Defence-Tech Dependencies, Europe Defence Tech Investments, and Governments’ Barriers to Entry

US defence startups developing weapons to counter China have a major contradiction built into their supply chain: They depend on China for parts of their technology.

This year, European defence technology will see a fivefold increase in VC investment since 2018, outpacing any other investment across NATO states.

But first, at the Berlin VC Project A’s PakCon defence event last week, investors and founders discussed concerns about defence tech. Some investors worried about exit opportunities, while other speakers focused on the government being a barrier to entry:

The Big Story

US Defence-Tech’s Dependency on China

US defence startups developing weapons to counter China have a major contradiction built into their supply chain: They depend on China for parts of their technology.

China is the dominant supplier of batteries, motors, sensors, rare-earth materials and other key components that US defence companies need. The industry relies on China for materials to build everything from drones to ships and missiles.

While the DoD sees having startups dependent on China as a national security risk, not having access to Chinese materials would mean not having access to the most affordable and available parts for defence tech startups.

Changing the supply chain is expensive and difficult but necessary for business survival. Startups are improving solutions and betting on which part will become off-limits while US regulations and Chinese export restrictions evolve. Strategies include manufacturing in Southeast Asia, sourcing from Mexico, building components in the US, and using 3D printers to make replacements.

Many drone companies see not using Chinese materials as an existential threat to their business. The problem is that some components, such as batteries, are only available from China.

Established defence contractors depend on thousands of suppliers in China, making decoupling complicated. Lockheed Martin is investing in 3D printing more components, and RTX is reviewing options for alternatives but is not pulling out of China. Anduril has reduced its spending on parts from China to 0.2% of its total supplier budget. A report last year showed that the Air Force increased its reliance on Chinese suppliers by 69%.

China supplies over 90% of the magnets needed for motors that power missiles, ships, drones, and satellites. At the same time, both China and the US have restricted the import of critical components from China that the defence industry wants, squeezing American companies. The law prohibits federal agencies from buying defence systems from China that use critical components, including cameras, radios, and flight controllers.

Five-Fold Increase of VC-Investment in European Defence Tech

This year, a billion dollars of venture capital will be invested into European defence technology. It is the first time that Europe has seen this kind of investment, and it has been a five-fold increase since 2018.

Since 2018, VC investment in defence-related tech has outpaced any other investment across the NATO member states and its allies by 25%, totaling $3 billion.

Most of the investment goes into startups in Germany, the UK, and France, collectively accounting for 87% or $2.2 billion.

In the past six years, German defence tech companies have raised more money than those in the Nordics, Netherlands, Switzerland, and the UK combined. Most of those companies are based in Munich, possibly due to the 487 million raised by Helsing in 2024.

370 VC-backed defence tech startups in NATO countries have a combined enterprise value of $161 billion.

Still, the US remains the dominant force in the defence tech sector, with American defence tech firms attracting 83% of VC investment. 66% of the funding in Europe came from US investors.

*Source: Muhammed Enes Yildirim/Anadolu Agency / Getty Images*

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