German cabinet approves new startup strategy: defense sector in focus, €130bn fund expansion

A new focus on defense

The German cabinet approved the "Startup- und Scaleup-Strategie" today, placing the security and defense sector at the center of state startup support for the first time. The black-red coalition of CDU/CSU and SPD aims to prevent successful founders from relocating abroad as they scale internationally. The move responds to geopolitical and economic dynamics that have heightened investor interest in defense technology. The strategy paper, seen by dpa, states the intention clearly.

This is intended to prevent successful startups from moving abroad during their international expansion.

To operationalize this focus, the government will create a dedicated direct investment vehicle for security and defense startups and ease their access to public contracts. In the first half of 2026, defense startups already attracted 579 million euros in venture capital, according to the EY Start-up Barometer, reflecting strong investor appetite that the strategy seeks to channel.

Widening the capital bottleneck

Access to growth capital remains a critical bottleneck. The strategy expands the Deutschlandfonds, a state guarantee program that cushions investment risk to mobilize up to 130 billion euros in private capital for future and infrastructure projects. Additionally, venture capital investments will be integrated into retirement savings products, and foundations will face fewer restrictions when investing in startups. These measures target the funding gap that leaves young and small startups struggling as investors concentrate on mega-deals exceeding 50 million euros. The government hopes that by widening the capital base, more startups can secure the funding needed to scale without leaving Germany.

Market reality: EY barometer

The EY data illustrates the urgency: German startups raised around 5.3 billion euros in the first half of 2026, a 14 percent increase year-on-year. However, the number of financing rounds fell by 11 percent, as capital flowed into a handful of large, perceived safe bets. Technology-driven startups remain investor favorites, with hardware and defense drawing particular interest. The concentration of funding in fewer, larger deals means early-stage companies often lose out, a dynamic the government's strategy aims to counteract by strengthening the broader foundation of the startup ecosystem.

Talent and bureaucracy

The strategy also addresses the skilled labor shortage. It proposes more flexible dismissal rules for highly paid employment relationships and more attractive tax conditions for employee equity participation, aiming to make German startups more competitive in the global talent market. On the bureaucracy front, the "Schneller Gründen" project will fully digitize administrative processes, and at the European level, a uniform legal form is intended to ease cross-border activities for startups. These changes are designed to reduce the administrative burden and make Germany a more attractive location for founders and talent alike.