DTCP’s idea for a defence sector-focused fund emerged four years ago after participating in a funding round for aerial intelligence technology developer Quantum Systems.

At the time, the Hamburg-based manager ran two strategies: growth equity, which focused on enterprise software-as-a-service (SaaS), including cybersecurity, vertical SaaS, cloud, AI, and robotics; and digital infrastructure, which targeted data centres, mobile towers, and fibre networks.

Thomas Preuss, a co-founder and managing partner at DTCP, was interested in Quantum Systems for the agricultural applications of its drone technology in crop monitoring. Not long after the firm began tracking Quantum Systems, however, the company started supplying drones to the Ukrainian military in the early months of Russia’s 2022 invasion.

By the time DTCP co-led a EUR 63.6m Series B round with HV Capital in September 2023, Quantum Systems was a fully-fledged dual-use technology supplier, having secured a significant contract with the German armed forces.

Joining the board of his new portfolio company, Preuss reached two conclusions. First, the tense geopolitical situation provided a strong imperative for European nations to build up their defence technology capabilities. Second, private capital could play a meaningful role in bridging that gap.

“Many leading experts expect there to be a NATO Article 5 ’test’ at some point, with an aggressor testing European defence capabilities and resilience. It is crucial that we are able to defend our infrastructure,” Preuss said.

Article 5 is NATO’s cornerstone principle of collective defence, stating that an armed attack against one member state is considered an attack against all. Responses can include the use of armed force.

Two-and-a-half years ago, Preuss began laying down the groundwork for a defence-focused fund. This involved DTCP familiarising itself with all stakeholders in the European defence ecosystem and mapping out the sector, looking for early growth-stage targets with the potential to achieve scale.

The firm undertook a similar approach with its other strategies, following what Preuss describes as a mandate to invest in technologies shaping the future. It looks to stay ahead of major megatrends, as demonstrated by initial forays into cloud computing not long after its founding in 2015.

DTCP is now onto its third growth equity fund, which closed in June 2024 on USD 450m (USD 402m), up from USD 350m in the prior vintage. A second digital infrastructure fund closed the same year with approximately EUR 1.6bn in commitments, including associated co-investment vehicles.

The hope is that defence will emerge as another franchise-shaping megatrend. DTCP Defence Fund I launched in January with a target of EUR 500m and recently achieved a EUR 455m first close.

Growth-stage funding gap

The fund will support all technologies that could be needed for Europe and its allies to defend itself in an Article 5 scenario, according to Preuss. The scope is broad, ranging from maritime defence, satellite communications, air defence to autonomous systems, secure communications and supply-chain resilience. DTCP can invest from Series B through to later-stage investments.

Preuss believes one of the largest gaps in the European defence funding exists beyond the early-stage segment. Many defence technology start-ups benefit from government support and national innovation programmes during their formative years but encounter funding constraints as they seek to scale.

“It’s hard to win your first contracts in defence. Survival rate is something you need to keep an eye on,” he explained.

“Generating revenue is a meaningful hurdle and typically a confirmation of the business model in the defence sector since the type and number of customers is limited to the armed forces or large defence companies and the like.”

DTCP focuses on companies that have moved beyond the earliest stages of development. They would typically generate at least EUR 5m-EUR 10m of revenue, although many opportunities under consideration already exceed EUR 100m in annual sales.

It predicts the deal pipeline will grow over the next three years as a strong cohort of companies coming out of the early stage – carried in part by increased government funding for defence – mature into growth targets.

The fund will participate as lead or co-lead investor, issuing equity tickets of EUR 20m-EUR 50m for minority stakes in 20-25 companies. Expected holding periods are in the 5-10-year range, with sales to strategic buyers or other financial investors seen as the most feasible exit outcomes.

Having built its defence network for over two years, DTCP primarily sources opportunities through its proprietary network and inbound enquiries, Preuss said.

The firm hired Ole Aguirre and Georgia Watson to lead the defence fund. A Norwegian Intelligence Service and special forces veteran, Aguirre co-founded drone company Prox Dynamics, led Bertel O. Steen Defence & Security and later held senior business development and M&A roles at FLIR Systems and Teledyne FLIR.

Watson has more of classic growth equity background. She joined from Lakestar, where she led growth investment activities and worked closely with technology companies across the portfolio.

Preuss views partner Aguirre’s military, intelligence, operational and corporate experience as a key competitive advantage in winning deals. “It’s rare for a single person with such a breadth of experience across corporate and the armed forces and this attracts young companies in the sector to DTCP.” he said.

DTCP Defence I has already completed two investments – Norway’s Six Robotics and UK-based Kraken Technology Group – with the third close to signing. Six Robotics develops autonomy and orchestration software that enables drones and other unmanned systems to operate collaboratively, while Kraken specialises in advanced uncrewed maritime platforms and payload systems.

DTCP’s value-creation strategy focuses on helping portfolio companies secure customers, build partnerships with established defence contractors, improve go-to-market execution and navigate certification and procurement processes.

“We are experts in the defence sector and have access to a large network, which companies need to scale,” Preuss said.

Establishing strategic hubs

DTCP initially secured roughly EUR 300m from anchor investors Deutsche Telekom and Porsche, having decided against securing backing from a single defence contractor. The goal is to have what Preuss describes as “a more independent pan-European setup,” with an LP base comprising a mix of corporate LPs, family offices and institutional investors.

He added that, in addition to delivering financial returns, the strategy must “fulfil the bigger purpose” of boosting Europe’s technological sovereignty and defence capabilities. While declining to name a specific return target, Preuss argued that defence technology could generate higher returns than traditional software investments of a similar size. He expects portfolio companies to grow at 100% per year.

DTCP has also announced major commitments from two key Danish LPs, EIFO and Danica. Meanwhile, the firm plans to open an office in Copenhagen to completement its headquarters in Hamburg.

Germany already has defence technology hubs like Munich that have achieved regional significance. Preuss cited companies such as Quantum Systems, Stark Defence, Helsing and Isar Aerospace as examples of the city’s rapidly developing defence ecosystem.

The Copenhagen office is expected to support sourcing and portfolio development across the Nordic defence technology market. While the Franco-German partnership remains central to European defence policy, Preuss noted, the continent’s defence innovation ecosystem needs to extend across the Nordics, Poland, Italy and the Benelux countries.

“It’s an ideal location for a Northern European defence technology cluster,” he said. “From Copenhagen, we aim to deepen relationships across the Nordic ecosystem, connecting investors, industry and founders, to support an integrated European defence technology landscape.”