In October 2023, I put out New Frontiers in Defense Tech on Substack. It’s gotten rediscovered recently, and we wanted to update it with some events, thoughts and experiences since then. Needless to say, quite a few things have changed. But fundamentally, the conclusion remains the same. It’s just easier for everyone to see. We’re not a defense tech fund, we invest into ++Sovereign Compute++ companies.

*Note: in this document, we may use military terms, which is why we’ve included a primer on talking about defense missions at the very end. Feel free to refer to that whenever you hit an unknown term. It is based on a workshop held at the European Defense Tech Hackathon in Munich Feb 2025 by ++Colin Macleod*++

Executive Summary

The war in Ukraine is not an isolated geopolitical flashpoint but a continuation of centuries of conflict rooted in the geography and power dynamics of Eastern Europe. Russia’s invasion must be understood in the context of a 500-year history of invasions, occupations, and shifting alliances. This historical perspective underlines the enduring strategic importance of buffer states like Ukraine and highlights the long-term fragility of peace on the European continent. In light of growing instability, Europe can no longer rely on U.S. military guarantees as it did throughout the post–World War II era. Transatlantic cracks, fueled by political uncertainty in Washington and a pivot toward Asia are forcing Europe to re-evaluate its security posture, defense capabilities, and industrial resilience.

This post introduces the concept of New Defense, which is a generational shift in how Europe must build, fund, and deploy defense capabilities. New Defense refers to a new breed of technology-first, venture-backable defense startups that operate with speed, adaptability, and technical excellence. Unlike legacy defense primes, New Defense companies are agile, modular, and software-centric. Enabled by inflection points in sensor tech, autonomy, distributed manufacturing, and digital infrastructure, these startups represent the future of defense innovation.

Structural challenges persist. Europe’s defense ecosystem is fragmented across national lines, leading to inefficient procurement practices, protectionist tendencies, and a limited market for early-stage companies. Legacy defense primes dominate contracting, while startups struggle with burdensome regulations, opaque requirements, and the infamous “valley of death” between prototyping and scaled deployment. Moreover, cultural and political divergences among EU members hinder the formation of a unified defense-industrial strategy.

Yet significant change is underway. Defense spending across Europe is rising sharply, with over €1.3 trillion mobilized for defense, infrastructure, and strategic resilience. Public sentiment is shifting in favor of military investment, particularly in Eastern Europe (esp. those with a border to russia). Institutional support for cross-border collaboration and SME access is growing, exemplified by programs like EDIRPA. Simultaneously, battlefield dynamics in Ukraine are demonstrating how cheap, attritable systems (e.g., drones) can outperform legacy systems, provided they are developed and deployed with urgency.

Against this backdrop, venture capital has a critical role to play. Traditionally government-financed projects are not able to move at the same speed as private capital paired with elite talent. Startups can move faster, innovate at the edge, and build systems that are good enough, cheap enough, and scalable enough to meet the evolving needs of 21st-century warfare. We identify three types of venture-backable defense companies: (1) vertically integrated system builders that replace primes with faster, modular platforms; (2) horizontal component companies that supply critical subsystems such as AI targeting, GNSS-denied navigation, and propulsion; and (3) deep tech dual-use companies that spin out frontier technologies with civilian and military applications.

This thesis is also a call to action: Europe must embrace a defense innovation culture, one that rewards speed over perfection, iteration over inertia, and collaboration over siloed nationalism. Each nation can’t build their own top performing drone company. In the case of Ukraine, agile procurement models and field-led innovation have proven decisive. Similar models must be embraced across Europe. The convergence of geopolitical urgency, industrial potential, and technological progress offers a rare opportunity to reshape European defense.

“New Defense” is not only a market trend, it is a strategic imperative for European sovereignty, peace, and prosperity. By building the technological and industrial foundations of a resilient defense ecosystem, Europe can ensure it is not only protected but also prepared to lead in an increasingly contested and multi-polar world.

A Brief History 

The war in Ukraine is more than a regional conflict. It is the newest episode of 500 years of wars rooted in geography and ideology. Russia was invaded from the west by the Poles in 1605, by the Swedes in 1707, by the French under Napoleon in 1812, by the Germans under Hitler in 1941. In return, Russia under Peter the Great acquired Latvia and Sweden in the Great Northern War (1700-1721), partitioned Poland three times (between 1772-1795), annexed Finland from Sweden (1809), re-occupied the Baltic states and Eastern Poland from 1949-1991. Ever since many Eastern European and Baltic countries declared independence. Ukraine was perceived as a somewhat neutral buffer country by the Russians until noises were made about further NATO expansion and the fall of the pro-Russian government led by Viktor Yanukovych in 2014 which led to Russia's interference ever since. Taking those last 500 years of history into account, further conflicts across eastern Europe need to be expected. It is in Europe’s interest to prevent such conflicts in the first place and ideally through diplomacy and deterrence. The latter can only be achieved through a solid military and industrial base in Europe. 

