EU Defense Market Entry: Challenges and Opportunities

The European Commission recently published its EU Defense Industry Transformation Roadmap, marking a significant shift in European defense policy toward innovation-driven growth. The Roadmap complements the European Defense Industrial Strategy (EDIS) and the proposed European Defense Industry Program (EDIP) regulation and should be read in the context of the Commission's 'Readiness 2030' plan (initially announced as 'ReArm Europe' in February 2025), which envisions up to €800 billion in additional defense spending capacity across the EU. The overarching objective is to accelerate disruptive innovations in the defense sector and position the European defense industry as more resilient and technologically advanced.

The Roadmap creates substantial opportunities for start-ups, scale-ups and technology-oriented SMEs – collectively termed "New Defense" actors – by providing enhanced access to EU funding instruments, testing environments and procurement structures. For German companies, particularly those in the technology and start-up ecosystem, this opens new avenues for participation in security-relevant EU innovation projects and dual-use technology development.

From an asset management perspective, the Roadmap also serves as a “capital mobilization” document. It explicitly calls on the EU to engage its financial ecosystem – including “investment funds and asset managers” – in support of defense-sector growth. In particular, the Roadmap highlights EU-backed fund-of-funds initiatives (including the Defense Equity Facility, expected to channel more than €500 million in equity into EU defense companies by 2026, and a proposed “up to €1 billion” Fund of Funds (with the support of private funds) targeted for launch in Q1 2026.

Key Strategic Objectives

The Roadmap focuses on opening the defense industry to young, innovation-oriented companies that are expected to play a central role in developing new security-relevant technologies. Priority areas include:

• Artificial intelligence
• Autonomous systems
• Quantum technologies
• Cyber defense
• Dual-use applications (civilian and military)

A core objective is to render public procurement more risk-tolerant, foster disruptive innovations through targeted demand-side measures and facilitate the participation of companies not traditionally associated with the defense sector.

Four Central Action Areas

1. Financing

The Roadmap highlights two key financing instruments: (i) the Defense Equity Facility (a Commission/EIF-backed fund-of-funds), expected to channel more than €500 million in equity into EU defense companies by 2026, and (ii) a proposed “up to €1 billion” Fund-of-Funds (supported by private funds, including venture capital, private equity, private credit and infrastructure) targeted for launch in Q1 2026.

The Fund-of-Funds is specifically designed for so-called New Defense-actors, including start-ups, scale-ups and technology-oriented SMEs working in priority areas such as AI, autonomous systems, quantum technologies, cyber defense and dual-use applications. The initiative strengthens connections between civilian innovation funding and defense by enabling defense-relevant deep tech developments to receive funding through Horizon Europe. Eligible start-ups can therefore access multiple funding streams, including the Fund-of-Funds, Horizon Europe and dedicated EU funds for companies newly entering the defense market. Detailed eligibility criteria – such as company size thresholds, revenue limits or specific application procedures – are expected to be published in upcoming calls for proposals. In light of the Commission's Readiness 2030 plan, which envisions up to €800 billion in additional defense spending capacity across the EU, the scale of available funding for new entrants may increase substantially beyond the initial Fund-of-Funds allocation.

The Roadmap’s financing pillar is designed to attract private capital alongside EU-backed financing: (i) it explicitly lists private funds and asset managers among the intended financing sources; and (ii) it points to equity (fund-of-funds) and debt (EIB support, including a dedicated envelope to support access to debt for SMEs in defense supply chains). Together, these mechanisms are expected to create fundraising/anchor-capital opportunities for eligible GPs, and expanded defense/dual-use deal flow for VC / growth / private credit strategies.

2. Accelerating Time-to-Market

New EU instruments are designed to enable technologies to be tested and brought to operational readiness within months. These instruments are intended to address the traditionally lengthy development and testing cycles that have posed significant barriers for new companies seeking to enter the defense market, enabling rapid prototyping and validation of disruptive technologies.

