Summary:
Investment in European defence startups surged by 30% to $5.2 billion post-Ukraine invasion.
Startups like Donaustahl face investment hurdles due to being classified as weapons companies.
Public institutions are slowly adapting funding requirements for dual-use technology.
Military procurement systems are lengthy, deterring venture capital interest in defence tech.
A cultural shift is necessary in both military and investment sectors to support defence startups.
Opportunities and investment have surged for European defence startups since Russia's invasion of Ukraine, with venture capital in the sector increasing by 30% to $5.2 billion by 2024, according to a research by the NATO Innovation Fund (NIF) and market analytics firm Dealroom. This growth reflects a shift towards adapting underlying technologies for battlefield use, such as additive manufacturing, AI, RF technologies, and battery technologies. However, these startups continue to face significant hurdles in attracting necessary investment.
Investment Challenges
A major obstacle is the reluctance of investors, including sovereign wealth funds and public banks, to invest in defence startups, which are often viewed similarly to “sin stocks” like gambling and drugs. For example, Donaustahl, a German startup transitioning from sports accessories to armed drones, has struggled to secure financing due to its classification as a weapons company. To overcome this, founder Stefan Thumann is exploring unconventional funding methods, including issuing digital bonds to fans.
Shifts in Funding
Despite these challenges, some public institutions are beginning to adapt. The European Investment Bank has removed the requirement for dual-use companies to generate at least 50% of revenue from civilian customers. Countries like Estonia and Finland are also showing increased interest in investing in defence and dual-use technology.
Procurement Systems
On the procurement side, defence startups face lengthy military sales cycles, which differ significantly from the faster-paced software investments typical in venture capital. Project A’s Jack Wang notes that military procurement often takes years, which can deter potential investors. There's an urgent need for a cultural shift within both the military and investment sectors to streamline the process and support the growth of defence tech companies.
Thumann emphasizes the need for the German army to modernize its procurement system to avoid leaving small firms out in the cold. The future may see defence tech companies engaged in ongoing contracts with military forces, allowing for continuous upgrades rather than one-off hardware sales.
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