If anything has become clear since Russia’s full-scale invasion, it is that new tactics, technology, and procurement innovation have changed the course of the war and that the post WW2 world order has ceased to exist. In observing not just this conflict but also the general instability of the geopolitical landscape, as well as our dwindling European economy, we’re increasingly certain that the private sector, specifically nimble startups, is needed. In turn, our governments, not just our defense departments, need to embrace the tools available to everyone else and rethink how procurement is done, on a European level.

We’ve seen the earliest, most obvious signs of replacement of primes and disruption happen in the US with SpaceX, ++Anduril++, and ++Palantir++, and more recently with ++Helsing++, ++Quantum Systems++, and ++Auterion++ in Europe. They have shown that getting direct government contracts can be done by relatively young companies and that there is a willingness from investors, procurement agencies, and founders to collaborate.

In this thesis article, we want to explore what the next generation of defense companies will look like, and how we think about investing in this category. We call these companies New Defense.

Inflections

As a venture firm we apply ++inflection theory++ as a framework to identify venture opportunities. We define them as pronounced shifts in science, technology, culture or (geo) politics that hold the potential to change human behaviour at scale. Many of them occurred over the last 12 months and set in motion a profound shift in Europe’s self-perception, industry and military endeavours.

US military backing is coming to an end: For decades, Europe has relied on a stable transatlantic alliance as the backbone of its security. The United States, through NATO, has been the ultimate guarantor of European defense, providing military infrastructure, nuclear deterrence, and rapid-response capabilities. But that world no longer exists. Today, cracks in the Atlantic bridge are widening. U.S. political uncertainty—exemplified by recent discussions of a potential NATO withdrawal—signals that Europe can no longer take American protection for granted. The fading bipartisan support for Ukraine, coupled with Washington’s shift in focus towards China, leaves European leaders facing an uncomfortable reality: we are on our own.

Europe is already at (hybrid) war: While not officially at war outside of Ukraine, Europe is engaged in a broad conflict with Russia and its allies, China and Iran, fought through economic, cyber, and political means. Hybrid warfare pursues several goals. The destabilisation of political systems (e.g., election interference). The erosion of public trust in institutions (e.g., disinformation). Taking control over critical infrastructure (e.g., energy grids, financial systems) and the expansion of geopolitical influence.Unlike traditional wars, it operates below the threshold of open combat, exploiting societal vulnerabilities and institutional weaknesses. 

++“[…] it’s crucial to explain to Europeans that this war isn’t solely about Ukraine’s future, but also about Europe’s ability to maintain secure borders and preserve peace across the continent.”++

• Foreign Policy - Will European Troops Enforce A Cease-Fire In Ukraine?

Europe started mobilising capital: In recent weeks, in the wake of US retraction and instability in their leadership, Europe immediately reacted. In aggregate, this is over €1.3 trillion, not counting the UK increase in defense budgets. Admittedly, it’s not pure defense; it’s also for infrastructure like roads and railroads, so comparing it to the US defense budget of approximately €822B isn’t entirely fair.

• ++**EU Defense Spending**:++ The European Union committed €800 billion to enhance defense capabilities and support Ukraine. This includes €150 billion in loans and €650 billion in flexible budgetary mechanisms for military spending

• ++Germany's Infrastructure and Defense Fund++: Germany proposed a €500 billion special fund for infrastructure and defense by reforming its constitutional "debt brake." This fund includes allocations for repairing roads, railways, and other essential infrastructure, with €100 billion earmarked for federal states

• ++UK Defense spending increase++: Zelenskyy visited Keir Starmer in no. 10 after the screaming match in the White House, and soon thereafter the PM announced an increase from 2.3% to 2.5% of UK GDP by 2027. And after that, it will increase to up to 3% according to Keir Starmer. This will largely come from reductions in foreign aid. For reference, the relative spending on defense has decreased by ++several multiples compared to healthcare and social++ spending in the UK.

European resilience innovation culture started shifting: The old continent became increasingly aware of its vulnerabilities since the invasion of Ukraine. Ever since, venture funds started to loosen the grips of their LPAs to allow for dual use and defence exposure. Entrepreneurs are flocking to industry events and hackathons such as the EDTH ones we are involved with. Public sentiment is shifting towards more support for defence budgets and initiatives depending on the country’s location - the further east, the more support, the further south / west the less.

