European Vc Breaks Taboo By Investing In Pure Defense Tech From Ukraine’s War Zones

1 week ago

Defense tech has gone from a no-go area for VCs to a basking finance sector. However, dual usage — meaning that nan exertion must besides person civilian applications — is still a request for astir of them, including the NATO Innovation Fund.

Estonian VC patient Darkstar breaks from this inclination by investing successful purely subject applications, pinch nan extremity of helping rearm Europe utilizing combat-proven solutions emerging from Ukraine. “This is very critical, not only coming but for nan adjacent 10 years,” said its cofounder and wide partner Ragnar Sass (second from nan near successful nan picture).

The patient takes a hands-on attack to this mission, helping startups bring products to subject customers some successful Ukraine and passim Europe. For Ukrainian teams, this intends not conscionable backing but besides support pinch mounting up compliant entities successful NATO countries for illustration Estonia. “In immoderate institution which wants to beryllium portion of European procurement aliases moreover grants, nan operational broadside has to beryllium perfect,” Sass said.

With a fundraising target of €25 cardinal (approximately $29.2 million) successful nan adjacent six to 12 months, Darkstar intends to attraction connected pre-seed and seed rounds, pinch a accustomed cheque size of €500k to €1 million. It has already made 2 investments: successful Ukrainian-Estonian startups FarSight Vision, which specializes successful geospatial analytics and 3D mapping for drone pilots, and Deftak, which develops ammunition for drones.

For Sass, investing successful weapons wasn’t an evident move. A cardinal fig successful nan Estonian startup ecosystem ever since Skype’s founders funded his first startup, a organization for pet owners, he went connected to co-found CRM and income instrumentality Pipedrive, and utilized nan proceeds of that unicorn-sized exit to make more than 50 angel investments.

Some of these investments became unicorns, too, including Veriff. But nary of them were successful defense, moreover aft Russia’s full-scale penetration of Ukraine successful 2022 prompted Sass to deliver trucks and assistance to Ukraine, to which he has individual and business ties.

“It took rather a agelong clip mentally to understand that I want to beryllium progressive successful limb systems,” Sass said. He yet made his prime a twelvemonth and a half agone erstwhile Estonian drone startup Krattworks became his first defense investment.

Krattworks marked a turning constituent for Sass; it was besides his past finance arsenic an angel investor. Sass is now putting his money into Darkstar, which started retired arsenic a conjugation organizing hackathons and bootcamps, leveraging his decade-long experience astatine hackathon organization Garage48 between 2010 and 2020. Since then, Sass went connected to money and waste different company, Salto X, though it is unclear whether he made money from that exit.

Sass isn’t nan only 1 backing this approach. Fifteen-month-old Darkstar conscionable completed a first adjacent of €15 cardinal (approximately $17.5 million) backed by European entrepreneurs, family offices, and Estonian state-backed LP SmartCap, TechCrunch learned exclusively.

Backing a money for illustration Darkstar makes SmartCap an objection arsenic well, alongside Lithuania’s sovereign VC money Coinvest Capital, which became authorized to make defense investments without requiring civilian usage cases successful 2023. It’s nary coincidence that each of these travel from nan Baltics.

Russia’s proximity and nan Soviet Union’s erstwhile business springiness Estonians for illustration Sass a consciousness of urgency that is now spreading crossed Europe arsenic investors admit nan value of defense. “But if you don’t person existent know-how successful that area, you’re struggling,” Sass said. For Darkstar, building that know-how meant talking to extremity users from time one.

In Darkstar’s case, nan extremity users are Ukraine’s brigades. While immoderate changes are being implemented, nan state has adopted a decentralized approach, enabling combat units to make their ain decisions. This tin beryllium difficult to navigate for outsiders, but Sass sewage a caput start.

“In nan past 3 and a half years, I person been to Ukraine 20-plus times, and I person personally met 100-plus portion commanders — spent clip pinch them, talked pinch them, learned from them,” said nan entrepreneur, who besides recovered a batch of communal ground. “Elite units are much akin to startups than we tin imagine.”

Although inexpensive first-person position (FPV) drones person been utilized to destroy instrumentality worthy millions, Sass says that it would beryllium a immense correction to deliberation that tech developments from Ukraine are easy copyable. There’s sophistication — “most elite drone battalions successful Ukraine person their ain R&D” — and location is velocity connected some sides of nan frontline. For instance, fiber-optic drones person been a crippled changer.

For startups extracurricular of Ukraine, it intends that a solution that useful connected insubstantial could go pointless, and that’s wherever Darkstar’s bootcamps are meant to help. The adjacent 1 will return spot this summertime successful Kyiv, and according to its website, will springiness companies “feedback, field-testing opportunities and combat validation.”

Some of Darkstar’s woody travel will travel from its bootcamps, wherever unit activity hands-on pinch teams for 5 days. But nan pipeline is broader, and Ukraine’s 2,000 eligible teams guidelines out. “Many of nan Ukrainian companies we are looking astatine are not six months old; they person been astir two-plus years and they person already managed to build a merchandise and institution pinch minimum capital.”

General mobilization of Ukrainian men isn’t arsenic large an obstacle arsenic often assumed. Founders building effective combat products tin person exemptions and recreation approval, and a important percent of Ukraine’s defense startup founders are women, including FarSight Vision CEO, Viktoriia Yaremchuk, Sass said. As for nan regularisation connected defense tech exports retired of Ukraine, that hurdle is in nan process of being removed.

Sass is applying a akin location accuracy to defense investing. Just arsenic he erstwhile based on that “early-stage Nordic startups should cut nan crap and move to Silicon Valley,” Darkstar won’t put successful companies that intend to enactment based exclusively successful Ukraine. It is besides talking to teams based successful Central and Eastern Europe, Latvia, nan U.K. and Germany, among others. “After a twelvemonth aliases two, this [portfolio] will beryllium a measurement much divers and mixed group.”

In alignment pinch this goal, Darkstar describes itself arsenic pan-European successful background. Sass is joined by Estonia-based GPs Kaspar Gering, who spent a decade astatine Wise successful engineering and information subject roles, and Mart Noorma, head of nan NATO Cooperative Cyber Defence Centre of Excellence (on nan near successful nan main picture). A 4th GP, Philip Jungen, is based successful Germany, pinch different partner and further staffers successful Ukraine.

As for categories, Darkstar plans to put successful autonomous systems, aerial defense, electromagnetic warfare, communications, cybersecurity, sensors, arsenic good arsenic surveillance and intelligence, some pinch azygous and dual uses.

According to Sass, immoderate of these could move into acquisition targets for cash-rich premier contractors struggling to present nan accelerated solutions that NATO countries are now consenting to bargain from them. But fueled by governments coming to position pinch really nan warfare successful Ukraine has transformed modern warfare, different startups could besides scope hundreds of cardinal successful gross connected their ain and moreover spell public.

It is unclear whether defense startups, peculiarly those without civilian applications, tin execute breakout occurrence connected their own. However, nan accelerated emergence and valuation of companies for illustration Anduril and Helsing on pinch a activity of caller defense-focused funds, suggests that nan imaginable of venture-scale returns is being taken much seriously.

Either way, what keeps Sass going is thing bigger. Though he embraces nan joke of NAFO, a global online activity leveraging memes to support Ukraine, Sass besides delivers a sober informing astir Russia’s relentless warfare economy. “The force is moving very fast, and that’s precisely why I judge that we request to person nan tech organization being progressive measurement much to reside that immense and increasing threat.”