How to actually invest into defence startups: 6 lessons for success

This is a slightly longer follow-on to my previous article Building a defence startup: 6 lessons I’ve learned, which concentrated mainly on the core pillars one needs to take into account when building a defence-oriented startup. This time the focus is on the investment side of the table — namely the insights which come directly from my experience in working with venture capital funds investing (or looking to invest) into defence, navigating defence procurement, and as always scaling a defence-tech startup.

In my current role as the Chief Strategy Officer at SensusQ, a defence-tech startup applying AI to transform intelligence workflows for NATO, allied militaries, and Ukraine, I’ve had a privileged front-row seat to both the explosive growth and unique challenges of this sector.

Investors cannot apply the usual playbook of “growth at all costs” without understanding the unique hurdles of selling to militaries. Each lesson highlights how the defense market operates on its own rules: from what really matters to military buyers, to how long it takes to build trust (and revenue), to the hard truths about exit options. Money is certainly flowing into defense, but smart investors must adapt their mindset to close the right deals.

Here’s what I’ve learned about what actually matters when investing in defence startups, and the hidden pitfalls investors should watch out for when assessing potential deals:

1. Battlefield impact trumps future hype

In defense, a proven advantage today beats a speculative breakthrough tomorrow. Investors often fall in love with futuristic tech: flashy AI weapons, exoskeleton armor suits, hypersonic drones but military customers are far more pragmatic. A technology that delivers a tangible improvement in mission capability now will outshine one that’s merely promising decades from now. For example, the famous FPV drones became a game-changer in Ukraine not because it was sci-fi or particularly advanced, but because its mobility and precision filled an urgent battlefield need.

In general military organisations have set budgets and high stakes; they will prioritize technologies with immediate combat impact over those that exist only in PowerPoint. As one U.S Army analysis put it, most hyped tech startups “almost never live up to all the hype… once exposed to the teeming world of regulations and requirements… they do not survive long enough to make it to market.”​

The takeaway for investors is clear: favor companies that solve concrete, present-day problems for soldiers or commanders. Does the product improve accuracy, protection, logistics, or decision-making on the battlefield right now? If not, all the future hype in the world won’t secure a defense contract today or in the near future.

2. Make sure the products work within existing frameworks

Big militaries are like giant machines with many moving parts. Any new technology must plug into the system. A easy mistake to make is betting on a product that might be technically brilliant but can’t integrate with current platforms, networks, or procurement plans. Defense customers won’t rip out their entire communications backbone or bypass safety certifications just to accommodate a cool startup gadget. If your solution doesn’t speak the right data link, fit on the standard rail mount, or comply with NATO cybersecurity protocols, it’s basically a non-starter. In fact, for many software-oriented companies, “the most difficult part of the process is not developing the product, but rather navigating the confusing labyrinth of compliance requirements before it can be operationally deployed.”​

From encryption standards to mission certifications, the hoops are countless. Failing to align with these frameworks can quietly kill a company that looked promising.

Alignment with procurement roadmaps is equally critical. Militaries usually buy according to doctrine and budgeted programs which dictate what gets purchased when. If a startup’s tech isn’t on a roadmap or doesn’t fit an existing program category, it risks falling into oblivion (the infamous acquisition “black hole”). As Andreessen Horowitz’s defense team notes, without a strong internal sponsor, even great tech can languish in the “Valley of Death” before reaching any full-scale procurement​.

Startups that succeed are usually those that map their product to an existing requirement or platform. For instance, instead of selling a brand-new standalone system, a smarter approach might be integrating into a fighter jet’s sensor suite or a NATO command software that is already being fielded. Investors should ask: does this company understand the standards and infrastructure of its target customer (be it the U.S. Army, RAF, or Bundeswehr)? If a product requires the customer to fundamentally change how they operate or purchase, adoption will be an uphill battle.

Look for founders who talk about complying with MIL-STDs, using open architectures, and slotting into current procurement programs — that’s the language of someone who knows how to get a contract actually signed.

3. Patience, patience, patience

In the defense world, patience isn’t just a virtue, it’s a requirement. Investors used to 18-month blitzscaling cycles and quick ARR ramp-ups will need to adjust expectations. Even if a defense startup has a fantastic product, converting that into significant revenue can take years. The sales process is long and winding: initial interest may lead to a small R&D contract or pilot, then comes a battery of field trials, testing, and evaluations, then perhaps a limited deployment. All before any major procurement dollars flow. This drawn-out timeline is often referred to as the “valley of death,” the chasm between early development funds and full-rate adoption.

Many companies stall here, unable to secure the budget line in a military program needed to scale production. At SensusQ we were in this phase for nearly two years, pushing with blood, sweat and the capital of true believer investors before signing major contracts.

