2026 Market Forecast: $2.3T Defense Tech Opportunity
The global defense industry stands at a critical inflection point, with projected market valuation set to reach a staggering $2.3 trillion by 2030. This unprecedented expansion reflects not only growing geopolitical tensions but also a fundamental reassessment of defense priorities worldwide. The defense technology sector specifically is experiencing robust growth, with the defense electronics market alone projected to reach $260.70 billion in 2025.
Global CAGR and Regional Growth Hotspots
The defense technology market is advancing at a compound annual growth rate (CAGR) of 5.3% from 2024 to 2033, positioning it for substantial long-term expansion. Meanwhile, output in the aerospace and defense manufacturing sector is projected to grow at 2.76% CAGR between 2025 and 2029. This acceleration comes as 61 active conflicts—the highest number since World War II—drive unprecedented investment across the globe.
North America continues to dominate the defense landscape, commanding 39.5% of the global market share in 2023. This regional dominance is anchored by the United States' substantial budget allocations, including $179 billion earmarked for Research, Development, Test, and Evaluation (RDT&E) in the 2026 defense budget—representing a 27% year-over-year increase. Furthermore, the Defense Innovation Unit has dramatically scaled its budget to nearly $1 billion in 2024, up from approximately $200 million the previous year.
Europe presents another significant growth hotspot, particularly as NATO members pledge to increase their annual defense spending targets from 2% to 5% of GDP by 2035. This historic commitment could potentially add hundreds of billions in annual expenditures. Currently, EU NATO members are spending €343 billion on defense with plans to add an additional €100 billion annually by 2027.
Asia-Pacific is rapidly emerging as the fastest-growing region, driven by increased defense modernization initiatives in countries like China, India, and Japan. The Middle East and Africa are likewise expected to see substantial growth, with projected CAGRs of 12.95% and 12.89% respectively through 2029.
Defense Tech Segments Driving Market Expansion
Several key technology segments are powering this market expansion. Air-based defense equipment remains the largest market segment, accounting for 34.40% of the total market in 2024. However, defense equipment maintenance, repair, and overhauling services are projected to be the fastest-growing segment at a CAGR of 8.31%.
Private equity investors are increasingly drawn to specific high-growth defense technology domains. AI-enabled systems stand out as a principal investment target, with US aerospace and defense spending on artificial intelligence and generative AI expected to reach $5.80 billion by 2029—3.5 times higher than 2025 levels. These investments primarily target mission systems, which held 37.71% of the defense market in 2024 and are projected to be the fastest-growing application segment with a CAGR of 8.55%.
Advanced drone technologies represent another significant investment area, with recent contracts highlighting their strategic importance. Firms like Draganfly are securing high-impact military contracts for platforms such as the Flex FPV and Commander 3 XL, addressing critical pain points around operational flexibility and supply chain security.
Private capital is also flowing into autonomous defense systems, which are growing at a CAGR of 8.73%—faster than traditional manual systems. This shift underscores a broader trend toward what venture investors term "defense-tech," where traditional venture firms are now seeking exposure to the next generation of military technologies. Notable investment firms like Point72 Ventures, 8VC, Lux Capital, Shield Capital, Razor's Edge, and A16Z have established dedicated defense technology investment practices.
The market is additionally seeing increased investment in cybersecurity and zero-trust architectures, with cybercrime costs estimated at $8.44 trillion globally in 2023. Naval and maritime systems represent another growth segment, with shipbuilding and maritime systems projected to increase substantially from $34.7 billion in 2020 to $65 billion in 2026.
Private Equity Investment Trends in Defense Technology
Private equity investment in defense technology has undergone remarkable expansion over recent years, transforming from a niche specialty into a core allocation priority. Funding has escalated dramatically across various defense subsectors, signaling growing investor confidence in the strategic and financial potential of military innovation.
Average Deal Size and Funding Round Distribution
Deal sizes in defense technology have expanded considerably, reflecting heightened investor appetite. Median pre-money valuations doubled year-over-year to reach $115 million by mid-2025, while median deal sizes doubled from $10 million to $20 million during the same period. Therefore, both valuations and investment rounds are scaling simultaneously.
The first half of 2025 has been exceptionally strong, with defense tech startups raising $28.4 billion across 361 deals, already exceeding all of 2023. In just the second quarter of 2025 alone, the sector secured $19.1 billion across 165 deals, more than doubling the previous quarter's activity.
Deal count for investments over $10 million has increased eightfold over the past decade, reaching a record 99 deals in 2024. These larger deals culminated in $6.7 billion of cumulative invested capital last year, headlined by Anduril's massive $1.5 billion Series F round.
Within Europe, defense tech venture capital funding has already reached $1.5 billion in 2025, with mega-rounds accounting for over three-quarters of this total. Moreover, across NATO countries, defense tech has attracted $9.1 billion in funding during 2025 thus far—already 1.4 times greater than the entire 2024 total.
