Emerging Disruptors Shake Up Defence Tech
Introduction
War is not cheap. But it may soon be cheaper. A new crop of defencetech firms is promising militaries faster innovation, fixedprice contracts and a dose of Silicon Valley disruption. The incumbents, such as Lockheed Martin, Northrop Grumman and other major primes, have historically relied heavily on cost-plus procurement models, where governments share the risk of cost overruns. But venture-backed upstarts such as Anduril are betting that autonomy, swarming drones and hypersonic delivery systems can do more with less.
The implications are not confined to battlefields. They stretch into capital markets, NATO strategy and the U.S. budget. Investors, generals, and politicians are all trying to decide whether the future of war belongs to giant floating fortresses or to cheap, smart machines that can be built in weeks, not decades.
1. Challengers in the arsenal
Anduril, founded by Palmer Luckey of Oculus fame, has become the poster child of this new defence economy. Valued at around $US30bn, it produces autonomous drones, AIdriven surveillance systems and modular hardware. Its model is fixedprice, in contrast to the primes’ preferred costplus arrangements. The latter guarantees the contractor’s margin while obliging taxpayers to absorb overruns. Anduril’s approach is closer to SpaceX’s fixedprice contracting model: promise a working product at a set price, then deliver quickly.
Anduril’s appeal lies less in glossy hardware than in the software brains that bind its systems together. Its Lattice operating system stitches data from drones, sensors and satellites into a single picture of the battlefield, enabling commanders to task swarms of autonomous machines rather than rely on lumbering, humancrewed platforms. The firm’s counterdrone towers already guard stretches of the USMexico border; its Ghost and Altius drones are designed to be cheap, expendable and upgradeable at software speed.
For investors, the attraction is that Anduril looks more like a technology company than a defence prime. Its model of rapid prototyping, fixedprice contracts and recurring software revenues promises Silicon Valleystyle growth in a sector long dogged by budget overruns and procurement sclerosis. By controlling the full stack, hardware, sensors, networks and AI, it aims to avoid dependencies on the traditionally slower-moving supply chains typical in large-scale defence programs.
That formula is proving bankable. The company’s reported $US30bn valuation reflects expectations that autonomy and AI will dominate the next cycle of military spending. If the future of war favours nimble swarms over leviathan carriers, Anduril’s investors are betting it will be the one selling the swarm.
Its approach is also proving popular with customers, with revenues reportedly doubling between 2023 and 2024.
The logic is obvious. The most sophisticated aircraft carriers cost around $13bn apiece and take a decade to build; a swarm of autonomous drones can overwhelm one for a fraction of the price. Hypersonic systems capable of Mach 12 raise similar questions about the viability of trillion-dollar F-35 fleets. A future of cheap, smart, expendable kit poses questions for the traditional economic models within the defence establishment.
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2. Europe arms up, without America’s shoulder
The war in Ukraine has concentrated minds in Europe. NATO’s new target would see its members spending 3.5% of GDP by 2029. Germany is doubling its defence spend; Poland is already nearly 4%; Estonia talks of 5%. Indeed, the alliance’s leaders have called for a ‘quantum leap’ in collective defence capabilities, including stronger air and missile defences, as emphasised in recent summit communiqués under SecretaryGeneral Mark Rutte’s leadership.
Europe’s motives are not entirely about Russia. They are also about Washington. Donald Trump’s ambivalence about NATO has sown doubt about the durability of American guarantees. If Europe cannot count on America’s security umbrella, it must construct its own. Cue a boom in European defence innovation.
The policy consequence is that Europe is pouring money into defence at precisely the moment new firms are offering different ways to spend it. That makes the continent both a laboratory and a market for disruptive technologies.
3. America’s “Big Beautiful Bill”
Across the Atlantic, Congress has been busy even before the Big Beautiful Bill increased defence spending. On December 23rd, 2024, former President Joe Biden signed the 2025 National Defense Authorization Act (NDAA), authorising nearly $900bn in defence funding, of which the lion’s share was allocated to the Pentagon.
The trend line continues heading north under the new administration and America’s defence budget is now edging into 13digit territory. The House’s “One Big Beautiful Bill” tacked on an extra $150bn in mandatory funding beyond base 2026 appropriations, lifting total outlays closer to roughly $1tn.
