It's time to reboot the innovation engine in Germany
Three years after Russia’s invasion of Ukraine, Germany finds itself caught between departure and stagnation when it comes to defence tech, write Said D Werner and Helmut Schönenberger
“Now is a critical moment to align around ambitious defence, security, and resilience start-ups and investors focused on filling capability gaps and accelerating the capacity of innovation ecosystems across the Alliance.” So said Prof. Dame Fiona Murray, newly elected Chair of the Board of the NATO Innovation Fund (NIF).
The Zeitenwende at Three: Turning capital into capability
Three years after Europe’s political watershed – the Zeitenwende – sparked by Russia’s full-scale invasion of Ukraine, Germany finds itself caught between departure and stagnation in answering this call to action.
Special funds have been approved, defence spending is rising, procurement reforms have begun. Yet one Achilles’ heel remains: the lack of intelligent steering of capital flows between demand and supply – the very core function that seems to be led by an “invisible hand” in places like Greater Boston, Silicon Valley and Israel.
In truth, this dynamic owes little to Adam Smith’s notion of political economy.
Successful innovation ecosystems are the result of targeted strategic interventions that connect research, entrepreneurial and industrial supply, and state demand along capability gaps.
In geopolitics, where technological speed determines a state’s ability to act, innovation emerges as a grand-strategic resource for security. The war in Ukraine shows that victory or defeat depends not only on the number of tanks, but also on drones, satellites, artificial intelligence, and digital marketplaces.
Ukrainian emergency legislation capped drone manufacturers’ profit margins at 25% (exceptions only by justification) to lower procurement costs while speeding up approval and production. In short: those who conceive development, commercialisation and deployability as a closed loop gain strategic autonomy.
Germany, however, still thinks too much in entrenched sectors – not in ecosystems.
Diagnosis: Why Germany is trailing
For decades, the Federal Republic benefitted from the peace dividend – but that also resulted in structural consequences. Those included “gold-plated” solutions (in other words, solutions that are overly sophisticated, expensive, or unnecessarily complex), siloed thinking, a defence sector decoupled from civil innovation, fragmented funding logic and a cultural skepticism toward innovations with defence and security relevance.
High-Growth start-ups in dual-use and defence sectors – from Quantum Systems, Helsing and ARX Robotics to Isar Aerospace – are golden exceptions that often fight against institutional gravity. However, deep-tech start-ups rely heavily on foreign capital for financing, and that opens the door to potential, and real, risks of relocation.
According to Bitkom, recently 59% of defence-tech founders said they would not start their company in Germany again; a quarter preferred the US. Reasons cited: better access to capital, more attractive markets and more pragmatic public procurement.
At the same time, strict ESG requirements, new banking rules like Basel IV and an overall cautious lending climate hamper new investments because banks must hold more equity for defence financing, and long-term projects along the sector’s supply chains are deemed too risky.
This produces significant friction losses. While subsidy programmes still predominantly address civilian domains, what is often overlooked is that dual use is not a technical category but an entrepreneurial strategy – a way to flexibly position innovations between civilian and security-policy, if not grand-strategic needs. The result is that on paper, Germany’s defence spending is rising – but the innovation drivers that underpin modern defence capabilities remain under-funded.
On the demand side, one finds a structure ill-suited to fostering innovation.
The general-procurement process is geared toward large programmes and long cycles – not agile collaborations and iterative product development as is common in start-ups. Occasionally innovative venture-building programmes – such as at Hensoldt’s FCAS Accelerator – appear, but they do not change the trend. In Germany’s weak economic environment, even partnerships between start-ups and large corporations or SMEs are crumbling.
Yet there are encouraging signs that procurement culture may be starting to shift. A potential €900 million drone contract involving Helsing and Stark could mark an important step toward integrating innovation-driven enterprises into procurement. Precisely now is when such impulses are needed – to lower prices through competition from new suppliers and innovative technologies, and to target the expansion of scarce European production capacities.
Absent of solid supply-chain financing and “technology-push” effects in defence technology, rising demand – driven alone by NATO’s genuine 3.5% target – risks devolving into an inflationary supply shock, a scenario the Draghi Report starkly warns against.
Even smart initiatives – like NATO DIANA or SPRIND (Germany’s Agency for Breakthrough Innovation), which provide valuable momentum through challenge calls and prototyping – cannot substitute for a much-needed course correction, especially as their funding volumes remain limited by design.
Innovation needs platforms to unleash entrepreneurial dynamism
A look around the globe shows how it can work.
In the US, DARPA, In-Q-Tel and the Defence Innovation Unit (DIU) of the re-named Department of War link venture capital and capability demand into a seamless innovation pipeline. Private funds co-invest alongside public money.
In Israel, Unit 8200 fuses military and civilian innovation — even shaping the entrepreneurial careers of its officers.
France, too, integrates start-ups early in its procurement cycles through the Agence de l’Innovation de Défense (AID).
