Drones and missiles: defense startups ride a wave of demand in the conflict with Iran
In just a few years, the defense technology sector has gone from a topic venture investors tried to avoid to one of the hottest markets in the world. What used to be treated as taboo by many venture capital funds, especially in the United States and Europe, now moves billions of dollars in funding rounds, accelerated hiring, and commercial disputes between startups and traditional military-industrial giants.
According to data from the Dealroom platform, the jump has been brutal: in 2020, defense tech companies raised around 869 million dollars worldwide. By 2025, that figure had passed 11 billion dollars, more than ten times the level recorded just five years earlier. It was not just any organic growth: it is directly tied to the rise in geopolitical tensions and wars that put drones, interception systems, and command software at the center of modern military strategy.
In the middle of this scenario, the conflict involving Iran, the United States, Israel, and Gulf countries has become a watershed moment. For many startups, this is when defense tech stops being a promise and becomes signed contracts. As reporter Samantha Subin described, the war in Iran turned into the moment the defense tech ecosystem and Silicon Valley had been waiting for: an explosive combination of operational urgency, billion‑dollar budgets, and political openness for young companies to compete head‑to‑head with large traditional suppliers.
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In 2020, defense tech was still a niche. By 2025, it had already surpassed 11 billion dollars in global investments, driven by wars, drones, and the definitive entry of startups into the defense game.
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How the conflict with Iran became a demand engine for defense tech
The offensive by the United States and Israel against Iran, which began in late February, triggered a sequence of attacks, retaliations, and defensive operations that put drones and missiles center stage. The Middle East, already one of the most sensitive regions in terms of security, started to see an impressive volume of airstrikes, many of them targeting US allies in the Gulf region.
According to data compiled by the Center for Strategic and International Studies (CSIS), more than 3,000 drones and missiles have already been launched against the United Arab Emirates, Saudi Arabia, Bahrain, and Kuwait since the beginning of the current conflict. For governments that deal with this type of threat on a daily basis, this is no longer about forecasts or hypothetical scenarios, but real pressure to modernize defenses, strengthen early‑warning systems, and purchase technology that is ready for immediate use.
That is where defense startups come in strong. Subin and other CNBC reporters heard from companies in the United States and Europe that reported a clear increase in demand for their products right after the first attacks on Iran. Many of these companies started receiving calls and emails from clients connected to the US Department of Defense and governments in the Middle East wanting to discuss contracts, increase orders, or even buy all of their available production capacity in the short term.
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In several cases, military officials and government procurement teams asked them to expand shifts, speed up manufacturing lines, and move up delivery dates. For some companies, demand came in the form of direct proposals: buying all projected output for a particular interception or monitoring system for months in a row, as long as the startup agreed to scale fast.
Frankenburg, Uforce, and the race to build a presence in the Middle East
In Europe, the movement is similar. Startups focused on drone and missile interception, cloud‑based command systems, and advanced surveillance platforms are, in the words of executives interviewed by CNBC, in intense negotiation mode with Gulf governments. At many of these companies, the Middle East has moved from the “potential market” column to become the top priority in their international expansion strategy.
One example highlighted in the news is Frankenburg, an Estonia‑based company that develops drone and missile interception systems. In recent field tests, the Frankenburg Mark I interceptor missile was evaluated in live‑fire scenarios, reinforcing the startup’s image as one of the boldest bets in the air defense segment. The war in Iran accelerated the plans: company executives confirmed they are expanding their team based in the Middle East, hiring more people in the region to handle support, systems integration, and relationships with local governments.
Another company in the spotlight is Uforce, headquartered between Ukraine and the United Kingdom. In a context where Ukraine itself has become, in recent years, a brutal laboratory for new defense technologies, Uforce brings to the Gulf hands‑on war experience in a high‑intensity environment. Just like Frankenburg, the startup has said it is expanding operations, teams, and physical presence in Middle Eastern countries, precisely because of the escalation of the conflict with Iran and the increasing interest from Gulf states in strengthening their defenses.
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European executives say interest from Gulf governments is “exploding,” with requests to reinforce defenses against drones and missiles and speed up the deployment of new systems.
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Defense tech is no longer taboo in Silicon Valley
For a long time, major tech funds avoided associating themselves directly with defense projects. A mix of image concerns, ethical debates, and unfamiliarity with the military procurement cycle kept venture money away from the sector. That started to truly change from 2020 onward, with intensifying tensions between major powers, Russia’s war in Ukraine, and now the conflict with Iran.
In Silicon Valley, funds and partners that used to resist the idea now see defense tech as a strategic slice of the next innovation wave. Startups building everything from command‑and‑control software to swarms of autonomous drones have entered their investment spreadsheets. The perception is straightforward: modern wars are deeply dependent on sensors, data, algorithms, and real‑time integration. That opens space for digital‑native companies to compete where, historically, only giants with decades of contracts had a shot.
