Estonia has officially launched a €100M Defence Fund to boost its domestic military technology sector and strengthen European capabilities. Initially announced in May 2024 as a €50M vehicle, the project has doubled in size and widened its scope to support the growing local ecosystem.
Prime Minister Kristen Michal stated that this initiative will boost Estonia’s defence industry and economy, while also enabling better support for Ukraine. The country will accelerate its overall defence commitments up to 5% of GDP, up from a 3.7% target for 2026.
The new fund, managed by state-owned investment company SmartCap, will invest directly in defence companies and in specialised venture capital funds. Economic Affairs Minister Erkki Keldo emphasized the importance of Estonia’s domestic defence industry for national security and economic competitiveness.
Key investment parameters include direct investments of €500,000 to €10M in defence companies and fund investments of €5 to €20M in defence-focused VC funds. The fund focuses on military-use and dual-use technologies, with a maximum 49% ownership stake in any single company.
The fund has strict eligibility requirements. Companies and fund managers must be established in NATO countries, and neither they nor their shareholders can have ties to Russia, Belarus, or countries on international sanctions lists. All investments require co-investment from private investors, with at least 30% of capital coming from independent sources.
SmartCap emphasized that the fund aims to attract private capital to Estonia’s defence sector through risk-sharing mechanisms. While Estonian companies are prioritized, the fund can invest across NATO countries if there’s strategic value for Estonia’s defence ecosystem.
For direct investments, the fund targets seed to growth-stage companies, equity and quasi-equity instruments (including convertible notes), and companies developing military-specific or dual-use technologies. The fund will remain open as long as it has uncommitted capital available.
In fact, at the 6th Estonian Startup Awards, the biggest story of the night was the rise of Estonia’s DefenceTech Sector. Whereas startups now represent almost 4% of Estonian GDP, the DefenceTech sector’s emergence as a powerhouse, with Tallinn being recognized as Europe’s major hub, signals a promising new direction.
Meanwhile, Estonia is considering renting its prisons to countries with prison space problems. The Ministry of Justice is exploring the option of renting Tartu prison to European nations like Sweden and the Netherlands. The number of inmates in Estonian prisons decreased by 164 in 2024, leaving 1,655 inmates currently incarcerated.
While prisons in Tallinn and Viru have higher occupancy rates, the prison in Tartu is currently only about 30 per cent occupied. Justice Minister Liisa-Ly Pakosta stressed maintaining prisons for potential future needs. Renting prisons is seen as a way to preserve the structure and cut costs.