Venture capital investors are flocking to larger defense-tech deals while overall dealmaking for the year slows.
Last week, Anduril—a California-based defense startup that supplies drone-related technology to the US military—closed one of 2024’s biggest defense-tech rounds, pulling in $1.5 billion from backers including Founders Fund and Sands Capital.
The deal is the latest in a slew of defense-tech mega-rounds to have closed in recent months, but investor appetite for the sector, in general, appears to be waning.
Defense tech has historically not been as popular with VC investors as it can increase reputational risk for firms. Many VCs simply aren’t able to invest in the sector due to LP agreements with regards to weapons. Securing government contracts is also a lengthy process dominated by a handful of established players, making investments riskier. A decade ago, only $4.3 billion was invested in the sector, compared to $34.9 billion last year.
But with the rise in geopolitical tensions, national security has become a higher priority for countries that are increasingly turning to technology for defense. Success stories like Anduril and Shield AI have also given VCs more confidence.
Even with the VC downturn in 2022, funding levels for the sector remained relatively resilient over the past couple of years. However, the pace of dealmaking has slowed. As of June, only 228 deals had closed in the sector worth a combined $9.1 billion, according to PitchBook’s latest defense tech update. At that pace, annual figures would come in below 2023’s total.
The sector is still capable of producing larger rounds, however. Aside from Anduril’s deal, Scale AI, which provides AI data training and validation for enterprises and the defense industry, closed a $1 billion Accel-led Series F in May. Last month, Helsing, a German developer of AI software for defense systems, secured a €450 million (about $494 million) Series C led by General Catalyst.
Government support for the sector is also ramping up, particularly in Europe. Earlier this year, the European Commission launched a consultation on opening its €95.5 billion Horizon Europe program to support companies developing dual-use technologies with civil and military applications.
The European Investment Fund also announced a €175 million fund to invest in VCs backing defense-tech startups in January.
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