The nature of warfare is changing rapidly: Through Ukraine it became obvious how drastically the very nature of warfare is changing. The topic is vast and entire books have been written about it but the tldr; is:

• Strategy: The cold war era was driven by a bi-polar rivalry which was resolved through nuclear deterrence and high precision warfare. Modern warfare will be multi polar, potentially holding higher global risks due to more complex game theoretical equilbira. Proxy wars have been contained through NATO alliances but today we see hybrid warfare tactics unfold instead. Offensive dominance (nuclear, aircraft carriers) is replaced by defensive deterrence via asymmetric capabilities (e.g. China’s DF-21 carrier killer missile).

• Technology: The cold war era was driven by nuclear arms, centralised platforms (aircraft carriers) and human controlled weaponry. New defence is focused on hypersonic weapons, decentralised platforms (mesh networks, edge compute) and autonomous systems taking.

• Battlefield dynamics: Instead of linear fronts in clearly defined areas we have to expect multi domain combat (cyber, space, urban, hybrid). Mass mobilisation will become less relevant than high precision strikes (hypersonics, AI targeting).

• Logistics: Instead of bureaucratic, centralised procurement and supply chains, more agile acquisition tactics and distributed manufacturing (3D printed parts, expandable drone swarms) can be expected. 

Such inflections disrupt the status quo and expose Europe to serious challenges. 

Challenges

European Military Culture Needs Rapid Innovation Cycles

Drones are the obvious change to warfare, to the point that it is ++being integrated into basic training in Ukraine++, and is what everyone mentions when they think about defense tech. Of course, they're very important, but we shouldn't overemphasize their role in a future battle of Europe. However, we can use them as a proxy for innovation capability and adaptability of our armed forces and looking at absolute procurement volumes of all drones in Europe. 

In this aspect, non-Ukraine Europe is not looking too rosy. Individual European countries have procured some quad-copter drones, and some long-range ISR drones, but most of them are of the expensive MQ-9 Reaper type, which have been in use since the start of the GWOT. Built by General Atomics, a US company, we might add. 

And even if countries have bought a few quad-copters, the types of tactics, techniques, and procedures currently employed in Ukraine are unlikely to have made it into the training of recruits or even doctrine. And this is even though we have known since 2022 of the immense advantage that cheap, attritable one-way drones can have. In summary, the challenge is twofold: capability priorities for procurement are not being updated rapidly enough, and modern technology doesn’t seep into practice within the military rapidly enough. 

Other examples beyond drones where we need very rapid iterations from the field to the procurable capabilities and training of recruits are multi-sensor integration in the operational picture, electronic warfare, UGVs, and AI-in-the-OODA-loop.

Europe Is Not a United States of Europe

European countries are unlikely to purchase from a foreign, European company unless they absolutely have to. 

This is why we have giants such as Rheinmetall (DE) produce the Leopard 2 tank, but also BAE Systems (UK) produce the Challenger 2 tank. Or Leonardo (IT) and Saab (SE), or Krauss-Maffei (DE) and Nexter (FR) before the merger. 

Even though we are within Schengen, if one may speculate, which we may since it’s our article, this is, besides the historic context, partly due to political reasons wanting to generate tax revenues within the country, employ people, etc.; partly due to mistrust in foreign countries, no matter how long the EU has existed, French will distrust the Germans; and finally due to their own strategic concerns about controlling their own firepower. Furthermore, some European countries such as Germany and Poland have put heavy emphasis on the transatlantic link for security, whereas France has been advocating for stronger defence cooperation within the EU. The consequence, however, is detrimental to early-stage, small-scale companies that can’t afford to only scale in one specialty if there’s only one customer you can sell to per country. It further limits the market size and the chunkiness of the revenues. This is also why we have less attractive procurement conditions, i.e., it’s worse for both the procurer and the companies. Tender requirements (financial guarantees, past performance, security clearances) can inadvertently exclude young companies. This has led to what ++Sifted described++ as procurement that “tends to favour traditional defence companies” over startups. 

Startups can spend years on trials and prototype programs without securing a large production contract, which strains their finances. This is the infamous “valley of death” between a successful pilot and a scaled deployment, where a procurement agency’s inertia or budget constraints can stall a startup’s growth. This is not unique to Europe though. In the US, one can look at the graduation rate of SBIRs to contracts, which is somewhere around 0.5%.

This leads to smaller contracts and more overhead for any individual company wishing to sell across multiple nations. They may also have slightly different requirements, leading to potential for exclusion. Another factor worth mentioning is the political incentives for individual procurement agencies to buy from a national company, stimulating local growth rather than European growth.

