Germany is putting its money where its mouth is — literally. Earlier this week, Katherina Reiche, the country’s minister for economic affairs, announced that the government would be starting a new fund specifically to invest in growth rounds for privately-backed defence tech startups that the German government has already engaged for work.
There is no total financial figure attached to the plan, nor many details yet on how it will operate. But it is nonetheless a big opening move, bringing the promise of large, later-stage funding rounds for defence tech startups. It comes at a time when growth-round funding remains thin-yet-needed on the ground in Europe: the region is focusing hard on rearmament and modernising their militaries and national security as war wages on with Russia in Ukraine and the US continues to press the region to invest in defending itself.
Even with scant detail, the announcement signals some notable developments in the defence tech sector, in Germany and Europe.
It’s one more acknowledgement of the role that technology is playing in Germany, and how defence tech is taking a more prominent position within it. But whether Germany has shown it can “support” with money is still being debated.
Germany is a distant second to the UK when it comes to producing startups and those startups raising money across all of tech, although now it’s home to some of Europe’s most valuable companies in defence tech, and that is something it can capitalise on.
Reiche noted, when announcing the plan, that the defence sector will contribute 0.5% to 1% to economic growth if the country plays it right.
She’s leaning on something of a track record: the German state already has initiatives in place to fund new technology, the Tech-Fondsinvest and the Germany Fund (Deutschlandfonds), respectively making indirect investments into funds as well as direct investments into industrial enterprises, SMEs, energy companies, start-ups and scale-ups. Earlier in July, the government-owned KfW bank announced it would double down on the concept with a further €1.5 billion in funding over the next decade to the Germany Fund and the related “Future Fund” and €770 million to back other funds.
The update from KfW came with some signalling of the defence focus that got revealed by Reiche this week. But words are weaker than actions. Saïd Werner, a Berlin-based Research Affiliate at the MIT Sloan School of Management, notes that its track record “remains limited” in growth-stage defence: just one defence-related investment under the Scale-up Direct programme has been publicly disclosed, a December 2025 co-investment alongside HV Capital in Quantum Systems, the drone maker currently valued at $8 billion.
“If the objective is to strengthen Germany’s defence industrial base more broadly, this approach addresses only a small part of the challenge,” he told Resilience Media. “Around 80% of the sector’s revenues are generated by small and medium-sized enterprises (SMEs), a category that includes many defence startups. Supporting these companies requires not only public investment vehicles but, more importantly, mechanisms that mobilise private capital and improve access to working capital finance.”
Which companies stand to benefit? Some think it might only be the largest, but these might be the last ones who need that assistance.
Alex Ferrara, a partner at Bessemer Venture Partners based in London and investing across Europe, believes that the dearth of funding for later stages overall makes the move overall positive.
“We see a lot of defence tech companies that quickly and easily raise seed rounds but then struggle to raise Series B rounds because of the ‘valley of death’ around procurement or because they need to iterate on their product and this takes longer with hardware than with software. If this fund is used to back those companies then I think it’s great and needed,” Ferrara told Resilience Media.
But he cautioned that the tendency might be to fund, ironically, the startups that might need Germany’s help the least.
“The problem with these kinds of state funds is that they instead often gravitate to funding the hot startups that don’t really need their capital. They crowd out private investment in the process,” he said.
Indeed, defence tech “startups” that are winning deals with the German government right now — thus, more likely to be considered for funding through the new plan — are already some of the biggest in all of Europe.
They include Stark and Helsing, who collectively are supplying drones and other systems in framework deals that could net them as much as €5 billion if fully exercised.
This is not specific to Germany. As one example, look at the UK Sovereign AI April backing of Ineffable Intelligence, the startup founded by ex-DeepMind researcher David Silver. “I don’t really get it,” said Ferrara. “Ineffable was a hot deal and they didn’t need any help raising money. All it did was crowd out other private investors.”
This points to another issue: government funds using public money may be more inclined to play it safe. “The problem with these funds is that if they invest where it’s most needed, that’s also often the most risky area where there is a good chance they lose money like any other VC,” noted Ferrara. “It doesn’t look good when a state run fund loses taxpayer money, so they end up being risk-averse and avoid the companies that need it the most.”
One side effect of state funding might also be more transparency around how much these companies are raising and how they are valued. Companies like ARX Robotics, for example, which works with Germany’s military, has raised multiple rounds where the value has not been disclosed up to now.
Will SMEs likely see any funding from Germany’s defence fund?
It seems that the idea will be for the fund to back startups strategically — that is, those that are already working with the government in some capacity. That might rule out early-stage startups from the gate. Werner does not think that is such a bad thing, however.
“For SMEs, particularly those generating less than €50 million in annual revenue, the primary financing constraint is often not equity, but access to liquidity needed to hire staff, procure materials and scale production,” he said. “In practice, even winning a government procurement contract is frequently insufficient to secure bank financing.”
A typical example illustrates the problem, he continued. “An SME wins a procurement contract from the Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support (BAAINBw) and receives a 10% advance payment. At the same time, BAAINBw requires the company’s commercial bank to issue an advance payment guarantee. Because the bank must hold regulatory capital against that guarantee, it will typically require the SME to provide full cash collateral. As a result, the advance payment becomes effectively locked up instead of financing production.”
The promise of a new state-backed defence fund out of Germany raises other questions.
One is whether it will consider funding smaller startups, and another is whether it will look beyond Germany — particularly given the bigger push for countries to collaborate across national lines to have better economies of scale.
Another is how and if this will complement other new financing initiatives. These include the proposed Defence, Security and Resilience Bank, recently launched by Canada and joined by eight allied countries at the NATO Summit earlier this month. Germany currently is not involved.
“Should Germany participate in such an initiative, it could reduce its reliance on complex and costly public equity structures while concentrating direct state investments on genuinely strategic defence scale-ups, where public co-ownership delivers more bang for the buck,” noted Werner, who has been involved with developing the DSRB proposal.
