When Russia launched its full-scale invasion of Ukraine, it was a turning point for Gundbert Scherf, co-founder of Helsing—a defence technology start-up based in Munich. At the time, raising investment was a challenge. Few were willing to back a company building battlefield AI and strike drones. But things have changed dramatically.

Now, Helsing is Europe’s most valuable defence start-up. The company’s valuation soared to $12 billion in a recent funding round—more than double its previous worth.

“Europe, for the first time in decades, is outspending the United States on acquiring defence technology,” Scherf said.

A former consultant at McKinsey & Company, Scherf believes Europe is on the edge of a major shift in defence innovation—comparing the moment to America’s Manhattan Project during World War II, which rapidly led to the development of nuclear weapons.

“Europe is finally waking up to its defence responsibilities,” he added.

To explore how Germany—the EU’s largest economy—plans to take the lead in rebuilding European military strength, Reuters spoke with around two dozen policymakers, investors, and company executives.

Berlin Backs AI and Defence Start-Ups

According to several sources, Chancellor Friedrich Merz’s government sees artificial intelligence and defence start-ups as vital to its national security goals. As a result, Berlin is working to remove bureaucratic obstacles and build direct links between military leadership and emerging tech companies.

Germany’s approach to defence has long been shaped by its past. After the Second World War, and the horrors of the Nazi regime, the country adopted a deeply cautious stance on military power. Combined with dependence on American military support, this meant Berlin kept its defence sector small and careful. Its business culture, too, was built on avoiding risk and preferring steady, incremental improvements over radical innovation.

But with doubts growing over the reliability of U.S. backing—and with Germany now one of Ukraine’s main military supporters—Berlin is preparing to nearly triple its regular defence budget to around €162 billion annually by 2029. A large portion of that will be spent on developing new tools and technologies to transform how wars are fought.

A New Generation of War Tech

Helsing is just one of several German start-ups developing cutting-edge military technology—from autonomous tanks and mini-submarines to insect-sized surveillance devices.

“We want to help Europe stand tall again,” said Scherf.

These smaller companies are increasingly being brought into discussions with government, alongside traditional defence giants like Rheinmetall and Hensoldt. But insiders note that such established firms tend to focus on filling existing orders for conventional systems, making them less likely to lead innovation.

To address this, Merz’s cabinet recently approved a draft law designed to make it easier for start-ups to win government contracts. It includes provisions for advance payments and would allow tenders to be restricted to companies within the European Union.

Marc Wietfeld, founder and CEO of ARX Robotics, said a meeting with Defence Minister Boris Pistorius marked a turning point.

“He told me, ‘Money is no longer the issue—it’s available now’. That was the moment I realised how serious this shift was,” Wietfeld said.

Following former U.S. President Donald Trump’s return to politics—and his repeated questioning of America’s commitment to NATO—Germany has pledged to hit NATO’s new defence spending target of 3.5% of GDP by 2029, ahead of most other European countries.

Berlin is also pushing to strengthen its own defence industry rather than rely on American companies. Still, major challenges remain. Unlike in the U.S., Europe’s defence market is fragmented, with each country applying its own standards to procurement, making it harder to scale across borders.

In contrast, the U.S. has long-standing military giants like Lockheed Martin and RTX, and is a global leader in key areas like satellites, advanced aircraft and precision-guided weapons. Since 2015, Washington has also invested heavily in newer firms like Shield AI, Anduril and Palantir by awarding them military contracts.

European start-ups have only recently begun receiving comparable support. But things are shifting. A report by Aviation Week in May projected that Europe’s top 19 defence spenders—including Turkey and Ukraine—would collectively spend €180.1 billion on military procurement in 2024, edging past the U.S.’s €175.6 billion. Though America still spends more overall, this marks a change in who is investing fastest in new systems.

Hans Christoph Atzpodien, who heads Germany’s defence industry association (BDSV), said the current procurement model is designed around established suppliers and isn’t well suited to fast-moving tech innovation.

Germany’s Defence Ministry said it is now working to speed up how it buys equipment and to integrate start-ups more directly into the system. Annette Lehnigk-Emden, who leads the Bundeswehr’s procurement agency, highlighted AI and drones as top priorities.

“These technologies are as game-changing as the machine gun or the aeroplane once were,” she said.

There’s also been a cultural shift. Sven Weizenegger, who heads the Bundeswehr’s Cyber Innovation Hub, said the war in Ukraine has made people more open to working in the defence sector.

“Since the invasion, there’s been a real change in how Germans see national security,” he said.

In 2020, he would get just a few messages a week from people with ideas for defence technology. Now, he receives 20 to 30 LinkedIn messages every day.

Some of these ideas sound like science fiction. Swarm Biotactics, a start-up, is developing live cockroaches equipped with cameras and micro-sensors. The insects are fitted with miniature backpacks and controlled through electrical pulses to help them navigate dangerous environments, gathering intelligence.

“Our living bio-robots carry sensors, secure comms and neural stimulation tech,” said CEO Stefan Wilhelm. “They can be individually guided or move together in swarms.”

Germany has a long history of military innovation. In the early 20th century, it led development in areas like missiles, jets, and guided weapons. But after the Second World War, it was demilitarised, and many of its top scientists left—such as Wernher von Braun, who helped the U.S. build the Saturn V rocket.

Today, some of the biggest civilian technologies—like GPS, semiconductors, and the internet—began in military labs. As Germany faces economic challenges, from high energy costs to declining exports and competition from China, renewed defence spending could also offer economic benefits.

“We need to understand that a strong defence sector supports the economy and drives innovation,” said Markus Federle, of investment firm Tholus Capital.

In the past, risk-averse investors avoided defence start-ups. As a result, many firms failed to survive the difficult early stage known as the “valley of death”—where costs are high and income is low. But the spike in defence spending since the Ukraine war has changed that.

Europe now has three defence start-ups valued at over $1 billion: Helsing, drone-maker Quantum Systems, and Portuguese firm Tekever, which also has a base in Germany.

“There’s real pressure now for Germany to lead Europe’s defence strategy,” said Sven Kruck, Quantum’s chief strategist.

Germany is now Ukraine’s second-largest weapons supplier after the U.S. Decisions that once took years are now made in months. The urgency of war has allowed start-ups to test equipment in real-world combat situations.

Venture capital investment in European defence tech hit $1 billion in 2024, up from just $373 million in 2022. Germany has received the most—$1.4 billion over the past five years, according to Dealroom.

Jack Wang, of venture firm Project A, said Germany’s engineering strength gives its defence start-ups an edge. They excel at building scalable systems with reliable components.

“Europe has brilliant talent,” he said, “but no one matches Germany when it comes to technical depth.”

With Germany’s automotive sector slowing, the country now has excess production capacity—especially within its Mittelstand, the group of highly specialised small and medium-sized manufacturers that form the backbone of its economy.

Stefan Thumann, CEO of Donaustahl, a company making loitering munitions, said he now gets three to five job applications every day from engineers leaving the car industry.

“All these start-ups need is the brainpower to design the systems,” he said. “The Mittelstand will provide the muscle.”

With inputs from Reuters