The war in Ukraine forced European countries to increase investment in defense technologies

European technology companies working with the defense industry, long an investment taboo for many venture firms, are receiving record amounts of funding after Russia’s full-scale invasion of Ukraine, reports Bloomberg.

Last year, the governments of European countries increased spending on military defense, promising to allocate billions of euros to modernize and build up their armed forces. Private investment in defense-related technology companies has grown in parallel. According to startup data provider Pitchbook, investment in the aerospace and defense industry last year reached an all-time high of nearly 780 million euros.

In peacetime Europe, defense investment can be controversial. In late 2021, an investment firm run by Spotify founder Daniel Ek invested 102.5 million euros ($109 million) in Helsing.AI, an artificial intelligence company that provides data analytics on the battlefield. News of the investment sparked calls to boycott Spotify and complaints that the music streaming service supports the military.

Such steps are now much more common. Technologies that can have both military and commercial applications — usually classified as “dual use” — have attracted renewed investor interest since Russia’s invasion of Ukraine.

In October, Project A, Sanno Capital and billionaire Peter Thiel invested $17.5 million in Quantum-Systems GmbH, a drone company that develops docking stations that allow unmanned aerial vehicles to be charged and deployed. The devices are intended for use by the military, border guards, mining companies and for surveillance in cities.

In 2022, Quantum-Systems delivered 42 drones through the German armed forces to support the Ukrainian army.

Partly because of the war, European defense startups have avoided a broader drop in technology investment. With interest rates and inflation rising in early 2022, the source of venture capital money that flowed in during the pandemic has dried up for many startups. Aerospace and defense technology were notable exceptions, and these sectors continued to provide investment despite the downturn.

According to Gundbert Scherf, co-founder of Helsing.AI, this is likely to continue as more investors and engineers in Europe rethink their priorities in the face of Russian aggression.

“Ukraine has probably shown that democracies need to be technology makers and not technology takers,” said Scherf, who was previously a senior adviser to the German Defense Ministry. “People are increasingly interested in contributing to a larger mission.”

European countries increased their defense budgets after the start of the war. Germany, which has for decades curbed spending on its armed forces, announced new commitments on defense funding and earmarked 10 billion euros ($10.6 billion) for the purchase of 35 F-35A Lightning II fighter jets. In April, shortly after the invasion, NATO launched the Defense Innovation Accelerator program, aimed at investing €1 billion in early-stage startups and other deep technology funds that align with the bloc’s strategic goals.

Last year, the EU Defense Fund also allocated 1.2 billion euros to 61 defense research and development projects.

Daniel Metzler, CEO of Isar Aerospace, which develops rockets for satellites that can also be used for defense purposes, says the war in Europe has changed the way some employees view the sector.

“They want to help maintain a peaceful existence on our planet,” Metzler said, “They shy less away, in my opinion, from working on dual-use technologies. Perhaps some three or four years ago, they would’ve never considered working in a field like that.”

The German rocket-maker has also seen an increase in investor interest in dual-use technologies since the start of the war.

“Just two years ago everyone said, No, we won’t touch any defense-related technology because some of their limited partners and investors said they weren’t allowed to do military technology,” Metzler said. “That is really changing from both the investor and the LP side.”