Tiz Gambacorta, Co-founder, Investor, and Fund Manager at Eunice.io.
For years, many VCs haven’t had the stomach to invest in defense-related startups. Why? Perhaps they didn’t want to look like they were cashing in on conflict.
But now, geopolitical instability is growing—and next-generation tech is seen as a crucial part of national security. Because of this, an alternative play has started to emerge: defense-adjacent investing.
Dual-Use Tech: Balancing Risk And Reward
The themes behind this strategy are compelling, but not without risks. Essentially, startups that fall into this category are creating “dual-use tech.” Think aerospace innovators building electric vertical take-off and landing aircraft, or the companies leading the race to return astronauts to space. Sure, their creations can be used in a military setting, but they could also benefit civilians, too.
Militaries are modernizing as artificial intelligence and robotics grow in capability and significance—and lucrative government contracts are on the table. But unlike pure defense stocks, whose bottom lines live and die by whether they’re chosen for key tenders, defense-adjacent sectors can diversify and tap into additional revenue streams from other industries.
The Global Race For Innovation
Major economies already know how big an opportunity this is—and the importance of gaining a first-mover advantage. Unveiling his AI action plan over the summer, President Donald Trump warned it was “a national security imperative for the United States to achieve and maintain unquestioned and unchallenged global technical dominance.”
This helps explain why semiconductors, perhaps the best example of a defense-adjacent sector, have become such a hot-button topic. Not only are these chips an essential ingredient in military technology, but they can also be prone to supply chain vulnerabilities. Goldman Sachs estimated that 169 industries were impacted during the years-long shortage exacerbated by the Covid pandemic. Ouch.
A big but is coming though: Protectionist measures designed to prevent shortages have a real risk of backfiring—for countries, companies and consumers alike. There’s a big difference between introducing smart policies to help new technologies flourish and embarking on a path of total sovereignty. Adopting an isolationist approach is a fast track to mediocrity—and regions that pit themselves against each other in a race to dominate telecoms, AI and semiconductors risk stagnating in the long run.
The reasons why are simple. It makes little sense for rival businesses separated by borders to duplicate their efforts and pursue the same goals. Not only does this delay the breakthrough innovations that can change the world, but a lack of international collaboration can also prevent a consensus from being reached on how new technologies should be used responsibly.
We’ve already seen this with AI, with the U.S. and China in a battle to achieve dominance. A fear of being left behind has meant this still-nascent industry has grown faster than the regulations overseeing its use, often at the expense of companies whose copyright and intellectual property were used to train models in the first place.
Risks And Opportunities
Defense-adjacent startups, and investors looking for opportunities, also need to remember that reshoring doesn’t always mean resilience. While concentrating production domestically may seem like a shrewd move, it also creates a single point of failure that can be even more disruptive than interruptions in global supply chains. From natural disasters to power outages to industrial action to elevated costs, black swan events can be calamitous.
Loads of new investment vehicles have started popping up to satisfy demand. While some defense-focused funds do allow investments into weapons, some are focused solely on startups providing dual-use tech. Interestingly, levels of interest are closely linked to geography, too. Giuseppe Lacerenza of Keen Venture Partners was recently quoted as saying that this play is more likely to resonate with family offices and high-net-worth individuals closer to Russia—think Estonia, Finland and Poland. As he told Resilience Media: “The further you are … Well, if you’re in Italy, why would you care?”
In a report earlier this year, McKinsey noted the defense ecosystem is at a “critical junction, ripe with opportunity for private capital,” and argued the next decade will prove consequential. It cited figures that show global VC investments in defense-specific technologies, as well as those with multiple purposes, rose by a third to hit $31 billion in 2024. A sizable chunk of this was linked to AI, and away from the bubble that’s forming in more flagship stocks.
Meanwhile, SG Analytics shows this trend is continuing into 2025, with $19.1 billion raised in 165 deals during the second quarter of this year—a 200% bump compared with the preceding three months. “For investors, the question is no longer whether defense tech deserves attention, but how to participate effectively in a market that is maturing at record speed,” it concluded.
A New Era For Investors
A backdrop of real-world events, rising government spending and relaxed regulations that allow smaller startups to win major military contracts is opening up the playing field—creating fertile ground for innovation in defense-adjacent products. What was once an ostracized sector could become one of the most consequential themes of the 2020s, prompting investors to rethink how these developments may fit into their broader strategies.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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