Germany to take direct stakes in defence startups under new strategy

By Maria Martinez and Miranda Murray

BERLIN, July 22 (Reuters) - Germany's government on Wednesday said it will create an investment fund that allows the state to take direct stakes in defence startups, as part of a broader strategy to support new businesses.

Spurred by Russia's war in Ukraine and doubts about the reliability of U.S. security guarantees under Donald Trump, Germany and other European governments are moving to rebuild defence capacity after decades of underinvestment.

Startups and scale-ups in the security and defence sector are playing an increasingly important role in bolstering Germany's security and defence readiness, according to a government paper seen by Reuters.

German Economy Minister Katherina Reiche said at a press conference that the defence sector overall could generate additional economic growth of 0.5% to 1.0% if the extra funding is invested well.

German AI defence firm Helsing and autonomous ground-systems startup ARX Robotics have supplied systems for battlefield use in Ukraine, where the war has become a proving ground for fast-deployable technology and helped show young European companies can deliver capabilities faster than traditional procurement channels.

To improve access to capital, the government will establish "a new vehicle for direct federal investments in startups and scale-ups" that develop products and services with clear military applications, it said.

The value of the fund has not been announced.

"By placing a major order, the state safeguards production and secures business deals. There is no need to invest capital upfront or tap into subsidy funds; the purchase order itself provides the economic security that start-ups need," Reiche said.

STRATEGY AIMS TO MAKE GERMANY MORE APPEALING

The vehicle is part of a broader startup strategy, led by the economy ministry, aimed at improving access to finance, attracting skilled workers and cutting bureaucracy for newly founded companies.

"After years of stagnation, one part of Germany’s economy is showing remarkable momentum: entrepreneurship," Deutsche Bank Research said in a note.

A record 3,053 startups were founded in Germany in the first half of 2026, up 52% from the second half of 2025. They employed 26% more people in 2024 than in 2020.

The German bank said the startup strategy could provide fertile ground for the numerous newly founded firms to grow.

"Europe and Germany perform well in early-stage financing — specifically pre-seed and seed capital —  where Europe accounts for nearly 80% of the allocated funds," said Reiche.

"However, Europe loses ground in larger funding rounds, with companies heading to the United States to secure major financing."

Germany struggles to turn successful startups into growth companies. According to the paper, venture capital investment reached €7.2 billion ($8.21 billion) in 2025, far below levels in the United States and Britain.

Germany's BVK private equity and venture capital association said the strategy marked an important step in strengthening Germany's standing as a startup location and "focused on the right levers, particularly regarding financing."

The strategy also aims to mobilise more private capital for sectors including technology and biotechnology.

The Future Fund — a German government-backed venture capital programme launched in 2021 — will be extended beyond 2030.

(Reporting by Maria Martinez, Christian Kraemer and Miranda Murray, Editing by Alexandra Hudson and Andrea Ricci)