When the European Innovation Council names its first defence investments in early 2027, the amount will be modest. The terms attached to it will shape who can own, sell and buy Europe’s next generation of defence companies.
Andy Demir · 23 October 2026 · 12 min read
Executive Summary
On 28 October 2026, applications close for the EIC STEP Scale Up Defence call, the first time an EU funding programme will take direct equity in defence companies. The €100 million budget is less than 2% of the $7.4 billion European defence start-ups raised by 20 September, so the money itself will not move the market. The terms may. The EIC Fund's guidelines allow a blocking stake where EU interests require it, a right of first refusal when shares would pass to buyers from non-eligible countries, and a sale of the Fund's stake for one euro if control moves outside Europe. Combined with US investors supplying 47% of European defence venture funding this year, and the revised EU screening rules applying from January 2028, these terms turn the choice between debt, private equity and public equity into a choice about the future buyer list. For founders, the effect falls less on the headline valuation than on the set of exits that support it. My expectation is that a dedicated defence equity line continues into 2027. For a scale-up board preparing a €50 to €150 million round, the decision worth making now is to create a capital map that assigns each funding need to the instrument whose control rights the company can accept.
In This Essay
- A €100 million call that reaches beyond its size
- Where Europe’s defence capital comes from now
- Debt buys time, equity pays for uncertainty
- What the EIC’s terms say about control
- Valuation follows the list of possible buyers
- The case that the terms will barely matter
- What early 2027 should reveal
- Choosing capital for the control it brings
- Questions for the C-Suite and the Board
- References
A €100 million call that reaches beyond its size
Applications for the EIC STEP Scale Up Defence call close on 28 October 2026. The European Innovation Council describes it as the first time any EU funding programme will invest directly in equity in defence companies, including in areas such as air and missile defence, drones, and counter-drone systems. Each investment is equity-only, between €10 million and €30 million, through the EIC Fund, from a 2026 budget of €100 million. The EIC co-invests in rounds of €50 million to €150 million or more, expects the total round to be at least three to five times its own ticket, and requires a pre-commitment from a single qualified investor covering at least 20% of the round. Results are expected in early 2027 (European Innovation Council [EIC], 2026a, 2026b).
The scale needs context. Dealroom and Resilience Media count $7.4 billion of venture funding for European defence start-ups by 20 September 2026, with a full-year projection of $10.5 billion, and find that mega-rounds account for more than 85% of the total (Dealroom & Resilience Media, 2026; Ruitenberg, 2026). At recent exchange rates, the EIC's entire defence budget equals well under 2% of what the sector has already raised this year. Measured by money alone, the call is a footnote.
The common reading is that the call adds a public cheque to a crowded market. My reading differs. What matters is the contract that comes with the cheque, because the EIC Fund's investment guidelines make European ownership an explicit, enforceable condition. A company that accepts this money accepts a view on who may later buy it. For founders and boards of European defence scale-ups, the choice among venture debt, private equity and public equity has become a choice about the future cap table and the future buyer, as well as about the cost of capital. This assessment rests on public documents and company announcements. My own work inside the industry ended in 2022, and nothing here reflects inside knowledge of the companies named.
Where Europe’s defence capital comes from now
The money arriving in European defence technology is increasingly international. Dealroom's 2026 report finds that US investors account for 47% of European defence-tech funding this year (tech.eu, 2026). The largest rounds show both the appetite and the sensitivity. Helsing raised $1.8 billion in July at an $18 billion valuation from investors including Dragoneer, Lightspeed, Goldman Sachs Alternatives, JPMorgan Chase, and CPP Investments, and its announcement stated that the company remains predominantly European-owned and that its board is unchanged (Helsing, 2026). That a company chose to say this in a funding release suggests that ownership has become part of the commercial proposition, not a footnote to it.
Quantum Systems followed a different pattern. Its $1.2 billion Series D, signed on 2 July at roughly $8 billion post-money, was co-led by Blackstone, Noteus, Airbus and Advent (Doll, 2026). A European prime sitting among the lead investors of a company that describes itself as a new kind of prime is worth noting, because strategic investors who join early tend to be well placed when a company later considers its long-term ownership.
Beneath the headline rounds, the middle of the market is growing. Funding at the $15 million to $100 million "breakout" stage has doubled compared with 2025, reaching a record (tech.eu, 2026). That is where the EIC's target rounds of €50 million to €150 million sit, at the upper edge of the breakout band and the lower edge of the mega-rounds. Dealroom also expects total private investment in NATO-country defence start-ups, including private equity, debt and grants, to reach $42.7 billion this year, above its venture-only forecast of $38.5 billion (Ruitenberg, 2026). Debt and other non-venture instruments are becoming a visible part of the capital stack, which makes the choice between them a practical one.
