Memo: Ninety-Nine Percent of Drone Defence Startups Will Die, But What About Europe?

Ninety-nine percent of drone companies will die. That’s what Anduril’s Chief Business Officer Matthew Steckman predicted in a recent podcast. That would mean that of the 10,000 drone companies today, only a hundred would remain.

The global drone market at the end of 2025. Source: Tracxn/Failory via Anthropic.

There are currently seven drone unicorns: Anduril, Helsing, DJI, Zipline, Quantum Systems, Shield AI and Skydio. Five of these are heavily into defence, not a surprise since most of the current funding flows are now going there. While the anti-drone segment is tiny, with just 176 companies, funding for counter-drones rose 2,300% last year, reflecting the unprecedented shift in how modern war has been waged in Ukraine.

In Steckman’s defence, the U.S. market, where contracting comes from one customer, looks to be sorted after Anduril’s monster 20 billion-dollar order earlier this month. And with the recent Palantir government exclusivity deal, Anduril is set to strengthen its dominant position in the U.S. with its new 60 billion valuation. The Thielverse has secured the future of U.S. defence, a fact that Europe has to start accepting.

While the U.S. venture capital market has delivered its magic, the retail market is only now picking up. Swarmer AI, a Ukraine-tested startup with only 350,000 dollars in orders, rose 1,200% during the first 48 hours of trading, reflecting the proprietary characteristics of the defence technology market. Retail has to crowd into a few scattered cases that become public.

But, as always. Europe is different.

Europe: Three Possible Markets

A major transatlantic defence decision went mostly unnoticed this February when the U.K. was given control of the NATO Joint Force Command in Norfolk, Virginia, the nerve centre of NATO’s Arctic defence that includes the U.K., Denmark, Finland, Iceland, Norway and Sweden.

Why is this relevant? In the “Europeanization of NATO,” the Northern countries are creating a separate enclave within NATO with closer ties to the U.S. At the same time, Italy, Greece, Turkey, Spain, Portugal and the Balkans reporting to JFC Naples, is creating a distinct Mediterranean naval enclave. Still to find its place in the geopolitical reshuffle.

The rest will report to JFC Brunssum which is in charge of Europe’s Eastern flank, except for Finland’s 1,340km border with Russia that belongs to JFC Norfolk. One half of Europe’s Russian front reports to Brunssum and the other half to Virginia, creating a procurement conundrum. The first europeanized and the second more transatlantically agile.

In other words, European NATO has at least three different spheres of influence. Orders will not come from one single customer, as with the U.S. Department of War, but from different European groups of different sizes, defensive needs and political spectrums.

The three JFC’s by GDP. Sources: NATO, IMF, World Bank via Anthropic.

Tier 1 defence venture investors are thus cautious when it comes to European defence despite raised defence budgets. Money isn’t flowing. The die is cast, but it hasn’t stopped rolling yet. Where will the European demand come from and what will it look like?

The most prominent example of European unpredictability is the recent German cap on deftech spending per company. This is already wreaking havoc at Helsing and Stark, both backed by U.S. investors.

It isnt’t unlikely that Europe will be divided into three markets when it comes to drone defence. One that is distinctively European, and unpredictable, and one that is more coupled transatlantically and stable. Where France will land in the end is anybody’s guess. The European dice rolls erratically.

The Joint Expeditionary Force

Europe is experiencing its biggest tumult since the end of the cold war as the war in Ukraine keeps on extending. One one hand, Europe’s economies are not in synch, and on the other, it is receiving unprecedented pressure form its key ally, the U.S.

One of the European defence enclaves that is actually moving is the Joint Expeditionary Force, which is behind the Baltic Sentry, designed to safeguard the Baltic Sea from more undersea infrastructure breaches. With 40 percent of Russian oil traveling through the Baltic Sea, this could be of interest for the U.S. also. With the Arctic dimension, JEF would be 69 percent of NATO’s budget. Poland could also join here, making it even bigger. What’s more, JEF shows significant coherence as it doesn’t include volatile countries such as Hungary and Slovakia.

