The $500B Opportunity in Europe’s Defense Buildout

0:00Welcome to Sorcery.

0:10Aistis Šimaitis:The potential of photonics. The technology to interconnect these GPUs. Global payroll and HR platform. 8 billion operational data points. Scale ups over startups. You'd rather have a million of something than one of anything. Building the intelligence layer for defense. There isn't enough power, there's not enough memory chips. We're at the end of physics of what we can still do.

0:40All right, so for this one, we're going to do something special and hand the baton to Bruno to introduce our lovely guests today. Bruno is a host for us with Strike and at Villa Charlotte. So, Bruno? Perfect. Well, we're here today with Isis, who was leading Palantir's commercial business for Europe and now is a co-founder and CEO at Onodrim Industries. And we're here with George Hajiminas, who is the chief strategy officer at FION. Thank you guys for coming. Thank you, Bruno. For the audience, without much context, so we're going to be talking about European defense right now. And I would love to start with both of you, just give a little bit of background.

1:21Aistis Šimaitis:Onodrim's mission is strengthening foundations of European defence. So our company, we're not building like another prime on your prime. We actually look to find the very good manufacturing and critical mission system businesses in Europe, acquire them and make them not about the next European defence to make sure that the defence primes can deliver the others in the next decade. So that's our mission. Well, Theon is an established player in the European defence industry. The focus is electro-optics, both for manned portable and platform applications. An example for everyone would be like night vision systems, augmented reality, head-up displays, things like this.

2:02And we are a company, one of these companies that was well positioned to take advantage of this boom in European defence over the past few years, both through an IPO in 2024 and having a pretty strong growth trajectory since then. So what is the current state of European defense and how has warfare changed since the start of the Ukraine war? So to answer this question, we have to look at where Europe was a few years ago versus where it is today. Europe really was underspending on defense for the past few decades. Ukraine proved that this can no longer be the case. We need to prepare, we need to be ready, we need to industrialize.

2:42It showed a lot of the weaknesses, so to speak, that we had in terms of our own ability to manufacture at scale and supply our militaries at scale. Now, obviously, there is a very large influx of money that is being poured into defence as Europe and European nations aim to strengthen up their arsenals and build up their armies. and this provides a very interesting opportunity to a lot of companies to scale up, to develop technologies, to create new technologies and to really achieve scale that a few years ago in this industry in Europe would not have been achievable.

3:19Aistis Šimaitis:And I'll add, sort of elaborating on the scale paradigm, I think the biggest lesson for defense companies sort of lesson from Russia invasion of Ukraine and the war that's happening is actually that the advantage is technology and volume. Like just having technology is not enough. And actually, if you had to pick between the two, you would go for volume. Like volume wins, like large scale, you'd rather have a million of something than one of anything. So ideally, we have to do both. But really, I think a lot of the defense industry pre-full-scale invasion of Ukraine was exquisite technologies, advanced technologies that are like dreams of generals that cannot be mass produced.

4:07Aistis Šimaitis:But now what we see the shift in the realities of defense, anything you do has to be produced in tens of thousands, hundreds of thousands or millions. So volume matters a lot. So this is, I think, the biggest conceptual change. ideally it also has to be technology and ideally also not easily copy-pastable. And to maybe double down on what Isis said, a lot of the systems that have been new and tested in the United States that have been deployed in Ukraine, frankly, at the beginning of the war didn't work. And they needed to go through these iterative cycles where they keep on updating them and making them better.

4:42So even before they reach scale, they have done extremely well in testing environments, but they just have not managed to perform towards the beginning of the war as well as expected. Bruno, I'm actually curious, because you have mapped out the whole market, how do you categorize where people are building most in defense right now? And where do you think there are still gaps? There's been a very big focus on neoprimes like Helsing. And each sort of core geography has some emerging players that are likely to seize a very large part of defense spend in that country. But one of the biggest gaps that we've noticed is, as Isis has pointed out, a lot of those systems are going to need to be produced at massive scale.

5:25And a lot of those systems will need to, more importantly, be produced in Europe. And in order to do that, you're going to have to acquire a very fragmented manufacturing base. The lead times for some of those components could also be in the years, which is why certain primes take four or five years to deliver on certain contracts. So I really think that the white space is very much in the sort of manufacturing gap for supplying some of those next generation primes that are building systems on sort of outdated supply chains. Have you had any issues of hiring and talent?

