UK Chancellor Rachel Reeves’s recent £400 million commitment to defence tech signals a pivotal shift in Britain’s defence industrial policy. Unveiled at her Spring Budget on March 26, 2025, this funding aims to establish the UK as a significant player in the global defence industry, responding to evolving global security challenges and potentially positioning the UK as a ‘defence industrial superpower’ by 2025.
Tech Funding News spoke with key figures in the UK’s defence technology ecosystem to explore what this commitment means in practice. Could 2025 be the year the UK takes a leadership role in defence innovation?
A new chapter for the UK Defence Innovation Fund
The investment will support the newly created UK Defence Innovation (UKDI) fund, which will launch in July 2025. This initiative mandates that at least 10% of the Ministry of Defence’s equipment budget be allocated to emerging technologies like AI systems and drones. Reeves has also pledged an additional £2.2 billion for defence spending in 2025–26, with plans to raise overall defence expenditure to 2.5% of GDP by April 2027.
Central to this vision is reforming the UK’s defence procurement system, which Reeves described as “broken.” The new framework promises faster, more agile processes tailored to specific technologies, particularly benefiting SMEs. Procurement decisions for fast-moving innovations like military drones will be made within three months.
Tanya Suarez, Lead of the Janus accelerator in partnership with the Ministry of Defence’s Accelerator (DASA) and CEO of IoT Tribe, welcomed the new funding: “We are excited not just about the pledge to raise defence spending by £2.2 billion but the overall acknowledgement that we need to invest in our defence capabilities to keep our nation and our allies safe… This is a call to action for the UK’s world-leading tech sector and the leading tech startups across our NATO allies.”
She added that to make this spend count, the UK must offer: “(i) clear demand signals to help better shape the technologies, (ii) the ability to rapidly test them to make sure they give our troops the edge they need, and (iii) agile procurement so when they prove their value, they can be quickly deployed across Allied forces.”
Charles Altuzarra, CEO and co-founder of Metahelios, welcomed the focus on SMEs, noting that defence contracts too often favor larger primes. “One of the biggest problems for the MOD is a huge lack of visibility of the UK SME ecosystem… If this funding improves procurement and visibility, SMEs’ ability to secure contracts could be drastically improved.”
Phil Chambers, CEO of Orbex, welcomed the initiative, particularly its implications for the UK’s strategic independence in space: “We welcome the establishment of the UKDI fund and its focus on streamlining procurement and support for UK defence tech start-ups. We hope to see demand develop from the MOD and European equivalents so there is less reliance on the US regarding defence-related satellite launches.”
Echoing this sentiment, Alan Thompson, Head of Government Affairs at Skyrora, emphasised that space is “paramount to defence tech and a robust national security strategy.” He noted that more investment in defence would “automatically mean more investment in space,” adding that if MOD’s upcoming reforms are enacted effectively, they will help companies like Skyrora — focused on sovereign launch capabilities — navigate procurement and win government contracts.
Stas Leonidou, founder and CEO of Solus Power, called the MOD’s renewed focus on working with SMEs “a huge boost.” “The simple fact is: the more money available, the more opportunity for businesses to secure contracts and for new technologies to succeed,” he said, empowering SMEs and encouraging them to seize the opportunities ahead. He also highlighted the inefficiencies in current procurement, noting that a faster, more streamlined system “means emerging technologies can secure contracts far quicker via a less convoluted route than before.”
An opportunity or a shakeout for defence tech startups?
This policy shift represents a potential turning point for startups that have long struggled to access defence contracts. Directing even 25% of new defence spending toward SMEs could transform sector dynamism.
Analysis from Wokelo, a Gen-AI-powered investment research platform, shared exclusively with TFN, identified key subsectors poised for growth: autonomous systems, electronic warfare, satellite communications, and aerospace propulsion. Recent moves include Saab’s acquisition of Blue Bear Systems Research and BAE’s purchase of Kirintec. Companies like Magdrive ($10.5 million seed funding) and Cohort (£75 million acquisition of EM Solutions) demonstrate momentum in propulsion and communications technologies.
