Defense investment is accelerating across multiple geographies, and the capital pursuing it is growing at a faster pace. Global venture capital investment in defense technology reached a record $49.1 billion in 2025, nearly double the previous year's total.[1] In Europe, where the shift has been sharpest, defense and security startups raised approximately $8.7 billion in venture funding, an increase of 55 percent year-on-year (YoY). Public markets have moved alongside. Since early 2025, the FTSE 350 Aerospace & Defence Index has climbed over 90 percent, and a surge in deal activity has followed: between January 2025 and early April 2026, 133 M&A transactions involving European defense targets were executed, predominantly with European buyers. CSG’s January 2026 listing, the largest defense IPO by deal size and market capitalization on record, reopened an exit window that had been closed for much of the cycle.[2]

This capital is also more discerning than it was a year ago. Investor interest has shifted from companies with great stories of demand for their products to funding those that are best equipped to deliver against that demand. It is in this context that, in drone and unmanned-systems deals (including drones, ground robots, and surface and sub-surface vehicles, often grouped under the broader UAx label), the bottleneck has become an operational and financial one: whether the supply chain, the labor pool, and the operational planning behind companies claiming scalability can keep pace with the growth assumptions priced into their valuation model. In this environment, post-close value is most often eroded not because the customer does not materialize, but because the production ramp slips 12 to 18 months beyond plan, gross margins compress during scale-up, and the workforce cannot keep pace with demand. The main question for investors, corporates, and private equity (PE) funds in the sector is therefore no longer about demand, but whether the target company can turn that demand into delivered units while remaining within margin trajectory and working-capital assumptions. 

To address this question, we provide four lenses for the diligence questions investors should ask before finalizing a deal:

1. Procurement pathways: What procurement pathways does the target operate within, and can they realistically scale to program-of-record level?
2. Where the moat sits: Where does defensible value actually reside in the architecture (hardware, software, command-and-control, or data)?
3. Ecosystem design: Is the ecosystem (hardware, software, command-and-control, and analytics) complete enough to deliver against the use case at scale?
4. Cybersecurity and supply-chain resilience as valuation inputs: Are cybersecurity posture and supply-chain concentration properly reflected in the valuation model, or treated as qualitative footnotes?

Procurement Pathways: From Pilot to Program of Record

US military traction has become a defining credibility signal in unmanned-systems pitch decks. On its own, however, it reveals little about whether the company can survive the transition from pilot to program-of-record scale, what the industry calls the “valley of death.”[3]  

US special forces purchases, which are typically small, fast, and budget-discrete, follow procurement pathways that look very different from standard Army procurement. A company that has shipped a lower volume of units into a special-operations test environment is not the same as one that has won a program-of-record contract. The latter requires test and evaluation regimes, certifications, qualified production lines, and contracting infrastructure that take years and significant capital to build. The same dynamic is present on the European side: NATO buying pathways and individual member-state procurement each carry their own gatekeepers, certifications, and political timing. 

For investors, this creates a two-part problem. First, in revenue forecasting: scaling from small special-operations sales of units is not a cross-sell. It is a fundamentally different business model. Second, in capability assessment: certified producers are scarce, and channel access is difficult to address later in the process. For startups and scale-ups, the gap between a special-operations pilot and program-of-record qualification frequently demands capital and lead times that exceed the company’s available resources.

Pre-deal analysis is therefore essential. In our experience, this work involves mapping certifications, prime relationships, and end customer routing, which represent some of the highest-leverage diligence items in unmanned-systems deals. The latest wave of European unicorns to scale through Ukraine deployments and into mainstream procurement (Helsing and Quantum Systems are the most visible examples) demonstrates that the second jump, from validated pilot to program-level scale, is significantly harder and more capital-intensive than the first.[4] The financial profile of a program-of-record contract is also materially different from that of a pilot: unit economics, margin structure, and payment timing all shift in ways that require their own diligence layer and should not be extrapolated from early-stage results. 

