On Dec. 2, Palantir Technologies Inc. chief executive Alex Karp took a few minutes during a talk about the US military to chastise European governments. While US allies in Europe agreed to increase military budgets in the wake of Russia’s invasion of Ukraine, Karp complained that they had mostly given contracts to local providers while boxing out American firms like his.

“They’re making terrible investments in tech,” Karp said at the Ronald Reagan Presidential Foundation in California. “I’ve screamed at people in Europe. But it’s not going to change.”

His comments didn’t come as a surprise to anyone who had been following the company closely. A month earlier, Karp griped during an earnings call about the French, who recently begun building their own version of Palantir’s policing product, Gotham. Worse, Germany’s top court had restricted it on privacy grounds. “It’s, like, insane,” Karp told investors.

His firm, co-founded by billionaire Peter Thiel, is at the forefront of a new wave of companies that use cutting-edge drones, software, sensors and weaponry — and the battlefield data they generate — to take on traditional defense contractors. Alongside Anduril Industries Inc., a California-based firm currently in talks with investors about securing a $10 billion valuation, Palantir has trumpeted multi-million dollar deals with the Pentagon and other government agencies. With European investors significantly trailing the US in defense tech investment, Anduril and Palantir’s success on the continent was all but assumed.

Instead, they’ve struggled in Europe, where countries have smaller defense budgets, different security priorities, and rising concern about sovereignty. Palantir warned investors in November that growth in continental Europe “remains challenging,” and Anduril recently reshuffled its regional leadership. In emailed remarks, Anduril said it is “committed” to the European market, and Palantir declined to comment on its business in Europe beyond Karp’s comments to investors.

At the same time, these defense tech companies are looking further east, to the threat of conflict in Taiwan.

Ukrainian prospects

When war broke out in Ukraine, Palantir and Anduril expanded aggressively in Europe, expecting that countries’ interest in modernizing their militaries would translate into splurging on Silicon Valley’s latest wares. “That hasn’t come true,” said Ulrike Franke, a senior policy fellow with the European Council on Foreign Relations.

One issue, explained Anduril co-founder Palmer Luckey in an interview last week with Bloomberg Television, is that European nations still prefer to secure tech from local suppliers, even if the offerings are pricier or “years behind” those sold by American companies. Giving up that bias is a “difficult pill to swallow for these countries,” he said.

Another is that military procurement processes tend to favor incumbents, and tech companies that break through in Europe often have relevant connections. Two German startups that recently signed contracts with that country’s military — the software provider Helsing AI and drone-maker Quantum Systems — had preexisting defense industries ties.

Anduril staff landed in Ukraine two weeks after Russia’s invasion to help Ukraine’s military deploy the company’s autonomous drones. Luckey visited later that summer, posting on social media that “having the best technology” could have prevented the war. “The right time to take arms is before the killing starts,” he wrote.

Palantir offered software that analyzes satellite imagery and drone movements for free to the Ukrainian government, and a significant number of staff temporarily relocated to the war zone. In April, the firm signed an agreement with Ukraine’s Prosecutor General to provide data processing services to facilitate investigations into Russian war crimes, and has also forged a partnership with the government to assist with post-war reconstruction efforts.

The US defense tech sector has ballooned in recent years as the US military has seeded new companies in an effort to modernize its weaponry, and venture capitalists have followed suit, pouring $135 billion into defense tech startups from 2016 to 2022, according to PitchBook. Defense technology companies have also bucked the trend of diminished fundraising rounds this year. US defense systems developer Shield AI raised $200 million at the end of October at a valuation of $2.7 billion, and drone startup Skydio managed to pull in $230 million at a $2.2 billion valuation in February. On the other side of the Atlantic, Helsing raised €209 million in funding in September.

Since Russia’s invasion, many of these fledgling companies spotted an opportunity to showcase their work. Waves of startups rushed into Ukraine with drones, sensors, satellites and artificial intelligence software.

