Defence Tech, Venture Capital and Investment Screening: Germany’s Strategic Capital Dilemma
Authors: Jesper Spangenberg (Practice Lead Defence & Space, Werter GmbH) and Simon Sharghi-Erdmosa (Managing Programme Associate & Acting Head of Programmes and Partnerships, CELIS Institute)
Introduction [1]
The gradual erosion of the transatlantic relationship has prompted Brussels and European capitals to reassess the relationship between military and economic security. Historically, the two have always been closely intertwined, as industrial capacity, resource bases, and technological control have consistently underpinned military power. What is new, however, is the explicit political, financial, and military reweighting of this nexus in the transatlantic context.
This reconsideration can be observed on two levels of liberal market integration. First, at the level of trade integration, the ReArm Europe plan reflects a deliberate recalibration of defence procurement rules. By excluding the US defence-industrial base from EU-funded procurement programs, the initiative seeks to strengthen European value chains, expand industrial capacity, and reduce structural dependence on US-manufactured weapon systems. Control over software updates for systems such as the F-35 fighter jet, access to artillery shell resupply, and the provision of maintenance and spare parts directly shape Europe’s operational autonomy. Diverging security priorities in the contexts of Ukraine and Greenland have further sharpened European sensitivity to its historic dependence on US weapons.
Second, the financial integration of US capital into Europe’s defence sector is attracting heightened scrutiny. The German Ministry of Defence (BMVg) is conducting a risk assessment of the German arms industrial base to evaluate potential vulnerabilities arising from US foreign capital exposure. In parallel, recent procurement decisions by the German federal government illustrate a structural reality of the defence market: an increasing share of systems acquired from defence start-ups and scale-ups stems from companies whose growth and technological maturity have been enabled through US venture capital. So far, US investment in Germany has yet to be blocked. However, the evolving discourse illustrates growing political sensitivity surrounding the US-linked capital participation in German defence-tech firms.
The questioning of US capital integration into German defence start-ups exposes a fundamental tension at the heart of Germany’s strategic reorientation. While in current debates, US capital is increasingly perceived as carrying potential national security implications, it is difficult to overlook that the emergence, scale, and success of several prominent German defence-tech start-ups have been driven by US risk capital.
Despite the defence-tech boom, European start-ups continue to face structural difficulties in mobilising sufficient private capital domestically. Venture capital, particularly from the US, remains uniquely suited to finance early-stage, high-risk, software-driven innovation.
Defence-Tech and the Changing Character of Warfare
A recent NATO training scenario, in which Ukrainian drone operators simulated the neutralisation of an entire brigade using low-cost autonomous systems, vividly demonstrated a new reality. It showed that non-traditional, rapidly iterated systems can outmaneuver and overwhelm conventional forces, not through superior mass, but through speed, swarm logic, and tactical unpredictability. In particular, the rapid adoption of civilian technologies such as AI-enabled drones or first-person‑view (FPV) systems is reshaping battlefield dynamics.
While conventional military hardware remains central to military capability and deterrence, a software-driven battlespace is rapidly evolving, with innovation cycles measured in months rather than years. Software-driven systems rely on rapid prototyping, resilience testing, and continuous upgrades. These characteristics align more closely with venture capital-style risk financing than with traditional hardware-centric defence models, as the former require large upfront investments before demand, stable contracts, or cost efficiencies emerge. Against this background, Europe’s military readiness increasingly needs to be complemented with an ability to cultivate an innovation ecosystem that requires dynamic, risk-tolerant private capital.
Yet the challenge is not only one of innovation, but also of industrial capacity. Germany's and ultimately Europe's industrial defence ecosystem must undergo a structural transition away from fragmented, craftsmanship-style manufacturing toward large-scale industrial production to achieve its strategic objectives. Much like innovation cycles, building large production lines for software-driven weapons involves high upfront investment and long payback cycles. Venture capital, therefore, plays a dual role. It is not only essential to advance technological innovation, but also a prerequisite for expanding industrial capacity to a level capable of supporting Europe’s military needs.
Capital Dependence and Structural Constraints in Europe’s Defence-Tech Venture Capital Ecosystem
The chronic shortage of private risk capital in European financial markets reflects not only the traditionally risk-averse mindset of many domestic investors, but also the heavy structural reliance of European capitalisation on bank lending rather than private equity markets. In 2024, banks accounted for around 70% of business debt in the EU, whereas in the US, they provided only about 20%, with approximately 77% of corporate financing sourced through capital markets, primarily via corporate bonds purchased by institutional investors. Because bank-based financing involves fixed repayment obligations and limited risk-sharing, it tends to be less flexible than market-based financing.
The consequences of the European capital gap are particularly pronounced in the defence and deep-tech start-up sector. European entrepreneurs struggle to attract sufficient late-stage funding in European markets: the capital needed once a prototype has been developed to expand production, hire talent, and scale operations. Today, US investors provide more than 60% of the financing in European funding rounds exceeding $200 million, while Asian and US investors together account for nearly half of late-stage funding overall. In the absence of a harmonised European capital market, the existing financing gap in European capital markets and the resulting dependence on US risk capital is there to stay.