5:59Aistis Šimaitis:I think hiring into defense has been great. Like people like the Europe's ambition to rearm and reinvest their lives. So honestly, from a monitoring perspective, we see the top talent. And, you know, my co-founder, Alex Citeo, he spent 17 years in the U.S. and now he came back to Germany two weeks ago with his family to strengthen European defense. And we see a lot of that demand, especially with the companies with big ambitions, which I think Europe has not seen enough. And Helsing has seen the same. They have no problem of attracting the best talent. So I really think this is a very favorable environment.

6:33In the US, defense is funded by the government and also ventures come into the scene. What has been the process like for funding and how is it different?

6:47Aistis Šimaitis:So, government is the buyer. There are these theories that the private military corporations will be the next way to do defense, but that's not yet the case. So funding is from the government, a lot of initiatives from the European Union. And that obviously attracts venture funding. When there is like a trillion of dollars being poured into defense by 2030, this triggers venture private funding for the companies to make use of those funds. So this has been the dynamic in Europe. As warfare becomes more and more autonomous, there's more robotics involved, there's AI, there's software. How does that change the supply chain?

7:29Aistis Šimaitis:Well, the key thing, and let's have her said, the key thing is actually that everything has to become cheaper. It's like if the radio could cost$30 ,000 four years ago for military and that was acceptable, this is no longer acceptable when you're talking about autonomous mass technologies, a lot of robots, hundreds and tens of thousands. So a lot of components that were exquisite, I mentioned radio specifically as an example, but there is more. Cameras is actually the same. A lot of these components have to go like significantly cheaper in price, significantly higher in scale. So that's I think the big impact.

8:07Aistis Šimaitis:Again, coming back to the volume becomes like a significant issue. I could not have said it better. Scale is the most important parameter here, but also having the underlying supply chain networks that allow for the scale to to be reached. This episode is brought to you by Brex, my favorite. You become what you spend on. And I refuse to spend my time on work that shouldn't exist. Expense reports, receipt chasing, and manual closes. The companies building what's next from Vercel, OpenAI, Anthropic, Granola, and Deepgram all made the same call. They all run on Brex. Brex is the intelligent finance platform that combines cards, expenses, and banking into a single stack with agentic finance built in.

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9:45to train superintelligence. Visit turing.com slash S-O-U-R-C-E-R-Y. In 20 years, do you think defense companies will look more like technology companies or industrial? I personally don't see this as being mutually exclusive. I think for our example with Theon, we were mostly an industrial company about four or five years ago. The main product we were making was night vision and still to be honest is, but since then we've branched significantly into new technologies. Mind you, the militaries of the world were not very quick to adopt new technologies a few years ago. This is changing. It is not so much a revolution, I would say, it is more of an evolution as new technologies get gradually adopted into existing platforms and systems.

10:38But to answer your question, I think the right recipe is a combination of both. You need prototypes, don't fight wars, no matter how good they are, they cannot win wars. So if you want to be able to be competitive in today's world, you need to have good technology, you need to be at the forefront of technological development and also be industrially acute enough to be able to deliver this at scale.

11:02Aistis Šimaitis:And my view here is slightly maybe controversial, but I think you need two types of companies. I think that technology companies who do AI and software for defense and connected battlefield have to not want to also be the manufacturing giants of the world. So essentially, I think there will be two types of... The success recipe for Europe and for the world is having technology companies who focus on the tech, on the software, on AI, on weapon final assembly and make testing and make sure that they work. And then there are industrial companies who are extremely good at producing components that those companies making technology need.

11:45Aistis Šimaitis:And the synergy between the two and not a competitive nature, but a non-zero-sum nature where they collaborate to produce at scale. I think this is my winning recipe for this part. So I asked this question yesterday when we were interviewing FEMA on photonics about the state of AI in Europe versus the U.S. and kind of the dynamics there. But the question for you both and Bruno, too, what is the biggest misconception about European defense?

12:19European defense has, to a very large extent, similar technological capabilities to the US. I don't place them as far apart as a lot of people might think. We have some fantastic companies in Europe.

12:40I'd say one main differentiator is the prevalence of startups in the US that have become scale-ups, so to speak, Unreal being one of them, Palantir being another, and scale-ups is an understatement of what these companies are. But in Europe, the traditional primes are very similar to the US. traditional primes. Well, the only difference is that we have some countries that protect, we have conflicting interests between countries. So each, you have a lot of national champions in Europe because there's just many countries. It's not like the States in the US. So I would say that the difference is that we have more companies than are needed in a lot of ways, because so many are national champions that will not survive in otherwise competitive of landscapes.