The only way to overcome this is innovation, through operational and product excellence.

https://securityconference.org/publikationen/sonderausgaben/defense-sitters/procurement-processes/

In case of urgency, fast beats perfect, as demonstrated by Ukraine in opening its many paths to procurement for private companies, and speeding up accreditation processes significantly. This also applied to Poland as they bought South Korean tanks, rather than German Leopards, citing velocity as a deciding factor.

Opportunities

Technology Can Trump Exquisite Systems

We don’t have to have the capacity to produce 23.2B tons of naval ships per year like China does to be competitive, ++as seen in Ukraine’s naval warfare++. 

Raw industrial capacity is necessary for the huge volumes required of attritable systems such as drones, and Europe has more manufacturing capacity than the US (ref needed). Germany leads the way, and collectively, Europe can ++outproduce the US in steel, ships, civilian airplanes, and vehicles++. 

This is largely due to a few inflection points in tech, namely the massively decreasing cost in compute (Moore’s law), our ability to prototype and test systems faster (simulations, 3D printing, off-the-shelf components), and finally, general software practices impact on a very traditional engineering-driven industry (e.g., RL agents for targeting mechanisms using cheap optical sensors vs. hard-coding trajectory calculations based off of expensive multi-sensors).

In New Defense, we see the following technological inflection points as most critical:

• Commoditization of certain types of software (via coding agents)

• Continued scaling of other types of software (RL/DL)

• Embodied autonomy models increasing in performance

• Production and acquisition volumes of UxSs rising rapidly

• Hardware SWAP-C continuing to decrease according to Moore’s Law

A common success factor in all defense tech startups we’ve seen is to reduce complexity on the hardware side, in favor of more advanced software. This allows us to come closer to the type of SaaS business scaling we saw in the 2010s but for fundamentally hardware-selling businesses. Over-the-air updates and upgrades become possible, where previously you had to replace the entire multi-million dollar tank, you can now download an upgrade for free.

This works especially well for the air domain, and the close-range attack missions of drones, as the attritable systems need to be extremely cheap, and are mostly software-driven in progress.

European Manufacturing Productivity

As mentioned above, Europe has more productive industrial capacity than the US. After all, the industrial revolution happened in Europe. While a lot of the larger industries were relocated to China due to higher labor costs (resulting from the stronger social system), niche, high-value manufacturing such as high-precision machining, automotive components, lithography and photonics, have remained strong in Europe. 

The US has a scale advantage here due to the market being larger for chemicals, heavy machinery, and electronics and the fragmentation in Europe still being an issue. Considering outcome quality, Europe is hard to beat. See Airbus in aerospace, BMW in automotive, and ASML for lithography. There’s room for improvement in the digitalization and software-driven platform approaches to manufacturing.

https://stat.unido.org/portal/storage/publication/yearbook/2023/Yearbook_2023_UNIDO_IndustrialStatistics_Yearbook_2023_NAE.pdf

Cross-Border Collaboration

Recently, the EU also approved EDIRPA (a €300 million initiative) to support joint procurement among countries for urgent capabilities (++thesoufancenter.org++). While these programs are new, the intent is to foster cross-border collaboration and enable smaller tech firms to contribute to multinational defense projects. 

Cross-border procurement is a big focus: the EU issued recommendations to improve SME access across borders, aiming to “foster a more dynamic defence market” and help companies operate Europe-wide ++pubaffairsbruxelles.eu++. If implemented effectively, such measures could let a startup developed in, say, France more easily sell to Germany or Poland without starting from scratch in each country.

New Defense technology (as imagined by 4o)

New Defense

New Defense is the hope and necessity for European sovereignty. It’s imperative for a new wave of tech companies to build for our ability to defend our territory and allies. New Defense is not giving bullies and dictators any leverage. They are a new generation of technology-first defense companies.

New Defense companies will need to exist alongside the old primes, component manufacturers, infrastructure providers, and procurement bodies. They will need to pair “Move fast and break things” with “Slow is smooth. Smooth is fast.” PhDs who can win a bar fight, and who can talk to everyone from ministers to welders. We will need to make the most out of the constraints and opportunities in Europe because Europe hasn’t changed fast traditionally. However, it’s in no way impossible; it’s just playing the startup game on hard mode.

Market Landscape

The EU NATO Market Is Large Enough

Relative to peer competitors, NATO’s defence spending is overall low. This is likely to change over the next few years.

That said, NATO countries commonly agree to the ++2% of GDP rule++, and in 2024, almost everyone is expected to reach that. Across the EU NATO, on average 20% of that 2% is spent on equipment procurement.

