In early December, German AI defence startup Helsing announced a big move: the company, which had previously only produced AI-powered software for defence, was building its own autonomous strike drones.
Since its founding in 2021, Helsing has been notoriously ambiguous about what it is building — some kind of AI battlefield software, which can use inputs from sensors and cameras on vehicles to map out battlefields — but clear that it was software-only. Now, the startup is also producing its own autonomous striking drones called HX-2.
If you ask defence industry insiders, the about-face didn’t come as a surprise. But it may have implications for the many other startups — including other autonomous drone companies — battling for customers.
Helsing is one of the best-funded defence startups in Europe, having most recently raised €450m last summer at a whopping €4.95bn valuation. Helsing’s move into drones now encroaches on a space occupied by other European startups like German autonomous strike drone maker Stark. Other drone startups — like Munich-based Quantum Systems, Riga-based Origin Robotics and Portugal’s Tekever — also hope to entrench themselves.
But is there still room — and money — for other defence tech and drone startups to make their mark? Will startups be increasingly buddying-up to win contracts? Or will Helsing go on a shopping spree? Sifted polled a few investors for their take.
A crowded market
The defence market operates differently to how other industries — say, B2B SaaS — function. In general, governments typically announce what products or services they want to purchase, and big companies — like the US’s Lockheed Martin or France’s Airbus — bid on those projects and build what the government wants.
But startups like autonomous systems developer Anduril, founded in the US in 2017, have been approaching it differently: making their own products and then shopping them around to governments.
It seems like Helsing is adopting a similar strategy. Helsing declined to comment to Sifted on whether its new drones were being purchased by governments yet, but they are reportedly different to the drones Helsing is equipping with its software to send to Ukraine via the German government.
Early Helsing investor Jeannette zu Fürstenberg, managing director at General Catalyst, told Sifted the company has chosen to build thousands of drones “to help Ukraine at speed and at scale… and to design a new system that is ‘software first’,” making use of “mass manufacturing techniques”. She argues that Helsing is going after a market segment where the customer doesn’t yet have “any workable solutions”.
But the drone sector, which also includes many companies building drones that do not have attack capabilities, has become crowded, investors say. There are lots of drone startups in Europe — including Helsing, Quantum Systems, Stark, Origin Robotics and others — chasing after government money.
Not all drone startups are the same, however, and some are tackling different parts of the market — like smaller versus heavier drones. Those companies building small drones may see fiercer competition. “It’s not a race to zero, but that’s going to be heavily commoditised,” says one US defence investor, who requested anonymity to speak freely and preserve professional relationships.
This new set of defence techs seem to be vying to be the new “primes”, or companies with established government relationships that consistently win contracts (think Lockheed Martin or Airbus). The US defence investor argues that some startups may be incentivised to develop those relationships directly with the governments: they say startups are “a second class citizen without a direct relationship with the customer”, and may not be able to charge premium euros if they’re working with larger defence primes that manage the relationship instead.
Even if Helsing or other startups like Stark produce the drones themselves, some VCs speculate they may still partner up with more established players for things like through-life servicing — maintaining and updating their products over the years.
“Who will be responsible for the software upgrades of those products or services? And who has got the trust, who’s been audited and verified by the respective governments who are on the procurement frameworks to be able to deliver such large programmes? There could be a scenario where actually you have an innovator like Helsing develop some amazing products that work really well, and they then partner with some of the incumbents to deliver the through-life servicing and maintenance,” suggests William McManners, founder and managing partner of London-based defence and dual use VC MD One Ventures.
Defence tech traction
Many defence tech startups have been boosted by contracts with Ukraine in the last couple of years as they get their businesses off the ground. But the challenge will be getting onto longer and bigger contracts, investors say.
The objective for any defence tech is to get placed onto a so-called programme of record — a predetermined bucket of funding for a specific defence capability. “That’s something that usually takes some time, because obviously the customers first want to see whether you’re reliable, whether a product works, whether it integrates with the rest of their products, and so on. And then obviously processes are not very fast,” says Christian Saller, general partner at German VC HV Capital and an investor in Quantum Systems.
Just doing software in defence just doesn’t work, or it’s not a big enough business.
For many startups, sending their drones or other products to Ukraine were “more one-time purchases,” but through that, “they built the credibility and the track record that now gets them into these programmes of record,” Saller notes. Both Helsing and Quantum systems have won programmes of record.
