European VC Invests in Ukrainian Defense Tech

The Shift in Venture Capital Towards Defense Technology

Investment in defense technology is experiencing a significant upswing, transitioning from a largely avoided sector by venture capitalists to a prominent area of interest. However, a prevailing condition for many investors, including the NATO Innovation Fund, remains the requirement of dual-use technology – applications serving both military and civilian purposes.

Darkstar: A New Approach to Defense Investment

Estonian venture capital firm Darkstar distinguishes itself by deliberately investing in technologies with purely military applications. Their objective is to bolster European rearmament efforts by leveraging combat-tested solutions originating from Ukraine. Co-founder and General Partner Ragnar Sass emphasizes the critical importance of this endeavor, not just for the present but for the coming decade.

The firm adopts a proactive role in its mission, assisting startups in delivering products to military clients in both Ukraine and across Europe. For Ukrainian teams, this encompasses not only financial support but also guidance in establishing legally compliant entities within NATO nations like Estonia. “Operational efficiency is paramount for any company seeking European procurement or grants,” Sass explains.

Fundraising and Investment Strategy

Darkstar is currently targeting a fundraising goal of €25 million (approximately $29.2 million) within the next six to twelve months. Their investment focus will be on pre-seed and seed rounds, with typical investments ranging from €500,000 to €1 million. They have already invested in two Ukrainian-Estonian startups: Farsight Vision, specializing in geospatial analytics and 3D mapping for drone operations, and Deftak, a developer of drone ammunition.

From Startup Founder to Defense Investor

For Sass, venturing into weapons investment wasn’t a natural progression. Having been a pivotal figure in the Estonian startup scene since receiving early funding from Skype’s founders for a pet owner community, he later co-founded the CRM and sales tool Pipedrive. The substantial exit from Pipedrive provided the capital for over 50 angel investments.

Several of these angel investments also achieved unicorn status, including Veriff. However, none were in the defense sector, even after Russia’s full-scale invasion of Ukraine in 2022 prompted Sass to provide aid and support to Ukraine, with which he had both personal and professional connections.

“It required considerable time to reconcile with the idea of investing in weapon systems,” Sass admits. The decision materialized a year and a half ago with his initial defense investment in Estonian drone startup Krattworks.

Darkstar’s Evolution and Backing

Krattworks proved to be a pivotal moment for Sass, also marking his final investment as an angel investor. He is now channeling his resources into Darkstar, which began as a coalition organizing hackathons and bootcamps, drawing on his decade of experience with the hackathon community Garage48 (2010-2020). Sass subsequently funded and sold another company, Salto X, though the financial outcome of that exit remains unclear.

Darkstar’s approach is gaining traction, as evidenced by its recent completion of a first close of €15 million (approximately $17.5 million), backed by European entrepreneurs, family offices, and Estonian state-backed LP SmartCap.

A Baltic Perspective on Defense Investment

SmartCap’s investment in Darkstar represents a departure from the norm, mirroring the approach of Lithuania’s sovereign VC fund Coinvest Capital, which gained authorization in 2023 to invest in defense technologies without the prerequisite of civilian applications. This trend is particularly prominent in the Baltic states.

The geographical proximity to Russia and the historical experience of Soviet occupation instill a sense of urgency among Estonians like Sass, a sentiment that is now spreading across Europe as investors acknowledge the importance of defense. “However, a lack of specialized knowledge can be a significant impediment,” Sass notes. For Darkstar, building this expertise began with direct engagement with end-users.

Direct Engagement with Ukrainian Combat Units

Darkstar’s primary end-users are Ukraine’s brigades. Despite ongoing changes, Ukraine has adopted a decentralized command structure, empowering combat units to make independent decisions. Navigating this landscape can be challenging for external entities, but Sass has established a strong foundation.

“Over the past three and a half years, I have visited Ukraine more than 20 times, personally meeting with over 100 unit commanders – spending time with them, engaging in discussions, and learning from their experiences,” Sass states. He also discovered significant common ground, observing that “elite units operate with a mindset remarkably similar to that of startups.”

The Innovation Emerging from the Ukrainian Conflict

While inexpensive first-person view (FPV) drones have proven effective in destroying high-value equipment, Sass cautions against assuming that technological advancements from Ukraine are easily replicated. He highlights the sophistication – “most elite drone battalions in Ukraine have their own R&D” – and the rapid pace of innovation on both sides of the conflict. For example, fiber-optic drones have emerged as a game-changing technology.

For startups operating outside of Ukraine, this means that solutions that appear viable in theory may quickly become obsolete. Darkstar’s bootcamps are designed to address this challenge, with the next event scheduled for this summer in Kyiv, offering companies “feedback, field-testing opportunities, and combat validation.”

Leveraging the Ukrainian Startup Ecosystem

A portion of Darkstar’s deal flow will originate from its bootcamps, where staff collaborate directly with teams for five days. However, the pipeline extends beyond this, with Ukraine’s 2,000 eligible teams representing a significant opportunity. “Many of the Ukrainian companies we are evaluating are not nascent; they have been operating for over two years, successfully developing products and building companies with limited capital.”

The general mobilization of Ukrainian men does not present as significant an obstacle as often perceived. Founders developing effective combat products can receive exemptions and travel authorization, and a substantial proportion of Ukraine’s defense startup founders are women, including Farsight Vision CEO, Viktoriia Yaremchuk, Sass points out. Furthermore, restrictions on defense tech exports from Ukraine are currently being lifted.

Strategic Location and Pan-European Focus

Sass applies a similar locational philosophy to defense investing as he did with Nordic startups, advocating for a relocation from Ukraine to more established tech hubs. Darkstar will not invest in companies intending to remain exclusively based in Ukraine. The firm is also engaging with teams in Central and Eastern Europe, Latvia, the U.K., and Germany, with the expectation of a more diverse portfolio in the future.

Reflecting this ambition, Darkstar positions itself as a pan-European fund. Sass is joined by Estonia-based GPs Kaspar Gering, with a decade of experience in engineering and data science at Wise, and Mart Noorma, director of the NATO Cooperative Cyber Defence Centre of Excellence. A fourth GP, Philip Jungen, is based in Germany, with additional partners and staff in Ukraine.

Investment Categories and Future Potential

Darkstar intends to invest in a range of categories, including autonomous systems, air defense, electromagnetic warfare, communications, cybersecurity, sensors, and surveillance and intelligence, encompassing both single and dual-use applications.

Sass believes that some of these investments could become acquisition targets for established prime contractors seeking rapid solutions that NATO countries are now willing to procure. However, fueled by governments recognizing the transformative impact of the war in Ukraine on modern warfare, other startups could also achieve substantial revenue and even pursue public offerings.

While the potential for breakout success among defense startups, particularly those lacking civilian applications, remains uncertain, the rapid growth and valuation of companies like Anduril and Helsing, coupled with the emergence of new defense-focused funds, suggest that venture-scale returns are being taken more seriously.

Ultimately, Sass is driven by a larger purpose. While acknowledging the irony of embracing the humor of NAFO, a global online movement supporting Ukraine through memes, he also issues a stark warning about Russia’s relentless war economy. “The adversary is advancing rapidly, and that is precisely why I believe the tech community must become far more involved in addressing this immense and escalating threat.”