This is a high-level view from NATO, estimated for 2024. In 2025, we already see a massive increase in GDP-indexed budgets, as mentioned above.

https://www.nato.int/nato_static_fl2014/assets/pdf/2024/6/pdf/240617-def-exp-2024-en.pdf

The United States is still ahead of NATO Europe and Canada in spending, but the rate of change is higher in Europe and Canada than in the US, indicating we’re catching up.

https://www.nato.int/nato_static_fl2014/assets/pdf/2024/6/pdf/240617-def-exp-2024-en.pdf

Much of this spending goes to primes, the companies that win contracts directly with the government. To understand what New Defense companies are going to be competing with, we need to understand the structure of primes today.

Structure of Defense Prime Contracts

Defense prime contracts are agreements between a government and a primary contractor, often a large defense company, to deliver specific military goods or services. For example, in 2022, the U.S. Department of Defense awarded contracts worth over $400 billion, with major contractors like Lockheed Martin, Boeing, and Raytheon Technologies receiving substantial portions. 

The primary contractor, or "prime," is responsible for fulfilling the contract's terms, which may include manufacturing weapons, developing technology, or providing services. Primes often subcontract portions of the work to other companies, known as subcontractors. Anduril was recently awarded a ++$682M C-UAS contract over 10 years++ by the DoD, and has multiple others running already.

Economics of Defense Contractors

Prominent defense contractors like BAE Systems, Saab, and Rheinmetall have established themselves as key players in the defense industry due to their ability to build large, exquisite systems, bundling a lot of various technologies. They meet the complex demands of military contracts by subcontracting or purchasing certain areas of expertise. These companies benefit from:

1. Stable Revenue Streams: Defense contracts often span multiple years, providing a stable revenue stream for those who can get them. For instance, BAE Systems reported revenues of £21.3 billion in 2022, largely driven by long-term contracts.

2. Research and Development: Because of the scale of Primes, they can invest massive amounts into research and labs. This turns semi-academic, and while it allows them to do things startups can’t, it’s not the only way to do innovation. In 2022, Saab invested approximately 25% of its sales in R&D, focusing on advanced defense systems.

3. Global Presence: Many defense contractors operate globally, allowing them to tap into various markets. Rheinmetall, for example, has a strong presence in Europe and North America, contributing to its €6.4 billion revenue in 2022.

4. Strategic Partnerships: Collaborations with governments and other defense firms enhance their capabilities. BAE Systems, for instance, partners with the UK Ministry of Defence and other international bodies to develop cutting-edge defense solutions.

5. Regulatory Environment: The defense industry is heavily regulated, which can create barriers to entry for new competitors, benefiting established firms. This regulatory environment ensures that companies like BAE Systems, Saab, and Rheinmetall maintain a competitive edge.

In the US, because of the massive consolidation in the primes in the last 30 years and presumably because of regulatory requirements, ++two-thirds of bids only have one bidder++! Less than 10% of bids had more than three bidders. 

This obviously harms innovation and doesn’t simplify the entrance of startups. But it also means that these contracts are attractive from a strategic perspective, in the eyes of someone who can achieve the same capability with a lot less, it looks like an opportunity. 

Given the required capability to protect a harbor, a current prime might offer an exquisite system of large complexity, funding years of R&D off of a large contract. Whereas a New Defense company might take off-the-shelf sensors, and then enhance the processing capabilities using advanced AI capabilities. This is likely cheaper and scales better across multiple harbors, domains, customers, and even nations than an exquisite system.

2024 Estimated Defense Spending Split Across EU NATO

A lot of the spending on defense goes to mundane but essential things, like boots, laptops and food. We’re really interested in the estimated $86B advanced equipment and $22-43B R&D budgets in EU NATO. We might also add that other countries like Ukraine, the UK, Norway, and Switzerland should be considered as part of the market as well, even though they are not in the EU. This would almost double the >$100B market, mostly due to the UK and Ukraine's focus on defense.

Agile Procurement Requires Agile Suppliers

We don’t only need to set the budget correctly, but we also need to ensure that it’s spent correctly and effectively. Granted, it’s in our interest as venture capitalists that startups can receive contracts from the government more easily, but it’s a pretty simple life-and-death equation of measuring the time of the feedback cycle from intelligence, observations and casualties in the battlefield due to changing operational requirements, to awarding a contract, and then to delivering on that. As an example, take the US DoD’s and American primes reaction to the IED threat in Afghanistan. They started a mine-resistant ambush-vehicle (MRAPs) program. It was a huge, clear problem at the time. It still took ++20 months++ between the first formal field request for MRAPs and validated requirements were obtained. This would have allowed Russia to take Kyiv in the first weeks. Instead, let’s look at Ukraine, a country historically mired by corruption, pre- and ++post-Soviet++, and how they are combatting that while allowing for rapid procurement processes.

