European VC Disrupts Norms by Investing in Pure Defense Tech from Ukraine’s War Zones

Investment in defense technology has transitioned from a specialized interest for venture capitalists to a thriving industry. However, the principle of dual-use technology—applicable in both military and civilian sectors—remains a vital consideration for most investors, including the NATO Innovation Fund.

Estonian venture capital firm Darkstar stands apart by occasionally supporting ventures that focus exclusively on military applications, with the goal of enhancing Europe’s defense through solutions proven in combat in Ukraine. “This is critical, not just for the present but for the next decade,” said Ragnar Sass, co-founder and general partner of Darkstar (second from the left in the image).

The firm employs an active approach in this endeavor, helping startups promote their products to military clients in Ukraine and across Europe. For Ukrainian teams, this involves not only financial backing but also assistance in forming compliant entities in NATO nations like Estonia. “For any company looking to tap into European procurement or secure grants, operational excellence is essential,” Sass explained.

With an ambitious fundraising target of €25 million (about $29.2 million) within the next six to twelve months, Darkstar is zeroing in on pre-seed and seed investments, usually ranging from €500,000 to €1 million. The firm has already pledged support to two startups: Ukrainian-Estonian firms FarSight Vision, which focuses on geospatial analytics and 3D mapping for drone operators, and Deftak, which specializes in drone munitions.

Sass’s journey into weaponry investment has not been linear. A prominent figure in the Estonian startup ecosystem, he received initial backing from Skype’s founders for his first venture aimed at pet owners, co-founded the CRM tool Pipedrive, and leveraged his successful exit to make over 50 angel investments.

While some of these investments have transformed into unicorns, like Veriff, none were in the defense sector. The extensive Russian invasion of Ukraine in 2022 prompted Sass to assist by sending aid and trucks to Ukraine, where he maintains both personal and business connections.

“It took me some time to mentally accept my inclination to invest in weapon systems,” Sass said. His resolve crystallized a year and a half ago when Estonian drone startup Krattworks became his first defense investment.

Krattworks marked a pivotal shift for Sass; it was also his final investment as an angel investor. He is now channeling investments through Darkstar, which originated as a coalition hosting hackathons and bootcamps, drawing on his decade-long experience with the hackathon community Garage48 from 2010 to 2020. Subsequently, Sass financed and sold another venture, Salto X, though the specifics of that exit remain unclear.

Darkstar has secured support from notable sources, completing an initial raise of €15 million (approximately $17.5 million), backed by European entrepreneurs, family offices, and the Estonian state-supported LP SmartCap, as learned exclusively by TechCrunch.

SmartCap’s support for a fund like Darkstar illustrates an exception in the venture landscape, akin to Lithuania’s sovereign VC fund Coinvest Capital, which received clearance to make defense investments without requiring civilian use cases from 2023 onward. It’s significant that these initiatives stem from the Baltics.

Given Estonia’s geographical closeness to Russia and its historical connections to the Soviet Union, a sense of urgency influences entrepreneurs like Sass. This mindset is now resonating throughout Europe as investors increasingly recognize the importance of defense. “However, if you lack authentic expertise in this field, you’re at a disadvantage,” Sass cautioned. For Darkstar, building this expertise required early engagement with end users.

In Darkstar’s context, these end users are the brigades in Ukraine. Despite ongoing shifts, the country has adopted a decentralized approach, empowering combat units to make crucial decisions autonomously. This evolving landscape can pose challenges for external entities, yet Sass enjoyed an advantageous start.

“Over the past three and a half years, I have visited Ukraine more than twenty times and engaged with over a hundred unit commanders—spending time, conversing, and learning from them,” Sass reported, noting many similarities. “Elite units are more similar to startups than most people realize.”

While low-cost first-person view (FPV) drones have been deployed to neutralize assets worth millions, Sass emphasizes that assuming Ukraine’s technological advancements can be easily duplicated would be a serious mistake. There exists a level of sophistication—“most elite drone battalions in Ukraine conduct their own R&D”—along with rapid changes on both sides of the conflict. For example, the introduction of fiber-optic drones has proven transformative.

For startups outside Ukraine, this implies that a theoretically viable solution may falter in reality, underscoring the rationale behind Darkstar’s bootcamps. The upcoming session is planned for this summer in Kyiv, where participants can expect “feedback, field-testing opportunities, and combat validation,” as stated on its website.

A portion of Darkstar’s deal flow will emerge from these bootcamps, where staff engage in intensive collaboration with teams over five days. However, the pipeline goes deeper, with Ukraine boasting 2,000 eligible teams marked by their experience. “Many of the Ukrainian firms we are evaluating are not startups in their infancy; they have typically been active for over two years and have already developed products and businesses with minimal capital investment.”

The general mobilization of Ukrainian men isn’t as substantial a hurdle as often presupposed. Founders creating effective combat products can secure exemptions and travel permits, and a significant portion of Ukraine’s defense startup founders are women, including FarSight Vision CEO, Viktoriia Yaremchuk, Sass noted. Furthermore, issues surrounding defense tech exports from Ukraine are being addressed.

Sass is applying a similar geographical approach to defense investments. Much like his past suggestion that “early-stage Nordic startups should forgo the fluff and move to Silicon Valley,” Darkstar intends to avoid investing in companies that only aim to remain in Ukraine. The firm is seeking collaborations with teams across Central and Eastern Europe, in Latvia, the U.K., Germany, and beyond. “In a year or two, this portfolio will showcase a much more diverse array of companies.”

Consistent with this vision, Darkstar positions itself as a pan-European entity. Sass collaborates with Kaspar Gering, who has a decade of experience in engineering and data science at Wise, and Mart Noorma, director of the NATO Cooperative Cyber Defence Centre of Excellence (featured on the left in the main image). A fourth GP, Philip Jungen, is based in Germany, complemented by additional staff within Ukraine.

As for focus areas, Darkstar intends to invest in autonomous systems, air defense, electromagnetic warfare, communications, cybersecurity, sensors, along with surveillance and intelligence, addressing both single and dual-use technologies.

According to Sass, some of these investments might appeal to cash-flush prime contractors that are struggling to deliver rapid solutions that NATO countries are eagerly seeking. However, as governments confront the transformation of modern warfare due to the war in Ukraine, other startups might independently generate notable revenue, even reaching public markets.

Whether defense startups, particularly those without civilian applications, can achieve considerable success independently remains to be seen. Nonetheless, the swift ascent and valuations of firms like Anduril and Helsing, coupled with a proliferation of new defense-focused funds, suggest a growing recognition of the potential for venture-scale returns in this arena.

Ultimately, Sass is driven by a broader vision. While he appreciates the light-heartedness of the NAFO movement—a global online initiative that uses memes to support Ukraine—Sass delivers a serious warning regarding Russia’s aggressive war economy. “The adversary is advancing rapidly, and that’s precisely why I believe we must engage the tech community more actively to counterbalance this imminent and escalating threat.”