The US takes the lead in financing European defense startups

American investors have significantly increased funding for European startups in the field of defense technology, making up the largest share of private capital entering this growing sector this year, amid rising global conflicts.

According to Dealroom data, the US has secured over 65 percent of venture capital investment in European defense technology so far this year, compared to 18 percent in 2023. This increase represents a sharp turnaround from the previous year when more than half of VC investment in European defense technology came from domestic investors.

American venture capital firms have provided $458 million for European defense startups so far this year, which is more than three times the amount in any other year, according to Dealroom data. Overall, VC investments in Europe have nearly quintupled since 2018 and are expected to reach $1 billion this year, Bloomberg reported.

The largest deal led by the US involved raising €450 million for Munich-based Helsing this summer, led by General Catalyst, with participation from Accel and Lightspeed Venture Partners.

The increase in investment, as noted by Lorenzo Chiavarini, who leads VC and startup research at Dealroom, is a sign that the startup sector in Europe is maturing, with some companies raising larger rounds where American investors can contribute significantly.

Venture capital investors, especially in Europe, have long been cautious about investing in defense technology companies due to ethical concerns, but this has begun to change following Russia’s invasion of Ukraine in February 2022.

Although concerns from some investors regarding environmental, social, and governance (ESG) criteria continue to limit investments, entrepreneurs and investors claim that there is evidence that more and more European capital is beginning to flow into the sector.

There has been a ‘fundamental change in Europe due to the extraordinary situation we are facing,’ according to Khaled Helioui, a partner at Plural, an early-stage investment fund established two years ago to help European founders develop various technologies, including defense. Plural has raised €760 million in two funding rounds, with European investors dominating the second round.

– We truly care about Europe’s sovereignty and strengthening industrial power on the continent – said Helioui.

Alex Kehoe, founder and CEO of the British startup Vizgard, which develops software for camera automation via AI, said that access to capital has changed over the past three years. The company’s recent funding round was not only oversubscribed but also completed much faster compared to the previous round in 2021. Vizgard raised over £1 million ‘very quickly,’ he said.

More investors, Kehoe said, have recognized that there is an ‘urgent need for funding these new technologies’ with a greater focus on ‘how quickly they need to get into the hands of operators’.

Challenges Remain Despite Capital

Overall, venture capital raised in Europe for defense technology projects has reached $3 billion, according to Dealroom data, with Germany, the United Kingdom, and France attracting 87 percent of that amount.

Munich has attracted the most VC funds in Europe, primarily thanks to Helsing, an AI startup that some see as Europe’s answer to Anduril, a California defense technology company. The latest funding round for Helsing has been valued at around €4.95 billion.

The defense technology sector now accounts for 1.8 percent of European VC funding, which is more than tripled since 2022, as the ecosystem across the region has matured.

Despite the increased influx of capital, industry experts warn that challenges remain for European startups.

Nicholas Nelson, a partner at MD One Ventures, expressed doubt that ‘Anduril’ will emerge in Europe, given the fragmented nature of the market, different national requirements, and varying attitudes towards defense technology across countries.

– Until there are unified requirements across these countries, it will be difficult and expensive (for a company) to expand. That does not mean you cannot have a European company, but it will be within certain markets – he said.

Eric Slesinger, founder of 201 Ventures, warned that ‘capital alone is not the solution’. Investors, he said, ‘must show startups that they can help them navigate the additional challenges of the defense sector — procurement, lobbying, export control, or security-cleared talent, for example — across multiple countries and languages’.

Paul Kwan, CEO of General Catalyst, one of the main investors in Helsing, agreed with Slesinger.

– Awareness is high, capital is present, innovators are here, but capital is not the same as contracts. Everyone is focused on capital, including governments, but what you need is to start buying modern technologies to support these innovators – Kwan believes.