In Ukraine, individual units and brigades have been able to raise money in the form of donations, and procure items they need without going through much formal procurement procedures. A decentralized approach introduced inefficiencies in terms of pricing and potential for distraction of soldier resources. Ultimately though, it has allowed for a bottoms-up approach to requirements setting and validation, as well as having forced brigades to take control over their own supply chain, integration and even development in a new way. We have been working with the Third Army Corps of the Armed Forces of Ukraine (recently ++promoted from Brigade++) and are continuously impressed by how they are able to engage high quality  engineering talent in their operations, modifying and building their own hardware and software while also engaging with many supplier companies. They are just one example from Ukraine. This model is further being formalized and embraced through the ++DOT-Chain initiative launched in 2025++, which should streamline procurement of robotic, EW, and SIGINT systems. Each unit of a brigade declares they want to procure a certain item, which is then added to the DOT-Chain system. DOT, the state entity responsible for non-lethal acquisition, then adds orders. The hope is that this can rein in some of the inefficiencies and potentials for corruption while maintaining the flexibility and demand generation. 

What A Venture-Backable Defense Company Looks Like

At Inflection, we largely see three kinds of business models that we think have a shot at being very, very valuable companies, and thus venture-backable., Of course, there will be many other types of companies required for a sovereign Europe, which aren’t likely to become venture-scale. So, this section is specifically for VCs and startups who want to raise money from VCs. It’s also generally for the ultra-ambitious, the high-agency, high-risk taker entrepreneurs who want a shot at ++building a Monument,++ not a B2B SaaS AI-slop company.

Dual-use vs. Defense Companies

People generally dislike the term dual-use because it’s associated with “ESG-washing” defense companies and comes from investors who can not invest in defense. But, looking at the business model itself, we at Inflection have nothing at all against dual-use companies, provided they are prioritizing correctly! 

Many companies building for the military as a first customer could potentially sell to civilian customers as well, especially if the technology is a very deep innovation. In fact, many of the groundbreaking innovations in the past have come from defense R&D (GPS, the Internet, silicon chips). AI for GPS-less navigation can be used in urban environments for delivery UGVs, secure networking and communication solutions can be used for remote areas, underwater surveillance robots can be used for harbor inspections, etc. 

That being said, for the sake of talking about the early days of a startup, where the focus is everything, we believe it’s only possible to have both civilian and military customers if you have low additional efforts on the civilian side (and defense customers are the focus customers anyway). For everyone else, we don’t think it’s possible to compete in defense without being 100% committed to getting to know your defense customers' requirements, building your product with military standards in mind, working hard to understand the procurement pipeline, and building deep relationships with defense actors.

The Types of Defense Companies We’re Interested In

Largely, we believe there will be three types of venture-backable defense companies:

1. Vertically integrators

2. Horizontal component manufacturers

3. Deep tech dual-use companies

These types of business models are not easy to create, as they have all the requirements of a civilian startup, in addition to powerful incumbents, long sales cycles, chunky revenues, operational and information security, direct relationships to politicians, and more. Given these issues and the fact that the market is rather slow moving, we don’t expect there to be more than a handful of very valuable ones in Europe in the next 10-15 years. With the exception of deep tech dual-use companies who can move into civilian markets if necessary.

Vertical Integrators

Our definition of Vertical integrators are very inspired by Packy McCormick’s ++Not Boring series on Vertical Integrators++. If you haven’t read that, go ahead and do that. In short, a vertically integrated strategy is superior in hardware-driven business fields because of the stronger control over the stack, maintained end-customer contact, and in defense, they will be able to sell directly to the end-user. They compete directly with incumbents, but with cheaper, often better products. We’ve reached the point in military innovation where the existing products aren’t “good enough” anymore. For a tank gunner, not having a counter-drone solution isn’t good enough, it’s deadly. Similarly, the rate at which innovation on the battlefield happens in Ukraine is something which a traditional prime could not keep up with. Hence, to prepare for an imminent active conflict, they’re absolutely not good enough and will need to be replaced. 

Vertical Integrators are companies that:

1. Integrate multiple cutting-edge-but-proven technologies.

2. Develop significant in-house capabilities across their stack.

3. Modularize commoditized components while controlling overall system integration.

4. Compete directly with incumbents.

5. Offer products that are better, faster, or cheaper (often all three).

In the earlier stages, they may look like pure software companies who then start building their own hardware. See Helsing and Anduril, who both started out in pure software, acquiring the hardware off-the-shelf or from subcontractors, and are then moving on to build ++their own++ ++factories++. One might argue Helsing is not yet vertically integrated, but in our opinion they are on that path currently. Others go vertical pretty much from the start, like ++SpaceX++, ++Hadrian++ and ++UNION++. Vertical integrators will be well positioned to sell systems directly to militaries, and thus getting prime contracts. However, we think they will be more likely to be reactive to the accelerating requirements setting-capability building cycle than current primes who are structured according to very long timelines of procurement with rigorous testing.

