European VC breaks taboo by investing in pure defense tech from Ukraine’s war zones

Protection tech has gone from a no-go zone for VCs to a sizzling funding sector. Nonetheless, twin use — which means that the expertise should even have civilian functions — remains to be a requirement for many of them, together with the NATO Innovation Fund. 

Estonian VC agency Darkstar breaks from this development by typically investing in purely navy functions, with the aim of serving to rearm Europe utilizing combat-proven options rising from Ukraine. “That is very essential, not solely in the present day however for the subsequent 10 years,” stated its cofounder and basic companion Ragnar Sass (second from the left within the image).

The agency takes a hands-on strategy to this mission, serving to startups carry merchandise to navy prospects each in Ukraine and all through Europe. For Ukrainian groups, this implies not simply funding but additionally help with establishing compliant entities in NATO international locations like Estonia. “In any firm which desires to be a part of European procurement and even grants, the operational aspect needs to be excellent,” Sass stated. 

With a fundraising goal of €25 million (roughly $29.2 million) within the subsequent six to 12 months, Darkstar intends to deal with pre-seed and seed rounds, with a standard test dimension of €500k to €1 million. It has already made two investments: in Ukrainian-Estonian startups FarSight Vision, which focuses on geospatial analytics and 3D mapping for drone pilots, and Deftak, which develops ammunition for drones.

For Sass, investing in weapons wasn’t an apparent transfer. A key determine within the Estonian startup ecosystem ever since Skype’s founders funded his first startup, a group for pet homeowners, he went on to co-found CRM and gross sales software Pipedrive, and used the proceeds of that unicorn-sized exit to make more than 50 angel investments.

A few of these investments grew to become unicorns, too, together with Veriff. However none of them had been in protection, even after Russia’s full-scale invasion of Ukraine in 2022 prompted Sass to deliver trucks and aid to Ukraine, to which he has private and business ties.

“It took fairly a very long time mentally to grasp that I wish to be concerned in weapon programs,” Sass stated. He ultimately made his selection a yr and a half in the past when Estonian drone startup Krattworks grew to become his first protection funding.

Krattworks marked a turning level for Sass; it was additionally his final funding as an angel investor. Sass is now placing his cash into Darkstar, which began out as a coalition organizing hackathons and bootcamps, leveraging his decade-long experience at hackathon group Garage48 between 2010 and 2020. Since then, Sass went on to fund and promote one other firm, Salto X, though it’s unclear whether or not he made cash from that exit.

Sass isn’t the one one backing this strategy. Darkstar simply accomplished a primary shut of €15 million (roughly $17.5 million) backed by European entrepreneurs, household workplaces, and Estonian state-backed LP SmartCap, TechCrunch realized completely.

Backing a fund like Darkstar makes SmartCap an exception as effectively, alongside Lithuania’s sovereign VC fund Coinvest Capital, which grew to become licensed to make defense investments without requiring civilian use cases in 2023. It’s no coincidence that every one of those come from the Baltics.

Russia’s proximity and the Soviet Union’s former occupation give Estonians like Sass a way of urgency that’s now spreading throughout Europe as traders acknowledge the significance of protection. “However for those who don’t have actual know-how in that space, you’re struggling,” Sass stated. For Darkstar, constructing that know-how meant speaking to finish customers from day one.

In Darkstar’s case, the tip customers are Ukraine’s brigades. Whereas some modifications are being implemented, the nation has adopted a decentralized strategy, enabling fight items to make their very own selections. This may be onerous to navigate for outsiders, however Sass bought a head begin.

“Within the final three and a half years, I’ve been to Ukraine 20-plus instances, and I’ve personally met 100-plus unit commanders — frolicked with them, talked with them, realized from them,” stated the entrepreneur, who additionally discovered lots of widespread floor. “Elite items are extra just like startups than we will think about.”

Though low-cost first-person view (FPV) drones have been used to destroy equipment worth millions, Sass says that it will be an enormous mistake to suppose that tech developments from Ukraine are simply copyable. There’s sophistication — “most elite drone battalions in Ukraine have their very own R&D” — and there may be velocity on each side of the frontline. For example, fiber-optic drones have been a game changer.

For startups exterior of Ukraine, it signifies that an answer that works on paper might turn out to be pointless, and that’s the place Darkstar’s bootcamps are supposed to assist. The subsequent one will happen this summer time in Kyiv, and based on its website, will give corporations “suggestions, field-testing alternatives and fight validation.”

A few of Darkstar’s deal circulate will come from its bootcamps, the place employees work hands-on with groups for 5 days. However the pipeline is broader, and Ukraine’s 2,000 eligible groups stand out. “Lots of the Ukrainian corporations we’re taking a look at usually are not six months previous; they’ve been round two-plus years and so they have already managed to construct a product and firm with minimal capital.”

Normal mobilization of Ukrainian males isn’t as huge an impediment as usually assumed. Founders constructing efficient fight merchandise can obtain exemptions and journey approval, and a major proportion of Ukraine’s protection startup founders are ladies, together with FarSight Imaginative and prescient CEO, Viktoriia Yaremchuk, Sass stated. As for the restriction on protection tech exports out of Ukraine, that hurdle is in the process of being removed.

Sass is making use of an analogous location philosophy to protection investing. Simply as he as soon as argued that “early-stage Nordic startups ought to cut the crap and transfer to Silicon Valley,” Darkstar gained’t spend money on corporations that intend to remain based mostly completely in Ukraine. It is usually speaking to groups based mostly in Central and Japanese Europe, Latvia, the U.Ok. and Germany, amongst others. “After a yr or two, this [portfolio] shall be a far more numerous and combined group.”

In alignment with this aim, Darkstar describes itself as pan-European in background. Sass is joined by Estonia-based GPs Kaspar Gering, who spent a decade at Sensible in engineering and information science roles, and Mart Noorma, director of the NATO Cooperative Cyber Defence Centre of Excellence (on the left in the primary image). A fourth GP, Philip Jungen, is predicated in Germany, with one other companion and extra staffers in Ukraine.

As for classes, Darkstar plans to spend money on autonomous programs, air protection, electromagnetic warfare, communications, cybersecurity, sensors, in addition to surveillance and intelligence, each with single and twin makes use of.

In line with Sass, a few of these might flip into acquisition targets for cash-rich prime contractors struggling to ship the fast options that NATO international locations at the moment are keen to purchase from them. However fueled by governments coming to phrases with how the conflict in Ukraine has remodeled trendy warfare, different startups might additionally attain lots of of million in income on their very own and even go public.

It’s unclear whether or not protection startups, notably these with out civilian functions, can obtain breakout success on their very own. Nonetheless, the fast rise and valuation of corporations like Anduril and Helsing together with a wave of latest defense-focused funds, means that the prospect of venture-scale returns is being taken extra significantly.

Both manner, what retains Sass going is one thing larger. Although he embraces the humor of NAFO, a global online movement leveraging memes to support Ukraine, Sass additionally delivers a sober warning about Russia’s relentless conflict financial system. “The enemy is shifting very quick, and that’s precisely why I consider that we have to have the tech group being concerned far more to handle that vast and rising menace.”