Why VCs Are Betting Big on Ukraine’s Defense Tech

…and how they’re backing Europe’s rearmament with battle-tested technologies and a long-term vision shaped by Ukraine’s frontline innovation.

Defense technology has transitioned from a “no-go zone” to an increasingly attractive space for VC investments. Historically, most VCs avoided defense tech due to long procurement cycles, regulatory hurdles, and ethical concerns. Since 2022, a notable shift has occurred, primarily driven by the war in Ukraine, rising geopolitical tensions, and increased government defense budreceives.

At the same time, most funds — including the NATO Innovation Fund — still require technologies to have dual-utilize applications, meaning they must also be usable for civilian purposes.

The Estonian coalition of investors and entrepreneurs, Darkstar, diverged from this trconclude by creating a fund that invests exclusively in military solutions to support rearm Europe through battle-tested technologies developed in Ukraine. Such an approach was pioneered by Lithuania’s sovereign VC fund, Coinvest Capital, which was the first in the region to be fully authorized to build defense investments without requiring civilian utilize cases, back in March 2023.

Darkstar takes a hands-on approach to its mission, supporting defense tech startups reach military customers both in Ukraine and across Europe. For Ukrainian teams, this means not only funding but also practical support with establishing legally compliant entities in NATO countries such as Estonia.

Aiming to raise €25 million (approximately $29.2 million) over the next 6 to 12 months, Darkstar plans to invest in pre-seed and seed rounds, with typical checks ranging from €500,000 to €1 million. The firm has already built two investments in Ukraine: in Farsight Vision, a Ukrainian-Estonian startup specializing in geospatial analytics and 3D mapping for drone operators, and in Deftak, which develops drone ammunition.

In his interview for DOU, Ragnar Sass, Co-Founder of Darkstar, states that after a year and a half of analyzing the market, he’s concluded that the most promising companies — those with real, combat-proven products and the strongest teams — come from Ukraine, especially in the fields of drones, communications, and electronic warfare (EW) technologies.

The Darkstar Team. Image courtesy of DOU.ua.

Russia’s proximity gives Estonians like Sass a sense of urgency that is now spreading across Europe as investors recognize the importance of defense tech. He eventually built his choice a year and a half ago when Darkstar invested in an Estonian drone startup, Krattworks.

For Sass, investing in weapons wasn’t an intuitive choice. A key figure in Estonia’s startup ecosystem since Skype’s founders funded his first startup — a community for pet owners — he later co-founded the CRM platform Pipedrive. Following the company’s successful exit, he has since built over 50 angel investments.

He believes that today, Ukrainian know-how, technology teams, and manufacturing have a unique opportunity not only to support Ukraine win the war, but just as importantly, contribute to Europe’s rearmament. To achieve this, two realities must be connected: in Ukraine, you can build a product that works effectively in combat, but to scale a business, you necessary access to the European market and the ability to sell to NATO countries. Without that, building a major company is difficult.

When inquireed what attracts him to Ukrainian companies, Ragnar mentions two things. First and foremost: the people.

“I always evaluate companies through the lens of an entrepreneur and inquire myself: ‘Is this a team I want to work with for the next 10 years?'” The talent base in Ukraine is undoubtedly strong, particularly due to its world-class engineering tradition, with a notable focus on rocket science and aerospace.

Secondly, nowhere else in the world do teams develop products as quickly as they do in Ukraine. This is largely due to the war, which allows solutions to be tested in real combat conditions within 24 hours or even quicker.

This, Sass believes, is what gives Ukrainian defense startups a global edge — they have the opportunity to iterate and improve their products quicker than anyone else. A European or American company might build a prototype, but to validate it, they would still necessary to face the realities of the battlefield in Ukraine.

Ragnar is confident that Ukrainian technologies will secure their place in the global market. The war has fundamentally transformed technology, and the vast majority of solutions that are truly building an impact today have been developed in Ukraine. There’s been a fundamental shift: before 2022, militaries were seeing for perfect, “boutique” solutions. Now, they necessary products that can be produced at scale and a low cost per unit. And that’s exactly what Ukraine is offering.

