Defence, security and resilience funding in Europe grew 4x in 5 years: Sander Verbrugge

0:00Sander Verbrugge:Hello and welcome to the Scaling Europe show presented by Deal. This episode is sponsored by SurrealDB, the multimodal database for AI agents. Omni, the AI analytics platform trusted by growing companies like Perplexity and Symbesia and VentureComet, the platform that gives startups and scale-ups real-time equity tracking, daily business insights and automated management information. Thank you for joining me. Please like, comment and subscribe.

0:33Sander Verbrugge:Hello and welcome back to the Skilling Utro presented by Deal. I'm Seb Johnson. Today, we've got a great guest, Sander, partner at the NATO Innovation Fund. How are you doing today? I'm doing well, thank you. And thanks for having me on the show. I really appreciate it. It is my absolute pleasure. There's probably never been a more important time to be doing what you're doing, investing in the type of companies that you're investing in. How's it been the last six months? Everything's changed. It feels like geopolitics, the world, defense europe is changing what has it been like yeah that's that's a very open question let me focus on a few things so first of all um it's been a great i think the niff offers offers great opportunities i think the niff is doing all the as you said all the right things that really move the needle for society as a whole at this point in time of course there's multiple funds doing that but the niff is very well positioned to do to do to have great impact while also doing great investment so looking back at the first six months I have to say NIF is only two and a half years old right so we're still building this and I'm really happy to be part of this the team has exceptional talent and we're really we're really moving forward to become a high class investor and I think it's going well we have a good portfolio we have a lot of firepower left to do more investment so that's all really exciting and if I then look at the larger DSR defense security and resilience ecosystem um i actually think that we are seeing that it is moving in the right direction and that is really good as well we recently reported uh or had a report out where we indicated that with the dsr ecosystem has significantly grown from a venture capital investment perspective over 25 this report together with dealroom um and compared to over the last five years it has even grown a 4x so the market growing as a whole four times in five years clearly shows that everyone sees the importance of defense security and resilience investing and we're in the midst of that and we're looking forward to work with everyone to make it even greater grow it further from a venture capital perspective but now also making sure it grows from from other types of capital stack types of investment debt maybe private equity doing buy and build and all these types of more advanced later stage capital that we want to draw into the DSR ecosystem.

2:54So overall, there's many things, of course, to the six months, but it's going well.

2:58Sander Verbrugge:Amazing. And I definitely want to get into the Delvering report because it was really interesting. There's some great bits of data in there. But the first question I wanted to ask about it, and I guess more broadly, is for those who don't know, or maybe who haven't read the report, can you explain the difference between defense, security and resilience? yes yes of course um so defense is really the technologies that help our ministries of defense and and armed forces to to become better at what they're doing here you can think about autonomous vehicles in general of course everyone knows drones but robotics and sea vessels are also on the rise there um and but it it also relates to things like isr stevenson reconnaissance type of drones.

3:42So the broader range of defense-related applications. If we then look at security, we actually have two buckets there. It's really the security of infrastructure that we're talking about, but also the security of critical technologies. And here you can think about the longer-term technologies that I think are valuable as NATO member states you have to become leading in specific important technology fields like quantum, like AI, maybe even energy fusion. These are really technologies that can move the needle for society as a whole. And if we look back in 15 years from now, we need to make sure we've done the right investments to be leading in these type of technologies.

4:23So that's for the security part. And then the last one, resilience, is actually more around resilient supply chains, resilience to specific needs on raw earth materials or even on energy, where you simply see that if we now look more at our 24 LPs that are in our fund, which are all European NATO members, you see that Europe has significant steps to make to become more autonomous in the energy space. But it's also for many other types of dependencies we currently have. So resilience is really the longer term. How can we manage on our own type of investments?

4:59Sander Verbrugge:Amazing. And yeah, I think that the highlight of the report was that, Yeah, DSR startups, I think, was just under$9 billion raised in 2025, 55 % year over year. And I thought what was particularly interesting is when you look at the report, so much of that growth is coming from late stage, you know, like the big funding rounds. And I was curious, why do you think that is the biggest driver of investment year over year?