Much of the new money is earmarked for the technologies reshaping modern warfare. About $33bn is slated for drones, autonomous systems and artificial intelligence. Within that, $13.5bn will go to small uncrewed systems and autonomous weapons, $9bn to collaborative combat aircraft, and nearly $3bn to surveillance and sensor platforms. Explicit provisions cover kamikaze drones, drone boats and undersea vehicles.
The intent is clear: to diversify procurement, complementing traditional large platforms built over decades with swarms of cheaper, smarter machines. The financial cost is vast; the strategic bet, larger still. The symbolism is as important as the numbers.
America’s defence establishment is aligning budgets with disruptive technologies. The primes will still feast. Shipbuilders and nuclear contractors stand to benefit heavily but the signal to investors is clear: drone autonomy and AIenabled systems are no longer curiosities; they are procurement priorities.
4. Markets, multiples and margins
Shareprice movements echo this strategic pivot. European-listed defence firms have surged ahead of their U.S. peers, indices like STOXX Aerospace & Defence hit record highs, and the so-called ‘European Defence 7’ rose nearly 46% YTD, while the US Magnificent 7 dropped 8% according to a report by eToro.
Venture capital inflows into defence tech are at an alltime high, nearly $13bn globally by mid-2025, with U.S. firms alone raising billions in 2024. Meanwhile, according to the NATO Innovation Fund, “Europe’s Defence, Security and Resilience sector reached $5.2 billion in 2024”, which it describes as an all-time high.
Yet defence valuation multiples remain modest by consumer tech standards, partly because much of the sector’s value lies with established primes whose scale, long programme lifecycles, and contract structures deliver steady, predictable returns. This stability, while attractive to investors, is valued differently in public markets than the rapid-scaling profiles seen in high-growth technology companies.
In parallel, a growing cohort of emerging defence tech firms is commanding tech-like valuations, often underpinned by software-driven, recurring revenue models alongside breakthrough capabilities, rapid contract wins, and scalable hardware - showing that innovation-led entrants can thrive alongside the industry’s traditional leaders.
Procurement priorities are shifting, with AI, drone autonomy, and Indo-Pacific capabilities increasingly emphasised in U.S. and European budgets. This signals growing opportunities for innovative firms. While fixed-price, disruptive models differ significantly from traditional cost-plus approaches, established primes continue to adapt, suggesting valuations may evolve alongside the market.
Despite enthusiasm for innovative newcomers, traditional defence specialists still capture most Pentagon contracts. As of 2024, established primes accounted for approximately 86% of major U.S. defence programme spending. Even high-profile startups such as Anduril, which secured a nearly $1 billion contract with U.S. Special Operations Command, remain exceptions rather than the rule. The Pentagon acknowledges the difficulty smaller tech firms face - the infamous procurement “valley of death” between prototype and adoption - and has initiated reforms to level the playing field. Nevertheless, substantial barriers remain, highlighting that further procurement reform could help realise the full potential of defence innovation.
Conclusion
The economics of war may be changing, but that does not mean the established giants will disappear. Europe is investing significantly in autonomous capabilities, and America is explicitly prioritising disruptive technologies, yet the defence primes have proactively adapted and continue to play a central role in shaping innovation. Partnerships and strategic acquisitions between traditional primes and innovative startups are increasingly common, as demonstrated by Saab’s recent investment in Hypersonix (advised by North Ridge Partners), highlighting a major prime’s confidence in the strategic importance of emerging hypersonic capabilities.
While cost-effective swarms and autonomous systems gain prominence, large-scale platforms are likely to remain essential, albeit evolving to become more agile and responsive. Recent Pentagon initiatives such as the Defence Innovation Unit (DIU), which aims to accelerate procurement and reduce barriers for innovative entrants, underscore a broader recognition that meaningful reform is underway.
Ultimately, the defence ecosystem of the future is set for coexistence rather than outright disruption, where established primes and Silicon Valley innovators leverage each other’s strengths. This dynamic collaboration promises to deliver enhanced military capabilities, accelerated innovation cycles, and greater value for taxpayers, creating a more versatile and resilient defence industry prepared for the challenges of tomorrow. Not to mention new technologies that will migrate from the military to our – hopefully peaceful – civilian lives.