Key takeaways
Strategic buyers shape deals early. CVC participation often precedes formal rounds.
Deal access stratifies before fundraising. Primes engage through pilots and prototypes first.
Exits are acquisition-heavy, scale-dependent. Manufacturing readiness determines exit options now.
Financial investors must reposition to compete. Co-investment and specialization replace passive holding.
Production capability concentrates returns. Execution matters more than invention for exits
When buyers become backers
VC deal value in defense tech reached $49.1 billion in 2025, nearly doubling from the prior year. The more consequential shift lies beneath headlines: investors writing these checks are increasingly the same entities that will eventually acquire the companies they fund. Strategic buyers now participate earlier, often shaping product development before technology reaches market readiness.
For fund managers evaluating defense tech exposure, this dynamic matters more than tracking funding totals. It redraws who gets access to deals, how transactions unfold, and what exit pathways actually look like.
Who's writing the checks matters more than how many
Defense tech's growth story is well documented. However, it is less obvious how the composition of that capital is changing. Corporate investment in defense tech reached $5.9 billion in 2025, a 28% increase from the prior year. That figure represents deliberate positioning by entities with integration pathways, not speculative inflows chasing momentum.
The number of firms actively investing in defense tech increased 41% in 2025. Yet, unique first-time investors are declining. Capital is concentrating among dedicated funds and strategic players who know how defense procurement actually works and plan to remain in the sector long-term.
Several indicators illustrate this:
Booz Allen Hamilton increased its CVC allocation to $300 million specifically to accelerate technology acquisition.
Point72 launched a dedicated Deterrence Fund targeting national security technology.
JPMorgan established its Security and Resiliency Initiative with multibillion-dollar capacity.
These are long-duration commitments from institutions with operational reasons to participate beyond financial returns. When a defense prime's venture arm leads a round, that capital often comes with development partnerships, pilot program access, and implicit acquisition optionality. Pure financial investors are competing on different terms.
Deal access stratifies before formal rounds begin
The most significant change for financial investors involves timing. Corporate investors increasingly engage through development contracts, prototype partnerships, or pilot programs that precede formal fundraising. By the time a Series B closes, strategic relationships may have already shaped the company's trajectory. Two CVC models illustrate the pattern.
How primes engage before rounds open
RTX Ventures invests in five to ten companies annually, split between commercial aerospace and defense applications. The fund operates differently from traditional venture capital. Business units like Collins Aerospace and Raytheon serve as potential integrators, creating a pathway from investment to acquisition that pure financial backers cannot replicate.
Roman Mueller, RTX Ventures' executive director, describes their mission as investing in companies that can transform the sector, with transformation often meaning integration into RTX's existing capabilities.
Lockheed Martin Ventures operates with explicit non-financial objectives. The fund seeks technologies maturing through commercial volume that could provide strategic advantages. A successful investment looks like Terran Orbital: a company that grew through commercial activity while hardening capabilities relevant to defense applications. Lockheed partnered on multiple government contracts, eventually acquiring Terran Orbital outright.
For financial investors, this creates a dilemma. A company with strategic backing may offer clearer exit visibility, since an acquirer is already engaged. That same backing may constrain competitive dynamics at exit, limiting upside. Assessing whether strategic involvement is a feature or a limitation requires understanding the specific investor's intent and integration timeline.
Strategic presence reshapes transaction dynamics
When primes participate in cap tables, they often seek influence over development direction alongside equity exposure. This pattern is accelerating in Europe, where CVCs increasingly function as precursors to acquisition rather than standalone investments.
Marc Lange, a defense tech consultant with 2 Ventures, frames the dynamic bluntly: large primes will struggle to outcompete startups on innovation speed. Their alternative is increasing CVC activity to secure early positions in technologies they will eventually need to own.
The 2024 launch of Presto Tech Horizons, a €150 million fund combining Presto Ventures with the Czech defense company Czechoslovak Group, exemplifies this model. The partnership provides capital alongside defense-sector expertise, accelerating both investment selection and portfolio company development.
Syndicate structures offer another evolution
MilVet Angels emerged from stealth in late 2025 with roughly 250 members spanning tech founders, Wall Street financiers, former military leaders, and intelligence officials. The syndicate has backed Anduril, Shield AI, Hermeus, and Ursa Major. Its value proposition combines capital with navigational expertise: members understand procurement timelines, classification requirements, and program office dynamics that generalist investors rarely possess.