Crossing that valley requires not only a great product, but years of trust-building with the customer, advocacy from within the client organisations, and support from internal true believers. Investors should bake slow revenue into their models. It’s not unusual for a defense-focused startup to spend 4–5 years before landing a large contract. Those early-year financials might look anemic. A few hundred thousand in pilot contracts, maybe some cost-sharing agreements…. and that’s normal!

There is also the very real possibility of gaps between contracts (as one program ends, waiting for another to begin), meaning cash flow planning has to be conservative. A keen understanding of defense budgeting cycles helps too: funding for a new tech might only be added in the next 2-year cycle, meaning no revenue from that project until then. The bottom line is, don’t count on rapid scale.

This isn’t a consumer app going viral; it’s more like winning over one highly skeptical, regulation-bound customer (who happens to have multi-billion-dollar potential if you succeed).

Investors should be prepared to support companies through a long “drought” before the flood of revenue, ensuring startups have the runway (and morale) to endure multi-year sales processes. Essentially, treat early contracts as validation milestones, not profit engines. If the technology and military demand are real, the big revenues will come, but not as fast as in commercial markets.

4. Ex-military leadership is great for product, but not always for sales

Defense startups often proudly showcase retired generals or elite veterans among their founders and executives. There’s a good reason: ex-military leaders intuitively understand the problem set. A former officer can design a product that truly fits the end-user’s needs, having felt the pain points first-hand. However, one lesson investors learn is that the skills that make for great defense product development don’t automatically translate into great sales. Enterprise sales in the defense sector is a full-contact sport that demands persistence, persuasion, and sometimes downright combativeness — qualities that may or may not be in a veteran’s comfort zone.
The stereotype (with plenty of exceptions, of course) is that senior military folks are accustomed to a structured hierarchy and collegial meetings, whereas startup sales requires chasing leads, handling rejection, and aggressively breaking through bureaucracy. A decorated officer might assume that a few calls to former colleagues will get deals moving only to find out that countless other gatekeepers and contracting officers stand in the way.

Even with great tech, you sometimes must force your way into the market. Ex-military founders may need to pair up with or hire experienced business development professionals who have that hunter mentality.. people who will knock on doors at the relevant organisations (figuratively), network at every defense conference, follow up tenaciously on leads, and push for the venture’s inclusion in programs. This isn’t to say military veterans can’t be excellent salespeople (many are), but the company culture must value proactive sales tactics, not just résumés and relationships.

As an investor you should probe a defense startup’s go-to-market strategy: Do they have team members who know how to navigate the procurement bureaucracy?
Who is waking up every day thinking about pipeline and customer engagement?
A founder who says “our product will sell itself because generals love it” is a red flag. Instead, look for a mix of domain credibility (yes, those ex-military advisors) and scrappy sales hustle.
In defense, “build it and they will come” doesn’t cut it: you need to build it and relentlessly campaign for it.

5. Militaries buy capabilities, not standalone products

One of the biggest mindset shifts for investors is understanding that a military customer isn’t buying a gadget or a software license, they’re buying an integrated capability. What does that mean? In essence, even a groundbreaking technology will only be adopted if it fits into a larger operational puzzle: doctrine, training, support, and combined usage with other systems. A standalone product, no matter how “game-changing,” can languish for years if no one figures out how to use it in practice. Take unmanned ground vehicles (UGVs) as an example. Defense firms have demoed robotic vehicles for over a decade; these robots can do patrols, carry gear and mount weapons. Yet, outside of niche roles and the unorthodox procurement structures in Ukraine, UGVs are still not standard issue in armies. It’s not because the tech doesn’t work, it’s because the military is still working out the concept of operations. A former U.S. Army acquisition chief explained that the role for UGVs had to be “better defined so that the technology can more effectively fit within the operating concepts of its units”​

In other words, unless the decision-makers know when, where, and how a robot will be used alongside human soldiers, they won’t buy big quantities of them. Contrast this with drones in the air (unmanned aerial vehicles): their roles in reconnaissance, strike, etc. aligned much more readily with existing air operation concepts, so they were adopted faster.

For investors evaluating defense tech, the lesson is to ask “What larger capability does this enable?” Is the company selling just a widget, or a solution that integrates into an overarching mission? Militaries tend to procure in packages: a new capability might include a platform, sensors, software, maintenance plan, and training program all together. If a startup only provides one piece, it likely needs partners or a clear integration story.

Sometimes, the missing piece is doctrine itself. Someone has to write the playbook for using the tech. The best defense startups often act like mini-prime contractors: they understand the end-to-end solution.

For instance, if you develop an AI targeting software, you should ensure it can plug into the analyst’s existing workflow and the soldier’s combat network, and maybe bundle it with user training.

If you make a hardware sensor, maybe you also provide the data platform that commanders will use to view that sensor’s output. Investors should favor companies that seek to embed their product into a larger system or concept. If not, adoption might stall at the trial stage.

