The number of startups seeking funding to solve some of NATO’s most pressing defence, security and resilience challenges is rising – and so is the number of investors turning their attention to this space. But fundraising in DSR does not follow conventional venture rules, creating tensions between standard frameworks and how DSR startups actually scale. 

In the second session of the NIF’s “DSR Playbook” webinar series, Erin Hallock, Partner at the NATO Innovation Fund, and Mikolaj Firlej, Co-Founder and Managing Partner at Expeditions Fund, discussed how investors assess DSR businesses across stages and what signals matter most.  

Key insights from the discussion include:  

How investor priorities change across stages 

At the earliest stages, investors emphasize founders over metrics. They want to understand what experiences founders bring, whether they are thinking ambitiously, and why they are positioned to solve a specific problem. 

For DSR businesses, this often comes down to what Firlej describes as the founder’s “right of claim“: domain knowledge, technical credibility, and a clear understanding of the problem being solved. Investors evaluate both a founder’s capacity to address a specific use case and what differentiates them as the right person to solve it. Founders with a strong personal connection to the use case and a well-grounded view of its scale are often more compelling, particularly when supported by relevant operational or sector experience rather than a broad market narrative. 

As companies mature, focus shifts to product performance, customer traction, and competitive positioning. By Series A, the evaluation centres on repeatability, scalability, and business model strength. 

Why conventional venture metrics do not always translate 

The conclusion is clear: DSR companies often do not follow the same commercial pattern as traditional software businesses. This becomes evident when compared with traditional software: 

In traditional software, early customer wins are often expected to compound quickly. In defence and dual-use markets, the pattern is fundamentally different. When dual-use companies start selling, they typically attract proof-of-concepts, pilots, and smaller initial contracts. But after securing that first contract, growth often becomes more challenging rather than easier. 

The curve frequently goes down after initial demand – the opposite of what software investors expect. This creates what Firlej describes as a “J curve“, where initial traction is followed by a period in which growth appears flatter or slower than a conventional investor might expect. This J-curve requires patient capital: companies may be performing well operationally but not generating significant revenue during this phase. 

The contrast with software is stark. In traditional SaaS, investors look at the LTV ratio (lifetime value to customer acquisition cost), where a healthy ratio is 3. In dual-use DSR, this ratio is often negative in early stages: lifetime value appears low while customer acquisition costs are high. A software investor would flag this as unhealthy. But the long-term reality is different: government contracts, once secured, tend to be very high value and extremely sticky. Companies need to breach the J-curve to reach this point. 

For founders, this means going beyond headline metrics and clearly explaining how progress in their market translates into long-term growth. In practice, this requires: 

• Setting expectations early: help investors understand that revenue may not scale linearly after initial contracts. 

• Defining the right milestones: highlight pilots, programmes, and procurement steps that signal real progress. 

• Articulating the path to scale: show how early validation converts into larger, longer-term contracts. 

• Reframing early metrics: explain why unit economics may look weak initially, and how they improve over time. 

Revenue quality matters as much as quantity 

As Firlej emphasized: “Revenues are not equal.” Grants and R&D contracts are fundamentally different from long-term commercial contracts, yet founders sometimes conflate them. Investors assess revenue across three dimensions: 

• Direct vs. indirect customer relationships: Are you contracting directly with government end-users or subcontracting to a prime? There is nothing inherently wrong with partnering with primes – it can be strategically valuable – but subcontractor revenue should be qualified differently. Prime contracts carry a premium because they are significantly harder to secure and demonstrate stronger customer ownership. 

• Concentration risk: How concentrated is your revenue base? This is a uniquely important factor in DSR. A company generating €10-15 million in revenue might achieve a €100+ million valuation using traditional SaaS metrics. But if that revenue comes from a single prime, the risk profile changes dramatically. What happens if leadership at the prime changes and the partnership is not renewed? Founders need to diversify prime partnerships to 2-3 relationships and ultimately work toward becoming prime contractors themselves. 

• Durability and contract type: How long-term and recurring are the contracts? One-off pilots signal interest but not sustained demand. 

Sovereignty creates opportunity, but scale remains the challenge 

The growing emphasis on technological and industrial sovereignty in Europe is creating new opportunities, but also new constraints for founders.  

Some founders are conducting systematic research on capability gaps and building solutions to address them directly. For example, Central Europe lacks long-range deep strike capabilities – a priority for many governments in the region. Founders who identify and address these specific gaps with clear operational relevance are better positioned than those pursuing more generic opportunities. 

Although European sovereignty is a shared objective in principle, governments often prioritize domestic champions over foreign solutions – even from allies. Many companies believe they are targeting pan-European gaps but address domestic markets at best. The drone industry illustrates this: in Germany, France, and Poland, domestic leaders struggle to escape their home markets, as they are not perceived as “sovereign” elsewhere. 

At the same time, businesses that remain too narrowly tied to a single domestic market may struggle to achieve venture-scale outcomes. The challenge is to use domestic traction as a launchpad rather than an endpoint. 

What makes an early-stage company compelling 

When asked what founders should get right first, three priorities stood out: 

• Deep domain understanding: a clear, non-obvious insight into a real operational problem, ideally grounded in experience. 

• A strong product narrative: what you are building, why existing approaches fall short, and why your solution matters. 

• A credible path to traction: who the first customers are, how you will reach them, and how early engagement scales. 

The key takeaways 

Fundraising in DSR requires both founders and investors to rethink how progress and value are assessed. In practice, three shifts stand out:  

1. Explain how progress works: DSR companies do not scale like traditional software. Founders must show how traction develops and how early validation converts into long-term revenue. 
2. Build from insight to scale: Early stages, require a strong founding story, a clear, non-obvious insight, and a credible path to first traction. As the business matures, the focus shifts to repeatability, durability, and real customer demand. 
3. Look beyond standard metrics: Conventional venture metrics are insufficient. Investors need to interpret non-linear growth and longer timelines, while founders must frame progress accordingly and articulate the long-term value of their technology. 

Ultimately, the companies that succeed are those that combine strong technology with real operational relevance and a clear path to scale. When that foundation is in place, fundraising becomes more effective and the range of outcomes expands.