Capital Under Fire: How dual-use technology leads UK defence tech investment

The UK defence tech sector finds itself at an inflexion point, where record public expenditure is no longer matched by indiscriminate private investment.

Defence spending reached £60.2b in 2024/25, the largest annual increase this decade. Yet the private investment markets are moving in the opposite direction. Higher interest rates and constrained liquidity have reduced risk appetite across growth equity, and defence tech has not been insulated from the blast radius.

In 2025, deal volumes fell by 30.5%, and total investment declined by 54.5%. While the contraction reflects tighter financial conditions, it also fits a longer-established pattern. Capital into defence tech has typically arrived in waves, marked by bursts of acceleration followed by periods of consolidation.

“Therefore, the latest pullback should not be read simply as a by-product of a “cooling” market, but rather, as part of a familiar cyclical pattern.”

More revealing is the extent to which capital continues to flow despite those constraints. Even in softer periods, dual-use defence technologies have secured a disproportionate share of larger rounds. Companies operating across both defence and civilian markets offer broader revenue bases, faster commercialisation pathways and more flexible exit options than single-purpose contractors. In a capital-constrained environment, that degree of optionality offers a clear premium.

The pattern is most visible in the largest deal recorded each year, accessible by selecting the corresponding bar in the chart below.

Much of the UK’s dual-use innovation arsenal is forged in its world-class universities. Nearly 12% of defence technology companies are university spin-outs, with Oxford and Southampton standing out as repeat contributors. This is not merely a statistical curiosity. It suggests the sector’s momentum is not being driven solely by procurement cycles or geopolitical urgency. Instead, it is supported by a consistent flow of research-led ventures emerging from institutions designed for long-term scientific development.

Alongside private capital, public funding remains embedded in the sector’s financial architecture, providing a stabilising counterweight during periods of market retrenchment. Innovate UK accounted for 59.8% of grant awards, with the Defence and Security Accelerator representing a further 28.7%. In effect, public funding underwrites early-stage technical risk, sustaining companies through capital market cycles and preserving the option for later private investment.

Taken together, what emerges is a sector in which resilience is increasingly defined by flexibility. Dual-use technologies, straddling defence and civilian markets, are better aligned with the realities of modern capital markets and procurement cycles. In that sense, the future of UK defence innovation may depend less on the scale of spending and more on the ability to sustain that optionality.