European VCs have grown increasingly eager to invest in defence startups as the industry has reached hype levels — and many of them are raising special defence funds to do it. It’s also resurfaced the age-old debate of whether it’s better to be a specialist fund or a sector-agnostic generalist.
Since Russia’s full-scale invasion of Ukraine in early 2022, ethical red-lines around the defence tech sector have eroded. A number of first-time defence funds have announced a first or final close so far this year, while Sifted counts at least 12 European defence-focused funds active in 2025.
The emerging cluster of defence-focused funds seems to mirror a similar growth spurt in climate-focused funds in the early 2020s, which raised big and are now facing a trickier investment landscape.
Why defence funds are booming right now
Big geopolitical shifts such as the US growing far more protectionist, a race to rearm Europe and the war in Ukraine have all led to the recent boom in interest in defence. Advances in AI and robotics have also made it cheaper to scale new tech like drones.
Jack Wang, partner at VC firm Project A, a generalist firm which has backed several defence startups, says there’s a lot of pressure on general partners from limited partners (LPs) to raise defence funds, after they’ve seen drones startups such as Helsing, Quantum Systems and Tekever all hitting $1bn unicorn status.
“Once an LP sees those sort of financial outcomes […] the conversation between the LP and their GPs will tend to be something like: ‘Hey, have you invested in defence tech already? What are you looking for? This sector is doing well’,” he tells Sifted.
Giuseppe Lacerenza, an AI and defence investor at Dutch VC Keen Venture Partners, reports more family offices are looking for specialisation to find an edge. “This applies to life sciences, biotech, defence. It’s almost an ask from the LP,” he says.
Whether VCs invest in defence through their generalist funds or set up specialist defence funds is the new question. Keen Venture Partners opted for the latter route. The firm raised two generalist funds and is now raising a €125m defence fund, backed by the European Investment Fund’s first defence cheque.
In defence, “there is an incredible complexity in navigating the industry […] that a generalist fund, even if it’s deeptech, will not be able to cover” in depth, says Lacerenza. “It’s just one part of your bigger picture.”
There are also logistical considerations that influence VCs’ decision of whether to invest in defence from a generalist fund versus a new specialised vehicle.
Historically, most fund LP agreements (LPAs) prohibited investors from backing weapons or defence. Although VCs report this is changing and becoming more permissive, “if you do start a separate fund, you also have to get a lot of permissions from your current LPA, to say, ‘Hey, can we spend time on the second fund?’ So all of that is not very straightforward,” says Wang, adding it may be more straightforward to just set up an entirely new entity.
Some funds have gone that way: Superangel, an Estonia-based early-stage fund, set up a new vehicle Archangel, run by investor Nicholas Nelson, to back defence and weapons tech.
The generalist versus specialist debate
Whether generalist or specialist funds are better is “an almost endless debate between GPs and LPs, and also between GPs — it’s almost a philosophical question,” says Maximilian Schwarz, founding partner of Nucleus Capital, a hyper-specialised fund focused on synthetic bio, foodbio and techbio within climate.
VCs point out that the pros for being generalist include having more flexibility to invest in a wide range of startups and being able to hop on hot deals or back stand-out founders when they first emerge, regardless of the sector.
“My observation over time is [specialisation] doesn’t necessarily drive performance, and it might even be problematic,” says Joe Schorge, founder of Isomer Capital, an LP in over 90 VC funds including Seedcamp and Hoxton Ventures. “The more ingrained in a certain market I am, the more likely I am not [going] to understand or see or want to back a radical innovation when it comes. That’s a really counterintuitive point, right? I’ve observed big wins in certain sectors where there were all generalist investors and no specialists,” he says.
There’s also the question of what portfolio companies actually need. “Do first-time founders need more general advice on how to build a company, or do they need advice on how to tackle the defence tech market? There’s no clear answer,” suggests Olaf Jacobi, managing partner at generalist fund Capnamic.
Isomer has backed more specialist funds in recent years — and Schwarz is clearly bullish on specialisation. He says spending 24 hours a day on one topic helps VCs become an expert, get to know corporations in the sector to help founders with intros or product-market fit and understand talent in the space. He does note, however, that it can also make it easier to miss hype cycles that could generate good returns, and it also limits the ability to build a bigger firm owing to often smaller fund sizes.
Specialist funds are also more risky. You run a “systematic risk” if you’re a specialist fund, says Wang, adding that’s also the case for climate tech or a fund focused on supply chain, for example. “That is the risk that both the LPs and the fund managers take.”
Ultimately the purpose of a VC fund is to make returns. “The next question is, is it possible to generate bigger returns with a specialised fund in defence tech, knowing the fund has a term of up to 15 years? It’s possible,” says Jacobi. “But to put all the eggs in one basket with no diversification — that’s bold.”
Will defence go the way of climate?
Once a booming space, climate funding is down for the past two years. There’s also been a move away from ESG and climate initiatives in the US, and several climate VCs are even rebranding themselves as investors in “resilience”, hoping to catch the coattails of the current defence hype.
Could defence go the way of climate, if governments cool their fervour for the space?
VCs seem optimistic. They point out that defence spending has become a huge priority for governments, particularly in Europe. Meanwhile budget cycles for defence tend to be long.
“Would we see the same shift in governmental priorities away from climate into defence, and then from defence into something else, over the next five to ten years? Not expectedly, given budget patterns and historic patterns,” says Wang. “But you never really know.”
Two spots of pessimism in defence tech are the exit pipeline, as well as dealflow in the future.
“The biggest risk,” says Lacerenza, “is country sovereignty” — meaning the “Germans are doing [defence] for Germany, Italians with Italy, the French with the French and then basically having local champions. And that’s not a VC case. That’s the major risk of a dedicated defence fund.”
While this year’s hype sector is defence, next year it’ll be something else, says Schorge. “I think it’s a natural part of the cycle,” he says.
Schorge adds that as the market matures in Europe, there “may be more need for specialisation.”
Isomer’s portfolio has gone from solely generalist funds in its early days to now include many specialist vehicles. “There are some interesting areas that I think you have to be a specialist,” he says, pointing to sectors like crypto and blockchain. Isomer has also backed solo GP Eric Slesinger’s 201 Ventures, a dual use fund.
What keeps Schorge up at night is whether Isomer is in the next big winner. “I couldn’t care less if we are in it through a specialist or a generalist.”
Read the orginal article: https://sifted.eu/articles/european-vc-raising-defence-funds-specialist-generalist-debate/