While Germany is seeking to address this capital gap through strategic investment vehicles such as the Deutschlandfonds and government-funded programmes like the Scale-up Direkt initiative to support the defence-tech sector, attracting private capital, including from foreign investors, will remain essential to achieving its ambition of becoming the "strongest conventional army in Europe." Even when accounting for EU-level instruments such as the Programme for Agile and Rapid Defence Innovation (AGILE), the European Defence Industry Programme (EDIP), and the European Defence Fund (EDF), these mechanisms remain insufficient to address existing capital needs.
Screening Capital: Germany’s Investment Screening in Defence Tech
Under the Foreign Trade and Payments Ordinance (AWV), foreign investment in the security and defence industry is subject to a mandatory, sector-specific filing requirement when a foreign investor acquires 10% or more of a German security or defence company’s voting rights. The concept of a foreign investor under the sector-specific regime covers all non-German natural and legal persons. Next to the sector of investment, the nature of the investor also weighs in on the risk assessment of foreign investment. In particular, whether a foreign investor is directly or indirectly controlled by a government serves as an indicator of risk, as it suggests that the investment may pursue not only financial returns but also foreign strategic or geopolitical interests.
The review takes place in two phases. In Phase I, the Federal Ministry for Economic Affairs (BMWE) has two months from the moment they are notified or made aware of the transaction to decide whether to open an in-depth investigation. If an in-depth review is opened, Phase II normally lasts four months from the receipt of complete documentation. This period may be extended by up to three additional months in particularly complex cases and by a further month where defence interests are significantly affected. The statutory review framework, therefore, allows for a maximum review duration of up to ten months (two months in Phase I and up to eight months in Phase II).
Importantly, the review timelines are not strictly continuous. If the Ministry requests additional information or documents from the parties, the review period may be suspended until the requested information is provided. As a result, the effective duration of the screening procedure can extend beyond the formal statutory timeline.
In January 2026, the Federal Ministry of Defence (BMVg) issued its first guidance for investors seeking to invest in the German defence industrial base. Although the BMVg’s role in the screening mechanism led by the BMWE is limited to providing an advisory opinion, the timing and substance of the guidance signal heightened scrutiny of foreign investment in Germany’s defence ecosystem. This development must also be viewed in the context of Germany’s 2024 National Security and Defence Industry Strategy, which groups together critical technologies considered essential to national sovereignty and provides that they should be sourced in Germany or, at the very least, within Europe. The assessment covers, among other factors, potential security concerns associated with the investor, the geographical location and governance structure of its decision-making bodies, and any direct or indirect supply relationships with the German Armed Forces. It also examines whether the target’s products occupy a distinctive position in international markets and whether they are of present military significance or could become strategically relevant in the future.
US-Risk Capital and National Security Considerations
Foreign venture capital investment raises national security concerns that partly overlap with, but also differ from, traditional foreign direct investment. While venture capital typically involves minority stakes, it may nevertheless enable access and influence. In particular, three factors are of relevance: the potential proximity of investors to political actors, the governance and information rights embedded in venture capital investments, and the structural opacity of fund-based ownership. Together, these features have the potential to create indirect channels of influence and early access to sensitive technologies.
a) Political Proximity
Exposure to political influence is a key consideration in national security assessments of foreign investments, as the political intent behind an investment may be to pursue strategic or political objectives. This notion has been particularly pronounced in the context of sovereign investment and state-owned enterprises as investment vehicles.
Current debates in Germany on US risk capital highlight the increasing blurring between private capital and the US executive. This emerging nexus has been labeled the “Authoritarian Stack” in a recent study published by the Friedrich-Ebert-Stiftung (aligned with Germany’s centre-left SPD). The study maps the network and connections between the US tech elite to the White House, such as Peter Thiel, co-founder and general partner of Founders Fund, and Elon Musk. The study informs ongoing risk assessments within the Social Democratic–led BMVg regarding the extent of Germany’s defence-tech start-up ecosystem’s exposure to US risk capital.
In contrast, Germany’s center-right CDU/CSU parliamentary group, which is the dominant force of the current government coalition with the SPD, considers such connections to be less problematic, arguing that awarding contracts to companies with investors such as Peter Thiel poses fewer legal and procurement‑law problems than critics claim. The CDU/CSU maintains that, given the security situation and operational urgency, such procurements can be justified and should not be blocked by overly restrictive interpretations of procurement rules and investment control regimes.