3. Access to Contracts

Innovation alliances between technology companies and military stakeholders will facilitate market entry. Traditional procurement structures have historically been risk-averse and difficult for non-traditional defense companies to navigate. The Roadmap seeks to address this by making public procurement more accessible to innovative newcomers and by directing an increasing share of EU funds toward companies newly entering the defense market. These reforms are designed to counterbalance the market dominance of established defense contractors, which has historically made it challenging for new entrants to compete for contracts.

4. Skills Development

In 2026, the Commission will launch specialized Defense Skills Programs, with dedicated training structures to be established in 2028 to meet demand for high-tech specialists. According to the Roadmap, approximately 600,000 European professionals in defense-relevant sectors are expected to acquire skills by 2030. These programs are intended to address the significant talent gap that technology companies face when entering the defense space, where specialized sector knowledge has traditionally been a barrier to entry.

Industrial Modernization and Investment Targets

The Roadmap envisions modernization of industrial production capacities through flexible, digitally supported manufacturing models. Member States are encouraged to allocate at least 10% of their defense budgets to highly innovative technologies. In the context of evolving NATO commitments for members to spend at least 2% of GDP on defense – with many Member States now targeting higher thresholds – and the Readiness 2030 plan's substantial additional spending capacity, this 10% allocation is expected to translate into significantly larger absolute funding volumes than previously anticipated. This allocation target creates substantial demand-side funding opportunities for innovative start-ups and technology companies, particularly those developing disruptive solutions in the priority technology areas identified by the Roadmap.

Implications for German Companies

For German companies, especially within the technology and start-up ecosystem, the Roadmap creates new opportunities for participation in security-relevant EU innovation projects. These opportunities are further amplified by the broader EU defense spending initiatives, including the Readiness 2030 plan and the complementary EDIS and EDIP frameworks, which collectively expand the scale and scope of available funding and procurement channels. However, new entrants should be aware of the systemic challenges that the Roadmap seeks to address, including limited access to venture capital, lengthy time-to-market cycles, risk-averse procurement structures, market dominance by traditional contractors, skills and expertise gaps, and the complexity of navigating the civilian-military technology interface. The enhanced European focus on dual-use technologies opens new avenues for cooperation potential between established industrial players and young technology companies.

Recommended Strategies and Key Opportunities for New Entrants

To overcome the traditional barriers to defense market entry, new entrants should consider the following strategies:

(i)                  Leveraging the various EU funding mechanisms now available, including the Fund-of-Funds, Horizon Europe and dedicated new-entrant funding streams;

(ii)                Participating in accelerated testing and rapid development initiatives to shorten time-to-market;

(iii)               Forming innovation alliances and strategic partnerships with military stakeholders and established defense industry players to build credibility and navigate procurement complexities;

(iv)               Aligning development efforts with the five priority technology areas where funding is concentrated;

(v)                 Emphasizing the dual-use potential of existing technologies to access both civilian and defense funding streams;

(vi)               Investing in specialized workforce development through the Defense Skills Programs; and

(vii)             Positioning as a "New Defense" actor by highlighting disruptive innovation capabilities and non-traditional defense credentials.

Companies interested in leveraging these opportunities should take the following concrete steps:

• Monitor upcoming calls for proposals under the Fund-of-Funds and Horizon Europe defense-relevant programs and track evolving eligibility requirements and application procedures as detailed criteria are published in upcoming program announcements.
• Explore innovation alliance opportunities with military stakeholders and evaluate strategic partnerships with established defense industry players.
• Assess dual-use potential of existing technologies to identify opportunities for accessing both civilian and defense funding streams.
• Consider early participation in Defense Skills Programs from 2026 onward to build sector-specific expertise and address workforce capability gaps.
• Track Member State defense budget allocations, particularly the recommended 10% allocation to highly innovative technologies, in order to identify national-level demand-side opportunities aligned with the Roadmap’s priority areas.

By implementing these strategies, new entrants can systematically address the traditional barriers of funding access, procurement difficulties, time-to-market challenges and skills gaps that have historically made defense market entry challenging.