The Critical Gap (and Opportunity) in European Resilience and DefenceTech 🏰

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Jack Wang & Uwe Horstmann
September 26, 2023

Welcome 🇪🇺

Welcome to the first issue of the European Resilience Tech Newsletter! Uwe and I (more about us at the end) initiated this newsletter to accelerate the building of the European DefenceTech ecosystem to fill a critical gap in European Resilience. We will keep the content bite-sized, frequent and free. We also openly invite guest content creators to contribute (see below for details on how to join). Our goal is to build an ecosystem of founders, operators, investors, and industry experts who are dedicated to enhancing European resilience through technology.

The Critical Gap (and Opportunity) in European Resilience and DefenceTech 🏰 

When Project A committed to backing Quantum Systems in September 2022, the Russia-Ukraine invasion - the biggest attack on a European country since WW2 - had been raging on for just over 6 months. In our thesis, we explained that while we didn't know how much longer the war in Ukraine would continue, we believed that Europe would once again undergo a fundamental shift in geopolitical nature, and that European resilience to adversaries would be repeatedly tested over the next decades.

Fast forward to the present, and as a result of the unfortunate continuation of military action in Ukraine, it has become clear that there has been a significant shift in military technology platforms. Over the past decade, the focus has shifted away from expensive, heavily manned, and slow-to-respond platforms such as missiles, towards cheap, attributable, autonomous, and fast-to-respond platforms like drones. Christian Brose aptly summarised this shift in his book "Killchain (2020)," highlighting how many established Western military forces, including Europe, have invested excessively in outdated platforms and not enough in future-oriented ones. Consequently, critical gaps in Europe's defensive capabilities against current and future military aggressors have emerged.

Why is the European defence industry not addressing these gaps? This can be attributed to the typical challenges of organisational behaviour that affect all industry incumbents. Additionally, selling Eurofighter jets worth $120m+ may be seen as a more appealing story for shareholders compared to cardboard drones priced at $2,000 each (more details in the news section below) during company earnings calls. Below, you will find a selection of the most prominent European defence companies and their R&D expenditures as reported in their 2022 annual reports.

  1. BAE Systems (UK) - £287m

  2. Thales Group (France) - €1.1bn

  3. SAAB Group (Sweden) - €640m equiv.

  4. Rheinmetall (Germany) - €351m

  5. Leonardo (Italy) - €1.8bn

These might seem like big numbers - but to put things into perspective, VCs invested over €24bn in European Fintech in 2022 alone.

US start-up founders and US VC investors have identified this exact critical gap in the US DefenceTech market which resulted in a wave of unicorns such as Anduril, Shield AI, Rebellion, Skydio and Epirus backed by the likes of a16z, General Catalyst, Founders Fund, Lux Capital, 8VC and InQTel emerge within the last 5 years.

Source: US and European Government Budgets 2022

How far behind is European DefenceTech compared to the US? It is well-known that the US spends more on defence than any other country. Specifically, the national US military budget for 2022 is just over $800 billion USD, while Europe's budget is just under $500 billion USD. In the same time frame, US VCs invested over $30 billion USD into US DefenceTech start-ups and scale-ups. If we apply the military budget ratio between the US and Europe to VC funding, Europe should have invested approximately $18 billion USD during the same period to keep up with the same relative pace of innovation as the US. However, Europe only invested slightly over $2 billion USD, resulting in a gap of around $16 billion USD or €15 billion Euros.

Source: Pitchbook (2022)

Of course capital alone is not enough to build the European DefenceTech ecosystem. During this year’s DSEI exhibition in London just a few weeks ago, there were one single message echoed by almost every government defence official on stage - “we (the government) cannot hire tech talent fast enough to meet the technology sophistication required to defend Europe”. This is due to a mixture of employee values (e.g. Google employees protest to work with the Petagon) and government financial incentives not meeting candidate expectations. Our hope is that with increased venture capital into the ecosystem, companies such as Helsing raising at high valuations and the increased willingness of governments to work with such SMEs to fill in gaps of their own talent pool, there can be an attractive financial incentive for talented people wanting to build in DefenceTech and to improve European resilience.

If you are a founder thinking about or already building in this space, we would love to learn more. Please reach out!

News That Caught Our Attention 👀

  • Helsing.ai became the first European DefenceTech unicorn 🦄 in a €200m round from General Catalyst and announces partnership with Saab to work on the Eurofighter upgrade - link here.

  • Aussie company SYPAQ 🇦🇺 helped deploy a drone made out of cardboard in Ukraine that completely threw platform unit economics out the window - link here.

    Source: SYPAQ

  • Elon Musk, Mark Zuckerberg and Bill Gates to advice U.S. Senate on AI regulation, but in a surprisingly closed door session - link here.

  • Anduril acquires Drone Fighter maker Blue Force Technologies demonstrating their willingness for inorganic growth / M&A strategy - link here.

and lastly and proudly…

  • ARX Landsystems raised a €1.5m pre-seed round led by us at Project A Ventures to bring low cost modular robotics to defence and humanity relief - link here.

    Source: Marc A. Wietfeld (CEO and co-founder) ARX Landsystems

Featured Jobs 👷

Every week we feature a list interesting roles in European DefenceTech start-ups and scale-ups for readers seeking their next challenge in their careers.

If you are a founder and would like to promote your open roles, please get in touch with us!

Passionate and want to contribute? 👩🏻‍💻

The European Resilience Tech Newsletter is always looking for regular and guest authors, writers, reporters, content creators etc. If you like what you read, you are passionate about improving European resilience regardless of your background and want to contribute, just hit Subscribe and reach out to us!

European Resilience Tech Newsletter Team

Uwe Horstmann co-founded Project A Ventures in 2012 as General Partner and has built Project A to be a leading European early stage investor with over $1bn USD under management and having backed 100+ founders. In addition to Project A, Uwe serves as Reserve Officer in the German armed forces and advises the German Ministry of Defence in digital transformation issues.

Jack Wang is a software engineer turned product driven tech investor and joined Project A in 2021 to lead the firm’s deep tech investing, which have grown to include DefenceTech. Prior to joining Project A, Jack worked in a variety of organisations such as Amazon and Macquarie Group across Australia, US and UK / Europe. Jack holds a MBA from London Business School and Bachelors of Engineering (Bioinformatics, 1st) from UNSW, Australia.

Project A Ventures is one of the leading early-stage tech investors in Europe with offices in Berlin and London. In addition to 1 billion USD assets under management, Project A supports its 100+ portfolio companies with a platform team over 140 functional experts in key areas such as software and product development, business intelligence, brand, design, marketing, sales and recruiting. Project A have backed founders of Trade Republic, WorldRemit, Sennder, KRY, Spryker, Catawiki, Quantum Systems, Unmind and Voi.