5:27Well, of course, we'll have to look over multiple years and we will do that together with Dealroom. But what we think now is, and that's based on multiple proofs, what we think now is happening is actually a maturing of the ecosystem. We have seen this growth over four to five years. And the defense and security investments particularly, some of them are more shorter term because they're not as fundamentally challenging academically from a technology development perspective as some of the other categories. And I think what we're seeing now is maturing. So some of these early companies that started off five, six, or a bit more years ago are now getting into the really large rounds.

6:05Here you can think about IQM in the quantum space, but definitely also in the drone space. We've seen multiple rounds above hundreds of millions. And this is a good sign. Because in the end, what we really need in the defense space is companies that not only have novel technologies that are slightly better or a lot better than other existing technologies. We need them at scale. we need volumes behind this and this is what i think this report goes very well there's still a significant amount of early stage deals mid-stage deals so the funnel is ever evolving nicely but we do now have a venture capital ecosystem in europe that is willing and able to to spend hundreds of millions in a single company in a single growth round the second part of this maturing ecosystem is the fact that these companies are actually able to raise or sorry not raise but generate revenues So there's actual top land, there's actual financial value created by these companies.

6:59And I think that's also why these companies are so successful in raising.

7:03Sander Verbrugge:And can you talk a bit about the geographic split that we're seeing? I know the report talked about the UK being the biggest country in sort of DSR funding, but we're seeing it change, actually. We're seeing hubs kind of crop up across Europe. Can you talk a bit about the geographical element of this? Yeah, first the highlights, because credit is due to where they are due, right? So UK, indeed, the largest country found in the funding landscape. I think they have four major hubs in the top 10. Of course, Cambridge, Oxford and London being amongst them. The actual largest hub from a region perspective is Munich at the moment.

7:38And it was so last year as well. So they're clearly doing many things right. But indeed, if we try to highlight some of the changes and the differences in the rest of the field, We see some rises in Scandinavia. Finland has done really well over the past year, also driven to a certain extent due to the IQM round, so that's a large quantum computing company. But all we also see, and we're really happy with that because we feel strongly that we want a strong VC ecosystem throughout Europe, is a rise of Central Eastern Europe. We see a lot more deal flow there. Of course, they're still smaller and earlier rounds predominantly, but there's definitely a significant rise of the rounds there.

8:22And yeah, we think that's the first sign that Europe will be getting a lot more mature ecosystem throughout Europe instead of only the countries we're already familiar with a mature venture capital ecosystem. Again, these are green shoots. It takes time to build a venture capital ecosystem. We're fully aware of that, but we're very happy that we now have data starting to support all of the growth in the Central Eastern European part of Europe.

8:50Sander Verbrugge:Yeah, we're seeing more funding in more regions and across more of the critical infrastructure, I guess, and the different categories within DSR. Where do you think we are dangerously underfunded? That's always dangerous to say. I would still say across the board, we definitely need significant funding. I think where we're good is in the autonomy space, especially these large rounds coming in. It shows that people are able to find these companies. If you look at one of the goals of the NIF, which I think is key, is having an eastern flank deterrence line. I think there in the sensor space, in the actuator space, there's definitely still a lot of room for high quality startups and scale-ups, especially scale-ups.

9:38we see some interesting companies coming up interesting technologies coming to play but some of them are still early days so they definitely need to go through the multiple rounds to become mature products and there's also mature products that still need to take the scaling step so if anything I hope that next year we can report that these fields and these type of companies have also moved to mega rounds or at least significant step up in the rounds they have been able to raise I would say that I don't see any fields that are underfunded I think we are very ambitious at the NIF and we want everything to move quickly as quickly as possible because there's a clear threat and we want to respond to that with good high quality startups so there's definitely areas of attention I do feel that good quality companies at the moment in the European VC landscape are able to get funding that they need to move forward at a good pace

10:36Sander Verbrugge:Yeah, it's great to hear. And I guess from your vantage point, you were able to see so much of the ecosystem, see some of the great companies. When you look towards the rest of the year, where are you looking to deploy capital? And how do you assess a business? Yeah, so very interesting questions. And I can't tell everything about that. But what we're definitely trying to work hard on in the defense part of our mandate, we're working hard with our mission platform group, which is a dedicated team of people who formerly wore the uniform. They are currently continuously bridging the offering of our portfolio companies and the demand signals at the Ministries of Defense and at NATO.

