Estonia's defense industry has experienced impressive growth in recent years, providing high-tech solutions that are used both in Ukraine and around the world. This expansion has been supported by the European Defense Fund, the Ministry of Defense's development grant competitions, the rapid integration of battlefield insights into product development and the determination of entrepreneurs.

Unlike in many countries, Estonia's defense industry companies are not state-owned. Nevertheless, the sector is characterized by a high share of exports, rapid development cycles and flexibility. A clear testament to this is the recent success of Estonian defense tech startups such as Wayren, SensusQ, Vegvisir, Lendurai and Frankenburg, which have been making headlines with their innovations.

Estonia's defense industry spans both hardware and software development, covering fields such as cybersecurity, robotics, autonomous systems, sensors and communication and surveillance technologies. Many of these solutions have dual-use applications, meaning they can be utilized in both the defense sector and civilian fields, such as border protection and critical infrastructure security.

Estonian companies are not solely focused on products but also on comprehensive solutions that strengthen the security of European and NATO countries. For instance, DefSecIntel Solutions develops advanced surveillance and situational awareness systems with the goal of increasing its revenue to €100 million in the coming years while contributing to the protection of EU and NATO external borders.

Despite ambitious goals and continued growth, it is crucial to remember that the development of Estonia's defense industry largely depends on a favorable environment and strong cooperation with the state. The Ministry of Defense, for example, supports companies' product development by offering testing opportunities and practical feedback from the Defense Forces. This not only improves the quality of products but also enhances export potential by providing valuable references.

The Estonian Defense and Space Industry Association has set an ambitious goal: by 2030, the defense industry's export volume should reach €1.4 billion, with total sales revenue hitting €2 billion. The foundation for achieving this is solid — but what will it take to make the next big leap forward?

Export and economic effect

To compete in the international market, continuous investment in research and product development is essential. However, developing new products is a capital-intensive process, as innovation in our sector goes beyond just creating technological solutions — it also requires constant testing and refinement to ensure that products meet extreme conditions and the needs of end users. No soldier or border guard will adopt a product or solution that has not been tested, seen in action or personally tried out.

Testing opportunities with the Defense Forces and obtaining practical feedback play a central role in this process. The war in Ukraine provides Estonian companies with the ability to gather rapid feedback from end users, thereby accelerating development cycles.

At the same time, testing has also highlighted the need for fast and flexible solutions, which require significant resources to develop. Improving testing opportunities and fostering experimentation is one direction that should undoubtedly be further advanced.

Challenges and opportunities from financing growth

Estonia's defense industry has reached a stage in its development where there is a significant need for equity investments to ensure the success of the next wave of high-growth companies. Until now, the defense sector has been somewhat of a taboo for investors and financial institutions. Securing loans was, until last year, extremely difficult — if not impossible — because the sector was equated with industries such as gambling or adult entertainment. Companies faced a disproportionate burden of proof to demonstrate that they were not engaged in illegal activities, along with excessive collateral requirements.

At the same time, the defense industry operates in a field where the primary client is both demanding and highly reliable: the state. That is why it is highly encouraging that the government has decided to fill this market gap through the recently launched Defense Investment Fund. This initiative enables companies to access state-backed financing, attract private investments more easily and ensure they have the necessary support to reach the next stage of growth.

The newly established fund is a welcome step forward — not only does it provide funding for new initiatives, but it also facilitates the next stages of development in defense investments. Since the fund also invests in other investment funds, it should encourage additional investors to enter the market — those who understand the unique nature of the defense industry and are willing to invest in it.

All of this supports product development, fosters the growth of defense tech startups and strengthens overall competitiveness. Similar initiatives exist in several other countries, but the fund launched by SmartCap is unique in that it is specifically tailored to the defense industry and defense-related products. It also supports the most significant advancements in the arms industry, such as loitering drones.

Future prospects

Estonia's defense industry is ready for its next phase of development — one in which startups and small subcontractors evolve into major companies or integrators with a more global impact. Achieving this requires increased investment and continued collaboration with both national and international partners.

Ambitious goals have been set and defense industry companies have made significant progress in staying competitive on the global stage. They are prepared to deliver innovative solutions that are directly linked to the security of our country and its partners. Now, concrete steps must be taken to turn these plans into reality.

The government has included a defense industry support program in its coalition agreement and work plan and it is now essential to implement it swiftly. Additional investments are still needed, along with cooperation with the Defense Forces to test and refine new products. Expanding reference purchases by the state is also crucial to maintaining growth and adapting to evolving security challenges.

In the coming years, governments worldwide are expected to make substantial investments in the defense sector. However, it is vital to ensure that these new investments lead to enhanced capabilities and new technologies, rather than simply being used to acquire outdated systems and weapons. Efficiency and development speed must also be significantly improved.

We must do everything possible to sustain the current growth trajectory of Estonia's defense industry and ensure that the sector becomes a new driving force of the Estonian economy — one that combines innovation, exports and strengthened security.

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