Since Russia’s invasion of Ukraine in early 2022, the global defence landscape has been transformed. What began as a regional conflict quickly escalated into a catalyst for a worldwide reassessment of military preparedness. For governments, this has translated into substantial increases in defence budgets. For businesses and investors, it has opened one of the most dynamic and commercially promising sectors of the decade. 

A recent agreement among NATO members to increase defence spending up to 5 percent of GDP by 2035 underscores the permanence of this shift. This is not a short-term surge but a structural recalibration of priorities. Defence is no longer a discretionary budget item trimmed in times of peace. 

For defence companies, the effect has been nothing short of transformative. Established firms such as Rheinmetall, BAE Systems and Lockheed Martin are experiencing order books that stretch years into the future. But what makes this moment distinctive is not just the dominance of long-standing giants. Medium-sized enterprises, niche suppliers and agile start-ups are also securing a seat at the table, creating a fertile ecosystem that mirrors the broader innovation economy. 

Investors have been quick to take notice. Private equity and venture capital firms, once wary of politically sensitive defence investments, are now aggressively pursuing opportunities. Much of the attention is focused on drones and counter-drone systems. As an executive of a high-tech drone engineering business remarked, “I think it is safe to conclude that drones have created an asymmetry of cost that upends previous assumptions that you can buy your way to air superiority.” Swarms and creative deployment strategies mean that, “with the right tactics, massed drones or novel employment methods can even overwhelm exquisite defence capabilities.” 

“I think it is safe to conclude that drones have created an asymmetry of cost that upends previous assumptions that you can buy your way to air superiority.”

Executive of a high-tech drone engineering business, UK

Militaries cannot simply throw money at the problem with expensive interceptors. “Defensive systems now need to be bolstered by designs that are scalable, flexible layers… but it needs to be done with cost in mind because you can’t keep firing USD 100,000 munition at USD 10,000 drones.” The defence expert elaborated, “This opens the door for innovative small companies and start-ups that can move quickly against these emerging market signals.” 

Start-ups like Helsing have built strong positions by offering AI-enabled strike drones at scale. “With short procurement cycles in support of urgent operational requirements, they have been very successful in securing multiple contracts,” enabling them to expand manufacturing capacity and market share. Others, such as Shield AI with its HiveMind-powered V-BAT, have differentiated through software, proving that autonomy and AI are as critical as hardware. 

Primes (global defence contractors) are also adjusting. Lockheed Martin’s new Vectis stealth drone is widely seen as a long-term play. “They lost the first stage of drone adoption to cheaper alternatives… but this has basically secured themselves the future contracts because all of the acquisition officers will benchmark their requirements against Vectis,” remarked the expert. 

While the technological race accelerates, procurement can become a bottleneck. “It depends on the time frame because military buyers will either rush to meet an urgent operational requirement, or they will drag the process out in pursuit of a ‘perfect’ solution through a comprehensive yet often dated acquisition model.” In the short term, companies which are able to deliver fast self-contained solutions with minimal integration barriers, such as Anduril’s Ghost drone, are well positioned to capture budget flows. 

“Demand already outpaces supply. Even if the wars stop, militaries still have a long way to go to successfully adopt drones across the entire spectrum of operations.” 

Defence expert, UK

However, other challenges remain, particularly for SMEs. Certification, regulatory hurdles and sustainment costs are often more expensive than development itself. As one insider noted, “This is where Primes retain dominance on large framework contracts due to long-standing government relationships and the ability to dedicate resource to influencing governments.” 

The trajectory of this sector is clear, with rising budgets, sustained innovation and continued deal-making. Defence today is not just about security but also one of the most compelling commercial opportunities of the decade. Still, risks remain. As one analyst warned, “All of this could come tumbling down with the Trump administration causing instability.” Yet others remained more optimistic, “Demand already outpaces supply. Even if the wars stop, militaries still have a long way to go to successfully adopt drones across the entire spectrum of operations.”