Defense tech has officially become Europe’s fastest-growing major VC segments, and there is data to back that up. European defense-tech startups have raised a record $7.4 billion in venture capital funding in 2026 so far. Much of this growth has been driven by mega-rounds, which account for more than 85% of European defense-tech funding this year. Meanwhile, US investors now account for 47% of European defense-tech funding, compared with just 17% in 2020.
Yet beneath the headline funding figures, investors are increasingly concerned about where that money is going, who is providing it, and whether European companies can scale without relying on US capital.
These questions were at the center of the panel “How VC Can Participate in Building European Defense Resilience,” at Engaged Investments Conference, moderated by Sandra Golbreich, Partner at BSV Ventures, with Erin Hallock, Partner at the NATO Innovation Fund (NIF); Petr Šíma of DEPO Ventures; and Cristobal Alonso, General Partner at Wolver Ventures.
The discussion explored whether European defense tech is experiencing an investment bubble, the obstacles preventing startups from reaching commercial maturity, and the role investors can play beyond providing capital.
Is Europe's defense tech boom becoming a bubble?
The panel opened with a question increasingly debated among European investors: Are rising defense tech valuations justified by demand, or is the market heading towards a correction?
For Petr Šíma, the concentration of capital is a more immediate concern than valuations themselves. He pointed to the disproportionate share of investment being captured by a small number of companies. According to his estimate, three or four major players account for approximately 80–90% of the capital flowing into the sector. "This is kind of a bubble, yes, or a missed opportunity," he added.
Erin Hallock offered a comparison with the climate technology investment boom between 2020 and 2022, when significant policy incentives, including the US Inflation Reduction Act, helped stimulate investment activity.
However, she argued that the current defense investment cycle has different underlying drivers, particularly NATO allies' increased defence spending commitments and the growing number of global conflicts. Hallock cited figures suggesting that European defense, security, and resilience (DSR) investment reached nearly €9 billion in 2025, with 2026 potentially exceeding twice that amount.
But the distribution of capital remains problematic. "The number of mega-rounds is ever-increasing, early stage is still flat, and there's almost no growth capital," Hallock said. She also highlighted Europe's reliance on international investors at later stages. "Any deal that I see where the company is raising more than $100 million has US money. And that's the gap."
European sovereignty versus US investment
The growing role of US capital raised another question: Can Europe build strategically independent defense companies while relying on US investors to finance their growth?
Golbreich described a conversation with a French defense startup that had reportedly been warned that accepting investment from an American firm could jeopardise its ability to secure contracts with French defense authorities.
Hallock questioned whether national ownership should be the primary measure of technological sovereignty. "I'm an economist by training, and this idea of national sovereignty bothers me because it's completely counter to everything that I know," she said.
In her view, the more important considerations concern who controls a company, where its technology originates, and whether its operations introduce strategic vulnerabilities. She identified several areas investors should examine: potentially adversarial shareholders, employee screening, supply-chain security, and the geographic distribution of customers and suppliers.
Rather than building companies dependent on domestic procurement, Hallock argued for businesses capable of operating across allied markets. The objective, she explained, should be to build a company "capable of scaling and capable of delivering venture-scale returns [...] rather than a national champion."
Cristobal Alonso agreed that Europe's ambitions must be supported by industrial capacity, pointing to the limited availability of European-made components. "I don't think today we can build most of the defense hardware companies with EU components. They're just not there, there's no scale," he said.
He recalled examples of companies attempting to source drone components from European suppliers. While individual manufacturers could provide small quantities, obtaining thousands of components at a predictable price and delivery date was considerably more difficult.
"They could buy 11 from Croatia, 20 from the Czech Republic, or 3,000 from China," Alonso explained. For him, the problem extends beyond manufacturing to Europe's fragmented defense market.
"Are we making European champions or national champions? Because national champions get us nowhere."
Should defense investors prioritise financial returns or strategic interests?
As the discussion continued, Golbreich asked whether defense-focused investors should take responsibility for strengthening European sovereignty, particularly when governments are encouraging funds to support technologies aligned with national security priorities.
Šíma maintained that venture capital's fundamental purpose should remain unchanged. "For me, it's investing like anywhere else," he said. Šíma argued that governments should finance technologies considered strategically necessary but unsuitable for venture capital.
"There are thousands and thousands of defense companies around. Only a few of them are VC-investable."
Alonso identified a different responsibility for investors: helping founders understand the commercial and regulatory environment in which defense companies operate.
There are examples of defense founders that have substantial technical or military experience but limited exposure to venture financing, international procurement, or the implications of accepting particular shareholders. "I think we have an obligation to make founders understand the playground," Alonso said.
That includes advising startups on ownership structures, supply chains, potential customers, and decisions that could restrict future investment or sales opportunities.
"We have an obligation to at least guide them into what not to do, to at least be more investable going forward or be more commercial," Alonso added.
