European VC breaks taboo by investing in pure defense tech from Ukraine’s war zones

In a significant shift, defense technology, once a no-go zone for many venture capitalists, has rapidly evolved into a compelling investment sector. While most firms, including the NATO Innovation Fund, still adhere to a ‘dual-use’ requirement (technology must have civilian applications), Estonian VC firm Darkstar is boldly breaking this mold. Darkstar is making waves by investing exclusively in purely military applications, with an ambitious goal: to rearm Europe using combat-proven solutions emerging directly from Ukraine’s active war zones.

“This is very critical, not only today but for the next 10 years,” states Ragnar Sass, cofounder and general partner of Darkstar. The firm adopts a highly hands-on approach, actively assisting startups in connecting with military customers across Ukraine and wider Europe. For Ukrainian teams, this extends beyond just funding to crucial support in establishing compliant entities within NATO countries like Estonia. Sass emphasizes, “In any company which wants to be part of European procurement or even grants, the operational side has to be perfect.”

Darkstar aims to raise €25 million (approximately $29.2 million) within the next six to twelve months, primarily targeting pre-seed and seed rounds with typical check sizes ranging from €500,000 to €1 million. The firm has already made two notable investments: FarSight Vision, a Ukrainian-Estonian startup specializing in geospatial analytics and 3D mapping for drone pilots, and Deftak, which develops ammunition specifically for drones.

For Ragnar Sass, a prominent figure in the Estonian startup ecosystem, venturing into weapons investment was not an intuitive path. Known for his involvement with Skype’s founders and co-founding the CRM and sales tool Pipedrive (a unicorn-sized exit), Sass had previously made over 50 angel investments, including in unicorns like Veriff, none of which were in the defense sector. Even after Russia’s full-scale invasion of Ukraine in 2022 prompted him to personally deliver aid and supplies to Ukraine, it took considerable mental effort to embrace defense tech. His turning point came about a year and a half ago with his first defense investment in the Estonian drone startup Krattworks, marking his final move as an angel investor.

Sass is now channeling his focus and capital into Darkstar, which evolved from a coalition organizing hackathons and bootcamps, leveraging his extensive experience from the hackathon community Garage48. Darkstar’s unique approach is resonating beyond Sass. The fifteen-month-old firm recently completed a first close of €15 million (approximately $17.5 million), with backing from European entrepreneurs, family offices, and the Estonian state-backed LP SmartCap. SmartCap, by backing a fund like Darkstar, also stands out, much like Lithuania’s sovereign VC fund Coinvest Capital, which was authorized in 2023 to make defense investments without requiring civilian use cases. This trend is not coincidental, as all these pioneering funds originate from the Baltic region.

The close proximity to Russia and the historical context of Soviet occupation instill a profound sense of urgency in Estonians like Sass, a sentiment now spreading across Europe as investors increasingly recognize the critical importance of defense. Sass notes, “But if you don’t have real know-how in that area, you’re struggling.” For Darkstar, building this essential know-how meant engaging directly with end-users from day one, specifically Ukraine’s military brigades.

Despite ongoing implementation of changes, Ukraine’s decentralized military structure empowers combat units to make their own decisions, a system that can be challenging for outsiders to navigate. However, Sass gained a significant head start. “In the last three and a half years, I have been to Ukraine 20-plus times, and I have personally met 100-plus unit commanders — spent time with them, talked with them, learned from them,” he shares, drawing a parallel: “Elite units are more similar to startups than we can imagine.”

While inexpensive first-person view (FPV) drones have demonstrated their capability to destroy multi-million-dollar equipment, Sass cautions against underestimating the sophistication of Ukrainian tech developments. “Most elite drone battalions in Ukraine have their own R&D,” he explains, highlighting the rapid velocity of innovation on both sides of the frontline, with fiber-optic drones, for instance, proving to be a game-changer. For startups outside Ukraine, this dynamic environment means a theoretical solution can quickly become obsolete, underscoring the value of Darkstar’s bootcamps. The next bootcamp, scheduled for this summer in Kyiv, promises companies “feedback, field-testing opportunities and combat validation.”

These bootcamps are a key source of Darkstar’s deal flow, with staff working hands-on with teams for five days. However, the pipeline is broader, with Ukraine’s estimated 2,000 eligible teams standing out. Many Ukrainian companies are not nascent; they have been developing products and companies with minimal capital for two or more years. Sass also clarifies that general mobilization of Ukrainian men is not as significant an obstacle as often perceived, as founders building effective combat products can receive exemptions and travel approval. A notable percentage of Ukraine’s defense startup founders are women, including Viktoriia Yaremchuk, CEO of FarSight Vision. Furthermore, the restriction on defense tech exports out of Ukraine is reportedly in the process of being lifted.

Sass applies a similar location-agnostic philosophy to defense investing. Just as he once advocated for early-stage Nordic startups to embrace Silicon Valley, Darkstar will not invest in companies intending to remain exclusively based in Ukraine. The firm is also engaging with teams across Central and Eastern Europe, Latvia, the U.K., and Germany, anticipating a more diverse portfolio within a year or two. Reflecting this pan-European vision, Sass is joined by Estonia-based GPs Kaspar Gering (formerly Wise) and Mart Noorma (director of the NATO Cooperative Cyber Defence Centre of Excellence), along with Philip Jungen in Germany, and additional staff in Ukraine.

Darkstar plans to invest across a wide array of categories, including autonomous systems, air defense, electromagnetic warfare, communications, cybersecurity, sensors, and surveillance and intelligence, supporting both single and dual-use applications. Sass believes some of these startups could become acquisition targets for cash-rich prime contractors struggling to deliver rapid solutions now eagerly sought by NATO countries. Others, fueled by governments recognizing the transformed nature of modern warfare, could independently achieve hundreds of millions in revenue and even go public. The rapid rise and valuation of companies like Anduril and Helsing, coupled with a surge of new defense-focused funds, signal a growing seriousness about venture-scale returns in this sector.

Ultimately, what drives Sass is a profound sense of purpose. While he embraces the humor of NAFO, a global online movement leveraging memes to support Ukraine, Sass also delivers a sobering warning about Russia’s relentless war economy. “The enemy is moving very fast, and that’s exactly why I believe that we need to have the tech community being involved way more to address that huge and growing threat.”