Debt buys time, equity pays for uncertainty
Quantum Systems' 2026 sequence illustrates the difference. On 12 February, the company announced €150 million of long-term debt financing, including a €70 million loan from the European Investment Bank, its second after a €10 million investment in 2021, alongside Commerzbank, Deutsche Bank and KfW. KfW described its part as growth capital that combines equity via KfW Capital with debt (European Investment Bank [EIB], 2026). Less than five months later, the Series D more than doubled the company's valuation, which its advisers attributed to fast-growing revenue and demonstrated profitability (Goodwin Procter, 2026).
The order of those steps matters. Debt raised in February funded growth without issuing new shares at February's price, and equity raised in July was priced after that growth had been demonstrated. I would read this as an inference from public announcements rather than a description of the company's internal reasoning, but the economic logic generally holds. A profitable business with contracted revenue can carry repayment obligations, and every euro it borrows instead of selling shares is a euro of ownership kept for a later, and potentially higher, price.
Most defence scale-ups are not yet in that position. Qualification can take years, orders arrive in uneven batches, and a delayed contract can collide with a fixed repayment schedule. A practical rule follows. Debt fits needs that can be repaid from committed revenue or secured against productive assets. Equity fits risks whose timing nobody can promise: qualification, certification, the first serial order and the procurement calendar. The earlier SwissTechnic analysis of how European defence demand becomes bankable for suppliers applies here at company level, because the strength of a customer commitment determines how much of a scale-up's growth lenders can safely carry.
A simple illustration, with assumed numbers and no reference to any real company, shows what is at stake. A scale-up valued at €300 million before a round that needs €30 million gives up about 9.1% of the company if it raises the whole amount as equity, since €30 million divided by a €330 million post-money valuation is 9.1%. If a third of the need can be met with debt instead, dilution falls to about 6.3%, at the cost of interest, covenants and repayment risk. Whether that trade is worth making depends on how confident the board is in the revenue that will service the loan.
What the EIC’s terms say about control
The EIC Fund's investment guidelines, updated on 27 August 2026 to cover defence activities and the larger STEP tickets, are explicit on ownership. The Fund generally aims for minority stakes between 10% and 20%, but may acquire a blocking stake where the Commission's award decision identifies EU interests to be protected, or may obtain equivalent guarantees through a shareholder agreement instead. It will seek a right of first refusal over shares sold by other investors, which it could exercise if those shares would otherwise go to an investor from a non-eligible country. If a company falls under the control of investors from non-eligible countries, it may have to repay the EIC support it received, and the Fund may sell its stake for one euro to the remaining eligible shareholders. The Fund also seeks to keep intellectual property within the EU and associated countries, including when it exits (EIC, 2026c).
Other provisions shape governance and timing. The Fund may appoint voting board members, describes itself as patient capital with a seven- to ten-year horizon and a maximum of generally fifteen years, and aims to align its terms with the lead investor and to exit alongside that investor. Its exclusion list covers lethal autonomous weapons without meaningful human control over selection and engagement decisions, while leaving room for early-warning and defensive countermeasures (EIC, 2026c). For a drone or counter-drone company, that clause makes product definition an investment question.
Eligibility sets the same boundary from the other side. The call excludes companies directly or indirectly controlled by a third country other than Ukraine or an associated EEA member, unless appropriate guarantees are approved under the national procedures of the country where the company is established, and every applicant must submit a self-assessment of its control (EIC, 2026b). A company with significant non-European shareholders therefore has to understand its own ownership chain before it applies, not after.
Valuation follows the list of possible buyers
The EIC does not set the price. By aligning with the lead investor, it accepts the valuation the market agrees. The effect on value works through a different channel. A venture valuation is, in the end, a price on future exit options, and the EIC's terms change those options by placing contractual limits on who can buy control.
Those options were already being narrowed by regulation. The revised EU foreign investment screening regulation, Regulation (EU) 2026/1386, entered into force on 16 July 2026 and applies from 17 January 2028. It requires every member state to operate a national screening regime, with mandatory screening for defence items, dual-use items and certain advanced technologies (Herbert Smith Freehills Kramer, 2026; Baker McKenzie, 2026). The EIC's terms add a contractual layer to a regulatory one, and they bind earlier: at the point of investment, not at the point of sale.
The public markets offer an uneven alternative. Czechoslovak Group was listed in Amsterdam in January in what was then the largest defence IPO, yet by early July its shares were trading about 44% below the issue price, and KNDS postponed its planned listings in Frankfurt and Paris, citing market volatility (Defence News, 2026). An initial public offering remains a route for the strongest companies, but its timing is not something a scale-up board can rely on.
