Three years ago today, Russia launched its full-scale invasion of Ukraine, triggering the deadliest conflict in Europe since World War II. Against the odds, the Ukrainian people have resisted, heroically displaying extraordinary resilience and ingenuity.
They have innovated fast and shown how the latest defence technologies, such as cheap AI-enabled drones, can be effectively used on the battlefield as warfare has been revolutionised by software. The rest of Europe urgently needs to draw lessons from Ukraine as it rearms in the face of a militarily resurgent Russia and an increasingly nationalistic US.
That strategic urgency should create a fantastic opportunity for European defence companies. The shares of Europe’s biggest defence contractors, including Rheinmetall, BAE Systems and Thales, surged last week. European venture capital investors, who have historically steered away from the sector, have also been pouring money into defence startups. VC investment in European defence tech topped $1bn last year, more than a 5x increase on 2020.
Specialist defence tech funds have also emerged. In 2023 the €1bn Nato Innovation Fund was launched to support innovative deeptech and defence startups. Last month, Estonian state-backed LP SmartCap launched a €100m defence fund. One of its missions would be to back more first-time defence tech VC funds, SmartCap’s CEO Sille Pettai told Sifted.
The European sector’s poster child is Helsing, the Munich-based startup whose tagline is: artificial intelligence to serve our democracies. Last summer Helsing raised €450m at a near €5bn valuation in a Series C fundraise led by General Catalyst, highlighting the strength of investor interest. “Europe’s security and prosperity can no longer be outsourced. They must be built, defended, and sustained by us,” the founders wrote in a Linkedin post. “It is time for a strong Europe.”
But even if there is a screaming strategic need — and an investment opportunity — for the European defence tech sector, there is not always such compelling financial logic. Many European investors, absurdly including several public sector funds, are still unable to invest in defence tech because of ESG restrictions, limiting the pool of available capital. They also remain wary of investing in capital-heavy hardware companies, preferring more predictable SaaS businesses.
“Why invest in defence tech startups when the returns are no higher than other sectors and the hassle is considerably greater?” I heard one investor ask recently.
For their part, founders express their frustrations at trying to build a business in this field. Unlike the US, where the Pentagon acts as a massive customer of first resort, Europe’s defence procurement agencies are fragmented. Moreover, lots of drone startups emerging around Europe are competing for the same, relatively small, contracts.
There is also a concern that European demand may drop if peace does break out in Ukraine, says Michael Jackson, who has been investing in European deeptech companies for 20 years. “My hope is that when the conflict ends in Ukraine, Europe will not turn the spigot off,” he says. “There are a lot of security and defence concerns in Europe. But politicians may lose interest when the hot war ends.”
This is in part why many defence tech startups have been developing dual-use technologies. Autonomous drones can be used to inspect oil pipelines or railway tracks as well as operating on the battlefield. Cybersecurity companies can sell their services to vulnerable companies as much as embattled governments.
The biggest help for the region’s promising defence tech startups would be for European governments to merge their defence procurement agencies and commit to sustaining demand over the longer run. That would also derisk the investment case attracting more private money to the sector. But political talk is cheap in Europe, and action rare. As in so many other areas, Europe needs to reboot its governance software.
Read the orginal article: https://sifted.eu/articles/ukraine-defence-tech-invest-europe/