Where the Moat Sits: Software and C2 as Sources of Durable Value

Vehicle hardware, including airframes, hulls, motors, and the printed circuit board assemblies (PCBAs) that animate them, is now largely commoditized. Bills of materials look broadly similar across competitors, and component supply is highly concentrated in Asia, as discussed later in this article. In our experience, this is where many investors misread the business. Unmanned systems are hardware companies, but software is what makes them defensible. An investor focused on the hardware is focused on the vehicle, which is not where the moat sits. 

The lasting value is not in the vehicle but around it: in the software stack, the command-and-control (C2) layer, and the continuous flow of real-time data across the operational field, whether industrial or military. In a mining operation, a fleet of drones that can fly represents a baseline capability. A fleet that can plan autonomously, share telemetry across platforms, and feed an analytics pipeline that closes the loop on operations represents an enterprise asset. The same logic applies in infrastructure inspection, perimeter surveillance, and logistics.

From a diligence perspective, investors should set the bar for software architecture, integration depth, and data network effects at least as high as for hardware. Investment theses that position hardware as the primary source of defensibility warrant particular scrutiny.
 

Companies that are succeeding in the unmanned systems space are built around an ecosystem. A viable architecture ties together hardware, software, C2, connected endpoints (sensors, ground stations, secondary platforms), and analytics pipelines that convert telemetry into application outcomes. The right question for an investor is rarely “is this a good drone?” It is “is this a complete solution for a specific use case, and is the use case large enough to justify the investment?”

This framing also clarifies execution risk. The variables most commonly overlooked in unmanned-systems deals fall into three categories:

• Labor and process maturity: Even when the software thesis is sound, delivery capacity is often underestimated. Specialized skills in defense manufacturing are rare. Skilled assembly and test roles typically take more than a year to bring to full productivity, in some cases closer to two, which means many facilities operate below capacity not because they lack machines, but because they lack the people. De-skilling, which involves standardizing work packages so that a broader labor pool can run them, has proven effective in the Ukraine context, but only after skilled technicians have built the first-off pilots and stabilized the process.[5] Ramp timelines that ignore this sequencing tend to slip, and gross margins are often compressed sharply during ramp-up as yield loss, expediting costs, and learning-curve inefficiencies accumulate.
   
• Make-or-buy decisions: Vertical integration is often presented as a tidy solution to fragile supplier networks, but it shifts the risk rather than eliminating it. Insourcing substitutes supplier dependence for greater labor and capex intensity, longer training times, and direct ownership of yield and quality. Internal production ramp is typically not accretive in the early years. The appropriate approach is to examine the question component by component, weighing strategic criticality against organizational readiness. The diligence question is whether management has been candid about which is which. For companies operating under US government cost-based contracts, the calculus carries an additional layer: in-house production savings do not always flow to the bottom line, since cost-based pricing structures and government audit rights can require a portion of those savings to be passed through to the government over time.
   
• Working capital: Long component lead times, inventory buffering for critical parts, and milestone-based billing common in defense contracts can push cash conversion far beyond commercial benchmarks. Revenue mix amplifies the effect. Direct US Department of War (DoW) sales, prime contractor sales, and commercial accounts price and pay differently and carry different margin profiles. Even a company with a credible-looking blended margin can have a working-capital structure that materially changes the equity check.

For assumptions on capacity, capex, and margin, the discipline is the same. In our experience, the most reliable approach is to stress-test against workforce, process, and cash-cycle reality rather than throughput theory.

Cybersecurity and Supply-Chain Resilience as Valuation Inputs

Cybersecurity and supply-chain resilience are frequently treated as qualitative footnotes in unmanned-systems deals. Both belong inside the valuation model. Weak cyber posture or brittle supply chains directly affect the probability of hitting production targets, margin trajectory, and, in government procurement contexts, ongoing qualification for future contracts. Each of these has a quantifiable impact on projected cash flows and should be reflected as such in scenario modeling and valuation assumptions.

• Cybersecurity: Unmanned platforms are networked by design. They communicate, take commands, and increasingly carry mission-relevant data. Any platform without a credible posture across communications, C2, and data layers carries an undisclosed liability. End customers, both government and enterprise, are increasingly treating this as a procurement gate rather than an optional feature. At minimum, investors should expect evidence of secure-by-design architecture, supply-chain integrity controls on firmware and components, and a tested incident response posture, rather than a list of certifications presented as a substitute.
   
