Investor focus on defense has rapidly increased over the last couple of years, with private investment growing from $2.3 billion in 2021 to $11 billion in 2025 – a 48% CAGRi. Yet capital alone does not guarantee scale. The ability to transition from innovation to operational deployment does.
Most innovators fail because they are unprepared for what it takes to move from a successful prototype to a funded program of record. Defense procurement fundamentally differs from commercial markets. Understanding these structural realities is becoming just as important as developing the technology itself. Before end user adoption, the unprepared innovator runs out of time or credibility – or both.
The rules that work for deep-tech start-ups do not work for dual-use and defense start-ups
Defense procurement systems are designed to reduce risk, ensure mission assurance and protect national interests. As a result, scaling follows a very different trajectory than in most commercial sectors.
Five structural dynamics explain why.
- Long procurement cycles: Due to strict technological requirements, defense innovation typically requires long and complex R&D cycles, and rapid development is often slowed by long timelines on the procurement side. In the US DoD, for example, traditional contracting processes take 18 months or moreii.
- Incentive misalignments: Procurement managers often optimize for risk reduction, compliance, mission assurance, sustainability of operations and delivery, and national interests along operational requirements. These incentive structures make it harder for start-ups to enter while established primes are often preferred. From 2020 to 2024, 32% of total US spending on private contractors was allocated to only five major firms (LMT, RTX, BA, GD, NOC)iii.
- Singular customer group: Defense procurement is dominated by governments, yet this does not translate into a unified market. While institutions such as the EU, NATO, or the EDA aim to promote cooperation between nations, purchasing remains national. In practice, each national MoD follows its own interests, rules, and budgets.
- Entrenched institutional cultures: The defense ecosystem is structurally difficult to enter from the outside. Access to operational users, classified environments, and operational testing conditions is restricted by security requirements, missing relationships, and institutional protocols. For startups, this creates a compounding disadvantage: without access to testing facilities or visibility into defense technology roadmaps, iterative development stalls. NATO and its Allies are beginning to address this through dedicated innovation programs and shared test center networks, but programs are in early development stages
- Regulatory barriers: Start-ups face significant regulatory barriers to demonstrate, apart from their technical prowess, their trustworthiness and alignment with national interests. Particularly sovereign supply chains, data architecture, alignment with industrial policy, certifications, and clearances may hinder market-entry and collaboration with customers.
What are the gates to unlocking scaling potential?
These challenges are significant, but they are also predictable. Companies that understand how defense acquisition works can build competitive advantages that are very hard to replicate.
In defense, the transition from a successful prototype to a funded program of record remains the industry’s “valley of death”, where many promising technologies fail to reach operational deployment.
Novaspace’s PAVED framework outlines five strategic priorities that consistently characterize companies capable of scaling successfully.
P – Prioritize dual-use innovation from the start
Successful defense start-ups often leverage technologies serving both military and civilian purposes, giving them an opportunity to scale in commercial markets while navigating the longer procurement and development cycles in defense. The strongest dual-use players, however, build products with military design requirements integrated from the outset. Successful examples include Starlink, Baykar, Anduril, and Quantum Systems.
A – Acquire early operational unit support
To gain credibility and reduce risk exposure to a novel technology, start-ups should seek support from end users with direct operational and ideally battlefield experience. Their endorsement carries weight with procurement managers while their field-tested perspective ensures development is targeted at real operational requirements. Militaries wand to field capabilities now, through solutions that can be tested and procured rapidly. This iterative engagement is also what ensures solutions reach the field faster than adversaries can adapt.
V – Vertically integrate to provide a complete solution
Defense customers often prefer purchasing integrated systems over standalone capabilities, and start-ups that offer a complete, ready-to-use solution scale more easily while benefiting from durable customer lock-in in the long term. Full vertical integration, however, is not always the right path. An alternative is deep integration within a prime’s existing system architecture, effectively becoming an indispensable embedded capability. Defense customers want outcomes, not components, and start-ups that position themselves accordingly, whether independently or within a larger platform, are far better placed to scale.
E – Establish partnerships with primes
Primes offer three things that early-stage defense startups rarely have: existing customer relationships, regulatory certifications, and a trusted record. A partnership can accelerate a startup’s market entry, but it should never become a strategic dependency. ICEYE’s joint venture with Rheinmetall illustrates the upside well: it unlocked a €1.7 B contract with the German armed forces while closing a capability gap that an established prime could not fill alone.
D – Diversify funding sources and align with policy instruments
There is a large variety of funding sources available, and founders must navigate between programs, grants, equity financing, and more. Critically, many of these are more than capital mechanisms: they are policy instruments, too. Innovation programs such as NATO’s DIANA explicitly function as procurement gateways, signaling institutional validation and alignment with national industrial priorities – the credibility gate that determines who gets to compete for a program of record.
Conclusion: Procurement strategy is an integral part of product strategy
The next generation of defense will be defined not by who builds the most capable technology, but by who understands that procurement strategy. Navigating the path from prototype to program of record, is as consequential as what gets built. Founders who internalize this from day one build competitive advantage that capital alone cannot replicate. Investors must evaluate institutional credibility as rigorously as they evaluate technology. And governments that strike the right balance between procurement rigor and the speed of fielding innovation will find that balance reflected directly in strategic advantage over adversaries.