Even where no malign intent can be established, a proximity between political actors, defence-relevant technology firms, and investors alters the risk profile of foreign investment. This concern is reflected in the evolving EU screening framework: Article 19(4a) of the provisional agreement on the new Foreign Investment Screening Regulation explicitly highlights the risk of investors “acting on behalf of another state,” including situations where a foreign investor is subject to third-country legislation requiring the sharing of information for intelligence purposes without adequate due process or oversight mechanisms. This underscores that risk may arise not only from ownership structures or close proximity, but also from legal and systemic constraints imposed on the investor in its home jurisdiction.
b) Investment Approach
The investment approach of venture capital, in particular its reliance on minority investments at early stages of corporate and technological maturity, adds further concerns in national security discussions. Minority shareholdings are often perceived as less critical from a security perspective than majority acquisitions. In the venture capital context, however, minority stakes frequently come with governance rights that may carry significant informational and strategic weight.
Preferential information rights, board observer seats, veto powers, and continuous access to technical reporting may allow investors to gain granular insight into a start-up’s intellectual property, product roadmaps, data assets, and R&D processes long before the company enters a formal defence‑industrial value chain. In a software-defined defence environment, where the most sensitive elements of capability development occur during early‑stage design and algorithmic iteration, such a degree of visibility can itself constitute a strategic vulnerability.
c) Structural Opacity
A further national security consideration comes from the structural opacity of venture capital investments, as venture capital funds typically rely on complex ownership architectures comprising multiple limited partners across jurisdictions, layered investment vehicles, offshore fund structures, and parallel funds with overlapping governance personnel. As a result, identifying the ultimate beneficial owner behind a specific investment can be difficult, particularly where indirect participation or fund‑of‑funds structures are involved.
The challenge of identifying the ultimate beneficial owner is also reflected in the provisional agreement on the new Foreign Investment Screening Regulation, which recognises that it may not be possible to determine the natural person exercising ultimate control in cases involving complex ownership structures. In the defence sector, such opacity raises concerns as to who may ultimately gain access to sensitive information, technological know-how, or strategic decision-making processes which may directly impact a state's strategic autonomy on the battlefield.
Compared to private equity, which typically targets mature companies and seeks operational control through transparent ownership changes, venture capital operates through embedded, informational influence rather than formal control. When minority investments are combined with structural opacity and potential exposure to political influence, their security relevance is amplified. Influence is exercised not through ownership dominance but through early access and the cumulative effects of governance‑embedded proximity.
Conclusion
Germany’s, and ultimately Europe’s, emerging defence‑tech landscape stands at the intersection of three accelerating dynamics: a transformed character of warfare, a structural dependency on foreign risk capital, and a tightening investment‑screening environment. Together, these forces expose a central dilemma for European strategic autonomy.
On the one hand, modern military capability is increasingly defined by software-driven, scalable systems that depend on high-risk venture capital that Europe has not yet been able to mobilise in sufficient volumes domestically. On the other hand, the opacity of venture capital, its reliance on minority investment structures, and its potential exposure to political influence pose unique challenges to the state’s ability to safeguard defence technologies.
The result is a contested space in which Europe’s operational readiness is conditioned by two opposing imperatives: openness to foreign risk capital as the lifeblood of defence innovation, and regulatory vigilance to prevent strategic leakage, undue influence, or the embedding of foreign political priorities into Germany’s and Europe’s technological core.
This political-technical tension is reflected in Germany’s growing debate on US risk capital. In this context, investment screening functions not only as a security review mechanism but also as a regulatory tool through which highly political decisions about US capital participation in the German defence-tech sector can be managed at the administrative level. While blanket prohibitions remain unlikely, authorities may rely more frequently on prolonged review procedures, which have the potential to render investments financially unviable. At the same time, the BMWE is likely to make greater use of mitigation measures that condition US investment in Germany’s defence-tech by requiring specific safeguards, such as maintaining production facilities or key capabilities in Germany. Through these mechanisms, the government can manage and constrain security-sensitive US investment in the defence technology sector without resorting to outright prohibitions.
The debate at hand is not unique to the security and defence sector. Close linkages between governments and private industry exist across critical infrastructure, energy, digital technologies, and finance. Political and corporate networks are a structural feature of modern economies. However, in the defence domain, these relationships are inherently more exposed, as procurement and investment decisions are always political in nature and closely tied to shifting parliamentary majorities and security priorities.
Against this backdrop, the current debate on US risk capital in Germany should be understood not solely as a security-technical issue, but as a fundamentally political one. Public criticism of US-based venture capital investors reflects not only geopolitical tensions, but also domestic political dynamics and the growing scrutiny faced by certain investors themselves. While security-relevant concerns associated with foreign venture capital investments must be addressed through established FDI‑screening mechanisms, it would be misleading to frame the debate exclusively in technocratic terms. Investment screening increasingly functions as a governance interface where political risk, public perception, and strategic autonomy are negotiated administratively.
[1] Methodological Note: This blog seeks to depict the current debate and controversy on German defence technology, US venture capital participation, and investment screening. The objective is to examine how security risks associated with foreign venture capital are framed and how these narratives interact with existing structures of state‑industry relations in the security and defence sector.
