How Europe can build a self-reliant defence tech ecosystem

Sponsored by Sponsored by June 16, 2026 Lara Bryant 6 min read Europe has a lot to shout about when it comes to defence tech, with a growing cohort of startups looking to disrupt the large, incumbent primes. Defence tech investment in Europe hit €2.5bn in 2025, more than double the €1.

2bn raised in 2024. Activity is being driven by multiple factors: Russia’s war in Ukraine has dragged into its fourth year, while fresh conflicts have flared in the Middle East; geopolitical instability is the new norm, and warfare is evolving fast. Early-stage dealmaking is gathering pace; according to Sifted data, pre-Series B defence startups have raised €556m this year already, compared to the €635m startups at the same stage raised in the whole of 2025.

However, experts think a number of things are stalling many of those companies from scaling, including government money going to the wrong places and a slower flow of growth and late-stage capital into the sector. To generate a successful innovation ecosystem, Paolo Surico, professor of economics at London Business School, thinks Europe needs more of three things: “the government to fund areas of public interest; research institutes to push the frontier of knowledge; and the private sector to turn that knowledge into new products.” If it gets that, “Europe will have the opportunity to catalyse this defence spending, not just to fight war and for national security, but also to build the ecosystem," he adds.

According to Surico, the most effective way to use government defence budgets is to spend on domestic R&D rather than acquiring equipment from foreign companies. “One problem with Europe is not how much it spends on defence but the budget composition,” he says. “Too much is skewed toward procurement and much less on R&D compared to the US."

According to research platform The Defence Finance Monitor, around 80% of European defence budgets is currently spent on procurement, predominantly in the US, with only 20% focused on domestic R&D. The platform also shows that collaborative procurement, where multiple organisations, departments or agencies pool resources to acquire defence assets, also remains at around 18% of spending, falling short of the 35% collaborative benchmark established by the European Defence Agency (EDA). Surico thinks when defence spending is focused on procurement and existing weapons, the effects on economic growth tend to be small and concentrated in the short-term.

Focusing on homegrown defence R&D and innovation can increase a nation's long-term productivity by creating new technologies, processes and intellectual property, adds Chris Coghlan, a member of Parliament in the UK and former army reservist. “Defence spending should be tilted in favour of R&D, because that’s what's going to drive economic growth,” he says. “Although the defence payoff may not be so immediate as buying kit off the shelf, it will dramatically improve our long-term defence capability."

In Europe, bigger government contracts tend to go to the existing, large defence contractors. “There's not a lot of evidence that innovation comes out of these incumbent companies,” Coghlan says. “They’re incentivised to take existing technology and make it better.”

“These platforms and services might be outdated in a decade's time,” adds Ram Puvinathan, policy consultant and founder of The Business of Defence. “Investing in innovation puts new technologies right into the hands of frontline users much quicker.” The European defence sector is also far more fragmented than in the US, says Puvinathan.

“The US simply operates at a much bigger scale,” he says. “There are a lot more opportunities and institutions there that have been built to quickly test and procure innovation. There's a willingness to give large billion dollar contracts to startups in a way that we're not really seeing yet in Europe.”

In Europe, some nations demand sovereignty, preferring technologies built within their own borders. However, the continent also needs to make sure it doesn't “have too much regulation that prevents us from choosing the best technology from our allies," Puvinathan adds. In 2024, the European Union updated its fiscal rules, granting member states leeway to increase their defence budgets without exceeding national deficit funding caps.

But Surico warns that this exemption has a flaw. Because this rule excuses military spending, governments are opting to buy off-the-shelf equipment from the US instead of within Europe. Surico advocates for a targeted innovation exemption by suggesting only R&D investments in homegrown defence startups are exempt from deficit limits.

If fiscal rules cannot be easily changed, Lisa Quest, head of UK&I at management consultant firm Oliver Wyman, argues the solution is to leverage alternative financing. “We need to catalyse private sector finance alongside government spending to create investable opportunities,” she says. “There's a huge opportunity here for pension funds to i