The defense ecosystem today is at a critical junction, ripe with opportunity for private capital, the traditional defense industrial base (DIB), and other commercial players such as hyperscalers to take critical roles in leading disruption within the innovation pipeline. Yet the window to reorient how public and private organizations invest to meet the challenges facing Western security is limited, with the coming decade being the most critical.
That’s because increasing geoeconomic tensions and evolving security threats are transforming the global defense landscape. Rising competition in technology is driving up defense budgets and mobilizing defense innovators across sectors. Major powers, such as Australia, Germany, Japan, and the United States, are seeking to rapidly modernize their defense capabilities across multidomain operations, a feat not possible without significant, concerted public and private investment to accelerate adoption.
Governments are investing. The North Atlantic Treaty Organization’s (NATO’s) €1 billion Innovation Fund, the first multination venture capital (VC) initiative in defense technology, announced its first round of deep-tech investments in June 2024. The United States committed more than $150 billion to research, development, testing, and evaluation (RDT&E) in fiscal year 2024 to support agencies such as the US Defense Innovation Unit (DIU) and the Office of Strategic Capital (OSC), marking a 55 percent expansion of defense funding during the past five years. And new institutional frameworks are emerging globally, from Japan establishing its Defense Innovation Technology Institute to the United Kingdom launching the Defense Innovation Initiative as part of a confirmed plan to raise overall defense spending.
Private capital is similarly mobilizing defense technologies, with global VC investments in defense-related companies jumping by 33 percent year-over-year to $31 billion in 2024. Investments span defense-dedicated and dual-use technologies with both defense and commercial applications. Notable investment areas include AI ($12 billion), next-generation communication networks and autonomous systems ($4 billion each), next-generation renewables ($3 billion), and biotechnology ($2 billion).
But money alone is inadequate to unlock the next evolution of these emerging technologies. With increasingly open customers keen on modernizing, real opportunity remains within the fragmented defense ecosystem across players—including VC firms, start-ups, government labs, allied innovation units, and the traditional DIB—to lead collaboration toward achieving at-scale adoption. These actors stand to gain immensely by reshaping our defense capabilities, developing during the next decade what we call a “modernized defense frontier”—a foundation for Western security.
The defense ecosystem: Three critical technology stages
Technological innovation is central to modernization efforts. Institutions have been rapidly assessing gaps and publishing calls to action, such as the NATO Emerging and Disruptive Technology Strategy and the United States Critical and Emerging Technologies List. We identified 17 disruptive technologies, spanning different phases of maturity, that have great potential to disrupt the national security landscape during the next decade (Exhibit 1). They also underscore broader themes in defense technology, such as an expanding definition of “critical technology” and dual-use technologies becoming more pervasive. In addition, they showcase private sector innovation leading a greater share of later-stage development and the urgency with which the innovation ecosystem seeks to modernize across all levels of maturity and readiness.
Despite the criticality of these 17 technologies, they risk being underfunded or failing to reach operational deployment if stakeholders are not appropriately aligned on funding and acquisition pathways. We see three distinct stages that each reflect the unique roles for stakeholders in the defense ecosystem:
- Emerging innovation. These capital-intensive technologies are cutting-edge innovations representing significant opportunities accompanied by higher risk. These efforts often lack commercial incentives given the long horizon of development. This often leaves public funding as the principal catalyst to turn bold ideas and research into investable areas, bringing down the cost of capital to innovate.
- Maturing technology. These are innovations with growing technical proof points that are not yet scaled or prepared to scale in defense. Private partners have an opportunity to lean in with public players to develop tailored support to accelerate technology from prototype to fielded capability.
- Scalable capabilities. These mature defense-ready technologies are established but need to be adopted at scale to achieve full impact. For many of these technologies, there are critical infrastructure gaps that are barriers to broader adoption, but for private players—whether commercial to accelerate scaling or the traditional DIB adopting—leaning into these innovations earlier presents significant opportunities for growth and differentiation.
1. Emerging innovation
Technologies in this early-stage category are characterized by high capital intensity and extended development timelines. For example, producing high-quality ultrawide bandgap diamond substrates—which are regarded as a critical input for next-generation applications such as high-power radio frequency switches and limiters and extreme-environment electronics and sensors—requires costly investment in materials, equipment, and processes (for example, seed crystals, vacuum chambers, and polishing). Without clear demand or near-term procurement from defense or civil sectors, private capital often hesitates to invest in such technologies due to inherent risks and long timelines to achieve returns (Exhibit 2). Other hurdles, such as navigating the niche regulatory environments for each technology, further reduce incentives for private involvement.
Across these technologies, defense-led publicly funded programs play a critical role in driving innovation and catalyzing technological advances through what can be ten or more years of development. But there are steps defense and civil research entities can consider to maximize the impact of their R&D investments.