Due diligence requirements have expanded accordingly. Evaluating company quality still matters. But financial investors must also map the strategic investor landscape:
Who else holds equity?
What are their likely acquisition timelines?
Does their presence clarify exit pathways or constrain competitive tension?
Dual-track processes (preparing simultaneously for IPO and sale) are becoming standard for later-stage defense tech companies, reflecting uncertainty about which path will optimize value.
Exits are acquisition-driven and scale-dependent
The exit landscape in defense tech looks different from traditional venture-backed sectors. VC exits reached $54.4 billion in 2025, up from $18.2 billion in 2024. The majority occurred through acquisition rather than public offering.
The most prominent transaction: Nvidia's €20 billion purchase of Groq, which develops AI hardware and software for applications including military autonomous systems. Ali Javaheri, senior analyst for emerging technology, anticipates a major venture-backed defense tech startup will be acquired by a traditional prime contractor in early 2026, as incumbents choose to buy proven capabilities rather than build from scratch.
What determines exit outcomes now
Three dynamics are reshaping how investors should evaluate exit potential.
Manufacturing capacity has emerged as the critical variable. Investment in manufacturing-focused defense technology rose to $4.7 billion in 2025 from $2.6 billion the prior year. Much of this capital targets drones, space systems, and defense electronics, where production scale determines contract eligibility.
Javaheri summarizes the implication: execution will determine returns more than invention. Companies that convert facilities into repeatable output will capture both capital and contract velocity disproportionately. For investors, this means evaluating manufacturing readiness alongside technology differentiation. A compelling prototype with no production pathway faces constrained exit options regardless of technical merit.
The exit certainty that strategic buyers provide comes with potential tradeoffs. Acquisition pricing reflects strategic value to a specific buyer, which may differ from what competitive bidding or public markets would yield. Financial investors accustomed to IPO optionality should calibrate expectations accordingly.
Where non-strategic capital still adds value
Despite the structural advantages strategic investors hold, opportunities remain for financial capital deployed thoughtfully.
The innovation gap persists. Prime contractors spend roughly 3% of revenue on R&D, compared to 11% for leading commercial technology companies. This disparity ensures continued reliance on external innovation sources. The NatSec100 companies have raised $70.1 billion in private capital against only $28 billion in federal awards, indicating substantial private market participation in capabilities the government eventually procures.
Four positioning strategies that merit consideration
Co-investment alongside CVCs. Participating in rounds led by strategic investors provides access to deal flow, reduces diligence burden through shared evaluation, and aligns interests toward operational milestones that matter for exits. The tradeoff involves accepting that the strategic investor's priorities may shape company direction.
Specialization in adjacent capabilities. Manufacturing technology, supply chain resilience, and cybersecurity represent areas where strategic buyers have needs but may not invest directly. Financial investors with relevant expertise can build positions in companies that become acquisition targets without competing head-to-head with prime contractor CVCs for core defense platforms.
Secondary market activity. As strategic investors rationalize portfolios and dedicated defense funds mature, secondary transactions create opportunities to acquire positions at different valuations than primary rounds. This approach requires sector-specific knowledge to assess fair value without public market comparables.
Funding the gap between prototype and contract. Government contracting reforms are shortening timelines from prototype to program-of-record. But the gap between successful demonstration and production contract remains capital-intensive. Investors willing to provide bridge financing with realistic timeline expectations can add value that strategic investors, focused on nearer-term integration, may not offer.
For investors evaluating entry points, start by mapping which primes and CVCs are already active in target companies and assess their likely acquisition timelines. That strategic landscape now impacts deal terms, development direction, and exit pricing more than technology differentiation alone.
The bottom line
Manufacturing scale-up is concentrating returns among companies that demonstrate production capability. As PitchBook analysts note, execution will determine returns more than invention, and capital is flowing toward companies that have already retired production risk.
For non-strategic capital, the path forward runs through co-investment alongside CVCs, specialization in adjacent capabilities, and willingness to fund the gap between prototype and contract. Those who adapt to a landscape where strategic buyers shape deals from the start can still participate in one of the few sectors showing sustained growth while broader venture markets cool.