Shift from Public to Private Capital in Defense
The defense sector is experiencing an unprecedented transition from public to private capital sources. Between January and mid-March 2025 alone, private equity and venture capital investment in aerospace and defense reached $4.27 billion, nearly matching all of 2024, with 83% of that capital flowing into North America.
This shift represents more than just financial reallocation—it fundamentally reshapes how the United States funds, builds, and governs its defense industrial base. Private capital is increasingly viewed as essential to closing the investment gap between defense requirements and available government budgets.
Major initiatives highlight this trend, including Stargate's aim to raise $500 billion of private capital for AI infrastructure, Andreessen Horowitz's "American Dynamism" fund for defense companies, and JP Morgan's Security and Resiliency Initiative targeting up to $1.5 trillion to reshore manufacturing at scale.
For European defense technology, this represents a historic moment—the sector has become truly investable for the first time in a generation, with venture capital flowing at rates unseen since the Cold War's final decade. Consequently, private investors are increasingly positioned to influence not just defense innovation, but broader national security outcomes.
Emerging Growth Areas in Defense Tech
Emerging technologies are reshaping the landscape of defense investments, with private capital increasingly targeting specialized domains that promise both strategic and financial returns. These three high-growth areas represent prime opportunities for private equity firms seeking exposure to next-generation defense capabilities.
Proactive Cybersecurity and Zero-Day Defense
The shift from reactive to proactive cybersecurity represents a fundamental evolution in defense technology investment. Unlike traditional approaches that respond after breaches occur, proactive cyber defense acts in anticipation to oppose attacks through cyber and cognitive domains. This strategic pivot is attracting significant private equity attention as the global defense cybersecurity market expands from $30.23 billion in 2024 to a projected $87.08 billion by 2034, growing at an impressive 11.18% CAGR.
Investment firms are especially targeting companies specializing in threat evaluation and vulnerability management, which dominated the cybersecurity revenue share in 2024. These solutions enable defense organizations to identify and address potential threats before they materialize into costly incidents. Additional high-growth segments include:
Zero-day vulnerability detection platforms
AI-powered threat hunting systems
Cybersecurity training and awareness solutions
The North American region commands 43.15% of this market, making it particularly attractive for investment, yet Asia Pacific presents the fastest growth opportunity as countries like China, Japan, South Korea, and Australia increase cyber defense budgets to counter espionage and sabotage threats.
AI-Enabled Air Defense and Surveillance Systems
Artificial intelligence is revolutionizing military surveillance and air defense capabilities, creating substantial investment opportunities. Advanced systems now employ AI to detect, identify, and respond to threats with unprecedented speed and accuracy. In fact, AI-enhanced surveillance systems can process and analyze video footage up to thirty times faster than human analysts.
Private equity investors are increasingly drawn to autonomous surveillance technologies that enable military forces to monitor expansive areas and identify threats with minimal human intervention. For instance, drone-based AI systems equipped with machine learning algorithms achieve target recognition accuracy of 92% compared to 70% for traditional human-operated systems.
One compelling growth area involves AI-enabled drone defense systems that can autonomously detect and neutralize hostile unmanned aerial vehicles without human input. As Lt. Gen. Sean Gainey noted, "The ability to accurately discriminate the threat, positively ID the threat, and then have the system auto-select the right interceptor or non-kinetic capability to defeat the threat is where we would definitely like to go".
Advanced Defense Manufacturing and Automation
Cutting-edge manufacturing technologies are transforming defense production capabilities, creating new avenues for private capital. As defense budgets expand globally, manufacturing innovation becomes essential to meeting increased demand.
Materials science breakthroughs are producing lighter, more durable alloys and ceramic matrix composites that enhance fuel efficiency and performance in defense systems. Concurrently, additive manufacturing is moving beyond prototyping to enable production of complex geometries that reduce weight and consolidate multiple components into single, highly engineered pieces.
Industrial AI applications offer particularly promising investment opportunities. According to Deloitte research, 36% of tasks performed across industrial products manufacturing could benefit from augmenting human capabilities with AI. Additionally, Defense companies' use of AI-enhanced design and engineering to transform workflows exceeds the cross-industry average by 16 percentage points.
Given that 49% of aerospace and defense executives expect most of their production to be powered by AI-enabled systems by 2030, private equity firms with manufacturing technology portfolios are strategically positioned for substantial returns in this rapidly evolving sector.
Startup Ecosystem and Innovation Pipelines
The defense technology sector has attracted a surge in private equity investments, fostering innovative startups that are reshaping military capabilities. These emerging companies are developing groundbreaking solutions across various domains, attracting strategic investment from venture capital firms seeking early exposure to tomorrow's defense leaders.
Global Command & Control Technologies (SCAD Platform)
Based in South Africa, Global Command & Control Technologies has developed the Surveillance Control and Air Defense (SCAD) platform that integrates sensor data to create accurate operational pictures for military decision-makers. The system comprises four key components: a Ground Command and Control System for flight planning, an Air Picture Display System for in-flight control, a Current Intelligence System for real-time information, and a Record and Playback System for training and incident investigation. Throughout operations, SCAD enables comprehensive monitoring of airfield systems, subsequently enhancing command capabilities for defense agencies.
