The European defence technology sector is experiencing a surge in investment, but investors are growing cautious as early signs of overheating emerge. While the market has seen a flood of startups and record venture capital inflows, experts warn that the hype may be outpacing practical innovation. Amid this frenzy, Ukraine stands out as a unique testing ground for defence technologies, offering real-world combat experience that could shape the future of the industry.
Since February 2022, over 230 defence tech startups have launched across Europe, attracting a staggering $1.5 billion in venture investment. However, investors are increasingly concerned that the rapid proliferation of startups is not matched by proportional advancements in quality. The focus on drones, in particular, has raised alarms, as it risks diverting crucial funding from other critical areas, such as air defence.
“Investors have lost enthusiasm for increasing defence spending and are now concentrating on margins and multipliers,” said Ragnar Sass, co-founder of the Darkstar venture fund. “This suggests some industry consolidation is likely.”
As the hype cycle nears its peak, experts caution that the defence technology market may be heading for a correction. The rapid influx of capital and the sheer number of startups entering the space could lead to an unsustainable bubble, particularly if the quality of innovations fails to keep pace with the hype.
Yet, amidst these warnings, Ukraine remains a critical hub for defence technology development. Unlike other regions, Ukraine offers a unique environment where technologies can be tested and refined under real combat conditions. This practical experience is invaluable, allowing companies to develop solutions that are battle-tested and immediately applicable.
“There is no bubble in Ukraine, and more funding is needed,” Sass emphasised. “The companies having the greatest impact on the front lines are based in Ukraine.”
As the European defence technology sector navigates this period of rapid growth and potential overheating, Ukraine’s role as a proving ground for innovation could become even more pivotal. While investors grapple with the challenges of an overheating market, the lessons learned from Ukraine’s front lines may offer a much-needed reality check—and a path forward for sustainable growth.
The coming months will be critical in determining whether the sector can balance hype with practical innovation, ensuring that the defence technologies of tomorrow are not only cutting-edge but also battle-ready.