That SPRIND has called for a comparable institution in Germany comes as no surprise: the scientific, industrial, and financial resources are there. What Germany lacks are platforms that systematically bundle these forces.
No single stakeholder is in charge of innovation alone. It must be promoted politically – but not controlled. Government’s role is to set the table, not serve the meal.
Financing architecture: Raise returns, strengthen supply chains
Germany is in its longest recession in two decades. The record-setting defence investments must therefore accomplish two goals.
First, they must sustainably expand the capability profile of the Bundeswehr. And second, they must trigger growth effects for the broader economy.
Both succeed only if expenditures do not focus solely on major defence contractors but deliberately strengthen industrial suppliers and carry forward “the tale of two entrepreneurs”: SMEs, and innovation-driven enterprises (IDE). It is precisely there where the achievement of production targets and required defence capabilities will be decided.
This calls for more capital along the entire supply chain, particularly for SMEs and IDE scale-ups. Today, investors and commercial banks often act cautiously: financing defence-tech scale-ups and their assets and projects requires hybrid models combining equity and debt components as well as guarantees and grants.
Guarantee and risk-sharing mechanisms through national and multilateral banks are needed to enable large financing rounds and make capital costs sustainably viable. The desired dynamic for such a financial ecosystem is clear: spill-over effects multiplying the public capital deployed.
Dynamically linking universities, start-ups and SMEs
Germany needs places where research and its entrepreneurial application through start-up creation continuously interact.
The ten recently launched Start-up Factories already demonstrate the civilian potential of publicly and privately capitalized partnerships. Universities, however, should not only be knowledge reservoirs but also active platforms for resilience and security-relevant innovation.
Regional clusters like Munich and Stuttgart, the Rhine-Ruhr metropolitan region, Dresden and Hamburg are suited to build defence, security and resilience ecosystems with dense value-chains. The rapid rise of Isar Aerospace was no accident but a systemic achievement — proof that such innovation successes can emerge not only in the Munich cluster, but across Germany’s many innovation regions.
The prerequisite is a shared understanding of innovation, an ambitious approach, and innovation-friendly frameworks. That’s in contrast to the civilian-clause firewalls at over 70 German universities, where anything tied to security is tightly policed and scholars must often show their work is strictly civilian, triggering long approvals and practical roadblocks.
At the same time, the Bundeswehr should, on the procurement side, more strongly involve start-ups early via experimental formats such as challenge calls, rapid procurement, innovation partnerships – and incentivise SMEs toward greater cooperation. For scaling, there must also be standardised interfaces – from APIs, data rooms to test-bed access and clear IP rules. Dual-use real-world labs can help here.
Recommendations: What to do now
Anchor innovation policy in the security strategy. Defence innovation is no longer the exclusive domain of the arms industry but a strategic focal topic for all key players in a resilient democracy.
Adapt financing instruments. Interpret ESG guidelines in a differentiated and pragmatic way; provide national to multilateral guarantees to buffer technological and development risks; create co-investment vehicles that leverage public capital and mobilise more private capital.
Institutionalise inter-sectoral cooperation. Loosen strict university civilian clauses; systematically expand dual-use strategy programmes; integrate universities and non-university research into defence, security and resilience networks.
Reform and open procurement. Engage start-ups early; adopt agile procedures (Rapid/Challenge/Innovation Partnerships); iterate with clear milestones rather than rigid solutions burdened with shifting and inefficient specifications.
Ensure international interoperability. Systematically connect to NATO-programmes (NIF/DIANA); examine new multilateral initiatives.
Turning political necessity into effective structure
A security policy watershed can only unfold its effect if it is translated into a permanently capable structure. This requires not only budget decisions but an acceleration of innovation ecosystems: regional networks where SMEs and industry, entrepreneurs, research, venture capital and not least philanthropists and the public sector cooperate strategically.
Such a structure must tightly link capital, procurement, as well as research and development – with financing mechanisms that reach along the full supply chain, and a procurement process that enables cooperation and speed.
What matters most is not the short-term reaction to crises, but the creation of a system through the lens of grand strategy. If that transformation succeeds, the Zeitenwende will no longer stand alone as a political idiom but become a vital cog in the wheel – part of a German innovation engine in which defence, security, and resilience fuel economic growth.
Said D Werner is Affiliate Director at the MIT Murray Lab for Deep Tech & Geopolitics, Research Affiliate at the Massachusetts Institute of Technology (MIT), Strategic Advisor at the Centre for Economic Security (CES) in London and Junior Fellow at the Leadership Excellence Institute Zeppelin (LEIZ) in Friedrichshafen.
Professor Dr Helmut Schönenberger is Vice President Entrepreneurship at the Technical University of Munich (TUM). He is co-founder and CEO of UnternehmerTUM, co-founder and managing director of Unternehmertum Venture Capital Partners (UVC), board member of the German Startups Association, and supervisory board member in several companies including DENA.
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