In case you missed it, Europe is reeling.
On a whirlwind tour of the continent last week, SecDef Pete Hegseth and VP JD Vance openly questioned the transatlantic security agreements that have underpinned European defense since WWII. Meanwhile, Trump is pushing forward with Ukraine peace talks that exclude Ukraine, along with all of Washington’s European allies. Then there was that hour-and-a-half-long call with Putin. The message from Trump’s White House is clear: Europe can no longer count on its friends in Washington for its security.
Splitting up: This raises a critical question: how well can countries on the continent defend themselves without the US? And how capable are they of building the tech needed to counter adversaries, including Russia and China?
Three reports on defense innovation released last week during the Munich Security Conference by McKinsey, the NATO Innovation Fund, and BCG help answer that. The main takeaways are that interest and investment in European defense have surged, but there’s still a long way to go.
- According to McKinsey, investment in European defense tech startups increased by 500%+ between 2021 and 2024 compared to the preceding three years.
- VC investment in European defense and security tech hit $5.2B in 2024, accounting for over 10% of all VC investment on the continent, according to the report by the NATO Innovation Fund and Dealroom.
- The US still boasts more than 2.4X more investment in defense tech than Europe, and bodies like the Defense Innovation Unit have led to a more “mature” ecosystem across the pond.
- Europe lags behind both the US and China in critical technologies like semiconductors, quantum computing, launch capabilities, and hypersonics, and remains heavily reliant on China for key components and critical minerals.
The funding problem: European defense startups may be pulling in more money, but they’re still struggling to get those late-stage, big-bucks investments. Many larger, later-stage companies turn to US and other foreign investors for backing.
- More than 60% of funding for rounds exceeding $200M comes from US investors.
- Each tech area tends to have a single key player that pulls in over 50% of all funding. For example, Helsing ($5.4B valuation) has scooped up the majority of European investment in AI and autonomy.
- Many European defense companies still rely on public funding, whereas private capital drives defense innovation in the US.
Breaking the taboo: Defense is still a dirty word to many investors in Europe. To boost innovation, this needs to change, according to the reports.
- Europe is still stuck in a peacetime mindset, whereas China and the US have changed to a wartime innovation footing.
- There is still a lack of consensus on the continent over whether to increase defense spending, though that is changing quickly with the US pullback.
Playing catch-up: All three reports agree: Europe has some work to do if it really wants to spur defense innovation. To catch up, the bloc should:
- Overhaul procurement processes to help smaller, start-up defense companies get contracts. A body like the DIU would help.
- Decrease reliance on US funding. A larger share of European VC investment should go to defense, especially to late-stage investments.
- Invest more in cheaper, dual-use tech, rather than expensive, exquisite systems.
- Unify its defense strategy—fragmentation among member states has led to stagnating innovation and decreased readiness.
And to address the elephant in the room, defense spending and investment in critical tech (AI, hypersonics, quantum) both need to increase. But the good thing is, most European states seem to agree.