From Cost-Plus to Code-First: The Radical Shift in Europe’s Defence Tech
A guest post from Samuel Burrell, a former solder, who is now Partner at Expeditions
As someone who has tested new military technology, both on the front line and in more benign training environments, I know that it doesn’t always work the first time. Or sometimes it works, but not in the way you expected it to. Or wanted it to.
I’ll come back to that idea in a moment.
Over the weekend I read an interesting piece by Chris Miller – A Competitive Assessment of US Software — from 1984. He points out that the top software companies from that year are almost unrecognisable to the modern reader.
That’s because the industry’s explosive revenue growth was being driven by a major business model shift. The leading software players of 1984 were losing ground to new upstarts.
Before the late 1970s, software was largely sold to a specific company to enable its unique computing needs. Software consultants would write bespoke programs to manage, for example, airline reservations or banking transactions. They would sell them to one, or at most a handful of companies. The revenue would cover the costs of a well-paid professional workforce, plus some margin on top.
That pricing model may sound familiar to people who work in defence procurement. It’s called ‘cost plus’ and it’s the way that defence primes price their work for Ministries of Defence. Put simply, they’re permitted by the government to earn a certain amount of profit above the costs they incur. Primes have adapted to that model because that’s how the government has required them to work.
A cottage industry has even been built around winning the tenders that MOD puts out – writing a proposal in just the right way and pricing the work at just the right price are skills acquired after years of experience. People who understand that process are coveted employees within the industry.
However, new defence tech startups are inverting the model. First they raise money, largely from venture investors like my own firm, Expeditions, then they use that to develop products that they subsequently sell to a wide range of customers. They design and develop the products first, then they find customers.
Just like packaged software replaced bespoke software in the 1980s, defence tech startups are creating a new class of product which can be sold en masse. They’re taking the software development approach to new weapon systems.
The idea is to benefit from economies of scale, create a standardised product - cheaper than a bespoke solution - and get that product to market quickly. That last part is crucial.
In recent days the European defence tech market has been reacting to a damning article in the Financial Times which criticises German defence tech startup Stark. Its flagship drone, Virtus, is accused of failing to hit a single target in four attempts. For Stark’s competitors that may make for enjoyable reading. But the article fails to understand a broader shift that is taking place.
Before I go any further, for avoidance of doubt, I myself am not an investor in Stark, but I do back many companies in the same space. My opinions here, my stance on the situation, and my main motivation for being an investor in defence tech all come from my experience in serving for many years in the military, and the same place as my decision earlier in life to dedicate my career to serving and being proactive about how to effect change in the world today.
The mentality of packaged software developers has always been ‘if you’re not failing, you’re not moving fast enough’. Their methodology is to test and iterate. Ideally in as realistic a setting as possible, to simulate real world environments. If the product isn’t perfect then they send an update.
Similarly, the new breed of defence tech startups is in the business of testing and iterating. And sometimes failing.
That is possible because companies like Stark are developing ‘software defined hardware’. In classic terms that refers to physical hardware components, like computer chips, whose function and internal logic can be reconfigured or changed after they have been manufactured, using software instructions.
In defence tech terms that means the hardware is built and then gets better as the software is updated. Just as Teslas routinely connect to a data network, download new firmware, then install updates, so defence tech companies push improved software to existing hardware. In some cases it will already be in use on the front line.
Why don’t they perfect it before selling it? The goal is to get product in the hands of end users as fast as possible. The reason for that is largely commercial – to beat their competitors. But there is also a geopolitical narrative behind the urgency. Defence ministries across Europe are looking to buy this new technology, born in Ukraine, after decades of underinvestment in military kit. Drones won’t replace everything. But they will form an important part of a modern capability.
Stark probably could have done a better job at managing expectations prior to the trials with the British Army in Kenya. The Virtus drone is billed as a finished product, so there is certainly a risk that defence customers now mistrust what they say. And other tech companies might be tarred with the same brush.
But if we, as Europe, want to rearm and deter Russia from further aggression, we will need attritable mass from this type of company. Ukraine has demonstrated that on the battlefield. And Germany has further validated it with its €900m contract for 12,000 kamikaze drones, awarded to Helsing, Stark & Rheinmetall.
I expect other European countries will soon do the same.
Samuel Burrell is a Partner at Expeditions. He started his career in the military, where he was an officer in the Royal Marines. After leaving the military he joined a startup called ZipJet, before studying for an MBA at INSEAD. He has since been in venture capital, at Octopus Ventures, NKB Group and the National Security Strategic Investment Fund (NSSIF), a UK government fund focused on investing in national security and defence technologies. He joined Expeditions at the beginning of 2025 and is the lead for UK and US investments.
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