Some VCs also believe that companies are realising that just going after one thing, like software, won’t cut it. “Just doing software in defence just doesn’t work, or it’s not a big enough business,” HV’s Saller argues.
That combination of software and hardware “is sort of the new barrier to entry to be really successful”.
Some of those companies have, apparently, been gaining traction. Investors describe Helsing and Quantum Systems, for example, as having very strong revenue (but wouldn’t comment further). In the latter’s case, Quantum Systems founder Florian Seibel told Sifted that the startup did €115m in revenue in 2024.
“You can see some companies now really taking off with revenues and traction because they found a system that users in Ukraine and NATO really value,” says zu Fürstenberg. “If there is a proprietary technology edge, it’s also clear that this will continue and so valuations will reflect that.”
Those valuations are a mixed bag, investors say. Nicola Sinclair, a UK Royal Air Force veteran who is raising her first dual use fund, Twin Track Ventures, says that based on what she’s seen, defence tech valuations are lower than AI companies, but “they don’t feel depressed”.
There isn’t loads of data for defence tech startups (and, particularly, drone startups) yet, but the median pre-money valuations for European drone and robotics startups appear to be on the up, reaching a peak of €10.1m last year, according to PitchBook data provided to Sifted.
Sinclair is watching for startups that VCs invested in two years ago to show a markup in valuation or not, as she believes many may be due a fundraise soon.
“I’m looking at 2025 and saying, ‘How have they actually managed that in terms of their runway? Have they managed to use the last two years to get the data points they need to graduate and successfully find investors who will support a higher valuation?’,” Sinclair says. “I think that where their revenues have been good, it’s in the minority… The majority, I think, will be really struggling.”
More consolidation on the horizon
Some of those struggling — or simply spying a good opportunity — may be looking to other bigger startups, or even primes, to snap them up.
For one, Sinclair took Helsing’s move into hardware as “an opportunity, potentially, for smaller, niche providers to have an additional M&A opportunity,” adding that she suspects Helsing may opt to grow via acquisitions.
The players will have to consolidate.
Helsing hasn’t publicly announced any acquisitions, and didn’t respond to Sifted’s request for comment. Quantum Systems founder Seibel told Sifted last year that the startup made its first acquisition of a sensors company last May, and was involved in other deals.
“I would be very surprised if M&A transaction volume hasn’t either already increased… or is set to increase through H1 [this] year,” says McManners.
Zu Fürstenberg also believes “the players will have to consolidate”. She thinks that long-term, startups will either have to have a highly differentiated capability or a cheaper price point. For strike drones in particular, she expects technology and mass manufacturing capabilities — i.e., being able to churn out tens of thousands of drones a year — will differentiate companies.
For one, Saller doesn’t see primes snapping up defence techs en masse anytime soon. Startups like Helsing, Quantum Systems or ARX Robotics are “growing great, so why would they talk about exit right now?” He adds that he doesn’t think the primes have “built the muscle and the capabilities to acquire startups”.
What’s next?
Partnering is a very common model in the defence industry, and it’s something that will become more and more typical between defence startups, VCs believe.
“I don’t think that this is a zero sum game at all with regards to, ‘Okay, well, if Helsing have done this, then XYZ company will be compelled to follow a particular model,’” says McManners. “Consortiums and partnerships across disciplines and across areas of expertise are integral to how the entire sector works.”
From a startup perspective, they may be looking at a well-funded and staffed company like Helsing and thinking, “’How do we play with them? How do we leverage some of their platforms?’” says McManners.
He sees Helsing as “another production partner” for startups to work with. “I definitely don’t think this is going to force an environment whereby everyone runs for the hills — I think it’s quite the opposite.”
McManners also believes we’ll see more startups becoming primes themselves. While we tend to think of primes as those massive defence firms like Thales or Raytheon, “a prime contractor can be a company that does €2m revenue; a prime contractor is a company that has a direct relationship with the end commissioning agent,” he points out. He believes governments across Europe will be allowing more companies to obtain that prime status because of pressure from the market and media.
For zu Fürstenberg, defence players will “either have a real software/AI edge or a mass manufacturing edge. If you’re stuck in the middle — so you’re OK at both and can ship a few — then you’re going to struggle”.
Read the orginal article: https://sifted.eu/articles/helsing-europe-defence-tech-market/
