(Image credit: Getty Images)
War has changed.
The conflict in Ukraine, the Houthi campaign and now the operations in Iran have demonstrated something that military planners have long theorized, but the world can now see with its own eyes: A $30,000 drone can destroy a $50 million piece of military equipment.
That single asymmetry has enormous implications for national security, for defense budgets and for investors.
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When a small, software-driven weapon can neutralize hardware that took decades and billions of dollars to develop, every military on Earth might be forced to rethink its entire infrastructure.
The tanks, ships, manned aircraft and other legacy systems that have defined defense capability for generations might have to be reconsidered.
Governments are beginning to rebuild from the ground up, and they’re increasingly turning to private technology companies to do it. This is now underway at a scale and speed that can create extraordinary investment opportunities for those paying attention.
The numbers confirm what the battlefield has already proven. Global military expenditure reached $2.63 trillion in 2025, according to the International Institute for Strategic Studies, and the global defense market could grow to $6.4 trillion by 2035 according to Spherical Insights.
NATO allies committed at their 2025 Hague Summit to spending 5% of GDP on defense by 2035, more than doubling their previous benchmark. The U.S. has proposed a $1.5 trillion defense budget for fiscal year 2027, which would represent a roughly 75% increase from 2025 levels if it is approved.
Defense budgets have historically persisted and grown through administrations of both parties. This is a tailwind with staying power.
There is a second tailwind reinforcing the first. The global space economy is on track to nearly triple, from $630 billion to an estimated $1.8 trillion by 2035, according to Statista.
Roughly 43,000 satellites are expected to be built and launched over the next decade, according to Novaspace, the equivalent of 12 every single day. Space has become foundational infrastructure for communications, navigation, surveillance and defense.
The battlefield intelligence that enables a drone swarm to operate autonomously comes from space-based assets. The missile defense architecture behind programs such as the Golden Dome depends on satellite constellations.
Defense technology and space infrastructure are converging, and the companies leading in one domain are increasingly indispensable to the other.
For investors, the question is straightforward: What is the best risk-adjusted way to participate in what could be the most powerful spending tailwind of the next decade?
Where the money is going
The answer, increasingly, might lie in the private markets. A new category of defense company has emerged in the past several years, sometimes called “neo-primes.”
These are technology-first firms winning direct government contracts in competition with legacy prime contractors many times their size.
They’re often software, or AI-first, vertically integrated, and built to iterate at commercial speed. They embrace artificial intelligence, increasing their ability to scale quickly. They typically own their intellectual property, which gives them pricing power and margin structures that look more like enterprise technology than traditional defense.
Because many of their platforms serve both military and commercial markets, they can scale revenue across multiple customer bases simultaneously.
Critically, these companies don’t normally wait for a government requisition to begin building. They can use private capital to fund research, develop prototypes and prove capability in the field, then bring a working product to the customer.
That inverts the traditional defense procurement cycle, in which a prime contractor bids on a government specification and spends years building to order on a cost-plus basis.
It is also why venture capital plays such an important role in this ecosystem: The capital funds the innovation, accelerates production timelines and gives these companies a head start that legacy contractors might not easily replicate.
The economics tell the story. Traditional defense primes (i.e. Lockheed Martin, RTX, Northrop Grumman, General Dynamics) typically operate with gross margins of 8% to 15%, constrained by cost-plus contracting (in which the government reimburses a contractor’s costs plus a fixed profit margin, which limits upside).
Many neo-primes report estimated gross margins of 40% or higher, reflecting the technology-centric nature of their platforms.
According to PitchBook, venture capital (VC) investment in defense technology hit record levels in 2025, with nearly 8% of all global VC funding directed to the sector, and the defense tech market growing at an estimated 20% annually.
The number of firms actively investing in this space grew by 41% in a single year, as mainstream venture capital embraced a sector it had historically avoided.
The case for private markets
The traditional primes are strong businesses with durable backlogs and deep regulatory moats. They deserve a place in many portfolios, and the current environment can benefit them, as well.
The asymmetric opportunity, however, might lie with the private innovators. The fastest-growing, highest-margin companies in defense and space technology remain largely inaccessible through public markets.
But private market exposure requires patience. These investments are often illiquid by nature, with longer holding periods and potentially limited secondary-market options.
For investors with appropriate time horizons, the trade-off might be well justified, given the durability of underlying trends.
Several autonomous systems companies have seen their valuations more than double in a short period of time.
Anduril, perhaps the most well-known neo-prime, is reportedly raising capital at a $60 billion valuation, supported by contracts with the U.S. Army, Marine Corps and allied governments.
Consolidation is accelerating as larger players acquire innovative firms to compete for the trillions expected to flow into defense and space, and the urgent need to replenish depleted weapons stockpiles is adding fuel to an already robust pipeline.
Space compounds this opportunity. The greatest value in the space economy is increasingly being generated from data, which drives demand for more satellites and the systems that support them.
Modern, vertically integrated manufacturing is transforming the industry from bespoke engineering into productized hardware, driving costs down and expanding the addressable market.
Investors with private market access can participate across the full spectrum: Launch systems, satellite manufacturing, space-based analytics and the critical infrastructure layer that governments are integrating into their security architecture.
Looking ahead
Historically, these opportunities were reserved for the largest institutional investors, but that’s changing. New fund structures are broadening access, and the opportunity set is growing as more companies reach the scale at which they can absorb meaningful capital.
The key is working with managers who have genuine access and the domain expertise to evaluate what they’re seeing. According to Preqin, the performance gap between top-decile and bottom-decile venture capital managers exceeds 30 percentage points of IRR (internal rate of return).
The companies that will matter most are likely to be the ones identified by top-tier specialist investors.
The spending tailwinds are historic. The technology is being fielded and the use cases proven in real time. Military conflict has changed, and many of the companies building the new defense infrastructure are private start-ups.
Space is truly a new investment frontier and its importance to the future cannot be overstated.
It’s time for investors to seek differentiated exposure to two of the most durable structural themes in the global economy.
