Sifted - Defence tech is (sort of) overhyped

Good morning there,

During a recent coffee meeting, a Berlin-based VC told me something that I hadn’t yet heard from an investor. The gist was: I think you’re giving too much attention to defence tech; the space isn’t that busy. 

It’s an interesting comment considering plenty of investors I speak with talk about how interested they are in defence. Many of them write to me every time I have a new story out on the sector, which generally seems to be getting hotter. But it brings up an interesting question: is defence tech overhyped? I dig into that question below.

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• The Datadog European founders factory
• Sifted Scout: 20 retail and e-commerce startups to watch
• Future of work and productivity startups: early-stage market map

— Anne Sraders, senior reporter

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Defence tech is (sort of) overhyped

I’ve been spending a lot more time writing and talking about defence tech recently — so too, it seems, has a growing cohort of the VC world. In the last two years, several VCs have declared an interest in investing in the space to beef up national defences in Europe as the war in Ukraine continues. Just take a look at this list of 70 VCs open to investing in defence tech deals in Europe, compiled by dual-use investor Uwe Horstmann of Berlin-based VC Project A earlier this year. 

But some investors argue there’s more talk than action. And what started as an overdue reaction to Europe’s lacking defence capabilities is now, it seems, a sector that many investors feel they need to have a say on, but generally don’t seem to be spending a tonne of money on. 

The 264 defence tech and dual-use deals last year was down on the 308 in 2022, according to Dealroom data. Funding for the sector remained fairly resilient: with $2.4bn invested last year compared to $2.3bn in 2022 — though both years were below the $3.7bn invested in 2021. The data includes companies in areas like robotics, cybersecurity, space, drones, various quantum companies, dual use and defence.)  So far in 2024, funding for defence tech and dual use is dwarfed by other sectors like biotech and GenAI, according to Sifted data.

Big rounds like German AI defence startup Helsing’s €450m fundraise last week, meanwhile, will throw the data out of whack this year. “In the States, we call it the 'Anduril effect'; over here, you might as well call it the 'Helsing effect,’” says Nicholas Nelson, partner at UK-based defence fund MD One Ventures, referencing the well-funded US-based defence tech Anduril.

“There are many people ‘raising funds’ or saying they are, but in general don’t have or are not deploying capital,” Nelson tells me. “Similarly, there are many generalists who say they want to [do] defence or dual use, but aren’t willing or able to actually pull the trigger on making an investment. This is an issue we’ve seen for a number of founders, including from our portfolio,” he says. “If they're doing it out of [special purpose vehicles, a separate pool of money raised by a group of investors], that's more than okay… but I think there's a certain lack of transparency about that.” 

Even founders who’ve raised more than a hundred million euros think it’s gotten a bit carried away. “There's definitely a hype… they all have this FOMO now,” Florian Seibel, founder of AI drone startup Quantum Systems and weapons startup Stark, said recently in an interview with Sifted. 

He believes that some big US VCs like General Catalyst or Andreessen Horowitz (early backers of Anduril) had a head start. “Now I have the feeling that all these other companies, all these other VCs, are kind of like, 'Hey, me, too.' And they don't have the experience,” he told me. “Talking to some of these VCs, I could tell them anything, and they would believe me. That is shocking to me.”

I’ve also heard criticism in the investor community that VCs with no prior experience working with defence or governments are jumping to invest in the space. 

That said, there are investors dedicated to pumping euros into the space, like the €1bn NATO Innovation Fund, which recently announced a smattering of startups and VC funds it’s put money into. There may be more defence funds in the future: David Dana, head of VC investments at the European Investment Fund, recently told me it’s already considering investing in about 10 defence tech funds, and expects to see double that amount pitched by the end of this year. 

Others on the ground don’t think it’s overhyped: “From the perspective in Ukraine, this is not a matter of FOMO whatsoever. This is actually a matter of very real need, very real solutions and very real technology that can both make a difference for Ukraine's defence but... then have potential dual use,” says Deborah Fairlamb, founding partner of Green Flag Ventures, a new defence and dual-use fund focusing on Ukrainian startups, which is currently raising an inaugural $20m fund. 

For defence founders who do find themselves in conversations with VCs, Nelson suggests they ask prospective backers a few questions to suss out if they’re actually writing cheques or just scouting. He recommends they ask whether the VC is investing out of an SPV or if they have a fund; which defence or dual-use companies they’ve invested in; and how they add value to their investments (i.e. having a background in the military). 

Readers, what do you think? Is defence tech getting more air time than it should be? Do you think it’s overhyped, or are you seeing more term sheets being signed? Send me a note.

— Anne Sraders, senior reporter

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