The real unicorns of the startup world: European defence technology funds

In Europe there’s a much, much more rare unicorn than the billion-dollar startup: The defence technology investor. And by this I mean its rarest breed, the defence investor who is well acquainted with allied intricacies.

Truly impactful defence technology investing is probably the most difficult subgroup of venture capital. Players in this field not only need to understand both startups and venture capital, but more importantly they also need to be conversant in a complicated web of national interests.

Because of these special characteristics, dealflow of the most promising cases is as proprietary as it gets, sometimes woven between allies before they see the light of dawn. Serendipity, the hallmark of startup investing, is rare.

As these investors also need to be trusted by allied intelligence organisations, building venture funds around traditional European requirements becomes impossible. They fail already at management team level as creating a team of trusted managers that meet the governance and diversity requirements becomes an impossibility. Defence simply doesn’t fit normal templates. Requirements from Limited Partners need to flex.

As a result, the really impactful and truly networked European defence funds of today are small and typically solo-GP – which is a , dealbreaker for the European Investment Fund. Take for example 201 Ventures, the Madrid-based fund of Eric Slesinger who also founded the European Defense Investor Network.

Although being the first fund supported by the NATO Innovation Fund, even 201 has struggled to raise large amounts of money because of the intricacies involved. While exceeding its original target, the fund closed at 19.5 million euros, which doesn’t help scale European defense startups.

Final Frontier, arguably the first Nordic deftech fund, recently raised a mere €4.5 million.

In contrast, U.S. funds like Andreessen Horowitz and Lux Capital that are able to meaningfully invest in actual hard defence such as Anduril, run in the billions of dollars.

If Europe doesn’t find a way to throw in larger tickets quickly, the U.S. funds will siphon all the continent’s new defence opportunities.

The Dark and Stormy Atlantic

While Europe’s institutional LPs are still in the kindergarten when it comes to hard defence, some fund managers are trying to work around the problem by investing in defence-adjacent startups, soft defence that excludes weapons.

The most recent example being the Balderton-led round into Quantum Systems where the company was ahead of the round split in two, reconnaissance-focused Quantum and defence-focused Stark, to give room for soft defence investors.

While this supports the greater mission of boosting European resilience, it doesn’t meaningfully drive Europe’s capacity to defend itself in a kinetic war.

This dichotomy between Europe and the U.S. risks stretching further as trust between the two erodes following increasingly diverging interests over the outcome of the ongoing Russo-Ukrainian war and conflicts over NATO interests. Not to talk about the burgeoning global trade war.

In Europe, for less defence-literate investors the situation may look dire. Can U.S. investors be trusted with European defence? But what are the alternatives, share with Russia and China?

What’s more, although Trump is herding European founders to establish in the US, Europe is on the benefiting side when it comes to knowledge transfer. Europe doesn’t have a plan for a digital defence platform. The U.S. has Palantir. Europe doesn’t have a new defence prime elect. The U.S. has Anduril.

While U.S. courting Russia is a major muleta for Finland, which shares NATOs longest border with Russia, and other countries bordering Russia, the only alternative is to start dancing with the U.S. or dance alone without any plan of a digital defence platform.

Defence-washing and Posturing

In this time of division, manoeuvring allied defence technology entails great uncertainty. Countries who want to move faster than the collective of NIF should consider building national vehicles in the style of IQT and NSSIF, national investment vehicles close to local intelligence organisations.

Need we remind ourselves that IQT was instrumental in creating both Palantir and Anduril? It also gave wings to Finland’s ICEYE, the polar ice monitoring satellite turned recon operator. You see the pattern?

While NIF was birthed in this sandbox, it may have too much collective European inertia to effectively meet the modern defence needs of the countries that border Russia. Many investors claim they’re fostering European defence while they’re actually doing traditional consumer deep tech, birthing a new term: ”defencewashing.”

Take the case of Tesi in Finland, the state investment vehicle that seeds most of the country’s emerging venture funds. Tesi also supplies the country’s contribution into NIF. But it is burdened by the same conformism of EIF which makes effective participation in really meaningful allied deftech difficult.

While NIF is close to both IQT and NSSIF, it too moves at the collective speed of Europe. Countries that feel a stronger sense of urgency must create their own IQTs that both safeguard their own interests and have the agility and literacy to work with international intelligence networks.

While Finland last year freestyled its strategic investment into ICEYE through a traditional-industry vehicle, the country – like almost all of Europe – is still without a proper home for truly impactful defence technology that bridges local and allied needs. This must change fast!

European institutional investors need to stop posturing and start acting.

Dr. Jonas Dromberg is the founder and principal at Revalence Ventures, an early investor in Nordic Air Defence. Based in Helsinki and Stockholm, he has spent more than two decades in venture capital and finance. A former Bloomberg bureau chief, Jonas served as venture partner at one of the top Nordic venture funds and received his doctorate at IE Business School in Madrid researching VC limited partners and family offices. He is a member of the European and AUKUS defense investor networks.