Investors warn of a bubble in the European defense sector

The European defense technology (DefTech) market has been caught up in a "wave of excitement" with hundreds of startups and billions of venture capital dollars, but investors are already seeing signs of overheating. The only place where defense technologies really work and are created from practical experience is Ukraine. This was reported by Financial Times.

Since February 2022, more than 230 DefTech startups have emerged in Europe, and venture capital investments have reached a record $1.5 billion, but experts are already talking about a "hype cycle" that is approaching its peak.

Nicholas Nelson, general partner of the Archangel venture fund, has received about 1,200 proposals from European defense startups this year.

"The quality is improving, but the quantity is growing much faster," Nelson says. This year alone, 52 new defense startups were founded in Europe. The largest concentration is in the field of drones – according to various estimates, more than 500 companies operate here.

Investors warn that the focus on drones is diverting funding from other critical areas. In particular, there is a lack of investment in air defense.

"A lot of people are trying to create drone startups because they've heard that it's important for Ukraine," Nelson says. However, most do not realize that many technologies have been around for a long time.

Lorenz Meyer, CEO of software startup Auterion, talks about the change in scale: while an order for 100 drones was previously considered large, the company now has a contract with the US Department of Defense to supply 33,000 "strike kits" of drones to Ukraine.

"Investors have stopped getting excited about increasing defense funding and are focusing on margins and multiples, so we expect some consolidation in the industry," adds Mayer .

Ragnar Sass, an Estonian entrepreneur and founder of the venture capital firm Darkstar, emphasizes that the best defense technology teams are located here, where innovation cycles have become incredibly fast.

"There is no bubble in Ukraine, and more funding is needed," Sass says. According to him, the companies that have the most influence in the fighting are in Ukraine, but they "don't speak, they don't have PR teams.".

• According to data from Dealroom, investments in European miltech startups have reached a record $1.5 billion, almost four times more than before Russia's full-scale invasion of Ukraine.