The war in Ukraine has served as a wake-up call for Europe, and defense tech has emerged as one of the top investment areas within deep tech. According to Dealroom's latest report on Defence, Resilience, and Security (DSR) in Europe, released in collaboration with the NATO Innovation Fund (NIF), DSR startups secured a record $5.2 billion in venture capital last year, up 24% compared to 2023, and nearly five times more than in 2019.

The report highlights the significant shift in European venture capital investment, with defense tech going from a sector that most European VCs didn't touch to one of the top investment areas. The NATO Innovation Fund, a multi-country €1 billion initiative, has been instrumental in driving this growth, making direct investments and backing funds in the DSR space. One of its portfolio companies, Portugal-based dual-use drone company Tekever, raised a $74 million Series B in November.

Despite the surge, $5.2 billion is only twice as much capital as U.S. defense tech company Anduril is reportedly seeking to raise just for itself. However, it represents an all-time high of 10% of all VC funding in Europe, a 2.5-fold increase over the past two years, according to Dealroom. Yoram Wijngaarde, founder and CEO of Dealroom, noted that "appetite for defense, security, and resilience startup investment is unrecognizable in Europe from just a few years ago."

The growth of DSR investments is not limited to defense tech alone. The sector is broader, encompassing supply chain, quantum technologies, and energy, which are equally critical for Europe's sovereignty. This means that a broader range of startups now fall into the DSR pipeline, especially with rising defense budgets making the idea of selling dual-use technology in Europe less daunting.

The rise of dual-use startups has contributed to the evolution of VC appetite, making it easier for generalist VCs to accommodate the sector within their mandate. As a result, a broader range of European VCs are now making investments adjacent to defense tech, with more than 850 investors active in at least one DSR deal in Europe, according to the report.

Germany has emerged as a hub for DSR funding, claiming Europe's top spot in 2024, followed by the U.K. and France. AI defense tech rising star Helsing, based in Germany, raised some $487 million in a Series C led by General Catalyst last year.

Despite the growth, challenges remain. The Defence Equity Facility (DEF), a €175 million fund launched in January 2024 by the European Commission and the European Investment Fund (EIF), is only about to announce its first investments, as the European Investment Bank (EIF's parent organization) had to update its rules on dual-use technology.

However, a lack of founders isn't one of the challenges, as confirmed by recent defense hackathons across Europe. According to Wijngaarde, "despite recent growth, defense, security, and resilience tech remains a relatively nascent sector, but the data shows an active pipeline of early-stage companies looking to change that."

In conclusion, the surge in defense tech investments in Europe is a significant development, driven by the war in Ukraine and NATO's innovation fund. As the sector continues to grow, it will be interesting to see how European startups and investors adapt to the changing landscape and capitalize on the opportunities presented by this emerging sector.