Analysis-Trump anxiety boosts investment in European defense startups By Reuters

By Martin Coulter

LONDON (Reuters) – Donald Trump’s potential return to the White House has helped spur a wave of investment in defense technology startups in Europe, according to eight prominent industry executives and investors.

The Republican presidential candidate threatened to withdraw the US from NATO and said he would not defend allies who did not increase their defense budgets. He is locked in a tight race with Vice President Kamala Harris in the Nov. 5 election.

Trump’s unpredictability, combined with the war in Ukraine and tensions in the Middle East, helped global military spending reach a record $2.4 trillion in 2023, according to the Stockholm International Peace Research Institute (SIPRI).

In June, the $1.1 billion NATO Innovation Fund (NIF) announced partnerships with venture capital firms and defense startups in Europe with the aim of strengthening security on the continent.

Meanwhile, earlier this year the European Union unveiled its first industrial defense strategy, committing more than $1 billion to military innovation.

While the prospect of a Trump presidency wasn’t the only factor behind those initiatives, it was a big driver of subsequent investments by governments and venture capitalists alike in drone, robotics and quantum computing makers, the eight executives said.

Operating out of Munich, Vsquared Ventures is one of Europe’s leading deep-tech investors, having recently raised a €214 million ($237.99 million) fund to invest in space, robotics and other technologies.

“Trump’s threats have made European states think very differently about investing in their own capabilities and awarding contracts, often to startups,” said Herbert Mangesius, founding partner at Vsquared, which partnered with the NATO fund.

“We want to see faster cycles, wider experimentation and better capabilities. Planning in a ministry is so slow and the VC world is a potential answer to that problem,” he added.

Vsquared’s portfolio includes IQM, one of Europe’s leading quantum computing companies, and Isar Aerospace, a rocket manufacturer that has raised more than €400 million in private capital.

The FNI is currently supported by 24 NATO countries, with 8 countries remaining – including Canada and the US – not involved. “My ambition is that eventually all NATO allies join the fund,” said Andrea Traversone, the organization’s managing partner, in an interview with Reuters.

Asked if Trump’s potential return has affected FNI’s activities, he said: “I don’t think it will make a difference to our mission. This matters to anyone interested in our mission to protect the citizens of allied partners.”

STRUCTURAL CHANGE

While Russia’s invasion of Ukraine was the main reason for higher spending, some defense industry investors say Trump’s approach to US allies has rattled leaders in NATO and across Europe. This has led to increased government spending on defense, investment and partnerships with new technology companies.

Ricardo Mendes, CEO of Lisbon-based drone maker Tekever, which has contracts with Britain, Ukraine, the EU and others, said: “A second Trump presidency means different things for US and European defense companies. There is a structural change in the defense. sector here.”

“We have become very dependent on the US,” he added. “I talk to a lot of defense people, and what I hear is that it’s very important for European countries to be more self-sufficient. I don’t necessarily like it, but that’s the way it goes.”

As of 2023, spending on defense and security in Europe has increased by 16% to €552 billion in 2022, according to data collected by SIPRI.

ARX ​​Robotics, a German startup that recently raised a €9 million funding round backed by NIF, builds autonomous robots that can be deployed on the battlefield.

Asked if the potential for a Trump victory in November is influencing defense investment, CEO Stefan Roebel said: “Absolutely. It’s something that’s on everyone’s mind. Europe needs to increase its investment in defense and you are seeing a change. up now.”

RESILIENT

Worldwide, VC funding faced a major downturn in 2023 as investors waited to see how their pandemic projects would fare against a backdrop of rising interest rates and public market volatility. In Europe, total investment in start-ups fell by 44%, from $103 billion to just $57 billion, according to Pitchbook data.

By comparison, investment in domestic defense technology startups remained relatively resilient, falling 21 percent over the same period, from $2.6 billion to about $2 billion.

Germany is cutting red tape for investment in defense companies, Finance Minister Christian Lindner told Reuters in February, as Berlin ramps up military spending.

Mangesius cited Quantum (NASDAQ: ) Systems, a German drone maker that recently signed deals with its home government, as a company that directly benefited from Germany’s Trump comeback plan.

“It was a direct consequence of what Trump said. That made the German state react and put money into it because European countries have to be self-sufficient,” he said. “You can’t outsource your own security to another country.”

Bulent Altan, founding partner at Alpine Space Ventures, also based in Munich, told Reuters that Europe invested in defense technology to be a better partner for the US.

He said: “And if that partnership should have hiccups along the way, you’re not out there empty handed.”

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