The army agreed with him, asking for EUR1.6 billion ($2.32 billion) for enough long-range rockets to mount a serious resistance.
That was a huge figure, roughly 10% of Estonia’s annual national budget. The government wavered over whether it could find the money. In frustration, Salm very publicly quit, forcing the issue to the top of the national agenda. The government ultimately caved, but Salm was out.
He is now taking a more hands-on approach to arming Europe. Along with Estonia’s former top general, a leading rocket scientist, and one of the country’s richest businessmen, he launched Frankenburg Technologies — a missile start-up that wants to use off-the-shelf sensor technology designed for smartphones to build an air-defence platform for a fraction of the cost of existing systems.
Europe is on the cusp of an immense defence spending spree, after the US administration of President Donald Trump called into question decades of American support for European security. In response, European governments plan to throw hundreds of billions of dollars at expanding and modernizing their militaries.
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That money won’t just go into the so-called “primes” — the large defence companies that dominate the industry. The way the war has played out in Ukraine has shown the need for rapid innovation of the kind that start-ups can offer.
“You need to make sure you have solutions that are cheap and that can be mass-produced quickly and in a situation where the entire country is a warzone,” said Tomas Jermalavicius, head of studies at the International Centre for Defence and Security think tank in Tallinn.
European defence, he added, is “ripe for tech disruption”.
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Ground-based drone vehicles at the Milrem Robotics’ facility in Tallinn on March 3. Photo: Bloomberg
Lethal strategy
Estonia has not historically had much of a defence industry. Until 2018, private companies were not even legally permitted to produce explosives. The full-scale invasion of Ukraine jolted the country into action.
Since 2022, the government has doubled its military budget. In January, Prime Minister Kristen Michal pledged to spend 5% of the country’s GDP on defence.
Estonia is fortifying its border with Russia with a network of hidden infantry bunkers and a “drone wall” to detect and shoot down hostile unmanned aerial vehicles — reflecting the shape of the battlefield in Ukraine, which has been characterized by trench warfare and high-tech drone combat.
As well as planning an explosives factory, buying long-range rockets and implementing a defence tax, in January the Estonian government launched a EUR100 million fund to invest in defence start-ups.
“We are building an industry from zero, on a blank page,” Sille Pettai, CEO of SmartCap, which runs the fund, said. Unusually for Europe, the fund is explicitly focusing on weaponry.
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“We are one of the few European limited partners with a lethal strategy,” Pettai said.
The small Baltic nation already had a booming tech community, boasting the most EUR1 billion-valued start-ups per capita in Europe, according to a report by London-based venture capital firm Atomico.
The Founders Society, a start-up association, says it now has around 100 members working on defence-related applications. Around half of them were established in the last three years. “It’s the fastest growing sector of our tech industry, for sad and understandable reasons,” said Allan Martinson, the society’s president.
Among the local start-ups are companies producing self-driving armoured vehicles, AI targeting platforms, electronic warfare systems and underwater drones.
Executives from some of Estonia’s most successful tech companies have been cheerleaders for the sector. Plural, a venture capital investor backed by Skype and Wise alumni Sten Tamkivi and Taavet Hinrikus, has provided funding.
Margus Linnamäe, Estonia’s fifth richest person, according to rankings compiled by Estonia's business newspaper Äripäev, is an investor in Salm’s Frankenburg.
The European defence-tech sector’s most successful player, the German start-up Helsing, recently set up an office in Estonia. Founded in 2021, Helsing is now valued at EUR5 billion, and has expanded from its origins in AI to supplying drones to Ukraine.
“The eastern flank is a big priority for Helsing, considering that’s where the most acute threat is right now,” Kadi Silde, Helsing’s director of European engagement, said. “We picked Estonia because it’s a tech country with strong software talent.”
In 2023, Milrem Robotics became the first major acquisition of an Estonian defense company by an international buyer, in a deal with United Arab Emirates-based Edge Group. While it was founded far earlier than the current wave of companies, in 2013, the war in Ukraine has given Milrem a shop window. Its unmanned military vehicles are currently being used by the Ukrainian armed forces to transport ammunition and evacuate wounded soldiers.
