Analyzing the Growth and Strategies of European Defense Tech Start-Ups

European NATO countries are shifting their defense priorities and rearming to meet new threats on European borders and increase defense spending. To achieve these objectives, they are discussing three key areas: replenishing and expanding stocks of weapons systems and munitions, improving mission readiness by increasing the availability of existing weapons systems, and developing new capabilities to stay at the forefront of technology as battlefield lessons emerge and opportunities arise—sparked by innovation.

While European governments will likely seek to focus their existing defense industrial base around the first two priorities, new industrial options—including start-ups and private capital funding—could play a major role in the third area of maintaining an edge in technology. An expert on the topic who we recently interviewed suggested that a balanced approach that incorporates both the agility of start-ups and the established capabilities of traditional defense players could be essential as countries increase spending to meet defense needs.

Learning from the US ecosystem

The future battlefield could look very different: Technological advancements from the civilian commercial world—including satellite constellations, first-person view (FPV) drones, and AI—are rapidly being adopted by military forces. Geopolitical instability, particularly the war in Ukraine, has accelerated this trend. However, military leaders of European NATO countries are facing challenges in adopting these new technologies, including those already successfully deployed in Ukraine, and building new capabilities.

As we have written before, start-ups and investors are actively seeking to meet these needs—both in Europe and the United States. But as the data in Exhibit 1 show, the emerging European defense tech start-up ecosystem is about five years behind the United States’ in terms of maturity. European nations can learn from the United States’ experience and accelerate their own start-up ecosystem to improve the development of innovative defense capabilities.

We analyzed the European tech start-up funding environment to determine how it differs from the United States and what could accelerate its development. Four themes emerged:

• Differing levels of maturity. The United States has a more mature defense start-up environment, which is reflected in the volume of capital deployed, the age of the more mature and scaled companies, as well as the number of completed funding rounds (two to four times more rounds in the United States than in Europe) (Exhibit 1). This is largely due to the deeper venture markets in the United States, which are benefiting from the Defense Innovation Unit (DIU), which—ten years after inception—is awarding larger, nine-digit contracts today, stimulating further investment and scale. Unlike in Europe, an increasing number of US companies, such as Anduril and Palantir, have emerged as significant global players and are even beginning to act as primes or form consortiums independent of established players. Additionally, talent with expertise from more established defense tech players in the United States have left those companies and founded new US start-ups, further boosting the ecosystem.

  In addition, the environment in which European and US start-ups are developing differs greatly. European start-ups’ geographical proximity to the war in Ukraine has accelerated their development—from idea to deployment with accelerated learning due to battlefield lessons—which could enable European defense start-ups to close the gap to their US peers or even emerge as the innovation leader in some technology areas.

• A significant increase in funding. Our analysis shows that investment into European defense tech start-ups has increased by over 500 percent in the 2021 to 2024 period compared to the preceding three years. The number of venture capital (VC) investors is growing, too, highlighting the expansion of the ecosystem. These include defense-focused investors, for instance, D3, Decisive Point, and Tholus Capital; more generalist investors such as Lakestar; and corporate VC funds; as well as public funds (for example, the NATO Innovation Fund) and national initiatives such as Ukraine’s Brave1.
• A gap in European capital for later-stage rounds. On the whole, European deep-tech start-ups struggle to secure late-stage funding from domestic investors, with the share of capital from Asian and United States’ investors rising to nearly 50 percent at these stages. This trend is mirrored in the defense tech sector, where the growth in early-stage funding described above is not mirrored in later stages. Here, US investors dominate larger, later-stage rounds, providing more than 60 percent of the capital in funding rounds exceeding $200 million (Exhibit 2). This is supported by our survey data, which confirms that a significant percentage of start-ups find it easier to secure large-scale funding from US investors than European ones. And despite the existence of European defense innovation structures, limited budgets often prevent start-ups from securing large-scale contracts that are essential for their growth.

• Crowning the winners with capital. When examining the funding dynamics in Europe, our analysis reveals that each application category is dominated by a single, large start-up, which often receives more than 50 percent of all funding in a category (Exhibit 3). This phenomenon is not unique to Europe (where, for example, Helsing, an AI-focused defense tech unicorn, has achieved remarkable prominence); it is also observed in the United States, where companies such as Anduril, Epirus, and Saronic lead their respective sectors in terms of funding that they have attracted.

In interviews, investors expressed a clear preference for identifying and supporting these leading companies early on, effectively seeking to “crown the winners with capital.” Moreover, the specific dynamics of the defense market, especially customers’ understandable focus on reliability and trustworthiness, may contribute to this pattern: Once a start-up has earned the trust of end users and the procurement agency, these established relationships can serve as a competitive advantage, effectively creating a barrier to entry for potential competitors.

Nevertheless, the defense tech start-up ecosystem is still young, even in the United States. With a typical life cycle of ten to 15 years for the maturation of VC-funded companies and very few start-ups more than five years old, the evolution of the sector is far from clear.

Boosting the European Defense Tech Start-Up Ecosystem

To further unlock the potential of European defense tech start-ups and accelerate the growth of the ecosystem, stakeholders could consider decisive action in various areas. The order of these actions does not reflect their prioritization or importance.

1. Shift public perception to attract potential founders to defense-related challenges

Despite their growth, European defense tech start-ups still only accounted for 1.8 percent of Europe’s VC funding in 2024. Many potential deep-tech founders and start-up employees view dual-use or military cases as “off limits,” hindering company formation and shrinking the available talent pool. Shifting public perception to view defense as central to Europe’s security and resilience could help attract more founders. Public institutions could consider how to address the explicit and implicit constraints which are inhibiting research with military relevance and funding for such research. This could help to increase the body of research available for industrialization and signal public support to researchers for these efforts.