That leaves a second-order effect that ordinary coverage of the call has not addressed. If public equity narrows the set of non-European buyers and the listing window stays volatile, the most likely large buyer for many European defence scale-ups becomes an established European prime. Policy designed to build independent challengers could, in that case, steer their eventual ownership towards the incumbents they set out to compete with. Whether that matters depends on the company. For some, integration into a prime is the best route to scale and to customers; for others, independence is the source of their speed. In either case, the founders who understand this early can plan for it, for example by building strategic partnerships that keep several European buyers interested rather than one.
There is also an upside that should be included in the same calculation. A sovereignty-aligned cap table can be an asset in European procurement and in accessing European programmes, and the EIC awards a STEP Seal to companies that meet its evaluation threshold, regardless of whether they receive investment (EIC, 2026b). For a company whose customers are European ministries, these terms may cost little and signal a great deal.
The case that the terms will barely matter
The strongest objection is one of scale and choice. With a minimum ticket of €10 million, the 2026 budget can fund at most ten companies, and probably fewer. Companies with access to mega-rounds need not apply, and the terms bind only those who choose to accept them. US capital, at 47% of this year's funding, will continue to flow to companies that prefer it. Many of the protections duplicate what national screening and standard rights of first refusal already provide, and the shareholder-agreement alternative to a blocking stake gives the EIC room to be flexible.
These points are fair, and they limit the claim. The call will not reshape the market directly. Its influence, if any, will come through precedent. The first awards will show how a public European investor prices control in defence, and other public capital is building in parallel. The European Investment Fund's Defence Equity Facility 2.0, a fund-of-funds with an initial target of €1 billion, aims to back 25 to 30 venture, private equity, private credit and infrastructure funds and is expected to start investing once commitments reach €250 million at first closing (European Investment Fund, n.d.). On balance, I would treat the EIC's terms as more important as a template than as money, while accepting that a template only matters if others follow it.
What early 2027 should reveal
My expectation is that the defence equity window will not be a one-off. I think it more likely than not, at moderate confidence, that the Commission will keep a dedicated defence equity line open into 2027, either through a further EIC call or another EU equity instrument, and that by October 2027 at least one European defence round of €50 million or more will publicly include EIC equity alongside a European lead investor. The confirming signals are the announcement of awards in early 2027, any published application count, the EIC's 2027 work programme, and the first closing of the Defence Equity Facility 2.0.
The view would be wrong if awards slip well beyond mid-2027, if the call is undersubscribed, or if no defence equity line appears in the 2027 programme. A further signal to watch is Dealroom's next measure of US participation: a rising share alongside EIC-backed companies selling control outside Europe would suggest that private terms, not public ones, are setting the market.
The likely beneficiaries are breakout-stage companies with a credible European lead investor, and European primes positioned as strategic investors and potential buyers. Founders whose most valuable exit would be a non-European acquirer have the most to weigh, and the most reason to decide early which capital they accept.
Choosing capital for the control it brings
My counsel here is addressed to the board of a European drone or counter-drone scale-up preparing a €50-€150 million round in 2027, as well as to its lead investors. Were I part of this discussion, the decision I would suggest minuting is this: before the next term sheet, the board approves a capital map that assigns each funding need to debt, private equity or public equity, and states which control rights the company is prepared to grant, and to whom. It would replace the habit of treating round size and valuation as the only numbers that matter.
The first ninety days are diagnostic. The CFO and general counsel can review the cap table and ultimate beneficial owners for third-country control, which determines EIC eligibility and will matter under national screening. The CEO can map the realistic buyer universe, separating acquirers that could pass screening and contractual limits from those that could not. Finance can test how much of the funding need can be carried by debt against contracted revenue and assets, including conversations with promotional banks. In the following six months, the round can be run with two structures side by side, one with public equity and one without, compared on dilution, governance rights and the exit set each leaves open, with a decision on whether to target a later EIC call. Within twelve months, if a public investor joins, the board can prepare for its seat, its reporting needs and an employee share plan that keeps management aligned with the long horizon.
The economics can be stated as honest ranges. Under the illustrative assumptions above, meeting €10 million to €20 million of a €30 million need with debt rather than equity keeps roughly 3 to 6 percentage points of ownership with existing shareholders, in exchange for interest and covenants. Public equity should not lower the price, since the EIC aligns with the lead, but it may narrow the exit set. The value at stake is the gap between the best offer an eligible European buyer would make and the best offer from any buyer, which the buyer map is designed to estimate. In many companies that gap will be small; in some it will be decisive.
The timing argument is practical. The first EIC awards in early 2027 will set the reference terms, and the screening regime will apply from January 2028. A board that maps its capital later will negotiate against templates that others have already set, with fewer options. The trade-off is real: committing early to a European ownership path may limit flexibility if the market changes. I would advise differently for a company whose technology is primarily civil software with a global market and whose strongest buyer is outside Europe; in that case, public equity warrants more caution. For a company that sells mainly to European ministries, the terms are likely to cost little and may help.
