Opinion
From the automotive industry to the battlefield: Why automotive startups are turning to defense
As funding slows and autonomy timelines slip, automotive startups are increasingly turning to defense markets as a parallel path to growth, reshaping the future of mobility and deep-tech investment.
The global automotive industry is going through a complex period. For years, it was perceived as a major growth engine for the high-tech and deep-tech sectors, with promises of fully autonomous vehicles, the electric mobility revolution, and a fundamental change in the way we move from place to place. But now, more and more companies and entrepreneurs are discovering that the road ahead is far longer than the optimistic forecasts of the beginning of the decade, and are looking to incorporate intermediate alternatives.
Why is this happening, and why now?
The underlying assumption is that these are startups that are in any case characterized by long timelines to exit, and in the current market environment the entire sector has entered a mode of heightened caution. IPO activity has declined, the M&A market has weakened, and investors are no longer rushing into the sector. At the same time, Tier-1 suppliers and major OEMs are delaying deals, slowing programs, and in some cases even postponing collaborations that had already been agreed upon in principle. Some are even breaching contracts or stretching processes over years, partly because the entire ecosystem is moving in the same cautious direction.
The industry has shifted from aggressive growth to capital preservation and capital discipline. This is not a complete freeze, but certainly a profound change in the way investment decisions are being made. Whereas in the past the industry operated under the assumption that autonomous driving was “just around the corner,” companies today are taking fewer risks alongside larger but more focused investments.
Capital is now being directed primarily toward areas viewed as strategic: Software Defined Vehicles (SDV), batteries, ADAS systems, partial autonomy, and supply chain resilience. At the same time, traditional automakers are slowing or postponing aggressive full-EV programs, reducing investments in factories, and prioritizing more profitable hybrid models. Pressure is also increasing among suppliers. Declining production volumes, cost inflation, tariffs, and slower-than-expected launches are hurting margins. In Europe, one out of every four suppliers already expects losses during 2026.
Sitting on the Sidelines
Three main forces are driving the slowdown:
A. Margin Erosion
According to industry data, automakers recorded approximately $55 billion in write-downs during 2025. EV programs failed to meet expectations, leading to impairments, project cuts, and delayed investments.
B. A “Wait and See” Macro Environment
During 2025, only 347 automotive M&A transactions were completed, the lowest annual number in more than a decade. High interest rates, uncertainty around tariffs, and regulatory changes created valuation gaps between buyers and sellers, and many transactions are being delayed because the parties cannot agree on pricing.
C. A Deep Structural Reset Across the Industry
Automakers are shifting from EV expansion toward a focus on profitability, while prioritizing hybrid vehicles and more selective programs. The result is fewer startups successfully raising capital, fewer acquisitions, and fewer companies reaching IPO readiness.
This has been accompanied by declining investor confidence. Companies such as Aurora Innovation and TuSimple lost substantial portions of their value after going public, reinforcing skepticism toward autonomy companies once viewed as highly promising. At the same time, automakers such as Ford Motor Company and General Motors reduced investments in advanced autonomy initiatives, including the suspension of projects such as Cruise Origin. Safety incidents surrounding autonomous vehicles have also negatively affected the market, delaying regulatory processes and tightening requirements.
The result has been a significant decline in M&A and IPO activity, alongside a clear preference for late-stage investments only.
The slowdown does not necessarily stem from a rejection of the vision of full autonomy. Within the industry, the delay is mainly described as a multiplier of caution. In the past, the market priced in rapid commercialization of Level 4 and Level 5 autonomy between 2025 and 2030. Today, those timelines have been pushed back by at least two to five years, while true Level 5 autonomy is still not perceived as commercially viable at scale.
Capital Has Not Disappeared, It Has Simply Become More Selective
The market has not “woken up from the hype,” but rather shifted from a funding cycle based on future narratives to a longer and more selective cycle.
At the peak of 2020–2022, mobility and automotive companies were valued based on the vision of rapid EV adoption, fast commercialization of autonomy, and the enormous potential of SDV. This led to inflated multiples and aggressive capital deployment. Today, the reality is different.
Capital has not disappeared. It has simply become far more selective. Consolidation and efficiency have replaced the “growth at all costs” model. Markets are no longer satisfied with ambitious technological roadmaps alone; they demand a clear path to profitability within a visible timeframe.
At the same time, the technology cycle itself has lengthened. Profitability in EVs, software commercialization, and especially autonomy are advancing at a pace that is two to five years slower than original forecasts. Naturally, this extends capital cycles and delays exits. For startups, the implications are clear: fundraising has become more difficult, sales cycles have become longer, and investors today are looking for companies capable of demonstrating near-term revenue, a clear integration path into OEM platforms, cost reduction or efficiency improvements, and regulatory or safety relevance.
On the other hand, consolidation is also creating acquisition opportunities. Many large companies now prefer acquiring existing technology rather than developing it internally from scratch.
Geography also plays a major role. China is perceived as the center of scale and aggressive competition in EVs. The United States is viewed as the leader in software, autonomy, reshoring trends as part of deglobalization, and the connection to defense markets. Europe is focused on industrial partnerships and regulation-driven niches, while Israel maintains a strong position in autonomy, cybersecurity, AI, sensors, fleet technologies, and dual-use solutions.
Defense as a Go-to-Market Channel
As in nature, there is no vacuum in industry. This is where the increasingly strong connection between the automotive industry and defense markets comes into play.
More and more companies understand that technologies originally developed for autonomous vehicles are also naturally relevant to the defense sector. Core sensors such as radar, cameras, lasers, navigation systems, and perception technologies are highly suited for military applications. The same is true for batteries, automation systems, robotics, and mass manufacturing infrastructure. All of these are meeting growing demand from defense organizations, especially as procurement systems become increasingly open to commercial technologies.
This represents a significant opportunity, particularly as global defense spending is expected to reach approximately $2.6 trillion in 2026.
The transition from civilian deep tech into defense is therefore not perceived as a forced pivot, but rather as an acceleration toward an additional market. In practice, autonomous driving and civilian deep-tech companies are increasingly becoming dual-use by default.
The companies currently succeeding in the automotive sector are not necessarily those that executed a sharp pivot, but rather those expanding into defense markets as a parallel go-to-market channel. In some cases, such a move even improves valuation, business resilience, and long-term durability.
Ultimately, the automotive industry is not disappearing. It is simply changing shape. The vision of full autonomy still exists, but the road toward it is longer, more expensive, and far more complex than many believed until recently.
Until then, many of the technologies originally developed to lead the transportation revolution may ultimately find themselves on the battlefield.
Lisya Bahar Manoah is Managing Partner at Arieli Group, Chairperson at Elron Ventures & a Board Member at Rafael Development Corporation.