Investors may consider inspiring potential founders by publicizing start-up success cases that highlight the link between purpose, prosperity, and strengthening the defense capabilities of European NATO countries. They could also seek to encourage military veterans to become founders, who could bring their experience to launch defense tech companies.

Military reserve programs could be a way to make the roles of the armed forces more accessible to civilians (and for them to understand the challenges). This could also be done through what is being referred to as “total defense” approaches, modeled after practices in Scandinavian countries such as Sweden. Governments and industry leaders could strengthen support systems for founders by establishing and funding accelerators and incubators with dedicated defense tech programs.

2. Adapt the incentive system to attract funders to defense-related businesses

Many start-ups struggle to secure VC and growth investment due to regulatory requirements and limited pools of potential capital. For example, limited partner investors—both public and private—often prohibit investments in lethal or purely military technologies. By addressing the challenges that cause these investment constraints, available capital could be expanded, and the ecosystem growth could be accelerated. The issue of insufficient capital is twofold, involving both private and public capital. Potential measures include:

For private capital:

• While investors are changing their policy statements, some governments and the European Union are already discussing the scope of the official definitions of environmental, societal, and governance (ESG) criteria and adapting them to explicitly include defense and dual-use technologies. These changes could also support start-ups in building and maintaining relationships with banks.
• Governments could explore capital attraction tools, such as tax incentives, as a way to motivate private investors to allocate more resources to later-stage start-ups.
• Private investors could revisit limited partnership (LP) agreements to remove restrictions or consider establishing subfund structures that cater to the needs of different LPs rather than adopting the most restrictive common denominator. This would allow investors who are navigating regulatory constraints, such as pension funds and insurance companies, to participate in various dual-use investments and more flexibly adjust their stance as guardrails change.

For public capital:

• National and multilateral institutions could adapt the requirements for public funding vehicles—such as the European Investment Fund (EIF) and European sovereign wealth funds—to allow a broader range of defense investments.
• Governments could make investment in defense VC funds more attractive by providing nondilutive capital to defense start-ups and offering low-cost leverage to VCs, similar to the approach taken by the Office of Strategic Capital (OSC) in the United States.

3. Adapt procurement mechanisms to access innovative solutions from a wider supply base

The government procurement processes associated with defense programs can be complicated, country-specific, and administration-heavy, placing high costs, lengthy procedures, and hard-to-meet requirements on young companies that lack the resources and experience to navigate such processes. Current European procurement systems often operate on very long cycles, which can be incompatible with the fast-paced, iterative nature of venture-backed innovation. To work effectively with start-ups, a significant cultural shift toward more agile procurement processes is needed.

Multiple start-ups have raised concerns about “innovation theater” that captures public attention without allocating resources at the scale required to achieve significant revenue growth. In addition, the fragmented procurement environment in Europe is a significant disadvantage for defense start-ups compared to the unified US market, as the start-ups have to deal with individual nations sourcing from domestic, regional, and global suppliers, with additional requirements to meet different regulations in each country.

Measures can be taken by procurement agencies, governments, and end users to address these challenges and build a robust European defense ecosystem. These could include procurement agencies establishing dedicated innovation units with their own contracting staff, similar to, for example, the DIU, to speed up access to innovative solutions and support start-ups to meet growing demand.

In addition, governments could ensure that their budgets allow for evolution from prototype to larger-scale purchases with visible pathways. Investors are clear that this is essential for start-ups to raise capital beyond progress in achieving procurement stage gates.

4. Strengthen collaboration between start-ups and primes

Both start-ups and primes have pointed out potential concerns about working with each other. Start-ups have described issues with funding delays, restrictive exclusivity agreements, and the way that primes can treat start-ups as subcontractors rather than innovation partners. Conversely, primes mention different ways of working, their need to adhere to more stringent obligations (for example, on risk management), and adequate resourcing for long-term programs as sources of tension. However, there are ways that the value of partnerships could be emphasized to boost support for defense innovation.

Tailored operating models for innovation partnerships could be developed by primes (instead of standard program consortiums), as well as alternative commercial models that grow the strengths of and provide mutual benefits to all parties involved. An example could be to streamline investment processes, enabling quicker decision-making on funding or contract opportunities for start-ups. The choice of operating model becomes particularly relevant when primes collaborate with more mature start-ups. A conscious decision must be made about which engagement model to use, which requires a thorough understanding of their own technology competencies and their ability to outperform their tech peers in innovation.

Governments could act, too, by considering putting requirements in place for the use of commercial and dual-use technologies in program tenders. They could also encourage primes to include innovators in their supply chains, for instance, by adapting criteria in their supplier selection processes.

Start-ups are able to take action by thinking about incorporating “prime collaboration” as an explicit part of their capability profile, for example. This could be done by hiring talent that understands the dynamics of working with larger industry players and that can navigate the complexities of these relationships.

5. Enable iterative development of solutions with end users

Start-ups’ core value proposition lies in their ability to move quickly, fund their own R&D, and develop solutions in close collaboration with end users. Currently, this rapid, iterative development can be constrained by the challenges young start-ups encounter when trying to access military end-user feedback and data. While the military’s stringent standards on quality, reliability, and access to classified information are in place for good reasons and need to be adhered to, finding ways to ease collaboration between start-ups and end users is likely to enable better solutions aligned with practical needs and operational realities.

To address these issues, private capital providers could utilize innovation hubs and defense technology foundries to enable real-time codevelopment and refine solutions with end users—demonstrated by the Cyber Innovation Hub of the German armed forces. These could also allow for closer connections between industry players, start-ups, and Ministry of Defense (MoD) end users. Meanwhile, public capital providers (government agencies or state-owned VC funds) could consider adopting elements of successful US vehicles, such as the DIU or In-Q-Tel