European defense startups have a significant competitive edge by creating tech outside of US ITAR (International Traffic in Arms Regulations). This 'ITAR island' makes their products highly valuable for export and for acquisition by US firms seeking to bypass cumbersome American export controls.
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A European founder targeting the US market shouldn't dismiss European VCs. You might be the top priority in a European firm's portfolio, receiving more attention and support than you would as a lower-priority deal for a top-tier, oversubscribed Silicon Valley firm.
The push to build defense systems in America reveals that critical sub-components, like rocket motors or high-powered amplifiers, are no longer manufactured domestically at scale. This forces new defense companies to vertically integrate and build their own factories, essentially rebuilding parts of the industrial base themselves.
A major shift in government procurement for space defense now favors startups. The need for rapid innovation in a newly contested space environment has moved the government from merely tolerating startups to actively seeking them out over traditional prime contractors.
Building hardware compliant with US defense standards (NDAA) presents a major cost hurdle. Marine robotics company CSATS notes that switching from a mass-produced Chinese component to a US-made alternative can increase the price by 8x to 15x, a significant economic challenge for re-shoring manufacturing.
Limiting chip exports to certain nations will force them to develop their own parallel hardware and software. This bifurcation creates a new global competitor and risks making the West's technology stack obsolete if the rival ecosystem becomes dominant.
The most likely exit for a defense startup isn't necessarily being acquired by a large contractor. By developing a capability that can be adopted across multiple service branches (e.g., Navy, Army, Marine Corps), a startup can significantly expand its market. This "joint solution" approach creates more runway and strategic options.
According to Terra Industries' founder, defense contracting in Africa is network-based and solution-first, not bureaucratic. This gives startups an edge over incumbents. Success comes from building a working product and conducting live field demos, bypassing the lengthy proposal processes common in the West.
The emergence of public infighting and rivalry among startups at the Munich Security Conference is a positive indicator. It shows the European defense tech scene has moved beyond its nascent stage and is now a competitive, maturing market with clear winners and losers.
The go-to-market strategy for defense startups has evolved. While the first wave (e.g., Anduril) had to compete directly with incumbents, the 'Defense 2.0' cohort can grow much faster. They act as suppliers and partners to legacy prime contractors, who are now actively seeking to integrate their advanced technology.
Anduril isn't looking to acquire and fix struggling defense startups. Their acquisition sweet spot is a company with a strong engineering team and a unique product that is struggling with go-to-market. Anduril provides the capital and, more importantly, the infrastructure (legal, government relations, sales) to accelerate an already-great product.