• Supply-chain resilience: PCBAs and many subassemblies remain concentrated in China. Advanced integrated circuits (ICs) depend on Taiwan.[6] Defense and space adjacencies, including energetics, deployables, and specialty materials, rely on small, highly specialized suppliers with limited capacity and labor pools. This concentration is structural rather than transitional, and forecasts that assume rapid localization tend to overshoot. A further dimension that diligence should not overlook is regulatory compliance: bill of materials (BoM) analysis should verify that no components are sourced from restricted or sanctioned suppliers, a risk that carries significant post-close liability under the FY2026 National Defense Authorization Act (NDAA), specifically its expanded sourcing restrictions and foreign ownership, control, or influence (FOCI) disclosure rules.[7] The platforms that manage this well share two characteristics: sales-and-operations planning (S&OP) processes mature enough to handle multi-program volatility, and hardware interoperability designed in early, so that a disrupted module can be swapped without re-architecting the platform.

Investors should look for both. Resilience is no longer simply an operational concern within a specific platform; it has emerged as a horizontal investment theme across European technology and infrastructure, with security, sovereignty, and supply-side reliability captured under a single frame and capital priced accordingly. In this environment, weak cyber and resilience design carries margin and execution risk that compounds over time. Robust design, by contrast, represents one of the more durable sources of competitive advantage in the sector.

Unmanned-Systems Diligence Requires an Integrated Financial and Operational Approach

Effective diligence in drone and unmanned-systems deals integrates four elements that are too often analyzed in separate workstreams:

• Procurement pathways: A clear read on where the company is today (special-operations pilots, prime contractor, commercial), what it would take to reach program-of-record scale, and the realism of that timeline.
   
• Where value sits: A view of where value actually resides in the architecture (software, C2, or data), and whether the company’s own investment is concentrated where the moat sits.
   
• Capacity and labor: A bottom-up assessment of capacity and labor against the production ramp the model assumes, including the maturity of process standardization and de-skilling.
   
• Geopolitical exposure: A component level map of geopolitical exposure, treated as a valuation input rather than a risk-register entry.

When conducted well, this integrated approach enables transactions rather than impeding them. It pairs the risks investors already half-suspect with executable mitigation levers, allowing capital to be deployed with conviction.

Implications for Operators and Management Teams

For founders and scale-up management teams, the same four lenses can be used as a checklist for what investors will probe during diligence. A few practical observations:

• Procurement pathway specificity: “Sold to the US Army” is insufficient context for investors evaluating scale potential. Naming the specific program, the end customer, the unit count, and the next contracting gate provides the level of detail that supports a credible scaling thesis.
   
• Pre-deal mapping: Certifications, prime relationships, and end customer routing represent some of the highest-leverage areas of effective diligence. Companies that document these in advance of investor engagement are better positioned than those that attempt to reconstruct them under time pressure. Documentation supports the conversation; improvisation does not.
   
• Make-or-buy candor: Vertical integration is currently in favor as a strategic response to fragile supplier networks, but it is also a labor and capex commitment. Companies that present it as a clean win typically have not modeled the trade-offs; those that present it as a deliberate trade-off usually have.
   
• S&OP maturity: In a multi-program, supply-volatile environment, sales-and-operations planning is increasingly the difference between a credible production ramp and a slipping one. Treating S&OP as a back-office function rather than a competitive asset is a common error among less mature scale-ups.

How A&M Can Help

A&M’s Corporate Transactions Group works with investors, corporates, and PE funds across the deal life cycle. In drone and unmanned-systems deals, our work focuses on the gap between a growth thesis and the operational reality required to deliver it: supply chain, labor and process maturity, sourcing strategy, sales-and-operations planning, and cybersecurity posture. The team combines aerospace, defense, and industrial operating experience with transaction advisory expertise, supporting both deal-side diligence and post-close operational execution. Investors and operators with a specific situation in mind are welcome to reach out for a conversation.