The conflict in Ukraine has served as a catalyst for change in Europe, transforming defense technology from a neglected area for many European venture capitalists into a leading focus within the realm of deep tech investments.
This transformation is highlighted in Dealroom’s recent report on Defence, Resilience, and Security (DSR) in Europe, produced in collaboration with the NATO Innovation Fund (NIF), a multi-nation initiative of €1 billion aimed at making direct investments and supporting funds in this field.
NIF’s portfolio features startups like Tekever, a Portuguese dual-use drone company, which successfully secured $74 million in a Series B funding round this past November. In total, startups in the DSR sector attracted an unprecedented $5.2 billion in venture capital last year, representing a 24% increase compared to 2023 and nearly five times the amount raised in 2019.
Despite this impressive figure, the $5.2 billion raised is merely twice the amount being pursued by U.S. defense tech firm Anduril for its own expansion. Nevertheless, this represents a historic peak, constituting 10% of total VC funding in Europe—a remarkable two-and-a-halffold increase over the last two years, according to Dealroom.
“The interest in investing in defense, security, and resilience startups in Europe has transformed dramatically compared to just a few years ago,” stated Yoram Wijngaarde, founder and CEO of Dealroom, in a statement. “This shift aligns with a growing trend of aligning capital and innovation towards addressing Europe’s key strategic requirements through deep technologies.”
With the DSR sector now representing one-third of all deep tech venture funding in Europe, the convergence of these areas is evident. Importantly, DSR encompasses more than just defense tech, emphasizing the critical nature of supply chains, quantum technologies, and energy for the sovereignty of the region.
Consequently, a wider array of startups is now included in the DSR pipeline, especially as increasing defense budgets alleviate the hesitance associated with marketing dual-use technologies in Europe. The NIF is also aiming to facilitate this process; it recently appointed John Ridge, a British Army veteran, as its chief adoption officer.
While fragmentation and slow adoption have historically hindered progress, investment appetite has started to shift. The emergence of dual-use startups has eased the path for generalist VCs to engage with the sector, which typically deters them from direct investments in pure defense technologies or weaponry.
The pure defense tech segment represents only a minor fraction of total funding, yet it is on the rise; a prior Dealroom report projected a $1 billion total for 2024, marking a fivefold increase since 2018. In contrast, a growing number of European VCs are now investing in fields adjacent to defense tech, with over 850 investors participating in at least one DSR deal in Europe, as indicated in the report.
This growth is particularly notable in Germany; with Munich and Berlin serving as key hubs, the country topped the list for DSR funding in 2024, followed by the U.K. and France. AI defense tech company Helsing, based in Germany, raised approximately $487 million in a Series C funding round led by General Catalyst last year.
Nonetheless, these changes will not happen overnight. The Defence Equity Facility (DEF), which is a €175 million ($182 million) fund established by the European Commission and the European Investment Fund (EIF) in January 2024, is just starting to announce its initial investments, following the need for the European Investment Bank (EIF’s parent organization) to update its regulations concerning dual-use technologies.
Despite the many challenges that lie ahead, the lack of founders is certainly not one of them, as evidenced by recent defense hackathons held across Europe. “Even with the recent expansion, the defense, security, and resilience technology sector remains relatively young, yet the data indicates a vibrant pipeline of early-stage companies ready to affect change,” Wijngaarde concluded.
Compiled by Techarena.au.
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