The United Kingdom’s (UK) defence capability is approaching breaking point. Successive cuts to defence spending since the end of the Cold War mean that Britain’s strategic ambitions are outpacing capabilities. The Royal Air Force (RAF) has fewer jets than it did a decade ago, the Royal Navy is struggling to keep the nuclear Continuous At-Sea Deterrent (CASD) operable, and the British Army is at its smallest size since the Napoleonic Wars.
Gen. Sir Richard Barrons, co-author of the 2025 Strategic Defence Review (SDR), warned as far back as 2023 that the UK only has enough munitions stockpiled to sustain a high-intensity conflict for about a week. What is more, Prof. John Bew, former Foreign Policy Adviser to 10 Downing Street, has recently warned that Andy Burnham, Prime Minister, could face a major international military crisis within a matter of weeks.
The case for rearmament has never been stronger. The Defence Investment Plan (DIP) is a step in the right direction, and news that the Burnham administration intends to meet the North Atlantic Treaty Organisation’s (NATO) spending target of 3.5% of Gross Domestic Product (GDP) by 2035 is certainly welcome. Much of this new investment will (quite rightly) be focused on rebuilding Britain’s depleted weapons stockpiles, purchasing new equipment, and investing in future technologies that will be crucial to winning the next conflict. However, while the political rhetoric is positive, it is not aligning with reality.
Innovation nation?
The UK has a long history of being at the forefront of defence innovation. As seen during Russia’s full-scale invasion of Ukraine, successfully leveraging new technologies such as drones and Artificial Intelligence (AI) often translates into success on the battlefield.
Despite the examples of Ukraine and its historical pedigree, Britain is not sufficiently investing in future defence technology at the scale and pace needed. A report from data analysis firm Beauhurst suggests that while overall investment into British defence companies has increased since the commencement of the Kremlin’s invasion, funding into innovative ‘defence tech’ companies has actually fallen, from 55 deals worth £313 million in 2022 to 41 worth £91 million in 2025 – a drop of 71%.
This is not just a case of investors getting cold feet. Non-dilutive public sector grant funding for defence tech firms has also fallen. While the value of grant funding into defence tech firms doubled in the immediate aftermath of Russia’s invasion of Ukraine, from £49.2 million in 2022 to £101 million in 2024, funding dried up in 2025, with Beauhurst reporting a 74% drop in year-on-year funding into the sector valued at only £25.9 million. This marked the lowest level of grant funding into British defence tech firms since 2016’s £11.7 million.
Why does this matter? For defence tech businesses, developing a promising product is only the beginning. The real challenge is surviving long enough to turn that technology into a dependable contract. Major defence platform contracts take an average of six years to award, while even modular technology upgrades typically require around three years. For smaller companies with limited reserves and little recurring revenue, this creates a prolonged gap between building a working prototype and generating meaningful commercial income.
Nor does winning a place on a defence programme guarantee timely delivery. A National Audit Office (NAO) review found cumulative delays on Ministry of Defence (MOD) projects were equivalent to more than 21 years in 2021 alone. More recently, only two of the MOD’s 49 major projects were assessed as both on time and within budget. This is a longstanding problem: a review of defence procurement in 2009 found 40% of projects overran cost expectations and 80% were delivered late.
These delays are inconvenient for major contractors, but potentially existential for emerging defence tech firms. Most Small and Medium-sized Enterprises (SMEs) do not sell directly to the MOD, instead entering the market through supply chains controlled by large prime contractors. This weakens their visibility over future contracts, delays revenue and increases the amount of working capital needed before a product reaches deployment.
This helps to explain why falling equity and grant funding matter so much. Defence tech firms are being asked to finance years of research, testing, regulatory compliance, and procurement uncertainty at the same time that the capital available to span that period is retreating. Without patient funding, otherwise viable companies may abandon military applications, concentrate on civilian customers, or move overseas in search of clearer demand.
Growing dependence on foreign capital
The retreat of capital from British defence tech companies is not without consequences. Beyond the immediate impact on the economic and innovative opportunity cost of businesses not receiving much needed scaling capital, it has also left the UK uniquely reliant on foreign capital to finance the technology which could serve as the guarantor of sovereignty in the years ahead.
Beauhurst data shows that investment into innovative British defence technology companies is becoming increasingly internationalised. In 2015, around two thirds of investment came from UK-based investors. By 2025, that figure had fallen to around one third, with growing participation from Commonwealth and NATO-aligned investors, particularly those based in the United States (US).
This is particularly apparent for some of Britain’s most promising and strategically important defence tech firms. In June 2026, London-based maritime drone manufacturer Kraken Technology Group (KTG) secured £130 million through a major equity deal. This deal transformed KTG into the UK’s latest tech unicorn, but it would not have been possible without foreign investment: of the ten investors in KTG, only two were British funds.
Part of the problem lies in the structural barriers facing defence investors: slow and uncertain procurement cycles; Environmental, Social, and Governance (ESG) funding restrictions; and a shortage of late-stage capital across Europe. These weaknesses have left the UK increasingly dependent on overseas investors to finance technologies, with direct implications for its future security.
This dependence is most pronounced in relation to the US. American investors are not always the most frequent backers of British defence tech companies, but when they do invest, they tend to write much larger cheques. The average deal involving a US-based funder is significantly larger than one backed by European Union (EU)-based investors, and almost four times the size of a domestically funded round.
American capital has undoubtedly helped British companies to develop and scale technologies that might otherwise have struggled to secure funding. However, relying on it so heavily carries strategic risks. Investment can influence where companies expand, where intellectual property is held, and ultimately which country captures the economic and military value created by British innovation. The answer is not necessarily to turn away from US investors, but to rebuild the UK’s own capacity to finance strategically important companies.
Conclusion
Britain cannot rebuild its military strength through headline spending commitments alone. The technologies shaping modern warfare need patient capital, predictable grant funding, and a procurement system capable of moving promising products from prototype to deployment before their developers run out of money. Overseas investment, particularly from trusted allies, will remain valuable, but it should complement rather than substitute British capacity for financing important companies.
The DIP offers an opportunity for the UK to close this gap, but only if funding reaches beyond established primes and into the emerging businesses driving innovation. Otherwise, Britain risks entering the next crisis with the ideas to compete but neither the capital nor commercial pathways needed to get them into the field.
Callum Newton is an Associate Director at Beauhurst Insights, where he leads the team’s work with public sector organisations and institutional investors. He specialises in analysing the financial, fundraising, and innovation activity of private companies, with a particular focus on the UK’s defence tech landscape.
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Spot on. It’s pure hypocrisy for the administration to talk about leading in AI and drone tech while public grant funding for defence tech hit its lowest level since 2016. When only two out of 49 major MOD projects are on time and budget, the system is fundamentally broken for small innovators who don't have the runway to survive years of administrative delays. If the government doesn't intentionally direct the new DIP funding toward startups rather than the usual legacy primes, Britain's strategic ambitions will remain entirely unachievable.