European Defence Tech Funding Surges to 10%

The Transformation of European Defense Tech Investment

The conflict in Ukraine dramatically altered the investment landscape in Europe, prompting a significant re-evaluation of the defense technology sector. Previously largely overlooked by European venture capitalists, defense tech has rapidly ascended to become a primary focus within the broader deep tech arena.

Dealroom's Report and the NATO Innovation Fund

This notable shift is detailed in Dealroom’s latest analysis of Defence, Resilience, and Security (DSR) in Europe. The report was published in collaboration with the NATO Innovation Fund (NIF), a multinational €1 billion initiative dedicated to direct investments and fund backing within this crucial space.

The NIF portfolio already includes innovative startups like Tekever, a Portuguese company specializing in dual-use drone technology. They successfully secured $74 million in Series B funding in November. Collectively, DSR startups achieved a record-breaking $5.2 billion in venture capital funding last year, representing a 24% increase from 2023 and almost five times the amount seen in 2019.

Funding Levels and Comparison to the US

While this surge is substantial, the $5.2 billion figure remains modest when contrasted with the reported funding goals of U.S. defense tech firm Anduril, which is seeking to raise a similar amount independently. Nevertheless, this represents an all-time high, constituting 10% of all venture capital funding deployed across Europe – a more than two-and-a-half-fold increase over the preceding two years, as highlighted by Dealroom.

Yoram Wijngaarde, founder and CEO of Dealroom, stated that the current appetite for investment in defense, security, and resilience startups is fundamentally different in Europe than it was just a few years ago. He emphasized that this trend reflects a broader commitment to leveraging capital and innovation to address Europe’s core strategic requirements through the application of deep technologies.

The Broadening Scope of DSR

Now accounting for one-third of all deep tech venture funding in Europe, DSR’s influence is undeniable, demonstrating a significant overlap between the two fields. This is due to the expansive nature of DSR, which extends beyond traditional defense tech to encompass critical areas like supply chain security, quantum technologies, and energy independence – all vital for regional sovereignty.

Consequently, a wider spectrum of startups now qualify for inclusion within the DSR pipeline. This is further facilitated by increasing defense budgets, which make the prospect of marketing and selling dual-use technologies within Europe less challenging. The NIF is actively working to support this development, recently appointing British Army veteran John Ridge as its chief adoption officer.

Overcoming Investment Obstacles

Historically, fragmentation and slow adoption rates have presented challenges, but a key obstacle – limited VC appetite – is now being overcome. The emergence of dual-use startups has played a crucial role in this evolution. These companies have made it easier for generalist VCs to incorporate the sector into their investment mandates, which often restrict investment in purely defense-focused technologies, particularly weapons systems.

While pure defense tech still represents a smaller portion of overall funding, it is also experiencing growth. A prior Dealroom report projected a $1 billion total for 2024, a fivefold increase since 2018. Furthermore, a growing number of European VCs are now investing in areas adjacent to defense tech, with over 850 investors participating in at least one DSR deal in Europe, according to the report.

Geographical Hotspots

This growth is particularly pronounced in Germany, which, with Munich and Berlin as its primary hubs, secured the leading position in DSR funding in Europe during 2024. The United Kingdom and France followed closely behind. Helsing, a rapidly ascending AI defense tech company based in Germany, raised approximately $487 million in a Series C funding round led by General Catalyst last year.

Challenges and Future Outlook

Despite these positive developments, adaptations are still underway. The Defence Equity Facility (DEF), a €175 million fund ($182 million) launched in January 2024 by the European Commission and the European Investment Fund (EIF), is preparing to announce its initial investments. This was delayed as the European Investment Bank (EIF’s parent organization) needed to revise its regulations concerning dual-use technology.

However, a shortage of founders is not among the challenges facing the sector, as evidenced by recent defense-focused hackathons held throughout Europe. Wijngaarde concluded by stating that while defense, security, and resilience tech remains a relatively new field, the data indicates a robust pipeline of early-stage companies poised to drive significant change.