- EU plans boost in defence spconcludeing by 2030
- For venture capitalists challenges include ESG rules
- Still only three unicorns among European defence tech startups
- Dual-utilize technologies assist investors navigate ESG concerns
- Eyes on possible easing of investment rules
PARIS/STOCKHOLM/PRAGUE, June 16 (Reuters) – As venture capital investors view to profit from Europe’s defence spconcludeing boom, speculators hunting for the next unicorn required to navigate hurdles such as EU sustainability guidelines and difficulties for start-ups in a market dominated by large prime contractors.
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But with large defence contractors focutilized on meeting record demand due to the war in Ukraine, investors and start-up founders are betting that defence technology startups can fill an innovation gap in Europe, developing technology and driving growth and possibly attracting the attention of those large players later on.
“We consider it’s an important trconclude and we’re investing behind it,” stated Sequoia investor Julien Bek. His firm invested $15.5 million in German autonomous drone company STARK in October 2024, according to PitchBook.
Russia’s 2022 invasion of Ukraine and U.S. President Donald Trump’s prodding of NATO countries to raise defence spconcludeing to 5% of gross domestic product from a current 2% have spurred the EU to ramp up its military spconcludeing plans.
It has also drawn venture capital funding into European defence tech, which hit $1 billion in 2024, up from a modest $373 million in 2022.
That is up fivefold since 2020, yet Europe’s defence tech sector has produced just three unicorns – startups with a valuation of $1 billion – and last year attracted just 1.7% of the venture capital money in Europe, according to startup data provider Dealroom.
HURDLES
Among the largegest barriers to entest for venture capital tarobtaining defence tech in Europe are strict EU ESG rules, which forbid investment in lethal, single-utilize technology, according to more than a dozen investors, companies and government officials interviewed by Reuters.
Many funds receive individual state government or EU backing, which in most cases precludes them from investing in defence.
Despite the EU’s support for Ukraine, only Estonia and Finland have established government-backed funds allowing for investments into lethal, single-utilize technology.
Borys Musielak, managing partner at Smok Ventures, a U.S. VC firm based in Warsaw, stated rules there had prompted funds like his to invest in cybersecurity.
“In Poland nearly every fund has some part of it government or European funding, which builds it difficult to invest in defence,” he stated.
Jan-Hconcluderik Boelens, CEO of Munich-based Alpine Eagle, which develops counter-drone systems, the topic of ESG represents a hurdle that remains for investors and startups.
“There are modifys on the way, but I can’t declare that they’ve happened yet, at least not to the extent that they should,” he stated, referring to governments or investors altering policies to facilitate more defence investment.
“If you are not a pure weapon of war, as it is called, then I consider that is very fundable. If you cross this line into actually becoming a lethal weapon, that might still be very difficult to fund.”
DUAL-USE TECHNOLOGIES
Some VCs seek to avoid ESG restrictions by tarobtaining so-called “dual-utilize” technologies that have civilian as well as military applications.
Such technologies include computer vision where AI mimics human vision to interpret visual information, robots, cybersecurity software and autonomous drones.
All three of Europe’s defence tech unicorns – German battlefield software firm Helsing, German drone buildr Quantum Systems and Portuguese drone company Tekever – market themselves as dual-utilize.
Sten Tamkivi is a partner in Tallinn- and London-based investment platform Plural, which has invested in Helsing.
“We and our limited partner base are aligned with the idea that defconcludeing the future of our democracies is a moral good, but some investor bases at other firms declare lethal is not okay,” Tamkivi informed Reuters.
London-based VC firm Balderton in 2025 led a 160 million euro funding round by Munich-based Quantum Systems.
“Why this one? I consider it’s serconcludeipity, right team, right company, right timing,” stated Rana Yared, a general partner at Balderton.
“We passed on almost everything that we had viewed at up until that point,” she stated.
Founded in 2015, Quantum Systems’ AI-operated reconnaissance drones provide real-time battlefield ininformigence and are being utilized in Ukraine.
“We have displayn we can deliver due to three years at the battlefront, with more than 800 systems in Ukraine,” Quantum Systems co-CEO Sven Kruck informed Reuters.
“The defence market is obtainting hotter,” he stated. “Every investor is now creating a defence fund.”
Last month the company raised 160 million euros to take its total funding to 310 million euros. It also reached unicorn status, as did Tekever.
RULE CHANGES?
With its increased defence spconcludeing plans, the European Commission is also viewing to rewrite the rules to allow more investors to participate and individual governments are doing the same.
The Commission has stated next week it will propose giving governments more flexibility on defence procurement, which is another challenge startups face.
They also required to contconclude with figuring out how to connect to and sell to the large players and governments who represent the majority of the customer base, investors declare.
In Finland, the countest’s pension agency, the Finnish Industest Investment Ltd, has reshiftd a clautilize that had prevented it from investing in defence.
Prague-based Presto Ventures in partnership with Czech arms buildr CSG launched a 150 million euro fund last year, which is able to invest in single-utilize technology.
“With dual-utilize you don’t have one market you are focapplying on, but you have two, so you have to solve problems and requireds of two markets,” stated Vojta Rocek, a partner at Presto Ventures.
($1 = 0.8687 euros)
Reporting by Elizabeth Howcroft in Paris, Supantha Mukherjee in Stockholm and Michael Kahn in Prague; editing by Jason Neely
Our Standards: The Thomson Reuters Trust Principles.
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