For instance, multiple agencies often research the same technology by design to provide fresh perspectives on the same problems. High-entropy alloy funding in the United States, for example, remains split between several entities. While having multiple independent efforts is a core aspect of research and can unlock new answers, the scale of duplication across many of these disruptive technologies may warrant review. In addition, when technologies begin to gain traction with private capital, public funding can sometimes be uncoordinated between sources and risk duplicating or contradicting private capital investments. Better coordination between publicly funded programs could stretch R&D budgets further and clarify demand signals around innovation priorities, making it more likely for private capital to enter the picture.
The defense sector benefits significantly from the influx of private capital that typically follows successful demonstration of dual-use technologies initially supported by government funding. For instance, a company developing innovative medical technology that received initial government support later obtained regulatory approval and subsequently raised more than $100 million in private investment to further its development.
2. Maturing technology
Maturing technologies are technologies that are developed past the early-stage archetype but are not yet ready to scale for defense; they do not meet security and reliability standards for defense contexts. Maturing technologies have seen growing private investment following early proof points, such as the $12 million in VC funding raised by a perovskite solar cell start-up to build production scale. As these technologies mature, however, so do their core technical challenges and nontechnical hurdles, such as the quantum talent shortage that could threaten US leadership in space.
Technologies at this maturity stand to benefit from private players that can help develop tailored enabling strategies to push these technologies into an investable threshold. Public funding is a critical enabler because these technologies are not commercially viable on their own due to longer development lead times. Public sector incentives, such as direct research funding, US Department of Defense Small Business Innovation Research contracts, and large-scale government programs, can significantly accelerate technology development. Active engagement and feedback on these incentives from private players can help overcome barriers preventing defense readiness and production scaling while also providing unique market opportunities for these early-moving private players that lean in.
3. Scalable capabilities
Scaling technologies have mature applications but have not been adopted at scale, often due to infrastructure gaps and significant investment required. Examples include low-probability-of-intercept and low-probability-of-detection (LPI/LPD) networks and space-based optical lasers.
One common gap in scaling technologies is computing power constraints, especially for devices at the tactical edge, such as deploying AI at the point of action for real-time insights in dynamic, resource-constrained environments. Autonomous systems require substantial computing for mission execution and navigation. Space-based optical lasers, which are tasked with handling vast volumes of data, need improved computing power for efficient data transfer. LPI/LPD networks resolve waveform design but require more computing for waveform selection and data packaging. Defense AI also has a large deficit in computing power. Unlike commercial AI with its data centers and fast, reliable communications networks, defense systems must operate efficiently in contested environments, requiring greater computing efficiency and reliability at the edge.
Beyond the computing gap, there are several other major challenges to adoption at scale. Scaling technologies need to function alongside a mix of legacy and modern platforms, each with distinct standards, protocols, and architectures; standardization efforts and significant investments may be needed to reduce the cost to adopt new technologies at scale. Further, defense organizations often struggle with integrating new technologies into entrenched processes given their size and complexity. Private players that can coordinate adoption of innovation and manage change effectively within their organization stand to gain immensely in terms of reliability, cost, and potential differentiation on ongoing missions.
Catalyzing the modernized defense frontier
Emerging defense technologies are advancing, offering groundbreaking potential for military superiority and operational effectiveness. From AI to advanced manufacturing, the innovation pipeline is accelerating—and that’s worth celebrating. However, technology adoption remains a sizable hurdle, with significant barriers threatening to delay or derail progress.
The current defense innovation ecosystem is fragmented, with distinct roles spread across government labs conducting foundational research, public institutions providing demand signals and funding, start-ups pioneering breakthrough technologies, large traditional commercial players scaling solutions, and the DIB mobilizing, deploying, and sustaining military operations. This fragmentation causes inefficiencies, significantly slowing the transition of technologies from the lab to the edge of the battlefield.
To streamline the tech transition, we need a modernized defense frontier—a new way of operating that transforms how we scale emerging technologies and accelerate adoption by removing barriers. Specifically, public and private sectors will need to collaborate to address funding inefficiencies, infrastructure barriers, and critical talent gaps, working together in an ecosystem in which departments and ministries of defense, leading contractors, and disruptive innovators can easily convene and drive results. Achieving and adopting this frontier means capturing value from what is estimated to be a more than $250 billion opportunity, realized by overcoming three challenges to defense innovation adoption.
1. Revolutionizing capital and funding, deployment, and efficiency
Efficiently allocating the more than $180 billion in public and private R&D capital is essential to overcoming the defense sector’s longstanding challenges in developing and scaling disruptive technologies. However, R&D investment in many critical technology areas (excluding AI) appears to be flat-to-declining, creating a significant risk to the maturation cycle for these technologies. Without sufficient funding growth, promising innovations may stagnate in areas such as in-space propulsion, ultrawide bandgap materials, and high-entropy alloys, limiting their operational impact.