“The start-up advantage is doing things faster and cheaper and thinking differently,” said Kuldar Väärsi, Milrem Robotics’ CEO. “Ukraine’s experience demonstrates that that’s what’s needed.”
Many of the start-ups in the sector say, like Väärsi, that they’re able to be more nimble and innovative than the defence primes, which tend to work on long-dated, large-scale contracts.
While large numbers of tanks, artillery pieces and aircraft are still part of the modern battlefield, the war in Ukraine has shown the need for cheaper, more adaptable systems.
Relatively inexpensive first-person-view drones can destroy tanks worth millions of dollars. It makes little sense to use a Patriot air defence missile costing US$4 million to shoot down an Iranian-made Shahed kamikaze drone that, according to a recent Estonian intelligence agency report, costs less than US$300,000.
It is this latter problem that Salm’s Frankenburg is trying to solve. Hundreds of thousands of cheap but deadly drones are now being pumped out by Russian factory workers. But Europe currently lacks an affordable countermeasure, Salm said, and hasn’t really seen innovation in its air-defence strategy for decades.
“The short-range rocket business has been totally braindead for the last 30 years,” he said. “For years the industry had no interest in doing things cheaper or faster. It’s completely against the entrepreneurial spirit.”
Salm wants to build inexpensive, lightweight rockets that can fly three times faster than drones and can be produced by the millions. He plans to test them in Ukraine this year.
Export markets
Amid the panic sparked by the war and US policy shifts, Estonia sees an opportunity to break into other European defence markets.
From 2022 to 2023, the Estonian defence sector’s export revenues rose by almost 60%; employee numbers in the industry rose by more than 17%. Ukraine has become the main destination for defence exports.
Europe’s defence spending spike could increase the opportunity for start-ups by an order of magnitude. Poland and the Baltics had already announced significant budget increases before the Trump administration’s shock announcements in February, which pushed other countries, including the UK, to follow suit.
Germany’s chancellor-in-waiting is seeking approval for a EUR200 billion emergency fund for defence. Salm estimates the European defence market will triple in the next five to 10 years.
Venture capital investment in European defence start-ups increased 24% in 2024 to a record US$5.2 billion, according to a February report by the NATO Innovation Fund, a defence and deep-tech venture capital fund launched in 2022, and backed by 24 NATO members.
But that money is not always available to small-scale entrepreneurs. The funding ecosystem is fragmented, often along national lines, with sovereign funds supporting only local companies.
The European Investment Bank, the EU’s lending arm, cannot currently invest in weapons — although the institution has proposed to change that. Neither can NATO’s Innovation Fund.
On top of that, militaries tend to be slow moving and conservative, and unlikely to back unproven technologies.
“European defence start-ups struggle to break through because they have to pay for the product before they can get their first contract,” Marko Kaseleht, a military veteran who founded SensusQ, a defence data management platform. “End-users prefer proven technologies. This makes it expensive to enter the market and difficult to attract investors, who want to see sales.”
In Estonia, the urgency to build an industry isn’t just about money. The country has been warning about Russian aggression for years. The Kremlin was slow to pull troops from Estonia after its independence in the 1990s, and still uses the country as a target in simulated missile launch exercises.
The government has accused Russia of staging cyber attacks, acts of sabotage and other so-called “hybrid war” tactics. Having watched Russia invade Georgia in 2008, illegally occupy Crimea in 2014, and then launch its full-scale invasion in 2022, many in the Baltic states feel an acute need to prepare themselves.
Whether they’re ready remains to be seen. Bloomberg spoke to an Estonian volunteer in Ukraine’s Third Separate Assault Brigade fighting as a spy drone operator in Izium, eastern Ukraine.
The soldier, who was only willing to be identified by his call sign, Ostriv, described relentless air assaults on the front. On both sides, men mainly spend their days hiding underground.
Outside, there’s a constant hum in the air. Surveillance drones patrol the sky, punishing any sign of movement with artillery shelling or FPV drone bombing.
“We need to wake up,” Ostriv said. “Europe’s defence capabilities are catastrophic. Is Estonia ready for thousands of drones falling down on us? You can’t imagine how quickly they will kill you on the battlefield.”
