Who is funding the future of British defence?
Government and venture capital is flowing into the British defence and national security ecosystem
There has been a veritable flood of funding into the UK defence sector over the past three years. The second Russian invasion of Ukraine and the United States’ capriciousness in working with its hitherto “allies” has brought domestic defence and security sectors into sharp focus around the world, especially in Europe. As the world shifts from a unipolar American power structure to a multipolar state of affairs, Europe has been caught out in its overdependence on the American military industrial complex. Now it is scrambling to revitalise its own defence industries.
America (was) First
Wars in Ukraine, Lebanon, and Iran highlighted the breakneck speeds at which technology on the battlefield is changing, both in the actual technology being used and how humans are adapting to it. This paradigm shift in modern warfare has manifested an unprecedented opportunity for innovation by fast-paced and scrappy defence tech startups.
Concordantly, VC-backed U.S. defence tech startups such as Anduril, Palantir, Shield AI, and SpaceX have already demonstrated the power of vertically integrated platforms. Coupled with the renewed enthusiasm at the U.S. Department of Defense for purchasing off-the-shelf, non-prime defence solutions, venture capital funds backing new U.S. defence tech startups have emerged triumphant in the last five years.
European Underdog
On the other hand, Europe presents a stark contrast. Historical deep-seated reluctance towards pure defence plays has resulted in suppressed valuations and constrained exit pathways for venture capital investments in non-prime defence. Its defence ecosystem is fragmented, not only along national borders, but also in vertical system integration.
While the landscape has rapidly shifted in the U.S., with investors piling into the next big domestic drone or AI dual-use startup, Europe initially proved far more tepid.
Initiatives such as the UK’s National Security Strategic Investment Fund (NSSIF) and NATO’s Defence Innovation Accelerator for the North Atlantic (DIANA) are beginning to stimulate activity, but the majority of deal flow remains small and nationally siloed. Deals are concentrated on low-risk technologies that offer early proof-of-concept, but lack significant operational leverage on the field. As a result, many European startups struggle to meet the viability criteria of venture capital backing.
The vast majority of the lucky few that do receive investment are drones, ISR platforms, and AI software, while less sexy, but no less strategically critical domains such as energy, logistics, and propulsion remain neglected. As VCs chase familiarity, the ecosystem risks reinforcing the brittle nature of European defence tech that innovation is intended to solve.
However, despite the challenging landscape, a new generation of European defence tech startups are emerging. Companies such as Cambridge Aerospace, Helsing, and Tekever have demonstrated significant potential for defence-themed VC investment in Europe.
All Is Not Lost
As European venture capital learns from its American counterparts, VC funding for European defence tech is increasing - reaching an all-time high of $8.7 billion in 2025. The UK leads with total VC funding for Defence, Security, and Resilience (DSR) at $2.9 billion in 2025, with Germany coming a close second with $2.1 billion. It is still a long way off from the $49.9 billion that VCs invested in U.S. defence tech in 2025, but it is almost quadruple 2020 levels of European VC investment in defence. As it stands, 43% of all European Deep Tech funding and 13% of all European VC funding went to DSR startups in 2025. Clearly, the ball is beginning to roll.
British cities, and the UK in general, have emerged as top spots for defence investment. London and Cambridge ranked 2nd and 3rd in Europe for defence investment in 2025, only behind Munich. When taking into account that 43% of funding in Munich was raised by Helsing, the British cities present a much more attractive picture for DSR-themed venture capital investment.
So Who Are They?
New venture capital funds have emerged to cater to this increased demand for investment in European defence. Notable defence-specific private funds include Air Street Capital, Offset Ventures, and MD One Ventures, focusing on early stage UK and European defence tech, though there is a wide overlap with AI/Deep Tech and defence tech at this stage. More generalist funds have also taken an active role in investing in UK defence, with investors such as Lakestar Advisors, Lux Capital, and Spark Capital all announcing investments into UK defence startups. In September 2025, ex-NSSIF and ex-Molten Ventures investors teamed up to launch a €300 million defence fund specifically to invest in Series A and B dual-use technologies, addressing the funding gap for scaling defence small and medium enterprises (SMEs) in Europe.
Corporate venture capital has also joined the fray. Legacy defence primes such as BAE Systems, Airbus, and MBDA have all launched their own venture capital funds and startup incubators supporting UK aerospace and defence startups. Even Palantir has partnered with the UK government to mentor British defence startups as part of their £1.5 billion investment plan to drive AI innovation within the British Armed Forces.
And Last, But Not Least
Now, public investment is catching up with the trend. The UK Ministry of Defence (MOD) has committed an additional £2.5 billion with SMEs by May 2028. In July 2025, the MOD created the UK Defence Innovation (UKDI) organisation to boost the pace at which innovative technology will reach the hands of frontline troops. It is the MOD centrepiece of the current government’s Plan for Change, with a £400 million budget focusing on driving defence as an engine for UK growth and creating high-skilled jobs in the UK dual-use sector.
Additionally, the MOD is putting in a concerted effort to lower commercial barriers for non-prime enterprises. In 2025, they introduced new “Lite” Enterprise Agreements5 to lower commercial barriers for domestic software and AI companies such as Adarga, Hadean, Oxford Dynamics and WhiteSpace, and established the Defence Office for Small Business Growth (DOSBG) to support small businesses and startups to better take advantage of the new government spending and initiatives.
Carrying on the momentum from last year, in January 2026, the UK launched a £20 million fund to help create Britain’s next defence unicorn, geared specifically towards small, innovative startups. It aims to provide seed funding for new and innovative ideas that have not yet been able to get off the ground. The fund will also bring in the MOD’s Defence Investors’ Advisory Group to better connect companies to private financing.
So What Now?
Despite clear enthusiasm from the UK government, both in terms of increased funding and acquisition reform, practical implementation of new defence tech policies has left much to be desired. The MOD’s publicly available work on AI suggests that it still lacks familiarity with AI and is struggling to integrate the concept smoothly into current and future UK defence doctrine. The Defence and Security Accelerator, the previous incarnation of UKDI, lacked meaningful spending power and was unable to consistently pull new technology through to the frontline. It remains to be seen whether this renewed vigour from the government will be different, this time.
In this pivotal moment in global geopolitics, the UK is at a crossroads with regards to its place in the world order and its ability to project influence (military or otherwise). Clearly, in the UK defence and security sector, things are looking up. Domestic defence startups are being showered with more interest, talent, and most importantly, capital. With so much support, all that is left is for the companies themselves to rise up and go head-to-head with other global defence tech giants.
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