The €100 million itself will barely register in this year's funding totals. What founders and their boards sign in 2027 will matter far more, because it will help decide whether Europe's new defence companies grow into owners of the industry or into its acquisitions.
Questions for the C-Suite and the Board
Which of our funding needs could be carried by debt, and which genuinely require equity? The CFO's answer separates growth that committed revenue can repay from risks only shareholders should bear, and shows how much ownership the next round needs to sell.
Who could realistically buy control of this company in five years? A buyer map prepared by the CEO and general counsel shows how much of the valuation depends on acquirers that screening rules or investor terms might exclude.
Does our ownership chain meet the control tests applied by European public capital? Reviewing ultimate beneficial owners now helps avoid discovering an eligibility issue mid-funding process.
Which control rights are we prepared to grant, and to which investors? Agreeing this in advance lets the board compare term sheets on governance, exit options, and price.
Where would a strategic investor add more than capital? The answer shows whether a European prime among investors would open up customers and scale, or narrow the company's later choices.
How does our product roadmap sit against the exclusion clauses of public investors? For drone and counter-drone companies, the chief technology officer's answer shows whether product definition and funding eligibility are aligned.
References
Baker McKenzie. (2026, July 1). The revised EU FDI Screening Regulation: A new era of FDI enforcement in the EU. https://foreigninvestment.bakermckenzie.com/2026/07/01/the-revised-eu-fdi-screening-regulation-a-new-era-of-fdi-enforcement-in-the-eu/
Dealroom & Resilience Media. (2026, October 5). The state of defence tech 2026. https://dealroom.co/reports/the-state-of-defence-tech-2026/
Defence News. (2026, July 2). Tank maker KNDS delays stock listing, citing defence-market volatility. https://www.defensenews.com/global/europe/2026/07/02/tank-maker-knds-delays-stock-listing-citing-defense-market-volatility/
Doll, S. (2026, July 3). Billion-euro funding round for Quantum Systems. Munich Startup. https://www.munich-startup.de/en/news/billion-euro-funding-round-for-quantum-systems
European Innovation Council. (2026a, July 1). EIC STEP Scale Up Defence call opens today. https://eic.ec.europa.eu/news/eic-step-scale-defence-call-opens-today-2026-07-01_en
European Innovation Council. (2026b). EIC STEP Scale Up Defence. https://eic.ec.europa.eu/eic-funding-opportunities/eic-step-scale-defence_en
European Innovation Council. (2026c, August 27). Investment guidelines for the Horizon Europe compartment [EIC Fund investment guidelines]. https://eic.ec.europa.eu/document/download/6df458e7-fa47-4ace-93fa-86099606bdb0_en?filename=EIC_Fund_Investment_2026_guidelines_f.pdf
European Investment Bank. (2026, February 12). Quantum Systems secures new European financing package to scale the future of unmanned technologies [Press release]. https://www.eib.org/en/press/all/2026-057-quantum-systems-secures-new-european-financing-package-to-scale-the-future-of-unmanned-technologies
European Investment Fund. (n.d.). Defence Equity Facility 2.0. Retrieved October 15, 2026, from https://www.eif.org/flagship-initiatives/defence-equity-facility-2-0
Goodwin Procter. (2026, July 10). Goodwin advises BOND on investment in Quantum Systems’ $1.2 billion Series D. https://www.goodwinlaw.com/en/news-and-events/news/2026/07/announcements-privateequity-goodwin-advises-bond-investment-quantum-systems-1-2-billion-series-d
Helsing. (2026, July 13). Helsing raises US$1.8bn in Series E [Press release]. https://helsing.ai/newsroom/helsing-raises-1-8bn-in-series-e
Herbert Smith Freehills Kramer. (2026, July). The new EU FDI Screening Regulation: Key changes and implementation timeline. https://www.hsfkramer.com/notes/crt/2026-07/the-new-eu-fdi-screening-regulation-key-changes-and-implementation-timeline
Ruitenberg, R. (2026, October 5). European defence startups to raise record $10.5 billion in 2026, Dealroom forecasts. Defence News. https://www.defensenews.com/global/europe/2026/10/05/european-defense-startups-to-raise-record-105-billion-in-2026-dealroom-forecasts/
tech.eu. (2026, October 5). European defence tech hits record $7.4B as investment nearly triples in 2026. https://tech.eu/2026/10/05/european-defencetech-hits-record-7-4b-as-investment-nearly-triples-in-2026/
Not investment advice. For information only. Sources accessed 15 October 2026.
About Andy Demir
Andy Demir is the editor of SwissTechnic and writes on strategy, international growth and capital in aerospace, defence, space and advanced technology. Drawing on a career in commercial leadership, the analysis examines how technology, sovereignty and industrial capability shape competitive power and long-term value.
