As war rages on in Ukraine and geopolitical tensions continue to ratchet up, defence tech is set for a big year ahead. The industry – which, from an investor perspective, includes startups building things like drones and robots as well as battlefield software — has become a more popular space to invest capital in recent years following Russia’s invasion of Ukraine in 2022.
A new set of homegrown European startups have been raising hundreds of millions of euros from European and American investors alike — including German AI defence tech Helsing’s whopping €450m round in the summer of 2024.
What will 2025 bring? Sifted asked a couple of investors and a founder for their take.
Trump ups the pressure on NATO country spending
There’s a lot of questions about what a second Donald Trump presidency will mean for European companies — and, in particular, defence tech startups. But one thing VCs seem to agree on: Trump’s second administration will mean pressure for Europe to be more self-sufficient with its defence capabilities.
For years NATO countries have been underspending on defence, only recently upping many of their budgets in response to Russia’s invasion of Ukraine. Trump hasn’t been shy about his criticism of the shortcoming: at one point he called for Russia to attack any underpaying NATO country.
Now, Paris-based deeptech VC Michael Jackson believes Trump will “demand higher than 2% of GDP spending targets on defence for NATO members,” he says, referring to the longtime NATO spending target. As Sifted has reported, a more protectionist American stance — and the potential for the US to pull Ukraine aid — could mean a shifting buyer landscape for startups’ products as governments move budgets around.
More consolidation
Though still in its early innings, the defence industry has spurred a host of new European startups in recent years in response to Ukraine. But some areas — like drones — may be getting a bit crowded, and VCs like William McManners, founder and managing partner of defence VC MD One Ventures, anticipate more consolidation.
“It’s kind of a moment of divergence,” adds Loïc Mougeolle, the cofounder and CEO of AI-powered battlefield software startup Comand AI. “You have many, many players that are emerging, and I think in two to three years, it will consolidate, especially if the conflict in Ukraine slows.”
Startups with US contracts trump those selling to Ukraine
Project A’s Jack Wang predicts “European defence tech startups selling to the US will do better (in terms of revenue and VC funding) than the ones selling to Ukraine in 2025 because I think the Ukraine war will hopefully end next year and the US will take its focus away from Ukraine towards APAC [Asia Pacific],” he says.
That would be good news for maritime drone makers (“given there are a lot of oceans in APAC”) and startups with a diversified contract base, but bad news for those European startups which have been fuelled by government budgets to send weapons like drones to Ukraine.
Banks growing friendlier to defence startups?
Defence industry insiders have complained that it’s difficult for some startups to get banking services — or even open an account — considering the industry is still somewhat shunned by traditional financial services.
Some VCs like McManners wonder if we’ll see more of an embrace from the finance set in 2025: “The UK [business] minister says that banks need to be more supportive to security [and] defence companies. How will that manifest itself? What does that actually mean? Will banks respond and will banks listen to the sentiment presented?”
American VCs backing European weapons
A big point of tension in the VC industry is the line between dual use, defence and weapons. Many VCs have been held back by terms in LP agreements (LPAs) stipulating that they cannot invest in weapons.
In the coming year, Wang believes “there will be even clearer differences in expectations between Baltic states and Poland for defence tech investing — funds in those regions have started to invest in home grown weapons capabilities — whereas Western Europe is still working through various ESG terms in their LPAs.”
Though some VCs have flirted with the idea of moving more into straight defence investing, many are still on the sidelines. Even the NATO Innovation Fund — a €1bn pot of money to invest in deeptech and defence startups backed by 24 NATO allies — says it can’t invest in ammunition manufacturers.
But instead of VCs in France or Germany quickly reworking those LPAs and upping their investments in weapons, “it will be more common to see US funds actively investing in European weapons startups than big EU funds,” he predicts.
Read the orginal article: https://sifted.eu/articles/defence-tech-predictions-2025/