11:17And we're really working hard to get these demand signals in structurally to make sure that we are investing in the companies that truly make the difference in the two to three to five-year timescale on the defensive needs of our allied members. So this is one of the areas where we'll focus on heavily, and that will definitely be around the sensor part that I just alluded to. Potentially the software stack that allows all this data out of the sensor stack to be processed and brought to central command in an orderly fashion. And then, of course, a decision needs to be made where the signal goes back.

11:48And then we have the actuator part where we also see a significant amount of companies and successful startups that can still make it. And what they specifically will be, we will work on that in close collaboration with our mission platform group team. If you look at the more long-term technologies, it is even harder to assess what you need there because no one knows what the future will bring in five to 10 years. At least I personally am not able to do it. So if you know anyone, please let me know. however we are working closely with with nato with the mod's but also as a team and with all our fund on fund investments teams to to really stay in touch with everything that's happening in academic europe to see what type of technologies are on the rise that can really move the needle for for strengthening the sovereignty of of the technological leadership of our lps so that's where we're slightly more opportunistically driven maybe but we're definitely trying to keep an eye out on all the the major progress areas that are out there amazing and when i've spoken to other i

12:55Sander Verbrugge:guess i'm focusing on defense for a moment i'm talking to other defense investors and other people in this ecosystem they feel that there is still a lack of urgency or a lack of awareness from european lps predominantly who are still reluctant to invest in lethal weapons and they feel like there's still this tendency to want to support companies that are like dual use as opposed to just like building weapons for the sake of weapons. Do you see that as an issue across Europe? I think if we look three years back, I would have said yes immediately, even though it's not the answer I would have liked to have given.

13:32Yes. And when you say institutionals, I'm thinking banks, pension funds, but really all the major wealth managers. What I also have seen while I was at my previous fund, the Innovation Industries, but definitely now that I'm part of the NIF, is I see all the banks and all the pension funds moving on this because they read the newspapers as well. And they're a large organization, so you can't expect them to change all of their policies in a single day. But I definitely see significant policy changes in their investment mandates and also in where they really allocate the money as well. So it's hard to assess where we currently stand because there's actually quite some funds out fundraising at the moment.

14:13And I can imagine they give a signal that there's never enough, which makes sense to me. However, I do see the mindset changing, whether it's already being allocated to true dual use and even being even defense-only type of funds and companies. I can imagine that people indicate that they would like to see more. And I think it's fair to call upon the entire capital stack to really take this into consideration because a good defense does require offensive means. Having said that, I do believe, and that's why we do it at the NIF, dual use is the best investment strategy for defense related technologies.

14:51Because dual use will allow you to build a robust technology, a robust manufacturing chain. and then even in times of peace you're still able to develop and continue to develop the defensive capabilities as well and still have the massive deployment capability that you would have because you're currently in peacetime focusing on the civilian use cases that you're able to offer. I think that's still the best way to work in the defensive industry because hopefully there are times upcoming where we need a little bit less of these types of materials but then we need the capabilities to continue to deploy or be available, develop and have the manufacturing capability to deploy them at mass when needed.

15:34Sander Verbrugge:Interesting. And you mentioned that there are funds out there fundraising at the moment. Do you think as an industry, defense, security, resilience, do you think that works better with sector-focused funds? Do you think you need a deep level of understanding of the business models, of the technology to be able to be a great investor in this space? or do you think we're going to see, as we are seeing, more of the big generalist funds doing more and more investments in this space? I think there's a role for both, in all honesty. If you look at these more fundamental deep technology companies that I just touched upon that we definitely look at as well, I think it's vital that your team knows technologies, understands the language of the founders and has expertise in the fund that can at least make a reasonable judgment how likely it is that this technology will turn to a product and will turn into a product that will have commercial success.