We expect these companies to produce larger systems or sub-systems of the more “exquisite” level, rather than the attritable or even expendable kind, to begin with. After they’ve disrupted the expensive, high absolute unit margin systems they may move down the line to lower cost attritable ones.

Customers: Governmental defense organizations

Competitors: Existing primes, system integrators

Inputs/suppliers: Data, niche components, raw materials

Moats: Supply-side economies of scale, can bear regulatory overhead and to some extent brand

Exit path: IPO or merger with another prime 

++Danger zone:++ Vertical integrators should watch out once the economics of their target markets become so large and differentiated in the customer base that more and more of the component manufacturers start breaking out into specialization.

Examples from the startup scene include Nordic Air Defence, Highcat, Kraken, Hypersonica

Horizontal Component Companies

There are deeply differentiated technologies that will become crucial to the New Defense sector, and the companies who supply them will have a chance to become very valuable. The types of companies we’ve seen in the past that are representative of this would be ++Martin-Baker++, a 75 year old company producing ejection seats. Together with ++Collins Aerospace++ (now a subsidiary of Raytheon/RTX) they comprise 100% of the market for ejection seats. So highly consolidated. Today, ejection seats are likely to decrease in importance as we remove the pilots from the aircraft and put them on the ground, until someone decides to start ejecting the cameras, gimbals and compute units from loitering munitions for re-use. 

For example, one opportunity for such a technology company  we see is the “minds and brains” of the unmanned systems. Much like Cruise or Waymo have been able to build the brains for autonomous driving, we expect a few companies to emerge to compete for the controlling AI capabilities for unmanned systems, in all domains, and for all missions. They might compete with the internal teams of vertical integrators and primes, at first, but assuming data and versatility is the bottleneck for performance, they are likely to win out. 

Other examples of technologies here are: 

• UxS fleet management software (e.g., ++Ark++)

• Control systems (e.g., Mutable tactics, Farsight vision, Bavovna)

• Laser target designators or gimbals (e.g., M-FLY)

• Energy storage and propulsion systems (e.g., Greenjets, Max Joule Tech)

Customers: Primes, system integrator, and down the line vertical integrators

Competitors: Internal teams at primes, other component manufacturers

Inputs/suppliers: Data, niche components, raw materials

Moats: Brand (known to be the best component), supply-side economies of scale, and potentially demand-side (network effects by collecting more, better data)

Exit path: Most likely acquisition by a prime, or a large OEM

Danger zone: Horizontal component manufacturers should watch out not to become middleware, as this could be commoditized, hence specialized technical differentiation and in-house knowledge is necessary.

Deep Tech, Dual-Use 

Defense spending on research has already spawned many “deep tech” companies and technologies, and one might make the comment that almost any sufficiently important innovation will make it into military usage, whether it’s materials, battery technology, LLMs, or cryptography. As the capabilities of adversaries increase across domains, so do the requirements on the defensive and deterring side. If China develops the possibility to take out satellites and disrupt earth observation intelligence gathering, the US needs to think about how to defend satellites, or create redundant systems (e.g., in the form of stratospheric airplanes). The same goes for energy supply. If we base our power mix on imported gas, we either need to protect those supply lines, shipping or pipe-line-based, or we need alternative power generation methods which are harder to attack (e.g., solar+SMRs). All of these are defense companies in the sense that the military is directly impacted by their existence, can employ them in an offensive scenario, and improve our deterrent effect. 

Other examples of relevant technologies include: 

• AGI/ASI (e.g., OpenAI, Deepseek labs)

• Alternative positioning, navigation and timing (PNT) (e.g., Tern AI,

• Rapid-cycle pharma development infrastructure

• Chips for edge compute (e.g., Ubitium)

• Secure communications protocols and infra

• Robotics, world-understanding and autonomous navigation (e.g., Radical Aero, Lodestar Space , SE3 labs)

Customers: Primes, system integrator, and down the line vertical integrators

Competitors: Well-integrated, legacy tech, other deep tech companies

Inputs/suppliers: Science, OEMs, 

Moats: Case-by-case

Exit path: IPO or acquisition by a competitor

Danger zone: Optimizing along one vector may not be good enough to replace legacy solutions. The magnitude of “better” needs to be 10x+. If cost-effectiveness isn’t met, even 10x higher performance might be insufficient

Conclusion

At the moment, the defense tech market is certainly going through a boom, with renewed European focus and prioritization normalizing the topic and explicit need for defense tech. The public attention is likely temporary, while the spending and investments are longer-term due to the nature of how budgets are set. As usual in venture markets, something is overlooked for a long time, and then it isn’t. We’re perhaps at the inflection point of defense having decreasing alpha as the theme becomes more consensus. That doesn’t mean that those with networks and insight, and a strong thesis won’t have an advantage. The cycle time for the larger funds to amend their LPAs to allow for defense investing is now approaching the end. We expect more multi-stage funds to enter defense verticals explicitly. This is overall a good thing. It’s inherent to the ++cycles of technological revolutions and financial capital++. 

