Defense as a software business

European defense tech is scaling rapidly: defense and resilience startups raised a record $8.7B in 2025, including about $929M for AI-specific defense startups. Helsing raised a 600 million euro Series D in June 2025 at a 12 billion euro valuation, while Quantum Systems reached 300 million euros in 2025 sales and Tekever became profitable and won a UK Royal Air Force contract. The article argues that AI, autonomous systems and faster procurement are structurally reshaping defense, creating a meaningful opportunity for software-led companies and incumbents alike.

Analysis

The investable change is not simply more defense spending; it is a re-rating of who captures the margin pool. Software-led entrants and dual-use platforms should take share first at the subsystem level, where procurement can be fastest and performance differentiation is easiest to measure, while legacy primes risk being reduced to integrators and balance-sheet guarantors. That matters because the highest multiple in the stack is likely to migrate from metal-bending prime contractors to the AI, autonomy, and mission-software layers around them.

For LMT and NOC, the near-term read is supportive but not unambiguously bullish. Their backlogs may improve, yet the bigger strategic risk is disintermediation: if governments increasingly buy capabilities as modular software + sensors + drones, primes lose pricing power and become dependent on partner ecosystems they do not fully control. The second-order effect is margin dilution from having to acquire, invest in, or certify startups to stay relevant, which can compress returns even as topline grows.

The more durable winners are likely the enablers of the new procurement model: secure cloud, edge AI, simulation, cyber, and sensor-fusion tooling. Consensus is probably underestimating how much of defense budget growth will be “spent twice” — once on legacy hardware refresh and again on software retrofits to make those platforms usable in contested environments. That creates a long runway for companies that sell mission software or the infrastructure beneath it, especially in Europe where procurement is explicitly opening to non-primes.

Main risks are policy and pacing. A ceasefire or de-escalation would hit the venture-funded frontier names first, but the larger reversal would be if European governments slow spending after one or two budget cycles and revert to incumbent-heavy procurement for political reasons. On the other hand, if wartime adaptation continues to prove decisive over the next 12-24 months, the capital cycle into defense software could extend well beyond current private-market enthusiasm.

Key Decisions for Investors

• Long LMT / short a basket of defense-software-adjacent private proxies where accessible: expect primes to benefit from budget growth but underperform on multiple expansion as software value migrates away from hardware over the next 12-24 months.
• Use any 5-10% pullback in NOC to build a tactical long for 3-6 months: earnings power should improve with higher European spend, but cap upside because margin expansion is less certain than headline backlog growth.
• Express the structural winner via public software/AI infrastructure rather than primes: long AI, cyber, and secure-cloud beneficiaries with defense exposure on a 6-18 month horizon; the key is that these names monetize the enabling layer, not the platform.
• Pair trade idea for industrial investors: long a European dual-use enabler / short a traditional prime, betting that procurement opening and faster iteration favor software-led companies over legacy integrators over the next 12 months.
• Treat venture-led defense names as optionality, not core capital: wait for public-market validation or profitability inflection before paying venture-style multiples; the risk/reward is attractive only if procurement keeps accelerating for at least 2-3 more budget cycles.