The UK and Germany are emerging as key hubs for a new wave of AI defence startups, as Europe scrambles to rearm amid rising geopolitical tensions. Investors have funnelled a record $4.3 billion into the sector since the start of 2022, nearly four times the funds deployed in the previous four years. Venture capital for European defence startups has spiked as members of the NATO military alliance have agreed to increase security spending to 5% of gross domestic product.
Germany's AI drone makers Helsing and Quantum Systems hit valuations of 12 and 3 billion euros this year, respectively, after rounds worth hundreds of millions of euros. In the UK, manufacturing platform PhysicsX raised $155 million this year, while missile interception startup Cambridge Aerospace reportedly picked up a $100 million round in August. However, the US channels over 40 percent of its public sector R&D spending into defence technology, while Europe musters barely 4 percent, with Germany spending only 0.04 percent of its GDP on defence-related R&D compared to 0.3 percent in the US.
Despite the advances, scaling remains difficult without continued political and procurement reform, as the UK still struggles with slow procurement cycles, clearance bottlenecks and a shortage of security-approved technical talent. Berlin should not squander this opportunity by just pouring fresh cash into legacy companies with outdated defence technologies, but should use the money to ramp up its military R&D spending and collaborate more on R&D with companies from other major EU defence markets like France and Italy.
Sources:
1. https://www.cnbc.com/2025/12/11/ai-defense-boom-in-uk-and-germany-as-new-wave-of-companies-emerge.html
