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A New Defense Era Unfolding
A major shift is reshaping the global defense landscape. NATO countries have committed to a historic target: allocating at least 5% of their GDP to defense spending by 2035. This ambitious move, driven largely by U.S. political pressure and concerns about regional threats, particularly from Russia, signals a booming future for defense technology. The implications are vast, not just for traditional military strategy, but also for venture-backed startups, manufacturing, AI-based infrastructure, and transatlantic industrial collaboration.
This policy commitment is occurring amid growing interest in defense innovation, exemplified by the U.S. push for a \$175 billion “Golden Dome” missile shield and increasing pressure to modernize outdated military systems. At the heart of the conversation are defense-tech players like Anduril and Firestorm, who are leading the charge in building smarter, scalable solutions for modern warfare. As traditional investors flock to what was once a niche market, the conversation now pivots to scalability, profitability, and geopolitical autonomyāespecially for Europe, which must now rely less on American protection.
The Surge in Defense-Tech Investment
The NATO agreement to boost defense spending to 5% of GDP by 2035 has sent ripples across political, technological, and economic arenas. Not only does it mark a strategic win for the Trump administration, but it also signals an era of intensified innovation within the defense-tech sector. The spending breakdown includes 3.5% for core military operations and an additional 1.5% for fortifying critical infrastructure. Countries near Russiaālike Estonia, Latvia, and Polandāare already outpacing others in defense investments, some crossing the 3% mark well ahead of schedule.
Venture capital has taken notice. In 2025 alone, over 400 global defense-tech companies have secured nearly \$13 billion in funding. Startups that once struggled to gain traction are now hot commodities. Defense giants like Anduril, which could go public at any moment, lead the way, while mid-tier startups face the challenge of finding sustainable exit routes. Acquisition options are murky, as defense M\&A multiples remain lower than those in broader tech markets. Though companies like Anduril are actively acquiring, theyāre not buying many VC-backed firms.
Some speculate that Big Tech may step in, potentially absorbing these defense innovators at profitable revenue multiples. However, most large tech players are currently prioritizing general AI development, leaving the defense sector to continue carving its own path. Traditional defense contractors might eventually feel pressure to modernize and begin aggressive acquisitions, though many are still content to ride the wave generated by the NATO funding surge.
Europe is especially on edge. Policymakers see the Ukraine crisis as a precursor to larger ambitions from the Kremlin and acknowledge that relying on the U.S. for long-term security is no longer tenable. The message from this weekās NATO meeting in the Netherlands is clear: collective defense demands not just soldiers and missiles, but also resilient industrial bases, robust supply chains, and scalable technology.
At the Paris Air Show, major figures in defense tech stressed the urgency of increasing production volumes. Andurilās Trae Stephens noted that while new entrants are welcome, the sector is at risk of becoming overhyped. Firestormās Dan Magy emphasized that scalable manufacturingāespecially through mobile technologies like 3D drone printingācould be the key to meeting global defense demands.
Meanwhile, supply chain resilience is taking center stage. Leaders from Amazon Web Services and Exiger highlighted how predictive models and AI are transforming logistics into strategic assets, moving beyond simple outage detection to proactive infrastructure building. The broader takeaway is stark: deterrence today is not just about weapons; itās about who can build, deploy, and iterate faster.
What Undercode Say:
Strategic Overhaul of Global Military Economics
NATOās 5% GDP pledge is more than a military agreementāit represents a strategic overhaul of how global defense economies are structured. This reallocation of funds will ripple through national budgets, requiring difficult trade-offs and sustained political will across member states. For smaller NATO countries, meeting this threshold might require austerity in other areas unless economic growth compensates for increased military spending.
A Renaissance for Defense Startups
Venture capitalists have historically been skeptical of defense startups due to long sales cycles and government bureaucracy. But with over \$13 billion raised in 2025, the stigma has lifted. What was once a āmisfitā sector has become trendy. Yet, this popularity carries risks. Overcapitalization and inflated valuations could spell trouble for many new entrants, especially if exit paths remain unclear.
Market Exit Dilemmas
The scalability of defense-tech innovation hinges on clear exit strategies. While companies like Anduril are positioned for public offerings or strategic buyouts, smaller firms face an uncertain landscape. Legacy contractors may resist paying high premiums, and Big Techās hesitancy to dive deep into defense only compounds the issue. Without acquisition activity picking up, many startups could stagnate after Series B or C rounds.
Europeās Push for Autonomy
Europe’s geopolitical reality demands a new defense doctrine. Countries like Poland and Estonia are already outperforming, but Western Europe lags. The threat from Russia has catalyzed a realization: sovereignty requires industrial and military independence. The U.S. can no longer be seen as the eternal shield. This creates a window for European defense startups to flourishāif funding and manufacturing scale match rhetoric.
Supply Chain as a Strategic Asset
The modernization of defense isnāt just about weaponsāitās about logistics. AWS and Exigerās focus on predictive modeling introduces a strategic angle thatās long been neglected in defense procurement. Instead of responding to shortages, defense systems must now be preemptively built to withstand global disruptions, a lesson well-learned from the COVID-19 pandemic and current geopolitical tensions.
AI and Autonomous Warfare
Autonomous systems will shape future battlefields. From drone swarms to self-guiding missiles, AI is revolutionizing combat. Firestormās portable drone manufacturing model underscores the demand for rapid, decentralized production. However, ethical frameworks and rules of engagement for autonomous warfare remain murky, raising concerns about oversight and accountability.
Industrial Policy Reimagined
Deterrence now extends into factories, labs, and data centers. NATOās new approach necessitates robust collaboration between government, startups, and industrial leaders. This is not just about building arms but about creating ecosystems that can pivot quickly in times of crisis.
Rising Risk of a Bubble
While optimism is high, the sector risks becoming overinflated. If NATO countries fail to sustain long-term budgets, or if war fatigue sets in among voters, the influx of capital could evaporate. Without tangible results, some defense startups may implode under their own valuations.
Cultural Shifts in Tech
Silicon
Production, Not Procurement, is the Real Battle
Magyās point that āyou canāt buy your way out of this, you have to build your way outā rings true. The next frontier isnāt just better weaponsāitās faster, smarter production at scale. Whoever controls the assembly lines, not just the algorithms, may control the future battlefield.
š Fact Checker Results:
ā
NATOās 5% GDP defense target by 2035 is official and confirmed
ā
Over \$13 billion has been raised by defense-tech startups in 2025
ā Big Tech is not yet significantly involved in defense-sector acquisitions
š Prediction:
Defense-tech investment will continue accelerating through 2030, especially in Europe, as geopolitical instability persists and NATO nations scramble to meet the 5% target. Expect a wave of consolidation in the defense startup landscape, with legacy primes and a few tech giants absorbing key players by 2027. Meanwhile, decentralized production and AI-based combat systems will redefine military infrastructure faster than traditional war doctrines can adapt.
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