The emergence of defense tech funds – and what it means for LPs
Why the most geopolitically urgent sector in Europe may require the most patient capital.
It is no longer a question of whether defense technology is investable. It is a question of how.
With NATO adopting a 5 percent GDP defense spending target and European startups like Helsing and ARX Robotics raising landmark rounds, the defense and dual-use sector has emerged as one of the most talked-about themes among European venture capitalists. Several funds have emerged with a focus on backing companies in Europe or across NATO countries. For Limited Partners, however, intrigue alone is not a strategy.
This sector operates on its own time horizon, procurement model and liquidity path. And while global tensions have catalyzed demand and capital, the investment dynamics remain complex. LPs need more than momentum, they need a fundamentally different mindset.
The spending supercycle has begun
At its June 2025 summit, NATO members agreed to a new defense investment target of 5 percent of GDP. That includes 3.5 percent allocated to core defense such as weapons, personnel and another 1.5 percent directed at broader security infrastructure like logistics networks, cyber resilience and critical infrastructure hardening.
This represents a structural shift, not a temporary surge. If fully implemented, NATO countries would collectively increase spending by hundreds of billions of dollars annually compared to current levels. Countries like Poland are already spending over 4 percent of GDP. Others, like Germany and the Netherlands, are now publicly debating how to close the gap.
Meanwhile, governments are actively encouraging capital formation. The EU has approved a 150 billion euro arms fund. Defense spending rules have been loosened to permit deficit flexibility. This new baseline of state-led demand is setting the foundation for a decade-long supercycle in defense modernization and procurement.
Returns will come, but not on venture’s usual timeline
Despite the capital momentum, defense startups rarely follow the familiar 5-to-7 year exit cadence of traditional tech ventures.
Most European defense and dual-use startups remain relatively young. As of 2024, only a handful are more than five years old. Milrem Robotics, acquired in 2023, took nearly a decade to reach exit. U.S.-based Palantir went public 17 years after founding. These are not exceptions. They are the norm.
Several structural reasons explain this:
Selling to government buyers involves multi-year validation, testing and procurement cycles
Exit options are limited to a handful of primes or IPOs
Valuations in defense M&A are typically modest, often 1 to 2 times revenue
Regulatory scrutiny, export controls, and national security reviews can delay or block deals
For LPs, this translates into a clear takeaway: successful investments are possible, but timelines need to be recalibrated. Defense tech is not incompatible with venture returns. It is simply incompatible with compressed venture pacing.
Dual-Use strategies are expanding exit potential
To navigate long sales cycles and constrained buyer pools, many of the most promising startups in this sector are building dual-use business models.
Companies like Quantum Systems serve both military and commercial clients. ARX Robotics upgrades defense vehicles but also applies its AI capabilities to civil logistics. Helsing’s software is relevant across air, land, and sea while increasing its position as a critical infrastructure play, not just a battlefield asset.
Dual-use strategies bring several advantages. They unlock earlier revenue, create commercial reference customers and expand potential acquirer universes. They also offer investors optionality: if defense procurement is delayed, the commercial channel may still provide traction and liquidity.
However, this approach requires careful execution. Serving two markets simultaneously can dilute focus and stretch resources. The most successful dual-use startups are those that sequence their market entries rather than attempt both at once. For LPs, funds that deeply understand these tradeoffs are best positioned to generate outsized outcomes.
The exit landscape is still narrow, but evolving
European defense startups currently face a constrained exit environment. Most acquisitions are led by large primes like Airbus, Rheinmetall or Thales, groups that historically pay conservative multiples and prioritize industrial fit over market disruption.
IPO options remain limited. While firms like Helsing have raised at valuations exceeding €12 billion, none of the leading European defense unicorns has yet gone public. Some may reach scale and maturity by the late 2020s, but that window remains aspirational for now.
However, the landscape is shifting. U.S.-based venture-backed primes such as Anduril and Shield AI are now acquiring younger companies at higher multiples, offering a different M&A culture. European defense contractors, under pressure to modernize their portfolios, may begin following suit. And as more dual-use companies gain commercial scale, broader private equity and institutional acquirers could enter the picture.
The upshot is this: exit activity is improving, but it remains relatively unproven. Most GPs active in the sector are underwriting long-horizon outcomes, with conservative assumptions about multiples and liquidity timing.
Government involvement is both tailwind and friction
One of the unique features of this market is the critical role played by public-sector actors. Governments are not only customers and regulators, they are also capital providers, innovation sponsors and strategic gatekeepers.
On the positive side:
The European Defence Fund has allocated over €1 billion to support early-stage R&D
National co-investment vehicles like Definvest in France or the NATO Innovation Fund are underwriting venture rounds
Accelerators such as DIANA and DASA are providing non-dilutive funding, access to test environments, and pilot contracts
These programs significantly reduce early-stage risk, particularly in the so-called "valley of death" between prototyping and scaled procurement. They also help validate startups in the eyes of later-stage investors and acquirers.
Yet governments can also slow things down. National security reviews delay exits. Procurement processes remain risk-averse and complex. ESG frameworks often exclude defense from sustainable investment mandates, limiting LP capital flows. Some investors still maintain policies against “lethal” technologies, which further narrows the fundraising universe for GPs.
The lesson for LPs is simple: look for funds that are politically fluent and structurally aligned with how governments operate. Without this edge, even strong technologies may stall.
What LPs should look for in defense focused venture funds
Given the sector’s specific dynamics, LPs should evaluate defense and dual-use managers using a different set of criteria. Here is a practical checklist:
What to look for:
15-year fund structures or flexible return mechanisms
Dual-use focus with commercial validation pathways
Direct relationships with government buyers and regulators
Conservative exit modeling and limited reliance on high-multiple outcomes
Access to public funding programs, accelerators and co-investment vehicles
What to avoid:
Overpromising liquidity in underdeveloped exit markets
Lack of operational or security clearance experience in the GP team
Limited exposure to regulatory and procurement processes
Excessive dependence on U.S. primes for exits without transatlantic alignment
LPs who apply these filters will be better positioned to distinguish between defense-curious funds and those with true domain expertise.
The opportunity ahead requires patience and precision
The trajectory for defense tech in Europe is clearly upward. Defense budgets are rising. New entrants are scaling. Public-private capital structures are maturing and sovereign capability is now an economic and strategic priority.
But even in this moment of momentum, realism is essential. Liquidity timelines remain extended. Exit routes are evolving but narrow. And the unique features of the sector like regulation, dual-use complexity, political friction require experience and discipline.
For LPs, this means rethinking how venture-style returns are achieved. It means aligning with managers who are not just chasing headlines but building long-term infrastructure. And it means recognizing that the goal is not to exit quickly, but to exit well.
Defense and dual-use tech is not a sprint. It is a structural reconfiguration of European industry and sovereignty. The capital that wins here will be the capital that is willing to wait.
If you’re a fund manager building a thesis around space, defense, or dual-use technologies or an LP actively exploring allocations into this emerging frontier, we’d love to connect.