Leonidou emphasised the changing nature of defence systems and the growing market for energy solutions. “Warfare is becoming less analogue with the increase in digital and electrical systems and equipment,” Leonidou said. “To realise the UK’s Future Operating Environment 2035, there needs to be a fundamental shift in operational power… battery power generation, storage, and distribution capabilities will transform how the army organises, operates and fights.”
Government collaboration with OEMs (original equipment manufacturers) is also accelerating innovation. Programs led by DASA and Innovate UK and strategic partnerships with firms like BAE, Lockheed Martin, and Leonardo are helping bridge the gap between R&D and operational deployment.
Reeves highlighted that this investment aims to promote economic growth and generate skilled job opportunities throughout the UK. Concentrating on advanced technologies will boost manufacturing in key locations such as Glasgow, Derby, and Newport. The Chancellor remarked, “This additional investment enhances national and economic security.” The initiative is designed to generate demand for highly skilled engineers and scientists while creating new opportunities for UK tech companies.
Data from Wokelo further reveals a snapshot of employment dynamics within the sector. Engineering remains the dominant skill area, accounting for over 50% of staff at firms like Archangel Imaging and VIZGARD. Large firms such as BAE Systems and QinetiQ are expanding steadily, with 3% and 2% headcount increases over the past six months. However, smaller players are experiencing more volatile growth: VIZGARD saw a sharp 27% jump in headcount, while ecoSUB Robotics and Archangel Imaging experienced double-digit declines.
AI, drones, and other emerging technologies
The funding aligns with global trends: defence tech is entering its AI era. CB Insights reports $1.5 billion in AI defence funding in Q1 2025, with projections hitting $6 billion by year-end. Altuzarra pointed to AI, sensors, and semiconductors as likely investment priorities, adding: “The UK can employ the same strategy the US used to create Silicon Valley — by seeding innovation through defence funding.”
The UK government is betting heavily on AI, drones, and other emerging technologies as the backbone of modern warfare. Reeves highlighted that AI-powered systems would be central to future procurement, enabling faster, smarter decision-making and more effective responses in dynamic combat environments. While detailed spending breakdowns are yet to be disclosed, the funding is also expected to support innovations in quantum technologies, advanced manufacturing, and next-generation computing.
Alex Leigh, Investment Director, Defence & Security Portfolio, UKI2S, noted: “This investment enables the UK to prioritise assured and sovereign capability. Historically, the UK has relied heavily on foreign supply chains – sometimes by choice, sometimes due to a lack of capital to build alternatives. This commitment signals a shift towards greater self-reliance in critical defence technologies.”
According to Thompson, this wider recognition of the overlap between civil space and defence drives public awareness and government coordination. He praised the Department of Science, Innovation and Technology for “connecting space and defence,” helping space-focused firms better understand their potential role in national security. “Space is the first battlefield for effective defence strategies,” he said. “The UK should focus on domestic capabilities as much as possible and move away from relying on the political whims of any third parties.”
Leonidou echoed the need for a more independent defence supply chain, noting that “the UK being vocal about its ambition to be a ‘defence industrial superpower’ shows an intent and commitment that we’ve not seen in decades.” He added: “Decision makers must stick to their pledge and build a robust and reliable supply chain that is fully independent to ensure the UK remains secure and state-of-the-art.”
So, what does it mean to the UK’s defence tech industry?
This policy pivot has already begun attracting international attention. US-based Anduril is opening a UK R&D hub, and Germany’s Helsing is investing £350 million to establish a production site in Britain. Dealroom data shows six of Europe’s top ten defence tech investment cities are in the UK.
Experts agree that scaling innovation will create ripple effects across academia and industry by generating high-skilled jobs and boosting economic growth. Suarez noted that His Majesty’s Government estimates a GDP increase of 0.3%, approximately £11 billion, from defence sector investments.
Leigh concluded: “This investment supports the government’s goal of building a modern, resilient, and autonomous defence capability. By backing technologies such as AI-enabled decision systems, autonomous platforms, and advanced sensing, the UK can both reduce risks to human lives and ensure it remains equipped to defend against evolving threats like drone swarms and cyber attacks.”
The UK’s £400 million bet on defence tech is a strategic shift in how the country approaches national security, economic growth, and technological leadership. If the government can implement reforms, attract private capital, and scale the SME ecosystem, this could begin a new era in British defence innovation.
