Three years on from Russia’s full-scale invasion of Ukraine, the conflict has upended Europe’s defence tech industry — attracting unprecedented sums of money, redrawing ethical red lines and prompting some companies to pivot towards military applications.
Emerging and disruptive technologies like autonomous drones and battlefield robots have seen some of the biggest surges in capital, with overall investment in European ‘defence, security and resilience’ tech hitting a record high of $5.2bn in 2024, according to data from data provider Dealroom and the NATO Innovation Fund.
Before the war broke out, most VCs were squeamish about investing in defence, and many LP agreements — which include what a fund can, and can’t, back — still restrict investments in the sector. But that may be changing.
“Many [VCs] viewed defence as they would tobacco or pornography: a sin stock,” says Andriy Dovbenko, founder of the UK-Ukraine TechExchange, a nonprofit supporting defence startups in both countries. “But the war dramatically shifted this sentiment […] much of the stigma has been set aside by investors in favour of supporting Ukraine’s war effort.”
Some LPs like Estonian state-backed fund SmartCap champion the sector aggressively, refusing to hand VCs money from its new €100m defence fund unless they can invest in weapons.
“The venture market has woken up to the fact this is a huge growth industry,” says Max Buchan, CEO of Valarian, which offers infrastructure enabling both corporate and government clients to safely store sensitive data.
“Combined with the US signalling a decreasing interest in funding other countries’ defence, you’ve got a recipe for a rapid escalation of defence investing over the next few years.”
Defensive action
As interest in the sector and its needs have grown, startups have started exploring how their tech might be adapted for military purposes.
French AI darling Mistral recently partnered with German defence company Helsing, not long before Sifted revealed the company had been pursuing military contracts with governments across Europe. Others like German autonomous trucking company Fernride are exploring ways its technology might work on the battlefield.
Scott Sage, cofounder of seed investor Crane Venture Partners, calls this the “reverse Palantir effect”, referring to Peter Thiel’s data analytics company, which originally offered services to militaries and police forces but has expanded into private companies and public services.
“Instead of defence tech moving into the commercial world, we’re seeing commercial innovation being pulled into defence applications,” says Sage.
Last month, London-based Faculty AI published a blog post in which CEO Marc Warner described the “moral obligation” of defence work. “We knew that we would face hard choices, ambiguous information and organisation complexity,” he wrote. “But we also feel like we’re doing the right thing, and that makes the difficulties surmountable.”
Changing warfare
Emerging founders are also more interested in the space, with young talents changing their view on defence, says Eveline Buchatskiy, managing partner of Kyiv-based D3, a VC fund backing early stage defence startups.
“Three years ago, if you said you were doing defence, you would be looked at like you’re doing tobacco. It would be marginalised, people would look at you like you are creepy,” she tells Sifted, adding that at a recent defence tech hackathon she attended in Munich she met people from the universities of Oxford and Cambridge, as well as the Technical University of Munich.
Buchatskiy says that the changes to the industry since the invasion has led to “revolutionary” growth in talent going into defence tech.
“The front line now is nothing like it used to be three years ago: tanks are practically useless,” she says. The roll out of commercial, off-the-shelf technologies like drones parts has also brought costs down and removed the barrier to entry to warfare. “Anybody can do it,” Buchatskiy says.
The Russians have changed. The Chinese have changed. They have no choice.
The industry is set for a big shift globally, says Deborah Fairlamb, founding partner of Ukraine-focused VC firm Green Flag Ventures. “I still believe that the West really does not understand how much warfare has changed,” she tells Sifted.
She points to a few key shifts: super-fast technological developments adapting to battlefield conditions, mass production has ramped up and the cost of effective products has gone down. For example “$500 drones that can take out a $5m tank, a $30m radar system,” she says.
The defence procurement process — which most defence founders bemoan as being unreasonably bureaucratic, slow-moving and fractured — has also sped up in Ukraine, she adds.
What’s next?
Despite all the progress, the defence tech industry faces an uncertain future. Some investors believe the defence tech market alone might not be big enough to build a sustainable business with VC-level return profiles.
Other investors worry about the exit market for defence startups and whether they’ll be able to get bought or go public through an IPO.
But it seems the state of play for defence tech companies, governments and the technologies is different now. “I think other defence tech ecosystems are going to have to change, because the Russians have changed. The Chinese have changed. They have no choice,” Fairlamb says. Others see the US’s increasingly protectionist stance as a bigger wakeup call for Europe.
“We have a nihilist in power who does not care about anything beyond domestic issues and China. There’s little incentive for him right now to support Ukraine,” Jonatan Luther-Bergquist, a partner at early-stage VC Inflection and cofounder of defence hackathon group European Defence Tech Hub, recently told Sifted of President Donald Trump.
“We can’t count on the US. We don’t have the money, we don’t have the people and war is happening — there’s one solution to this for us, at least, and that is tech and adoption of tech.”
Read the orginal article: https://sifted.eu/articles/how-ukraine-changed-defence-tech/
