Defence contractors face stiff competition from VC-swelled European startups, but their corporate venture investments could help them stay in front.
Europe’s large defence contractors must partner with startups or risk losing business to them as funding for the sector surges, says Marc Lange, a defence tech consultant and investor with 2 Ventures.
“Do they want to stay [as] big primes? It’s my firm opinion that they won’t be able to beat startups at their game. If they can’t beat startups at their game, they better increase CVC pipelines as crucial precursors to acquisitions. There’s a reason why those exist.”
VC funding for European defence tech startups had already reached an all-time high in 2024, according to a February report from the Nato Innovation Fund and Dealroom. One-and-a-half billion dollars of VC funding went into the sector in the first two months of 2025, according to Pitchbook. And in the weeks since the Trump administration’s hostility to Ukraine accelerated a European rearmament drive, governments such as the UK’s have encouraged private investment to drive innovation.
Lange thinks an ecosystem of well-funded startups threatens defence contractors, especially as European governments change their procurement policies to encourage more disruptive solutions. In March, the EU Commission published a white paper on defence readiness, with recommendations on “transforming defence through disruptive innovation” and “simplifying and harmonising” arms procurement.
“[With] Ukraine using very basic naval drone systems to sink large Russian ships, who says that systems need to be big and take 10 years to develop?” Lange says.
“So we’re going to see a lot more procurement of proliferated systems, we’re going to see a lot more procurement of systems from smaller manufacturers, and we’re going to see those scale at speed.”
Lange says that defence contractors have been slow to innovate in recent years because competition for contracts was not very strong. Now, though, the pace of development driven by smaller defence tech companies is changing that, making the need to keep on top of startup developments more crucial.
He cites the Estonian startup Frankenburg Technologies as an example of how startups are moving into business areas once thought to be the preserve of the contractors. Frankenburg, founded last year, is building short-range rockets designed to target drones.
“These guys are making missiles, think about that,” says Lange. “That was something that maybe a year or two ago, everybody would have said, ‘Never. Not a snowball’s chance in hell that a startup or VC would ever touch that.’”
“If I were someone who had a portfolio of dual-use technologies or systems, I would not want to miss out on such opportunities. I would want to do the thing that CVC and corporate, large-scale external innovation programmes and acceleration programmes have done so well over the last decade. Which is, let the startups do the innovation and let them run free, and stick to what [contractors are] good at, which is scale.”
What the contractors can do for European defence tech startups
Tichomir Jenkut, at Czech VC firm Presto Ventures, is one of the investors seizing the opportunity to back new defence startups. His firm pivoted to investing in defence tech after Russia’s full-scale invasion of Ukraine in 2022. He has made regular visits to Ukraine since then to keep up with innovations coming from the front line.
“The biggest benefit [of startups being present in Ukraine] is incomparable and impossible to copy at the moment. It’s that [they make] battle-proven technology which you don’t get anywhere else,” he says.
But his strategy is not to dethrone defence contractors. Instead, he supports cooperation through corporate venturing, arguing that the expertise of large companies is invaluable for making venture investment in defence tech a success. In 2024, Presto Ventures partnered with the privately-owned Czech defence company Czechoslovak Group (formerly Excalibur). The two companies launched a €150m ($163m) deep tech and defence venture fund called Presto Tech Horizons in June.
“[Partnering with a defence prime] would help with two things,” he says. “Namely, to assess the startup and the technology, and, second, to help the founders once we invest with their network and connections. It’s very different for defence than it is for anything else in the world.”
The Presto Tech Horizons fund has invested in two Ukrainian defence startups so far. Vidar Systems makes acoustic weapon-locating technology that can detect artillery, and Bavovna makes AI-driven navigation systems for unmanned vehicles.
What the startups can do for Europe
Lange says the supply gaps that European defence tech startups could most effectively target are drones and AI.
“Nato is not ready for any drone war,” he says “That is not one supply gap, that’s closer to 30 supply gaps, because we’re not just talking UAVs [unmanned aerial vehicles]. We’re talking ground vehicles, ships, we’re talking submarines like Anduril’s Ghost Shark. Unmanned systems are, bit by bit, upending every systems category leader in terms of price-performance.”
And Ukrainian forces have become adept at using AI in surveillance and signals intelligence, “sifting through heaps of data in a constant stream.”
“They’re making sense of that in a way no human can. [European Nato members] are not ready. And the Russians are doing it too.”
Under European procurement regimes that are more open to disruptive technologies, these gaps could come to be filled by the cheaper, innovative products that are receiving the VC cash flowing into the sector.
The idea of a new, venture-backed startup rivalling large defence companies may have once sounded farfetched. But Lange points to how Anduril, a private US defence company, has beaten the largest primes to some Pentagon contracts.
“I believe that if I were leading a large defence prime [in Europe] right now, I would be looking with worry on Boeing, Lockheed Martin and Northrop Grumman [in the US], who are starting to lose deals to startup companies, and I would want to have a seat at the table of the most interesting startup rounds.” he says.
“I don’t think that it makes sense from a de-risking perspective to not participate.”