The numbers reflect this shift. Beyond the jump from 869 million dollars in 2020 to 11.2 billion dollars in 2025 in global investments in defense tech, the sector remains hot in 2026, with mega‑rounds still coming in at a fast clip. One of the most recent examples was the 1.75 billion‑dollar round raised by Saronic, a US startup that builds autonomous vessels for military and maritime security use. Shortly before that, drone maker Shield AI raised about 2 billion dollars in a new funding round, underscoring the segment’s weight inside global investors’ portfolios.
Challenges: uneven contracts, production capacity, and geographic focus
Despite the boom, the road is far from simple. As Subin points out, the US government still does not provide a stable pipeline of contracts for many startups trying to sell solutions directly to the Department of Defense. This creates a very concrete dilemma: ramp up production capacity to try to ride the opportunity window, or keep operations leaner to protect margins and avoid being stuck with idle factories if demand slows down.
Some US companies say they are split. Expanding production lines, hiring more people, and investing in new facilities could be the edge they need to win larger‑scale contracts. But without guarantees of continuity, the financial risk increases. The fear is clear: betting big now and, two or three years from today, seeing the pace of purchases drop, leaving them with excess inventory and cost structures that are too heavy to maintain.
In Europe, the situation is even more delicate. Defense startups usually have less access to capital than their American counterparts, which limits their ability to make aggressive bets on infrastructure and expansion. With the explosion of opportunities in the Middle East, many European companies feel pressured to decide whether to channel more resources into the Gulf or keep their focus on contracts with their own governments and NATO allies.
Doubling down on the Gulf region may mean taking attention away from markets like the European Union and the United States. This is not a trivial choice: by chasing contracts in the Middle East to respond to the conflict with Iran, some startups may end up shrinking their presence in strategic programs in their home countries, risking losing ground to more established competitors. It is a medium‑term bet that only time will tell whether it was the right one.
Recent updates in the tech and defense ecosystem
While the defense tech sector goes through this rapid reshuffling, other important pieces on the global tech chessboard are also moving, helping to shape the backdrop for this moment:
- SpaceX took another step toward the public markets by confidentially filing documents with the SEC for a potential IPO, in a listing the market already treats as a contender for a historical record.
- OpenAI closed a funding round that pushed its post‑money valuation to around 852 billion dollars, cementing the generative AI company as one of the most valuable tech firms in the world.
- Oracle kicked off a cycle of thousands of layoffs, confirmed by CNBC, amid heavy pressure on its share price and the need to balance massive investments in AI infrastructure with short‑term financial results.
- French company Mistral AI secured around 830 million dollars in debt financing to fund a new data center equipped with thousands of Nvidia chips, boosting Europe’s race for AI computing capacity.
- Chinese AI specialist Zhipu saw its shares soar after reporting strong revenue growth in its first earnings release as a public company.
These moves show how defense, AI, cloud infrastructure, and large data platforms are increasingly intertwined. Defense startups rely on cutting‑edge chips, public clouds, and advanced AI models — while the AI race itself depends on infrastructure investments that, in many cases, overlap with national security and cyber‑defense demands.
Record funding and the normalization of defense in venture capital
Market data suggests that money is not only flowing strongly into defense tech, but also reshaping how the sector is perceived. That image of defense as a socially uncomfortable investment, the awkward corner of the portfolio, is giving way to a more pragmatic view: in a world with active wars, asymmetric threats, and constant drone and missile attacks, completely ignoring the sector also means passing on a significant part of technological transformation.
From 2025 to 2026, the pace of large rounds has remained strong. Companies like Saronic and Shield AI, with back‑to‑back billion‑dollar raises, help push up the average capital invested in defense tech. At the same time, a growing number of smaller startups focused on niches like sensors, electronic warfare, command software, and large‑scale simulation are filling gaps that appear when armies and air forces need to modernize quickly.
The trend, with the conflict in Iran still in the spotlight and the war in Ukraine far from a definitive solution, is that the topic will stay on the agenda for investors, governments, and founders. The big question is becoming less about whether it is worth looking at defense and more about how to structure theses, governance, and clear boundaries to balance innovation, financial return, and responsible use of these technologies.
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Defense tech stepped out of the shadows: it stopped being a “weird investment” and turned into a strategic bet in a world with active wars, an AI race, and a battle for technological sovereignty.
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What lies ahead for defense startups
With the war in Iran fueling demand for smarter defense systems and the Middle East consolidating itself as one of the biggest markets for defense startups, the next challenge is less about technology and more about strategy. Companies need to find the balance between growing fast and not becoming hostages to unstable contracts; between relying on a single major client and diversifying markets; between prioritizing the Gulf and maintaining a strong presence in the United States and Europe.
At the same time, the competitive landscape is set to intensify. Large defense groups, used to long sales cycles, have realized they can no longer ignore the speed of startups. Many are starting to move closer through partnerships, acquisitions, or open innovation programs, trying to combine decades of experience with the agility of digital‑native players.
Meanwhile, conflicts like the one in Iran keep serving as a daily reminder that drones, missiles, AI, and software are no longer just lab projects or prototypes in presentations: they are central tools in how countries defend their territory, infrastructure, and allies. For startups that have decided to play this game, the window is open — but it is also packed with risks, tough decisions, and long‑term effects that are still being written in real time.
