**London**: Following Russia’s invasion of Ukraine, European defence startups have experienced a 30% increase in venture capital investment, totalling $5.2 billion. Despite this surge, challenges remain in accessing funding and navigating military procurement processes, highlighting the need for cultural and structural changes in the sector.
Since Russia’s invasion of Ukraine, investment and opportunities for European defence startups have seen a significant surge, according to industry leaders. This surge comes with a notable shift in governmental and investor attitudes towards an industry that has historically been characterised by slow development. Research conducted by the NATO Innovation Fund (NIF) and market analytics firm Dealroom, published in February, indicated that venture capital investments in European “defence, security, and resilience” startups grew by 30 per cent over the two years leading up to 2024, amounting to a total of $5.2 billion in funding.
The growth in defence technology investment reflects a broader trend that began even before the full-scale Russian invasion in early 2022, as existing technologies were adapted for battlefield applications. Patrick Schneider-Sikorsky, a partner at NIF, noted that various “underlying technologies,” such as additive manufacturing, artificial intelligence, radio frequency technologies, and advanced battery technologies, were already attracting investment prior to the heightened conflicts in Ukraine. However, the pressing need for cutting-edge battlefield technology presents ongoing challenges.
One of the primary obstacles is securing funding from investors, including sovereign wealth funds, public banks, pension funds, and wealthy family offices, who often group defence investments with sectors deemed undesirable, much like “sin stocks.” This sentiment is echoed by Stefan Thumann, the founder of the German startup Donaustahl, which transitioned from producing accessories for sports shooting to developing armed drones. Despite receiving notable interest at the previous Berlin air and space trade fair, Thumann explained that his company has been “shut out from financing and the capital markets so far.” He described the situation as akin to “gambling and drugs.”
Thumann has begun to explore alternative methods of securing funding, including reaching out directly to the company’s supporters and using social media to issue digital bonds. Schneider-Sikorsky commented on the need for revising existing funding frameworks to enable investment in defence and dual-use technologies, which have both civilian and military applications. Some progress has been made in this area, as the European Investment Bank removed its previous requirement that “dual-use” firms secure at least 50 per cent of revenue from civilian customers.
Responses from various European governments vary widely, often reflecting their geographical positioning and perceptions of threat. For example, Estonia has launched a €50 million fund aimed at investing in both defence and dual-use technologies. Additionally, Pia Santavirta, CEO of Finland’s public investment fund Tesi, recently identified “defence tech” as one of the key future growth sectors.
Private investors are also recognising the potential for significant spending within the defence sector, particularly in Germany and Brussels, following recent constitutional changes in Germany that permit increased borrowing for defence funding. However, despite this influx of capital, defence startups face difficulties addressing military procurement systems, which are typically slow-moving and take years to finalise contracts. Jack Wang, managing director of venture capital firm Project A, noted that the standard venture capital model focused on quick revenue generation contrasts sharply with the lengthy cycle of military sales.
Both Schneider-Sikorsky and Thumann emphasised the necessary cultural change required in the defence sector to streamline relationships between startups and military procurement. Thumann articulated the need for the German army to modernise its procurement processes, arguing that existing tendering complexities prevent smaller firms from participating effectively, which can delay innovation and advancement in military technology.
The situation continues to evolve, as European defence startups navigate the intersection of technological innovation, investment opportunities, and the pressing demand for modernised defence capabilities in an increasingly complex global landscape.
Source: Noah Wire Services
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