The missing investments: Batteries, silicon, and critical components
Despite the record investment figures, Hallock argued that European investors need to reconsider which defense technologies receive funding. She criticised the tendency to concentrate capital in highly visible categories once they begin attracting substantial valuations.
"We can all pile into the really sexy things that once they become popular and the valuations start being really aggressive," she said, referring to areas such as autonomous and uncrewed systems.
Instead, Hallock called for greater investment in the technologies that support those systems. "What we do need is more silicon, more battery technologies, some of the components that enable and underlie all of this."
She also challenged the risk appetite of European venture capital firms, recalling a conversation in which another investor compared European VCs to bond traders. "The reality is we have capital at risk, and only a couple of our investments will return the fund. But we've got to take some of these big risks," she said.
Hallock stressed that additional private investment would not be sufficient without government measures encouraging entrepreneurship and reinvestment. She cited tax incentives for founders as one area where public policy could help, arguing that successful entrepreneurs frequently reinvest their earnings into new companies rather than simply extracting their wealth from the ecosystem.
Battlefield validation is not the same as commercial success
Another major theme was how investors should evaluate early-stage defense startups, particularly those testing their technologies in Ukraine.
Alonso, whose investment experience in Ukraine dates back to 2016, described battlefield testing as an important indicator of technical viability and founder commitment. However, he warned against treating deployment in Ukraine as sufficient evidence of a commercially viable business.
"Going to Ukraine, getting feedback from Ukraine is not being bulletproof, but it's something that you need to do."
For Alonso, investors should assess whether a startup has demonstrated genuine demand, how quickly its technology can be improved, and how much capital will be needed before it generates revenue. He also emphasised the importance of adapting investment timelines to the speed of technological development. Rather than assuming a startup can raise a single round and develop its product over several years, investors may need to finance shorter development cycles.
Šíma took a similarly demanding position on battlefield validation. "A defense startup without being present in Ukraine right now is not a defense startup. It's just a plain idea," he argued.
However, he acknowledged that operating in Ukraine does not guarantee commercial success. For him, the founder's ability to sell remains crucial.
"We need to see the capacity of the founder to sell the product. And selling to defense is even more difficult than selling to a big company."
Hallock expanded on the distinction between technological and commercial validation. "Battlefield validation removes one risk, but it doesn't necessarily solve the commercial risk," she said. A technology may function effectively in combat conditions without meeting the procurement requirements of NATO member states.
"Then the big question is: will NATO countries buy?"
Hallock explained that NIF can help portfolio companies navigate this challenge through its access to defense ministries and information about military requirements.
Fragmented procurement remains a major obstacle
Looking ahead, Šíma identified fragmentation as one of the most significant barriers to developing a competitive European defense technology market.
He argued that locally focused venture capital funds and country-by-country defense procurement reinforce the problem, limiting startups' opportunities to expand beyond their domestic markets. His proposed solution involves greater cooperation between early-stage investors across Europe, including sharing investment opportunities and helping portfolio companies access defense ministries in different countries.
"We need to cooperate as early-stage investors."
Alonso outlined three practical priorities for investors:
- educating later-stage funds about defense technology,
- improving startups' access to established defense contractors, and
- encouraging collaboration between portfolio companies.
He estimated that a substantial proportion of startups would secure their first contracts through established defense companies rather than directly from governments. Alonso also described how investors could connect companies developing complementary technologies, such as drones, optical systems, and batteries, allowing them to test integrated products and reach customers more efficiently.
As one example, Alonso mentioned two portfolio teams preparing to travel together to Ukraine, using an existing company's relationships and logistical arrangements to accelerate another startup's access to the market. For him, these partnerships could help companies progress towards commercial maturity before attracting larger investment rounds.
Hallock agreed that stronger connections between funds and their portfolio companies could help build a more functional defense innovation ecosystem.
"We need to do that more, and I think that's how we build a viable defense and resilience ecosystem, and VC can play a part in that."
What would success look like for European defense VC?
As the discussion moved towards its conclusion, the investors offered different definitions of success for Europe's defense technology sector.
Alonso placed greater emphasis on financial returns and the development of a functioning exit market. He estimated that the number of defense-related exits could increase significantly compared to couple of years ago. He also suggested that the large funding rounds attracting criticism could ultimately benefit the wider ecosystem if well-capitalised defense companies use that money to acquire smaller startups.
"If those mega-rounds are creating acquisitions or investments in early stage, then in fact, it's a different way to recycle the money."
Hallock cautioned against relying exclusively on investment volumes or the number of unicorns as measures of progress. "We can't just measure it with dollars or the size of our ecosystem versus the size of the ecosystem in the US," she said. For her, the more meaningful outcome would be identifying capability gaps, developing technologies that address them, and building companies capable of deploying those solutions at scale.
Member discussion