In the case of a cease-fire in Ukraine and Israel/Gaza, we don’t expect the relevance of defense tech as a sector to diminish. It’s one of the oldest industries in the world, after all. The difference is that the world is now sensitized to the fact that there are new threats we need to be able to respond to quickly. And rapid technology development and adoption is the only way to counter those threats. Engineered viruses, cyberattacks on logistics and energy infrastructure, drone swarms or bot-driven election influence campaigns are all of a sudden no longer science fiction but part of our history. For the stability and prosperity of our democracies, we need dedicated deterrent capabilities, but our key belief and reason for optimism around this sector is that they will spawn new civilian-use technologies that better humanity. “++Defense tech is peace tech++”.

Thanks to Toby Stone, Benjamin Wolba, Eveline Beer and Larysa Visingeriyeva for comments and suggestions.

Appendix. Primer On Talking About Defense Missions

We’d like to share a hopefully helpful primer on how to speak about military operations. It’s based on a workshop held by Colin Macleod during our Munich Defense Tech Hackathon in February 2025. It was targeted at hackers so that they could more accurately describe what type of mission their solution should be for. In his and Primal Scream’s words: “Just what is it that you want to do?”.

We can simplify this question into four dimensions:

Domain: Where are we fighting?

Echelons: At what distance?

Missions: What are we trying to do?

Kill Chain: What parts of the mission?

Domains

Domains are traditionally split into five areas: Land , Sea , Air , Space , and Cyber . However, this is not always a helpful classification, as it might be confused with, e.g., the Army, Navy, Air Force, Space Force, and Cyber Force. Those are service branches and not domains per se. The US Navy has fighter jets, the Space Force passes through the atmosphere on its way to space, and all are affected by cyber operations. So, the domains just tell us where a mission is taking place.

Echelons

Echelons describe the different areas of military operations.

Rear area is where:

• Forces required to support and sustain forces in the close area operate

• Support areas are positioned

Close area is where:

• Decisive operations using maneuver and fire are conducted

• Most maneuver forces are positioned

Deep area is where:

• Conditions for future success in close combat are set

• Enemy lead command structures from follow-ons are separated

• Enemy long-range fires, command and control, and sustainment are disintegrated

Missions

Missions are what the military is asked to do. According to NATO standards, these are generally split into three types:

1. Offensive, e.g.,:

2. Attack

3. Destroy

4. Seize

5. Defensive, e.g.,:

6. Defend

7. Delay

8. Contain

9. Others, e.g.,:

10. Reconnaissance

11. Withdraw

12. Retire

As an example of a mission, Colin uses this strike mission on Kursk:

Stages of the US Military Kill Chain (F2T2EA)

The Kill Chain is not only a famous book by one of the co-founders of Anduril but also a concept that describes the structure of an attack in warfare. The US armed forces use the F2T2EA-version, and NATO has a similar one (F3EAD)

1. Find: Identify potential targets through surveillance, reconnaissance, or intelligence gathering.

2. Fix: Determine the exact location and coordinates of the target.

3. Track: Monitor the target's movement continuously until a decision is made to engage or disengage.

4. Target: Select the appropriate weapon or asset to use against the target based on desired effects and available resources.

5. Engage: Apply the chosen weapon or asset to the target.

6. Assess: Evaluate the effects of the attack, including any intelligence gathered at the location.

An example of this would be how an anti-Shahed kill chain works:

1. Find: Learn that a Shahed is incoming using, e.g., acoustic sensors. Here, a battlefield management system would be informed about an incoming threat and its approximate vector, then tasking an air defense unit to fix the targets.

2. Fix: Establish where the Shaheds are located and what the trajectory is more exactly. This would be using a surveillance system such as a radar or electro-optical system.

3. Track: the surveillance systems track the Shaheds through the sky, potentially passing on new information back to the air defense unit through the BMS in order to dispatch a new unit to fix new Shaheds.

4. Target: Decide how to deal with the incoming Shaheds. For example, tasking the operator of interceptors with taking them down, or deciding the Shahed is not a threat to anyone and not do anything.

5. Engage: The Interceptor engages the Shahed kinetically.

6. Assess: Check whether the interceptors destroyed the Shahed. The surveillance system does a battle damage assessment.

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