Arms Cyber's Phalanx Endpoint and Cloud Security
Arms Cyber has emerged as a frontrunner in defense cybersecurity with its Phalanx platform. The solution enhances Microsoft Defender with specialized ransomware protection for Azure environments. Essentially, it employs patented stealth directories and dynamic decoys to mislead attackers while utilizing AI-powered monitoring for encryption detection. The platform's stealth recovery vaults enable system restoration in seconds without operational downtime, making it particularly attractive for defense applications where continuity is critical.
Dynovas and DCube in Advanced Materials and R&D
Dynovas specializes in aerospace and defense manufacturing, offering comprehensive engineering solutions for composite fabrication. The company has secured multiple SBIR awards, including development of the Rapid Additive Integrated Launcher System and Advanced Pressure Resin Transfer Molding for large three-dimensional woven preforms. Regarding software-hardware integration, Italian startup DCube designs MIL-STD-compliant mechanical and electrical components, overseeing full production cycles for defense applications.
SOTIRIA's AI-Driven Underwater Defense Systems
SOTIRIA Technology, a Greece-based NATO DIANA-selected company, has pioneered the Nereid system—a passive, scalable underwater Intelligence, Surveillance, and Reconnaissance solution. First of all, the system uses Type S and Type A sensors coupled with Dioptre, their AI-powered software platform, to detect and classify underwater threats. This technology provides critical protection for maritime borders and naval assets, establishing a competitive advantage in the growing underwater defense market.
Strategic Investment Models for 2026 and Beyond
As defense technology investments evolve beyond 2025, strategic positioning becomes increasingly critical for private capital seeking both financial returns and national security impact. Through careful planning and alternative approaches, investors can navigate the complex defense acquisition landscape.
Build-First vs Contract-First Approaches
Currently, a major shift is occurring in how defense technology companies approach market entry. The traditional "contract-first" model—where startups secure government funding before building—is being challenged by a "build-first" approach. This emerging investment philosophy involves self-funded research and development ahead of securing contracts, enabling companies to match the pace set by venture-backed technology firms. Ultimately, successful defense tech investors often employ hybrid strategies, securing Small Business Innovation Research funding for credibility, utilizing Other Transaction Agreements for rapid prototyping, then partnering with Program Executive Offices for scale.
Dual-Use Tech and Civil-Military Crossover Potential
Dual-use technologies—those applicable to both defense and commercial sectors—represent particularly attractive investment targets. Rather than merely a category, dual-use should be viewed as a deliberate strategy requiring specific plans and trade-offs. This approach enables investors to mitigate risk through diversified revenue streams while maximizing potential returns. In this context, technologies initially developed for commercial applications can find unexpected applications in defense, creating value in both markets simultaneously.
Exit Strategies: M&A, Defense Primes, and SPACs
Exit pathways for defense tech investments remain varied yet challenging. Misaligned valuation expectations frequently impede acquisition deals, requiring investors to carefully manage growth expectations. Traditional exits through sales to defense primes continue to dominate, illustrated by Arlington Capital Partners' planned sale of BlueHalo to AeroVironment and Carlyle's sale of Novetta to Accenture Federal Services.
Conclusion
Defense technology investments stand at a historic inflection point as private equity firmly establishes itself as a driving force behind military innovation. The projected $2.3 trillion market valuation by 2030 reflects not merely expanded budgets but a fundamental transformation in how defense capabilities develop and deploy. This shift toward private capital represents perhaps the most significant change in defense funding mechanisms since the Cold War era.
Private equity firms clearly recognize this opportunity, evidenced by the dramatic growth in both deal count and size. Deals exceeding $10 million have increased eightfold over the past decade, while median valuations doubled year-over-year to reach $115 million by mid-2025. Major investors like Insight Partners, KKR, and established defense specialists such as The Carlyle Group have positioned themselves strategically across key growth segments.
AI-enabled systems, particularly those focused on proactive cybersecurity and autonomous capabilities, offer especially compelling investment opportunities. The global defense cybersecurity market alone expects to reach $87.08 billion by 2034, growing at 11.18% annually. Additionally, advanced manufacturing technologies and dual-use innovations present attractive targets for private capital seeking diversified returns.
Regional dynamics further enhance the investment landscape. North America maintains market dominance with 39.5% global share, while Europe commits to historic spending increases as NATO members pledge to raise defense budgets to 5% of GDP by 2035. Meanwhile, Asia-Pacific emerges as the fastest-growing region, creating diverse geographic opportunities for strategic capital deployment.
The build-first approach increasingly challenges traditional contract-first models, allowing venture-backed firms to accelerate innovation cycles beyond conventional defense procurement timelines. This strategic shift enables private investors to drive technological advancement rather than merely respond to government requirements.
Beyond financial returns, private equity now shapes national security outcomes through targeted investments across emerging technology domains. As geopolitical tensions persist and defense priorities evolve, private capital will undoubtedly play an essential role in developing next-generation military capabilities through 2026 and beyond.