maker deals with a plummeting stock price tied to hefty capital commitments for building out AI infrastructure.
French AI startup Mistral said Monday it has secured $830 million in debt financing on to fund a data center powered by thousands of Nvidia chips.
Chinese artificial intelligence company Zhipu saw shares surge on Wednesday, after posting strong revenue growth in its first earnings report.
Chart of the week
Defense isn’t the socially-awkward investment area it once was in VC — and megarounds continue to roll in.
This week autonomous ship startup Saronic announced a $1.75 billion funding round and the week before drone company Shield AI said it had picked up a $2 billion raise.