Europe’s defense sector is experiencing an unprecedented surge in private capital, driven by a confluence of geopolitical pressures and ambitious rearmament initiatives. With commitments from the European Union and the U.K. to significantly increase defense spending, coupled with NATO members elevating security expenditure targets to 5% of gross domestic product under President Donald Trump’s influence and the ongoing Russia-Ukraine war, investors are rapidly re-evaluating an industry poised for substantial growth and innovation. This dramatic shift marks a fundamental repositioning of defense within the investment landscape, moving it from a niche area to a central focus for venture capital.
Reshaping the Investment Landscape
The influx of private capital into European defense firms has become particularly pronounced since Russia’s full-scale invasion of Ukraine in early 2022. A report by Dealroom and the NATO Innovation Fund highlighted a record $5.2 billion in venture capital investments into European defense and security startups in 2024, a notable contrast to the overall shrinkage observed in the region’s broader VC market. Yoram Wijngaarde, CEO of Dealroom, noted that the appetite for defense, security, and resilience startup investment in Europe is “unrecognisable” compared to just a few years prior.
This acceleration continued into the first half of 2025, according to Loredana Muharremi, an equity analyst at Morningstar. She observed a significant “step change” in Europe’s private defense market, largely propelled by NATO’s revised spending targets. Beyond rising overall investment volumes, Morningstar’s analysis indicates a higher per-deal value, suggesting increasing valuations. Concurrently, the nature of investment has evolved, shifting from M&A-led bolt-on acquisitions toward venture capital. Muharremi emphasized that “Private capital is playing a critical role in bridging the gap between early-stage prototypes and mainstream defense adoption.”
Strategic Shifts in Innovation and Capital
The focus of this new wave of investment is predominantly on software-driven, AI-enabled startups, specializing in areas such as drones, cybersecurity, and space technologies. These sectors often lie outside the traditional core competencies of established legacy defense contractors, presenting fertile ground for disruptive innovation. A significant trend facilitating this growth is the increasing involvement of U.S. investors, particularly in later-stage venture rounds, providing essential scaling capital.
Cody Huggins, a partner at Scout Ventures, a Texas-based VC firm, observed a geographical redistribution of defense market focus. Historically, the U.S. was the primary market for dual-use or defense-focused organizations due to its substantial budget. Now, Huggins identifies Europe as one of four key global hubs for defense tech innovation, alongside Southeast Asia and the Gulf states. This shift is attracting high-caliber entrepreneurs who previously might have hesitated to enter the European defense sector due to perceived lack of contracts or venture capital.
Emergence of Specialized Funds and Long-Term Outlook
European venture capitalists are also intensifying their focus on the defense sector. Archie Muirhead, a partner at British VC firm IQ Capital, stated that while defense-focused or dual-purpose firms have always been part of IQ’s portfolio, the firm has actively sought defense-first investments across Europe in recent years. This is driven by both mission-oriented founders and the increased accessibility and scale of funding in Europe.
Further demonstrating this specialization, U.K.-based Defence Invest launched in 2024, founded by a team with extensive military experience. Co-founder Matt Kuppers, a former German army officer, indicated that their on-the-ground experience helps identify critical capability gaps and supply bottlenecks, particularly in security communications (e.g., drone jamming), battery technologies, and critical component supply. Kuppers suggests that the market remains significantly underfunded, presenting ample opportunities for venture capital. However, he cautions that it will take two to three years for the substantial capital influx to fully translate into widespread defense innovation.
Startup Agility and Procurement Dynamics
Startups possess an inherent advantage in agility and rapid innovation compared to large defense primes, enabling them to compete effectively for new government contracts. “Startups can innovate pretty fast… They’re not bound to certification and compliance regulations, at least not during the R&D phase,” Kuppers highlighted. This allows them to contribute significantly to defense innovation at scale.
British data protection startup Valarian exemplifies this trend, having secured $20 million in total funding, with a recent $7 million round co-led by Artis Ventures. CEO Max Buchan described Europe as an “interesting arbitrage opportunity,” leveraging U.S. capital and deployment expertise. He noted a fundamental shift in procurement, where NATO governments are increasingly purchasing “capabilities” rather than merely products or technologies. Buchan 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.”
However, the competitive landscape includes well-established U.S. rivals. While some European defense primes advocate for prioritizing regional companies, and EU rearmament plans instruct member states to favor European firms, the notion that U.S. technology will be entirely excluded is “slightly overblown,” according to IQ Capital’s Muirhead. The transatlantic relationship will likely see shifts in procurement preferences as policies evolve.
Jonathan Reed received his MA in Journalism from Columbia University and has reported on corporate governance and leadership for major business magazines. His coverage focuses on executive decision-making, startup innovation, and the evolving role of technology in driving business growth.