Defense investment: startups target opportunity amid war with Iran and the new boom in military technology

The world of defense startups has gone through a radical shift in recent years. A sector many venture capital funds used to avoid, out of fear of controversy and public backlash, has turned into one of the hottest destinations for tech-focused risk capital. In 2020, the segment moved just 869 million dollars worldwide, according to Dealroom. Five years later, that number jumped to 11.2 billion dollars, revealing an investor appetite that simply did not exist at the same scale not long ago.

This growth did not happen in a vacuum. The combination of rising geopolitical tensions, drone warfare, cyberattacks, and regional conflicts has turned the world into a giant lab for new military and security solutions. First, Russia’s war in Ukraine accelerated the adoption of drones, interception systems, and real-time intelligence. Now, the conflict involving Iran and a coalition led by the United States and Israel is opening another front of opportunity for defense tech companies, with particularly strong impact in the Middle East.

Startups from the United States and Europe told CNBC reporters that in recent weeks they have seen a clear increase in demand for their products and services, largely tied to the war involving Iran. On one side, the US Department of Defense (DoD) is expanding conversations and purchase orders. On the other, Gulf governments are rushing to strengthen their defenses against drone and missile attacks, creating space for commercial contracts that, until very recently, seemed reserved only for large, traditional manufacturers.

Defense startups shed their taboo status and ride a multibillion-dollar wave

For years, many investors saw the defense sector as almost off-limits. Tech funds preferred to focus on enterprise software, consumer apps, gaming, fintech, and other segments considered more neutral. But the reality on the ground has changed, and fast.

According to global data compiled by Dealroom, the jump from 869 million dollars in 2020 to 11.2 billion dollars in 2025 in capital invested in defense tech is not just an adjustment, it is a structural shift. In 2025 and 2026, the volume of large funding rounds, the so-called mega-rounds, soared, with companies like Saronic, which develops autonomous vessels, announcing 1.75 billion dollars in funding, and Shield AI, which builds autonomous military drones, raising around 2 billion dollars.

Today, the defense sector is no longer viewed as the socially awkward investment it once was in Silicon Valley. The dominant perception among many VCs is that in a world of constant threats, not investing in defense technologies also carries a cost — both strategic and economic.

War with Iran: the moment the sector was waiting for

In the view of some analysts, the current war involving Iran has become, in the words of a CNBC report, the moment defense tech and Silicon Valley have been waiting for. As harsh as that may sound, it captures the sense of a reshaped ecosystem.

Behind the scenes, US defense startups say that since late February, when the United States and Israel began intensifying strikes on Iranian targets, Department of Defense–related customers have started to:

• Increase orders for existing systems;
• Offer to buy out entire production capacity (the classic factory-line buyout);
• Request accelerated delivery and an updated roadmap of new features;
• Discuss rapid scaling of pilot contracts into larger programs.

In practice, this means startups that previously struggled to be taken seriously next to large incumbents now find themselves competing for real contracts, at meaningful scale, with direct impact on field operations.

Middle East becomes expansion focus for European companies

In Europe, the movement looks similar, but with an extra twist: many startups on the continent have less access to capital than their US counterparts. Even so, industry executives say they have been accelerating commercial talks with Middle Eastern governments since the war involving Iran began.

One CEO interviewed by CNBC described interest from Gulf countries as firmly in takeoff mode, with a spotlight on the United Arab Emirates, Saudi Arabia, Bahrain, and Kuwait. That is no coincidence: according to data from the Center for Strategic and International Studies (CSIS), more than 3,000 drones and missiles have already been launched at those four countries since the start of the conflict.

Given this backdrop, the urgency is enormous. Governments in the region are seeking:

• Air defense solutions designed specifically for small and medium-sized drones;
• Hybrid C-UAS (Counter-Unmanned Aircraft Systems) that combine sensors, radar, and detection software;
• Real-time command-and-control platforms integrated with ground networks and satellites;
• Predictive analytics tools to anticipate attack routes and automatically adjust defenses.

European companies like Estonia-based Frankenburg Technology, which specializes in drones and interceptor missiles, and Uforce, a Ukrainian–British joint venture, have confirmed that they are reinforcing teams in the Middle East. Both plan to expand their regional headcount to handle the growing volume of negotiations and potential contracts emerging from the war with Iran.

