BY ANNE SRADERS

In a couple of my recent conversations with VCs, one topic keeps coming up: defense tech. And while the war in Ukraine sparked interest for some VCs in the sector, which broadly focuses on building technologies used for national defense, other long-time investors say there are a few big tailwinds for investing now.

When Russia invaded Ukraine in early 2022, “I think that woke people up,” Josh Wolfe, cofounder and managing partner at Lux Capital, told me last month, adding that seeing “commercial off-the-shelf technologies being used to defend the democratic nation was inspiring for many.” Lux has been a big investor in defense technologies across land, sea, air, and space, Wolfe notes, with investments in startups like military tech company Anduril and autonomous precision component factories builder Hadrian. It’s also a key investment area for the firm’s new $1.15 billion fund.

Defense tech can be a pretty broad term, but VCs are looking into areas like drones, satellites, cybersecurity, A.I., space, and communications. According to a new PitchBook report out this week, defense tech has experienced a boom in recent years: From 2016 to 2022, investors plowed $135.3 billion into the sector across 4,744 deals. There’s been a rise in deals in Q1 this year, with 89 deals compared to 60 in Q4, although deals are tracking lower for Q2 so far, according to PitchBook data provided to Fortune. There’s interest from some top players: Andreessen Horowitz recently announced that the firm is earmarking $500 million to invest in companies that support American interests, including in defense.

During the past year, the “top defense tech segments were renewable energy [and] generation ($3.9 billion), sensing, connectivity [and] security ($3.4 billion), and biotechnology ($3.2 billion),” indicating that “military priorities go beyond just aerospace and weaponry to include a full suite of technologies that form a broad definition of ‘national security,’” the PitchBook authors note.

VCs argue that defense tech’s rise in popularity is owing to a few dynamics: Historically the process of winning government contracts has been far more lengthy than the frequency of venture-backed startups raising funding, which is roughly 18 to 24 months, making it hard for young startups to sell to the government, according to Bob Ackerman, founder and managing director at cybersecurity-focused firm AllegisCyber. But “there’s a growing realization that something has to change and that the government is looking for ways to kind of streamline” their process, he told me. (Ackerman still believes that synchronizing the cycles of a startup with the government’s procurement process will continue to be an issue.)

Another propellant is that startups building technologies that can serve both commercial and government uses have been able to achieve more venture-worthy growth. The Department of Defense has in recent years created programs like the Defense Innovation Unit Experimental, or DIUx, and employed other transaction authorities (OTAs) that enable the government to write checks faster, giving venture investors confidence that these companies can scale more quickly, Sri Chandrasekar, managing partner of Point72 Private Investments, the hedge fund’s private investment arm, told me. “I think that’s really why you’re seeing all these people jump in: They’re seeing all the traditional SaaS businesses’…growth slow and we’re seeing instead there’s this market where companies are growing really fast.”

VCs today point to Elon Musk’s SpaceX, which was founded back in 2002 and is valued at well over $100 billion, as a shining example of a defense tech success story: “Between Palantir and SpaceX, we are seeing extraordinarily highly-valued businesses where the vast majority of revenue is government-derived. Venture investors look at that, and [they’re like], ‘Huh, that’s interesting,’” Chandrasekar says. We’re also currently seeing more ex-Palantir and ex-SpaceX founders building startups, he added.

But it’s not just the U.S.: Investors in Europe are also becoming increasingly interested in defense tech. Pawel Chudzinski, a partner at Berlin-based Point Nine Capital, told me while I was recently in Europe that “up until two years ago, a defense startup was, like, a no-go. That has changed completely.” He later added that the optics, and willingness, of investors to put money into defense has shifted significantly after the Ukraine war started. Europe is expected to increase spending on defense, Chudzinksi noted, and “all of this sounds like an opportunity to European tech entrepreneurs.”

Where are VCs looking to invest? Allegis’ Ackerman points to use cases like defending against offensive applications of artificial intelligence. Point Nine, meanwhile, focuses primarily on software companies, and Chudzinski says that they’re looking at applications that are, of course, “software heavy—automation, simulation, computer vision, etc.” Like elsewhere in venture, multiples for defense- and cyber-related startups have come down owing to the macro conditions, Ackerman says.

To be sure, defense has been a controversial area for VCs to invest in, and Ackerman says they won’t invest in offensive technologies—like those used to wield cyber attacks. But long an evangelist of defense tech, Lux’s Wolfe opines there’s “a moral imperative to invent technology so that people that are really doing the good work around the world are advantaged, not disadvantaged.”

And despite the up-and-to-the-right nature of defense tech deals over recent years, make no mistake: “This is not a phenomenon of 2023,” Ackerman says. “This is a trend line that’s been developing for 20-plus years, [and] it has continued to grow.”