European defense startups are attracting swathes of private capital, as investors look for exposure to an industry on the cusp of receiving a leg-up from massive rearmament plans. Pressure from U.S. President Donald Trump , the ongoing Russia-Ukraine war and widespread geopolitical instability culminated in commitments from the European Union and the U.K. this year to drastically ramp up defense spending. Meanwhile, members of the NATO military alliance agreed over the summer to raise their security spending targets to 5% of gross domestic product. Defense investment landscape ‘unrecognisable’ Since Russia’s full-scale invasion of Ukraine in early 2022, private capital has been pouring into European defense firms. According to a February report from Dealroom and the NATO Innovation Fund — a venture capital fund backed by 24 NATO member states — VC investments in European defense and security startups surged to a record $5.2 billion in 2024, while the overall VC market in the region shrank. “Appetite for defence, security and resilience startup investment is unrecognisable in Europe from just a few years ago,” Dealroom’s CEO Yoram Wijngaarde said in the report. There’s no sign that that appetite is slowing down. Loredana Muharremi, equity analyst at Morningstar, told CNBC the trend had accelerated further this year, alongside a surge in investor demand for publicly listed defense companies. “We’ve seen a step change in Europe’s private defence market since 2022, with a sharp acceleration in the first half of 2025,” she said in an email, noting that the driver this year was NATO’s new spending target. “Not only are overall investment volumes in dollar terms rising, but also per-deal value is higher, pointing to higher valuations.” Muharremi added that the nature of the deals had also shifted, from M & A-led bolt-on acquisitions to VC investment. “Private capital is playing a critical role in bridging the gap between early-stage prototypes and mainstream defense adoption,” she added. According to Morningstar’s analysis, the majority of European defense startups are software-driven and AI-enabled, with a focus on drones, cybersecurity and space — innovation areas outside the core remit of many legacy defense firms. “Another important trend is the growing role of U.S. investors, especially in later-stage venture rounds, which is providing the capital needed to scale,” Muharremi added. One U.S. investor taking an interest in the European defense space is Scout Ventures, a Texas-based VC firm with a focus on early-stage startups. “Historically, the main market for dual-use or defense-focused organizations was the United States,” Cody Huggins, a partner at Scout and former U.S. army officer, told CNBC on a call. “The U.S. just had a massive budget, and was the market to be in — now it’s really shifted to what I would call four main hubs, Europe being one of those.” Huggins said Southeast Asia and the Gulf states were also emerging as focal points of defense tech innovation. “Where the money is, you’re going to have folks fall, and so you’re going to see high-caliber entrepreneurs that otherwise wouldn’t have built in this space because they would be concerned that there weren’t the contracts or the venture capital or growth equity in Europe,” he added. “And that paradigm has shifted dramatically with the increase [in regional budgets].” ‘The pot of gold is larger’ European VC investors also told CNBC the defense sector was increasingly a focal point for the region’s own capital. Archie Muirhead, a partner at British VC firm IQ Capital, said that since 2005, up to a third of IQ’s portfolio companies have been defense-focused or dual-purpose firms. That positioning was based on companies’ merits — more recently, however, it has been actively seeking out firms whose technology can be used for security purposes. “In the last two, three years, we’ve started to make defense-first or defense-only investments across Europe,” Muirhead said on a call. “We started to see founders building in defense who had the right mentality to match VC outcomes. It’s partly because of emotional, mission-driven [founders], and partly the fact that the pot of gold is larger and more accessible in Europe now.” IQ Capital was an early participant in the U.K.’s National Security Strategic Investment Fund (NSSIF), the British government’s corporate ventures arm, which works with investors to fund startups building dual-use defense technologies. But amid the hype around European defense, Muirhead conceded that the exit trajectory for many startups in the sector remains shrouded in uncertainty. “We haven’t seen the first wave of new defense company exits yet,” he said. “We’ve seen the first set of very small bolt-on acquisitions, [but] those are not being based on revenue, they’re more based on strategic fit. The way we approach it is, is there white space in terms of overall capability, and could that become a multi-product, multi-platform, multinational business? If it could, then there’s clearly a path to going public, or a financial exit rather than a strategic exit.” While some VCs like IQ Capital have pivoted to focus more intently on defense, others are being set up in Europe purely to hunt for opportunities in the sector. Among them is U.K.-based Defence Invest, a VC firm set up in 2024 by a five-person team that collectively has over 60 years’ experience in the British and German armed forces. Co-founder Matt Kuppers served in the German army until last year, and is now a member of the reserve forces. He told CNBC that Defence Invest’s on-the-ground military experience had helped it identify capability gaps and supply bottlenecks in European defense – and it was looking to startup “hotspots” in Munich, the U.K., Ukraine and eastern Europe for investment opportunities. “The market is still highly underfunded, and there’s plenty of opportunities for venture capital firms,” he said, pointing to areas like security communications – for example, the development of “jamming” capabilities that disrupt drone signals — as well as battery technologies and the supply of critical defense components. But VCs should be prepared to wait for their investments to pay off, according to Kuppers, with the ramping up of defense spending still a relatively new phenomenon. “It will actually take a while until the huge influx of capital really starts taking hold and having an impact,” he said. “I would expect for this to happen in the next two to three years or so, until we see a large and significant increase in defense innovation.” Europe ‘standing on its own two feet’ Something startups should lean into is their nimbleness compared to the large defense primes, Kuppers said, which gives up-and-coming firms an advantage in competing for new government contracts. “Startups can innovate pretty fast. They can do a lot of DIY,” he told CNBC. “They’re not bound to certification and compliance regulations, at least not during the R & D phase. So, I think that defense tech startups can contribute significantly to defense innovation at scale in Europe.” One young company that already has government contracts is British data protection startup Valarian. Its most recent funding round of $7 million was co-led by Artis Ventures, an early backer of Palantir. It brought total funding raised by the five-year-old company to $20 million. Co-founder and CEO Max Buchan told CNBC that Europe currently offered an “interesting arbitrage opportunity.” “We raise not [just] capital from the U.S., but also that level of knowledge and experience for deploying capital, and take that to Europe and start deploying because we’re in this great time of geopolitical shifts,” he said. “NATO governments … they’re not buying products, they’re not buying technologies — what they are buying is capabilities.” “We see this across the board in Europe,” he added. “For the first time in a very long time, Europe really standing on its own two feet when it comes to spending allocation and sourcing of these types of technologies.” But although the geopolitical landscape continues to benefit European companies, IQ Capital’s Muirhead noted that they will still be competing with their — often much bigger and more established — U.S. rivals for government contracts. It’s led some European defense primes to argue that increased budgets should be allocated to companies headquartered in the region, while the EU’s rearmament plans have instructed member states to prioritize European firms . “There for sure is a kind of temporary ‘buy local,’ top-down view … particularly in segments like space and communications, where, if it gets switched off, you’re completely isolated or on your own,” Muirhead said. “[But] I think the idea that U.S. tech won’t be procured in Europe is slightly overblown. I think the winds will shift back and forth on that as as the [transatlantic] relationship is clarified and ironed out.”
