Several months ago, on a famous VC podcast, I heard an idea that I consider heresy: defence tech is not a real “vertical” or industry. I fundamentally disagree with this assessment. Defence tech is critical for Europe’s future — and it is a real vertical where investors of various profiles, including VC, can make money.
The podcast made a number of strong arguments for why defence tech is not a vertical. According to this view, venture capitalists spraying capital into defence are falling for a hyped-up category error and walking into a financial trap. It sounded clever on a podcast. But it relies on a mental model that was cracked in 2022 and then again at the 2025 Munich Security Conference.
The podcasters made a few claims:
- Defence isn’t a market; it’s a sales channel monopsony trained on the government.
- Defence contracting is a brutal “winner-take-all” arena. You win a decades-long Program of Record monopoly, or you get $0.
- Hardware is hard. Defence requires asset-heavy manufacturing, yet “tourist” VCs mistakenly price these industrial companies like 90%-margin B2B SaaS startups.
I agree with some of this skepticism. Selling in defence is not trivial. Hardware is indeed hard and more expensive to build than SaaS. And defence tech companies should not be priced on SaaS hype multiples.
But does this really disqualify defence tech from being a “proper” vertical — or from being eligible for VC funding?
The truth is: the defence market has changed enormously in the past few years. And this outdated thinking framework must evolve.
Defence is not a monopsony. It is B2B2G. Everyone fixates on the B2G layer — the largest revenue, yes, but also the strictest regulations, the least flexibility, and direct competition from the primes.
But primes — primary integrators — need an entire ecosystem of suppliers to be able to sell to governments in the first place. It is the B2B part of the defence industry that is interesting for investors. Winning in the new defence tech reality is not only about becoming the next prime (or “neoprime”). Build great horizontal technology (say, autonomous navigation) and many integrators become your customers. That is a very different — and much more VC-compatible — business model.
And in the B2G sector, defence contracting is rapidly changing with new innovation acquisition programmes (e.g. Drone Dominance in the US) and contract structures (like Germany’s €900M procurement scheme). Ukraine is the most extreme live example, with its fast-track procedures and multiple acquisition vehicles: Army of Drones, MOD, direct-to-brigade, municipalities, charities.
Private capital is funding capabilities the military didn’t know it needed. When a startup proves its tech works in the field, it forces governments to launch new programmes for emerging OEMs. Some VCs bet on this change in procurement even before 2022 – and they win here, the FMV of their defence portfolio is a rocketship.
Hardware is definitely harder than SaaS. But it was hardware that gave birth to Silicon Valley. And the revolution in defence tech means hardware today is less of a hurdle than it was yesterday. Today, the true value-add is software-defined. Because this software layer is horizontal, there are numerous areas ripe for innovation. This means the market has space not just for a single national champion (the old hardware mentality), but for multiple winners per category.
Finally, the argument I like least: dual use. The tech built by new defence startups is mostly applicable beyond the battlefield. I find this the weakest card to play — not because it’s wrong, but because it concedes too much. In most cases, ‘defence’ is simply a go-to-market strategy, not a technological cage. The underlying tech—whether it’s autonomous navigation, advanced materials, or secure comms—has massive commercial upside. Companies building fundamentally great technology can pivot or expand into civil industries seamlessly.
Defence tech is a proper industry with lots more room for venture-scale outcome and multiple paths to success. If anything, we need more VC in defence tech! We need more bright engineers choosing this space and more entrepreneurs making Europe safer. They need to be funded.
Anton Verkhovodov is a partner at D3, a venture capital firm based in Kyiv, Ukraine.
