Private capital discovers geopolitics

The British Business Bank is receiving a record number of proposals for venture capital funds dedicated to defence technology. This isn't a market curiosity. It's the visible signal of a structural mechanism that's redesigning who controls military innovation in Europe.

The numbers tell a clear story. In 2024, European defence startups raised roughly one billion dollars. In 2025, we're already at €3.5 billion and projections speak of exceeding two billion dollars by year's end. The British Business Bank has just received £6.6 billion to invest by 2030, with £4 billion specifically earmarked for eight strategic sectors, and defence is among them.

What's happening isn't simply "Europe is rearming". It's something more interesting from a systemic perspective: we're witnessing the attempt to dismantle an oligopoly that has dominated for decades.

The pattern that repeats in decomposed monopolies

We've already seen this mechanism operate. SpaceX broke the Boeing and Lockheed Martin duopoly in space. Fintechs decomposed the functions of traditional banks. Tesla challenged the automotive oligopoly when it seemed unassailable.

In all these cases, the sequence was identical. First: dual-use technology drastically lowers barriers to entry. Second: the state signals a strategic priority with credible capital commitment. Third: venture capital follows the state's signal because it reduces market risk. Fourth: startups can iterate faster than bureaucratised incumbents. Fifth: incumbents try to slow the process through procedural complexity.

European defence is following exactly this script. The so-called "primes", the traditional large contractors like BAE Systems, Thales, Babcock, have built their dominant position on three pillars: consolidated relationships with defence ministries, ability to navigate incredibly complex procurement, and legacy assets that require decades to develop.

But there's a structural problem. The primes' incentives aren't aligned with rapid innovation. When you have multi-year contracts worth billions for weapons systems that require ten years of development, your priority is stability, not speed. When your margin derives from the ability to manage bureaucratic complexity, you have a disincentive to simplify processes.

Dual-use technology as systemic crowbar

Here's where the element that changes everything comes into play: dual-use technology. A drone that maps agricultural fields today can become a military surveillance platform tomorrow. An artificial intelligence system that optimises commercial logistics can be adapted to coordinate operations in the field.

Dual-use technology lowers barriers to entry radically. A startup can develop capabilities in civilian markets, build revenues, perfect the product, and then enter the military market with an already functioning and tested solution. It doesn't have to wait years for a government contract that might never arrive. It can operate according to normal market logic, and then pivot towards military applications when it's ready.

This completely changes the game theory of defence innovation. Traditionally, military innovation required total initial commitment: either you were inside the primes' system from the beginning, or you didn't enter at all. Dual-use technology permits an incremental approach: build capabilities in civilian markets, then expand into military when you have traction.

Venture capital investors understand this mechanism perfectly. Market risk drops drastically when a startup can sell to commercial clients whilst developing military capabilities. The potential return becomes asymmetric: if it works in civilian markets, you have a solid business; if it then breaks through in military as well, you have a unicorn.

Who controls innovation controls security

But why is the state actively facilitating this unbundling? The answer lies in what happened in Ukraine. The conflict demonstrated that military innovation today moves at the speed of commercial technology, not at the speed of traditional procurement programmes. Drones costing a few thousand euros are changing tactical dynamics that seemed immutable. Artificial intelligence applied to targeting is compressing decision cycles that previously required hours.

Traditional primes aren't structured to operate at this speed. Their programmes are designed for systems that last decades, not for technologies that evolve every six months. Their economic incentives derive from long and stable contracts, not from fast innovation cycles.

European states are realising that depending exclusively on primes means accepting an innovation speed that's no longer compatible with the nature of threats. It's not a judgement on the primes' competence, it's a recognition that the very structure of their business models isn't aligned with what's needed today.

Hence the public capital commitment. The British Business Bank isn't just investing money, it's sending a market signal: the British state considers it strategically important that a defence startup ecosystem exists. That signal reduces perceived risk for private investors, who are indeed following. The result is a multiplier effect: for every pound of public capital, two or three pounds of private capital enter.

How incumbents slow the transformation

The incumbents aren't simply accepting this transformation. The first defence mechanism is procedural complexity. The primes have built their dominant position on the ability to navigate incredibly complex government procurement. Certifications, security requirements, compliance standards, validation processes that require years. All this creates enormous barriers to entry.

Startups complain about financing delays, restrictive exclusivity agreements, and the fact that primes often treat them as subcontractors rather than innovation partners. The primes respond that startups don't understand the risk management constraints they're subjected to, that they operate with incompatible time logics.

The second defence mechanism is privileged access to governmental decision-makers. When you've worked for decades with defence ministries, you have an enormous competitive advantage. Startups must build these relationships from scratch, and meanwhile the primes can use their access to influence requirements and standards.

The third mechanism is the national security narrative. Every time a startup threatens to enter a segment dominated by primes, the question emerges: can we trust critical defence capabilities to a company that's existed for three years?

Where power really resides

There's a deeper insight emerging from this dynamic. Traditionally, in the defence sector power resided in relationships with the state, in the ability to manage complex programmes, in control of expensive physical assets. Technology was important, but secondary.

What's happening now is an inversion. Power is migrating towards whoever controls the speed of technological innovation. Relationships with the state remain important, but become less determinant when you can build capabilities in the commercial market. Expensive physical assets become less critical when you can iterate rapidly on low-cost prototypes.

This shift explains why venture capital is flowing into the sector. Investors recognise that whoever controls rapid technological innovation today will have leverage against both primes and states tomorrow. It's not necessary to become the next BAE Systems. It's enough to become the company that has the best technology in a critical and narrow segment, and suddenly you have enormous bargaining power.

The state understands this, and that's why it's actively facilitating the birth of this ecosystem. Better to have a hundred startups competing to innovate quickly, even if some will fail, than to depend on five primes that innovate slowly because they have no incentive to do otherwise. It's a portfolio calculation: you accept more individual failures in exchange for greater systemic speed.

The sustainability test

But there's a critical question: is it sustainable? Or are we seeing a speculative bubble that will deflate when investors realise that selling to governments is much more complex than it seems?

The answer depends on how quickly startups manage to build real revenue with government clients. The dual-use model works to reduce initial risk, but at a certain point you must demonstrate that you can actually win significant military contracts.

There are positive signals. Helsing, the German AI defence startup, has raised €600 million and is valued at €12 billion. Quantum Systems is tripling sales in 2025. Tekever already has operational contracts in Ukraine. These aren't just prototypes, they're deployed systems generating revenue.

But there are also risk signals. Many startups complain about what they call "innovation theatre": governments make resounding announcements about innovation programmes, allocate budgets for prototypes, but then don't follow through with scale procurement. It's a classic trap: the state wants to signal it's innovating, startups want market access, but the underlying bureaucratic machinery isn't structured to actually buy and deploy new technologies rapidly.

The real test will be in the next two or three years. If we see a significant number of startups moving from revenues of a few million to tens or hundreds of millions through actual government contracts, then the unbundling is real and sustainable. If instead most remain stuck in perpetual pilot programmes, then it was a bubble.