13:31Whereas in the US, all of the US Prime seem to have found their niche. So this, I would say, is where I would compare one on the other. And to add further to George's point, I think one of the biggest misconceptions is that processes in US and in Europe for procurement of defense systems are similar. They actually aren't. They're quite fragmented and it's sort of country by country or on the European level. And because of that a lot of the current existing military sort of industrial complex is is very outdated so countries like germany and others have large volumes of systems that are not necessarily working and in the us companies like androil or hadrian have partnered with the government in joint venture initiatives to really change how this relationship between government spending and defense OEMs exist.

14:28And we think that Europe is certainly going in that direction, but it's very much behind in terms of those partnerships. So I would say that's the biggest misconception. Do you think we're at risk of a defense bubble or is it still too early? Is it too late? From a venture landscape point, I would say that a lot of companies have been funded with minimal amounts of capital, like five or 10 million. And the products that those companies have built can potentially be even better than the existing system. The problem is if you don't have hundreds of millions of dollars on your balance sheet, and the end customer is the government, they have very little belief in your ability to actually deliver and manufacture the problem at scale versus a company that has been working with the government for 10 or 20 years and has thousands of employees and millions or hundreds of millions on their balance sheet.

15:23So I think a lot of those companies in Europe are not going to do well, even though their product might be deemed superior compared to sort of traditional OEMs. But at the same time, certain companies have already been de facto kingmate, like Helsing in Germany or sort of ISAI on the sort of European level for SAR applications. And those companies are just going to keep on eating away at market share from traditional primes. I asked this before we started rolling and taping, but I have to ask you again. What do you think is a secret you know about the world that no one else does?

16:03Aistis Šimaitis:I think that choice is an illusion. I think that there is more and more research actually showing that we think after we feel. So I think that's my answer to this question. George? George? How could I talk that? How can you follow that? That was deep. I think Bruno should take that. Well, thank you very much for the reins. I think ISIS is hard to beat. One secret about the world that nobody else knows. Is that the question? Yeah. should we talk about the ukraine russia conflict no i i would say one secret about the world that very few people know is and this might be a bit of cliche but i think that the next five to ten years of scientific knowledge because of ai would be the equivalent of a hundred years of sort of manual human research so it may be not seen as a secret, but I think the world is very much going to fundamentally change over the next five or 10 years in more ways than we imagine.

17:20And all of our lives are going to change because of this. So I don't know if that's a secret or not, but I'm not sure many people are aware of that. Isis, I have to ask you, what is the biggest lesson you learned from Palantir? And maybe Alex curve?

17:35Aistis Šimaitis:Focus on being important and valuable and the money will come. So that's volunteer not being profitable for, I don't know, over 15 years is good and now being great. So I think that's like, I think, I think I always remember when people ask, you know, what do you sell tomorrow? What's like your next year's revenue? I think that's what I remember. Like what, how am I creating value? why we are becoming more important as a company for the world and then then the money will come. Amazing. Okay so as we close out you guys get the question everybody else gets we have to know what is your hottest take right now?

18:14I roughly mentioned this before I think somewhat controversial take is that defense does need more this ability to scale rather than crazy innovation or revolution so to speak on the technology side and this is a very interesting thing to tell to people that are in the VC world that, you know, it's not about finding something that's going to revolutionize everything, but finding the right fit that has the capacity to scale to be successful. So I would say scale-ups over startups and defense is a somewhat controversial take. Bruno? Well, very tough to beat both of those, but I believe that because of how large the defense market is, especially in Europe, and how close we are to the front lines, that if Europe can truly do exceptionally well on both manufacturing locally, but also in building the intelligence layer for defense, there could be a half a trillion dollar company come out of Europe in the defense space that was founded probably in the last five years or so.

19:16So how long will it take? Well, don't quote me on that, but I think could be done in the next decade. Amazing. Well, that's a wrap. Thank you, guys. Thank you. Great job. AI needs more than chips. It needs power, land, and infrastructure. Zone develops next-generation data center campuses, partnering with AI companies, site developers, and technology leaders to bring compute online faster and at scale. Zone is building the foundation of the AI frontier. Visit zonefrontier.com to learn more. That's zonefrontier.com to learn more. Today's episode is sponsored by VCX by Fundrise, the public ticker for private tech, allowing investors of all sizes to invest in venture capital.

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