16:25However, if I look at the defense space and go back to the market report that we just released, these really large rounds, these companies can be judged on financials for a significant part. The product is out there. The technology is proven. Customers are buying it. That's the best validation you can have for technology and the product. So I think generalist investors can definitely step in there. If they want to get in a level around earlier, great. I'm more than happy to collaborate with them. But I do think that the ecosystem is now more mature enough to have reasonable investments for all.

17:02Having said that, if you want to invest into an industry, I do think it's vital you understand the dynamics and the industry defense industry has its own dynamics, as every industry has. So knowing or at least having contacts within that industry and having the expertise in your team will help everyone to have better investments instead of just spreading around a lot of money.

17:28Sander Verbrugge:Amazing. And can we touch on some of the portfolio companies, maybe some of the more exciting ones that you think are doing really well at the moment? I know that you just invested in Satvu, a satellite company. I think Stark is one of your portfolio companies and that seems to be doing particularly well. Can you give maybe an example or two of either recent investments or slightly older portfolio companies that you think are doing really interesting things at the moment? So first of all, the two you highlighted are doing very well. I would love to pick out two others because I know them better.

17:59And in a partnership, you always divide up the investment. Of course. More where I know more to tell a better story. So one of the recent investments I would love to take out is Uplift 360. Yeah. This is actually a recycling company. Well, I don't think I'm allowed to call them that, but I think that's the easiest way to categorize them. And what they're able to do is they use fiber-based materials and defense has quite a lot of them at the end of life. But you can also think about wind turbine blades. And they can recycle these blades very efficiently and make sure that the glass fiber that was in there actually almost up to 100 % comes back in the same quality.

18:38So they really remove the resin and they do it at a low energy cost and therefore they actually are a perfect resilience play as well because they actually allow existing material that is already in our 24 nations and are supporting us as a fund to be recycled and to go back into the defense applications but also civilian applications where they use these materials as virgin materials. So I'm very excited about that. The company still has a few steps to go to mass scalable production, but everything's looking really good there and they already have quite a lot of partnership crimes in place. So for everyone interested in this space, please follow this company.

19:19I think it's going to be great. Maybe more on the defense space. I think it's valuable to highlight ARCS. ARCS is doing really well. They have a robotics-based solutions, autonomous or semi-autonomous solution that is a land-based unmanned vehicle. They are getting good first contracts at the at mods they have a fully functioning product portfolio and they are actually currently deployed in ukraine as well and doing very important things for for the troops there so we're really excited about this company they are doing well and i think they will be fundraising in the course of this year as well so for investors that are interested feel free to keep an eye out

20:01Sander Verbrugge:on that very cool nice like before we wrap up i just want to ask one final question which is you know, defense, security, it's become such a hot topic. What do you think we need to do as a continent, as an ecosystem to make sure that we are secure, we are resilient, we are well defended? You know, if you could change one thing, maybe it's more founders, maybe it's more capital, maybe it's lower regulation, what would it be that would change the security of the ecosystem?

20:32I think if it's one thing, I would go for awareness. but that goes to multiple angles. So awareness of the whole society that resilience is also having enough food and water, potentially a home battery in your house so that you can actually, if we're under cyber attack, can survive for a few days. And it sounds very easy, but if everything falls apart, you actually need to have quite some things in place. So awareness on that, I think is key. Awareness on the fact that all the voices you're hearing that are ringing the alarm bells that were not prepared at the defense aspect, please take them seriously and make sure that you, even though you can't influence directly, make sure that you are doing the right things, that these voices are heard and can be enabled to do the things that we need.

21:21And that is innovation, that is venture capital influence, and that is good procurement by the MODs, but also the freedom for the politicians to make the right decisions and move in this direction. because awareness at the global or throughout society will make sure that all the things that are needed to be done can actually be done. So that would be, if I'm allowed to say one thing, that would be the thing I would hope for that everyone has because I don't always taste it when I walk outside of the NIF offices and talk to people just on birthday parties and these type of things.

21:58Sander Verbrugge:Yeah, and it definitely still feels like a lot of complacency despite the very real risks we have around us. Well, Sande, thank you so much for joining me. You're doing great work and I love what you're doing. So I really appreciate the time. Yeah, again, thanks for having me. It was a pleasure. And yeah, look forward to check in again later.