Remember, the military isn’t in the business of buying cool tech for tech’s sake. They’re buying the capability that tech delivers in a real operation.

6. Exit opportunities: limited but clear

When it comes to exits in defense, the menu is short and simple: essentially go public or sell to a prime contractor.
There aren’t a lot of mid-tier acquisition sprees or acqui-hire scenarios as you might see in consumer tech. The good news is that both of those exit paths can be lucrative; the bad news is that each comes with caveats. An IPO is the clearest home-run scenario - we’ve seen Palantir achieve this in the U.S, and Anduril is rumored to be on a similar trajectory.
However IPOs require scale (hundreds of millions in revenue) and a robust growth story. Given the long timelines we discussed, few defense startups will reach that stage without substantial capital and success. Thus, the most common exit is an acquisition by a large defense contractor (Lockheed Martin, SAAB, Rheinmetall, etc).

However, investors should note that defense primes think about M&A very strategically (and often conservatively). They aren’t in the habit of paying sky-high multiples for early-stage companies. In fact, public defense giants themselves trade at only about 1–2× revenue. This means a prime often can’t justify paying 10× or 20× revenue for a startup without destroying their own stock value. A good example from Marque VC is that if a prime valued at ~2× revenue buys a startup for $1B (at 20× its $50M revenue), it would instantly “destroy” about $900M in enterprise value on the acquirer’s books.​

The only way such a deal makes sense is if that startup’s tech helps the prime win much larger contracts down the line. And indeed, that is how primes think about acquisitions: does this target company help us secure programs worth billions? If yes, it’s worth it; if not, the math won’t close.

As a result, the startups that get acquired are usually those whose product fills a critical capability gap for the prime’s offering. A study of defense M&A noted that the overlapping sweet spot tends to be companies building “discrete components” that are valuable to a prime’s system, but that likely won’t survive to IPO on their own​.

In plain terms, a prime will acquire you if you make a piece of the puzzle they need and if you’re not on a path to become a competitive prime yourself. This might sound limiting, but it’s a fairly clear rule that investors can plan around. If your portfolio company’s dream is to be bought by a Lockheed, make sure its tech is something that Lockheed would want to incorporate into a major program (e.g., a novel radar module that helps win the next fighter jet contract). Also, be realistic on valuation: the exit multiples in defense M&A are typically lower than in commercial tech. The flipside is, we are now seeing the rise of new, large defense tech firms (like Anduril, Shield AI, etc.) that themselves are acting as acquirers and paying more aggressive multiples​.

This could improve exit options in the future by introducing more buyers. But today, an investor in defense should underwrite their deals with the assumption of a prime contractor buyout or a long-haul IPO journey. Ensure the company’s strategy leaves both of those doors open: e.g., maintain the option to team up with primes rather than always trying to beat them, and build the kind of financial discipline that would appeal to public markets if it comes to that.

Conclusion and investor checklist

To recap, a practical checklist for investors evaluating defense companies:

• Focus on real use-cases, not just vision. Does the technology solve a current, pressing problem for military end-users? Tangible battlefield impact and user adoption are stronger indicators than a sci-fi pitch deck.
• Probe for integration and compliance. Ask how the product plugs into existing systems or networks. Is it compatible with the buyer’s platforms and standards? A startup that’s done its homework here de-risks your investment.
• Plan for a long sales cycle. Diligence a company’s pipeline and customer engagement: Do they have pilot projects or just letters of interest? Are they prepared to sustain through the “valley of death” with existing funds or dual-use revenue?
• Evaluate the team’s go-to-market muscle. It’s great to see ex-military talent on the roster, but also look for business development grit. Who will actually drive the deal process? Successful defense startups often have early hires who know how to work the halls of Defence Ministries and procurement agencies.
• Consider fit in the bigger picture. Does this startup enable a broader capability or concept that militaries are aiming for? If it’s a point solution, is there a roadmap to expand or integrate it? Investors should favor companies that understand their context in the doctrine and procurement plans of their customers.
• Have a clear exit thesis. Be realistic about who might acquire the company and why. If they are aiming for a prime, ensure the startup is engaging (or at least not antagonizing) those big players and positioning itself as a valuable puzzle piece. If aiming for IPO, understand that it will require significant scale and staying power.

Ultimately, defense investing is a long game of high conviction. It blends the endurance of private equity with the visionary bets of venture capital. The learning curve can be steep, but the rewards both financial and societal are considerable.

By doing thorough diligence, you can avoid common pitfalls and back the companies that will become the backbone of tomorrow’s defense industry. The next Helsing AI or Anduril is out there, but it will be built by those who marry innovation with an intimate understanding of the customer.

P.S: Happy to hear any thoughts, find me on LinkedIn.