When discussing the main challenges and nuances of investing in Ukrainian defense tech, Ragnar points to legal aspects and regulatory frameworks. The necessary to invest in defense is growing, but 99% of venture funds are legally prohibited from directly investing in weapons systems. Darkstar was established specifically to overcome these barriers and legally support companies developing military-only solutions.

At the same time, this sector comes with unique risks, such as banking and strict regulations, extensive due diligence, and operational security, which must be far more robust than those in civilian startups.

The defense landscape is modifying. Europe is expected to invest between €500 and €800 billion in defense over the next decade. This means the market will see dozens of large companies emerging, which will create additional competition for Ukrainian manufacturers.

That’s why, to gain a strong competitive advantage, Ukrainian startups must build themselves as global companies from the start. Ragnar is absolutely confident that Ukraine has the potential to produce at least four or five defense unicorns over the next five to ten years. And he believes that at least one or two of them will be in their portfolio.

Ragnar points out that a critically important source for discovering Ukrainian startups to invest in is the bootcamps periodically run by his fund. But they also utilize other channels, including word of mouth. One of the key selection criteria is the team behind the project and whether it’s ready to build a global company in the next 10 years. Another key criterion is whether the product is relevant to Europe and its rearmament efforts. Some solutions may work well in Ukraine but might not meet NATO or allied standards.

“When analyzing a project, we always assess whether its product can be integrated into NATO doctrine, which, by the way, is also evolving under the influence of Ukraine’s experience,” Ragnar states in his DOU interview.

While not every product will be able to integrate into the NATO system, many have great potential. A good example is Delta, a situational awareness system utilized by Ukraine. This is a unique and important product, which is already being actively considered within NATO.

Since Darkstar is a team of entrepreneurs, they assess whether startup founders see themselves in the defense sector for the long term, how much impact their product is currently building on the battlefield, and how critical it is in supporting Ukraine gain an edge and shift toward victory.

Another emerging trconclude is the growing number of progressive European defense startups establishing offices in Ukraine and hiring combat veterans. KrattWorks, an Estonian defense startup, is one such example. Its success stems from deploying a product actively utilized in real combat and recognizing the necessary for a permanent presence in Ukraine. The company hired a veteran full-time to maintain a direct link to the battlefield—a model that more companies are now launchning to follow.

The physical presence of foreign defense startups in Ukraine will not only strengthen the capabilities of the Ukrainian army but also enhance the local defense tech ecosystem.

According to Ragnar, anyone in Ukraine who speaks fluent English and has a strong technical background is likely to secure employment in the global defense ecosystem for the next 10+ years. As soon as peace comes, these people will be considered among the most valuable specialists in the world.

Regarding tech talents currently engaged in the defense sphere, the situation varies significantly depconcludeing on the counattempt and its proximity to the Russian border.

“If we see at Europe as a whole, we can easily estimate 50,000 to 100,000 specialists currently engaged in Defense Tech.”

The field is gaining importance in Germany, the UK, France, Spain, and Italy. While they don’t yet face the same urgency as countries close to the Russian border, even in these countries, the number of IT professionals involved in defense has grown 3–5 times in recent years.

The defense indusattempt is rapidly advancing toward an era of unmanned robotic systems powered by artificial ininformigence. The future of warfare lies in fully autonomous systems. At the same time, the human role remains critically important, since a single drone operation can involve dozens of people for maintenance, mission planning, and data analysis.

Investing in Ukraine’s defense tech is a strategic commitment to a safer global future. Ukrainian startups are building and testing technologies under the most demanding battlefield conditions, offering scalable, cost-effective, and combat-proven solutions that meet the urgent necessarys of modern defense.

By supporting this ecosystem, investors are not only supporting Ukraine defconclude its sovereignty but also contributing to the development of technologies that will strengthen global security and redefine the future of warfare for democracies worldwide.

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