JEF vs the JFC’s by GDP. Sources: NATO, IMF, World Bank via Anthropic.

As JEF is coordinating the fastest, the actual first demand could come from there. It also includes the countries that better understand the transition to new defence with little historic legacy industry such as Rheinmetall.

Democratic Differences

While the U.S. is increasingly stepping away from spending its defence budget on Europe, one aspect of NATO still remains valuable for the U.S. The defence of the Arctic. Countries aligning with this are the Nordics and the U.K. By chance, or design, the exact same nations that are in JFC Norfolk. There are increasing signs that these will create a separate enclave within NATO, probably together with the Netherlands.

Recent U.S. rethoric of Europe being a bad ally in its war in Iran, a drastic shift in the NATO composition may come sooner than later as the U.S. increasingly is driving a wedge between the E.U. allies so as to separate which ones to align with.

While JFC Naples may currently seem as the most peaceful and detached NATO enclave, it may turn into a melting pot if the Iran war continues to expand with Cyprus (not a NATO member) receiving salvos of Hezbollah drones.

The U.S. would probably want to keep JFC Naples close while its reworking its Arctic strategy. But what will happen to Brunssum, will the U.S. leave half of the EU/Russia border to Europe alone? And if yes, what control and procurement will Europe give to the U.S. there?

Democracy levels of the three JFCs. Source: Economist, NATO, IMF via Anthropic.

The three diffenet spheres within NATO, north, central and south, have a distincive spread in levels of democracy. Only JFC Norfolk is considered a full democracy, only the U.S. falling below that threshold, while Brunssum and Naples are on average considered flawed democracies. Interestingly, the U.S. is above the averages of both Brunssum and Naples.

More importantly, Norfolk is clustered tighter, suggesting stronger cohesion. This suppports the hypothesis that Norfolk may move faster to real procurement with better decisions than Brunssum and Naples.

Perhaps witness to this, Stark, which is suffering the most from the German spending cap, rececntly opened offices in Stockholm to better serve the Arctic dimension.

While the JFCs will affect how Europe will move into modern defence, the sizes of the individual economies will also have an effect in how the sub-alliances will form. Poland, one of the fastest-growing European nations, is well on its way in its defence buildup, while the Baltic states, with a combined GDP one fifth of Poland, have virtually no traditional defence capabilities.

As with the JFCs, both Norfolk and Brunssum are led by a large nation, while Naples is more evenly balance between three larger economies. In the Arctic, the U.S. is expected to carry the largest load, while Germany will do the same on Europe’s eastern flank.

Founders and investors are caught in this geopolitical centrifuge where the most agile players will come out as winners. And we haven’t even touched the future of the European Union, which the U.S. administration obviously wants to break as it increasingly references its war in Iran as its off-ramp out of NATO.

The Middle East

As if Europe wasn’t complicated enough alone, the crisis in Iran is making the transatlantic connection even more unreliable. But to some, it emerges as an opportunity as some players may be more suited to welcome investments and orders from Saudi-Arabia, the UAE and even Qatar.

With recent reports that U.S. stockpiles are dwindling, this may be Europe’s moment to balance the Middle Eastern demand. While France has traditionally been the European arsenal of the Middle East, this time the suppliers with stronger U.S. ties will probably be preferred partners. That is if the Abraham Accords and the Board of Peace prove successful.

While Naples would seen the natural enclave to snap future Middle Eastern demand, it doesn’t show signs of producing the required products. Except of possible Turkish technology.

The more likely enclave to fill this void would be the U.K. and the Nordics, or JFC Norfolk. The U.S. would likely prefer this so as to get the production of Arctic defence products running.

In conclusion, while the U.S. defence technology market seems set in stone, the European market is far from sorted. The startups that have the agility to best balance European and U.S. interest will gain access to the largest funding and exit markets, now maybe also including the Middle East, and thus grow to become Europe’s category builders. While cap table structuring will play an increasingly dominant role as the U.S.-E.U. rift widens, the development of Joint Force Commands may hint at how European contracting for new defence will develop.