This challenge is further compounded by the fragmented nature of defense tech funding. Multiple defense tech funding sources—including international treatise organizations, government agencies, VC firms, and corporate VC—operate independently, often resulting in redundant efforts. Unified frameworks and coordinated technology road maps across global and domestic stakeholders are critical for efficient allocation of funding.
To maximize return on funding, the modernized defense edge needs updated fit-for-purpose acquisition pathways tailored to the specific needs of each technology category. The US Space Force’s new commercial space strategy is just one instance that exemplifies how a commercial-led innovation approach can rapidly scale certain technologies, such as low-Earth-orbit satellite communications. However, while this example approach is effective for specific technologies, broader reforms are necessary to address unique challenges across different development stages. Without clear role definitions and collaboration pathways, defense entities risk coordination failures in investment and deployment, which can further delay the transition of technologies from development to operational use.
2. Investing in a culture of innovation and leveraging tech to grow and retain aerospace and defense talent
Workforce challenges and organizational health have been longstanding issues across the DIB, with 70 percent of aerospace and defense (A&D) companies reporting organizational health scores below the global median. Further, there are three core employee issues driving significant annual productivity losses, estimated at $300 million for a median-sized A&D company: a lack of skills, a lack of engagement, and an inability to prioritize high-value-add work.
These emerging technologies are only expected to exacerbate existing talent concerns as pressure to adapt and scale new technologies increases. Across defense innovators, there is significant opportunity to reevaluate internal processes, skills, and talent base needs to improve the health of their organizations. At the same time, leveraging innovations that are more cutting-edge can increase differentiation, improving the employee value proposition to attract and maintain a workforce that is energized by its work and equipped for execution.
3. Unlocking next-generation infrastructure for production, computing, and connectivity
The most significant opportunity for disruption across ecosystem players may be through unlocking infrastructure, scaling production of these technologies, removing barriers to adoption by building up assets (such as property, plants, and equipment), and increasing computing and connectivity capacity.
The industrial base today is heavily reliant on raw materials that often experience shortages, and established manufacturers are also experiencing a growing tech debt. Both challenges result in a scarcity of production capacity needed to deliver at-scale solutions at the rates required by existing conflicts, let alone to deter potential future adversaries. While some of these challenges require allied nations to come together (for example, by increasing the transparency of global supply chains and implementing shared private sector advanced manufacturing solutions), there is real opportunity for private players to meet this challenge head-on, particularly disruptors and traditional DIBs.
If the industry is to realize the full potential of these technologies, it needs the talent and infrastructure to build and deploy these systems at scale. This may require an expansion of the current DIB to provide additional services and infrastructure necessary to deliver on ongoing and arising missions. With an average today of about $6 billion to $7 billion in property, plant, and equipment from major platform-focused defense prime contractors deploying existing technologies, future industrial base players may need similar investments—amounting to an estimated $18 billion to $30 billion opportunity over multiple years to build the necessary capital. Rewards will flow to those that effectively scale production capacity while establishing themselves as leaders in this evolving ecosystem.
But that’s not all. Little attention has been paid to the most significant adoption challenge: the lack of computing power and connectivity necessary to support the influx of updates required to take advantage of emerging technologies. For computing and connectivity, there is not a widely established reference architecture for edge computing in the defense ecosystem. Major AI infrastructure programs that have recently been announced (for example, Stargate) are also unlikely to address this gap given the need for computing at or near the defense edge. This reference architecture gap—coupled with a complex array of standards—results in challenges when integrating new technologies with legacy platforms such as aircraft and maritime vessels, as well as a significant opportunity for players actively working to close the gap. Closing just this computing gap is estimated to require an investment of $160 billion to $230 billion over multiple years across more than 75 platforms and a total network of more than 700,000 nodes (Exhibit 3).
The standards and protocols of current computing and connectivity infrastructure are fractured across the services and US allies, lacking the throughput and capacity to handle an expanding ecosystem of connected devices. There is tremendous need within the system to add more clarity, but above that, there is a real business opportunity to drive the transformation and an upgrade of the install base at the foundation of all this technological change.
The race to modernize Western and allied-partner defense capabilities has catalyzed billions of dollars in technological investment from public and private entities, but it is only by scaling adoption of these critical technologies that the future of Western defense can be secured in an increasingly contested landscape. This requires aligning stakeholders on funding priorities, creating a strong foundation for successful technology transfer, and attracting the next generations of innovators to transition emerging technologies from potential to mission-critical operational impact.
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