How VCs are navigating Europe's defence spending push

As venture capital investors look to profit from Europe's defence spending boom, speculators hunting for the next unicorn need to navigate hurdles such as EU sustainability guidelines and difficulties for start-ups in a market dominated by large prime contractors.

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The European Union has earmarked up to 800 billion euros ($920 billion) for defence through 2030 with a bulk of that amount expected to go to prime contractors such as France's Airbus or Germany's Rheinmetall. But with large defence contractors focused on meeting record demand due to the war in Ukraine, investors and start-up founders are betting that defence technology startups can fill an innovation gap in Europe, developing technology and driving growth and possibly attracting the attention of those big players later on.

“We think it’s an important trend and we're investing behind it,” said Sequoia investor Julien Bek. His firm invested $15.5 million in German autonomous drone company STARK in October 2024, according to PitchBook.

Russia’s 2022 invasion of Ukraine and US President Donald Trump's prodding of NATO countries to raise defence spending to 5% of gross domestic product from a current 2% have spurred the EU to ramp up its military spending plans.

It has also drawn venture capital funding into European defence tech, which hit $1 billion in 2024, up from a modest $373 million in 2022. That is up fivefold since 2020, yet Europe's defence tech sector has produced just three unicorns - startups with a valuation of $1 billion - and last year attracted just 1.7% of the venture capital money in Europe, according to startup data provider Dealroom.