Defence tech (2025)

Europe is rushing to rearm — but shifting Europe’s defence path is no simple task. Historically, large parts of Europe have not had much of a defence industry. Army spending across Europe is a little above, and sometimes well below, 2% of GDP.

Tanks, artillery pieces and aircraft are still part of the modern battlefield, but the war in Ukraine has shown the need for cheaper, more adaptable systems. To this end, startups are producing drones, AI targeting platforms, electronic warfare systems and underwater robots for — they say — a fraction of the cost of existing systems.

The funding environment has improved: Sifted counts €1.7bn raised by defence-focused companies since the start of last year (this includes capital raised by Paris AI company Mistral, which has recently signed some defence deals). Today, the UK government announced a small loans programme for defence techs. Meanwhile, multiple, though also mostly small-scale, EU programmes have been set up to promote joint research, procurement and defence industrial expansion. There are also proposals to establish a new rearmament bank in Europe.

Countries most at risk of a Russian invasion are stepping up. Poland is on a defence spending spree. Estonia launched a first-of-its-kind €100m fund to invest in defence startups in January. Sille Pettai, CEO of SmartCap, which runs the fund, told Bloomberg: “We are building an industry from zero, on a blank page.” An Estonian defence player is Frankenburg Technologies, started by Kusti Salm who was, until very recently, the top-ranked civil servant in Estonia’s Ministry of Defence (he dramatically quit, citing the government's failure to move quicker on defence spending). His startup aims to use off-the-shelf tech designed for smartphones to build an air-defence platform.

Resistance to weapons investment is falling away, with more VC firms overcoming their initial squeamishness. Investors particularly like drone companies, which are making systems for as little as a few thousand euros to hundreds of thousands.

The sudden burst of activity is understandable, given possible US disengagement in European security under Donald Trump. But raising money is only one hurdle. The defence tech industry still needs to prove that it can gain enough customer traction. It will require fresh thinking from governments, which tend to stick to national conglomerates — the so-called “primes” — to procure weapons. The US has people like Eric Schmidt, the ex-Google CEO, to act as informal liaisons between the military and tech world: Europe doesn’t have equivalent figures.

Defence upstarts should expect plenty of scepticism from established players. Take for example European defence tech’s biggest raiser, Munich-based drone startup Helsing, valued at some €5bn. According to Bloomberg, drones equipped with Helsing’s software have been criticised by frontline soldiers and military experts as significantly more expensive and not as effective as comparable products.