The Frankenburg example and interception tests

One symbol of this new phase is the Frankenburg Mark I, a missile interceptor system developed by the Estonian startup. In recent live-fire tests, the company has demonstrated the ability to neutralize threats with a high degree of accuracy, combining sensors, tracking algorithms, and a distributed command architecture.

In practical terms, this type of solution fits perfectly with the current demand from Gulf countries, which are facing repeated attacks using drones and missiles and need systems that can respond quickly and, ideally, semi-autonomously. Startups like Frankenburg bring an approach closer to the software world: fast iteration cycles, constant updates, and heavy use of data to fine-tune performance.

Scaling challenges: lumpy contracts and the risk of overbetting

Despite red-hot demand, the outlook for defense startups is still far from simple. One of the most sensitive issues today is the lack of predictability in contracts, especially in the United States.

According to sources interviewed by CNBC, the US government does not provide a stable enough flow of contracts to justify, in many cases, that companies invest heavily in ramping up production capacity. This creates a classic dilemma:

• Scale quickly to try to win big contracts and risk burning cash and hurting profitability;
• Or keep growth at a more controlled pace and miss out on opportunities during demand spikes like the war with Iran.

In Europe, the challenge looks a bit different. Since European startups generally have more limited access to capital, the decision to go big on the Middle East can mean diverting focus from home markets such as the European Union and the United States. If the expected scale of contracts in the region fails to materialize, the risk is that they lose ground at home without making up for it with international revenue.

In short, the sector is playing a kind of financial chess game: each move toward expansion has to balance commercial opportunity, cost of capital, geopolitical risk, and dependence on a small number of large government customers.

Big Tech, AI, and infrastructure: the tech backdrop

The current defense tech moment is also tightly connected to the broader race for artificial intelligence infrastructure and high-performance computing. While military-focused startups raise billions, tech giants and new AI players are moving even larger sums to support data centers, language models, and cloud services.

Some recent highlights include:

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• SpaceX, led by Elon Musk, filing a confidential IPO request with the SEC, bringing the rocket company closer to a public listing that could be historic in market value and capital raised.
• OpenAI announcing the close of a new record-breaking round, reaching a post-money valuation of around 852 billion dollars, cementing its place among the world’s most valuable AI companies.
• Oracle beginning to communicate thousands of job cuts amid a sharp drop in its stock price and heavy capital commitments to build AI infrastructure.
• French company Mistral AI securing roughly 830 million dollars in debt financing to build a data center equipped with thousands of Nvidia GPUs.
• China’s Zhipu, focused on artificial intelligence, seeing its stock soar after reporting strong revenue growth in its first earnings release.

This context shows how defense, AI, and cloud infrastructure are increasingly intertwined. Modern defense platforms depend on large-scale compute, computer vision models, threat trajectory prediction, multi-sensor data fusion, and algorithm-assisted decision-making. None of that is possible without a robust ecosystem of chips, data centers, and AI software.

Invisible chart, very visible trend: money flooding into defense tech

The chart of the week section in the original newsletter visually highlights something the numbers already make obvious: capital invested in defense startups has exploded in 2025 and 2026. The chart underscores:

• Rapid year-over-year growth in investment volume;
• The increasing frequency of billion-dollar rounds;
• The shift in stance from traditional funds that once ignored or rejected the thesis.

Rounds like those of Saronic and Shield AI signal that investors are not just dipping a toe in the sector: they are going all in with massive checks, betting that defense tech will become one of the core pillars of the next decade of innovation, alongside generative AI, cloud computing, and advanced automation.

Where the defense tech ecosystem is headed

The current landscape suggests that the marriage between startups, AI, and defense is here to stay. The war involving Iran has accelerated contracts, sparked interest from new customers, and forced governments to rethink the role of agile companies in their security strategies.

At the same time, the sector still has to grapple with critical issues:

• Designing sustainable contracting models with governments that allow companies to invest in capacity without putting their survival at risk;
• Balancing international expansion with focus on home markets;
• Navigating export controls and regulations on sensitive technologies;
• Managing investor pressure for rapid growth in a highly volatile environment.

Looking at the data and market moves as a whole, what seems clear is that defense is no longer venture capital’s odd cousin and has firmly moved into the spotlight. From interceptor tests like the Frankenburg Mark I to megafundings for drone and autonomous vessel companies, the message is obvious: in a world of complex conflicts and asymmetric threats, defense technology has become a strategic priority — and one of the most closely watched sectors for anyone following the intersection of software, geopolitics, and investment.