A defence startup can have an impressive demonstration, enthusiastic military users and no reliable route to revenue. For investors, the decisive question is how technical demand becomes a funded purchase—and whether the company can afford the journey.
Defence tech covers businesses with very different economics. Software sold through an established contractor, a new aircraft manufacturer and a sensor company serving civilian and military customers cannot be assessed using the same revenue assumptions. Start with the product, buyer and procurement route before drawing conclusions about the sector.
What the funding figures tell us
European defence, security and resilience startups raised $8.7bn in 2025, up 55% year on year, according to a Dealroom and NATO Innovation Fund report released in February 2026. That is a broad category, including security and resilience businesses; it should not be presented as funding for military equipment alone.
The increase shows investor appetite. It does not establish that procurement is getting faster, that individual companies can manufacture profitably or that entry valuations leave room for attractive returns. A growing government budget also includes spending that may never reach a particular startup.
Trace the route from trial to purchase
Ask the founder to identify three people: the end user, the person controlling the budget and the person authorised to buy. They may work in different organisations.
A successful trial answers whether a product can work in a particular setting. Commercial diligence must then establish who can order it, under which contract and with what funding. A paid pilot may finance useful development while leaving the scale-up decision unresolved.
| Question | Evidence to examine |
|---|---|
| Who pays? | A named budget owner and identified funding source |
| How can they buy? | The procurement route, approvals and proposed contract terms |
| What remains before deployment? | Testing, certification, integration and training requirements |
| How much revenue is committed? | Signed orders, cancellation rights and delivery conditions |
| When does cash arrive? | Deposits, milestone payments, acceptance criteria and payment terms |
Separate signed revenue from a sales pipeline, and a pipeline from the total defence budget. If the forecast depends on one programme, model a delay to that programme explicitly.
Work out how much capital delivery consumes
Hardware growth can absorb cash before it produces profit. Components, tooling, inventory and quality assurance may need funding well before a customer accepts delivery.
An illustrative company wins a £10m order with a 20% deposit. It receives £2m upfront. If production and delivery require £6m before the remaining payment arrives, it still needs £4m of funding, before allowing for overheads and contingencies. The contract is commercially valuable, but its headline size does not solve the cash requirement.
Check whether the financial plan includes supplier deposits, replacement units, field support and certification costs. For software, examine integration work, security requirements and the engineering time devoted to each customer. Recurring licence revenue can carry substantial service costs.
Dual-use sales may broaden the customer base, but a civilian market needs its own evidence. A product's theoretical usefulness to airlines, factories or emergency services is not a substitute for orders from those customers.
Check ownership and export restrictions before closing
In the UK, defence is among the sensitive areas covered by the National Security and Investment regime. Certain acquisitions require approval before completion; the analysis depends on the activities of the target and the rights acquired. The government's NSI acquisition guidance also explains its powers to review transactions outside mandatory notification.
Build the review into the transaction timetable. Give advisers the proposed ownership chain, voting arrangements and investor information. A nominee or SPV does not remove the need to analyse the actual acquisition.
Export controls are a separate question. UK rules can apply to military and dual-use goods, software and technology, including certain transfers of information and technical assistance. Assess the proposed products, destinations and end users against current government export-control guidance.
The commercial implication is direct: a market the company cannot lawfully serve should not sit unqualified in its revenue forecast.
Separate regulation from investors' own policies
The FCA says its sustainability rules do not prevent investment in defence companies. Its statement distinguishes those rules from financial institutions' own investment policies. It also identifies controversial-weapons exclusions for specified climate benchmarks.
An investor or lender may therefore decline a deal under its own mandate even when the FCA's sustainability rules do not prohibit it. Establish the relevant restrictions with prospective backers before relying on their participation.
Match the holding period to the business
The investment case should identify what could make the stake saleable: sustained profitability, strategic demand, a later financing round or a public listing. Each route needs assumptions about timing and likely buyers.
Then test the downside. If procurement slips by a year, can the company survive? Can existing investors finance it? Does the investment vehicle permit the required follow-on funding and a longer hold?
A useful defence investment memo connects technical capability to a purchasing decision, delivery economics and an eventual return to shareholders. The sector label cannot do that work.
FAQ
Does the NSI Act apply to a defence SPV investment?
It can. UK notification and review depend on the target's activities, the rights acquired and the ownership arrangements. Pooling an investment through an SPV does not remove that assessment. Use the government's acquisition guidance linked above and resolve any required approval before completion.
Do FCA sustainability rules block investment in defence companies?
The FCA's statement says its sustainability rules do not generally prevent defence investment. Specified climate benchmarks have controversial-weapons exclusions, and investors may impose their own mandate restrictions. Confirm the relevant policy with each backer instead of treating regulation and voluntary exclusions as interchangeable.
Why is a paid pilot different from a procurement contract?
A pilot may pay for testing without committing the customer to a larger purchase. Establish who controls the later budget, what approvals remain and whether the follow-on order is binding. Technical success and procurement authority are separate parts of the revenue case.
What happens if a defence investment is held longer than expected?
The company may need more operating capital, and the holding vehicle may need an extension or additional expense funding. Review the relevant terms and approval rights in advance. A delayed procurement programme should appear in both the company's cash forecast and the investor's holding-period assumptions.
Are defence startups eligible for EIS or SEIS relief?
Potentially. Defence is not itself a blanket exclusion, but particular activities, such as shipbuilding, can be excluded. The company, share issue and investor must satisfy the relevant scheme conditions. Check the actual trade against HMRC's excluded-activities guidance; a defence-sector label or successful procurement contract does not establish eligibility.
