Europe risks widening space gap despite investment rebound.
Growing defence spending, Europe’s push for greater strategic resilience amid shifting US policy, and increasing demand for commercial space applications are creating new opportunities for European start-ups. However, European companies still face many challenges, including funding, that could further increase the gap between Europe and the US and China, an investor says.
Last year, space technology start-ups raised 12.4 billion US dollars in VC funding, 48 per cent more than in 2024, according to estimates by Seraphim Space. The total surpassed the 2021 peak of 10.9 billion US dollars and marked a full recovery from the previous pullback.
The lion’s share of last year’s investments, 60 per cent, were raised by the US companies, which increased overall funding by 130 per cent year over year. Meanwhile, funding in Europe grew by 25 per cent, primarily driven by increased defence spending and renewed focus on resilience, but the deal count fell by 15 per cent.
The latest McKinsey space report notes that in recent years, the European space sector has lagged behind the US and China, primarily due to fragmented governmental funding and subscale private investments. Other issues, such as talent shortages and difficulties scaling production, also affected European space companies.
According to Daiva Rakauskaitė, manager at Aneli Capital, a fund management company that supports Central and European (CEE) start-ups, the current pace of investment in Europe needs to accelerate for the continent to remain competitive.
“As competition with the US and China intensifies, the coming years will be decisive for turning political ambition into industrial scale. Europe must speed up capital deployment and strengthen growth-stage funding and commercialisation. Helping more start-ups enter and scale would narrow the gap, boost competitiveness, and drive innovation. Rising defence spending and expanding market demand point in the right direction, creating strong momentum for new technologies and major opportunities for European start-ups,” she says.
According to Rakauskaitė, key areas of focus for European space startups include satellites in low Earth orbit and medium Earth orbit used for Earth observation, intelligence, and secure communications.
Manufacturing satellite systems is a particularly good niche for CEE start-ups, which already have established players such as NanoAvionics in Lithuania and SatRev in Poland. Rakauskaitė stresses that the CEE region has not only experience, but also lots of hidden talent that could pave the way for a stronger European space industry.
One of the issues regarding funding European start-ups, according to the McKinsey report, is that private investment in European space is focused primarily on earlier-stage projects, and close to 70 per cent of investments in space industry companies are below 10 million euros.
“Based on these statistics, I would expect an increase in later-stage investments in SpaceTech companies over the next two-three years, as more commercial solutions are brought to market. More active participation of EU pension fund capital in the VC ecosystem is also likely during this period,” Rakauskaitė says.
Currently, pension funds in Europe have massive assets (around three trillion euros) only a fraction of which actively participate in the European VC ecosystem, whereas in the US, such practice is much more common.
However, Rakauskaitė also emphasises that, beyond increasing funding, it should be accepted as natural that a portion of these investments will not yield returns. Therefore, it is equally important to accelerate the commercialisation of early-stage companies to maximise the impact of those that do succeed.
“Way too often, start-ups spend too much in the development phase. While for space companies pathways to commercialisation are limited in the early days, they should still look for ways to find small revenue streams – whether through dual-use applications, data services, pilot contracts with defence institutions. Early commercial validation not only strengthens resilience, but it also makes companies significantly more attractive to later-stage investors and strategic buyers,” Rakauskaitė concludes.
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