But as the war drags on, tech providers haven’t seen their initial outreach in Ukraine evolve into contracts with other European nations or meaningful revenue from allied countries. So far, Palantir has earned just north of $1 million from the United States Defense Department for its work in Ukraine, and donated the rest of its services.

Ukrainian officials have also shown a thinning patience for Silicon Valley treating the country as a testing ground. Mykhailo Fedorov, Ukrainian vice prime minister for innovation and development of education, recently dismissed most vendor pitches the government receives as “R&D projects.”

Many startups used Ukraine as a “marketing opportunity” more than a venue to understand battleground needs, said Alexander Harstrick, a managing partner with J2 Ventures, a defense investment firm. “They sort of crossed over the border, dropped some stuff and left.”

Palantir’s problem

Breaking into other European markets has proven particularly difficult. The EU is increasingly interested in developing homegrown tech champions, and NATO set up a €1 billion fund this year to support European defense startups. Much of the military spending that has been approved since the Ukraine invasion comes with an emphasis on “sovereignty” — which translates into minimizing dependence on American tech and backing away from Pentagon priorities.

Data security is a major part of this. Earlier this year, Germany’s highest court implemented stringent rules that restricted the country’s law enforcement from using data tools like Gotham, Palantir’s domestic policing product, on privacy grounds. France’s intelligence services recently began developing its its own version of the software for €40 million, prompting a rebuke from Karp on the November earnings call. “You can’t rebuild it for $1 billion,” he said. “You need us.”

The company has stronger ties in the UK, where it’s worked with the British Armed Forces for more than a decade. So far, however, revenue has been modest. Its largest deal yet, a $12.5 million contract with the UK Ministry of Defence, only lasted one year and ended in May. When Palantir won a contract in November with the UK’s National Health Service for as much as $602 million over seven years, data privacy advocates expressed concern about the firm’s track record. The company has faced repeated criticism from civil liberties groups over its data-mining practices and links to the Cambridge Analytica scandal.

“Palantir has a reputation problem,” said Franke. “People think they are not particularly trustworthy.”

In response to questions about data security, a spokesperson for Palantir said, “Customer data is held wherever the customer wants it held. Monitoring cyberattacks is also done in the jurisdiction of choice for customers. No data data needs to be sent or processed outside.”

Anduril too has had better luck in the UK. Earlier this year, it teamed up with Britain’s Home Office to test its autonomous surveillance towers — the equipment deployed on the US-Mexico border — on tracking migrants crossing the Channel from France. In November, the UK defense ministry awarded the startup a 31-month, $21.3 million contract to “explore future capabilities.”

Still, Anduril has lost two senior executives in Europe and the UK since September, a sign that multiple observers said indicated weaker-than-expected traction. The company now appears to be trying to turn that around. In November, it named Richard Drake, a former executive at British defense contractor Babcock International Group Plc., as its new general manager for the UK and Europe. Drake is charged with doubling Anduril’s presence in the UK to 80 over the next two years and creating products with UK-sovereignty at the core, the company said. This means ensuring Anduril’s products are all designed, engineered and manufactured in the UK and are sourced within UK supply chains.

Asked to name any major contracts in Europe, a representative for the firm said only that it has “actively engaged” with a number of US allies in the region.

In a statement, Greg Kausner, Anduril’s senior vice president of global defense, said that the company “is committed to the European market because the US is a global power, and the cornerstone of international security remains the transatlantic alliance.”

But with the European market proving harder to crack than anticipated, some US defense tech providers are now looking to what they regard as the site of the next potentially lucrative geopolitical conflict — the South China Sea.

Looking East

While conversations about foreign military support for Taiwan remain extremely sensitive, there are indications that the defense tech sector’s attention is turning to the region.

On the recent earnings call, Palantir’s Karp replied, “absolutely” but didn’t provide further details when asked if his firm had any plans to aid “our allied partners in Asia.” Harstrick, the investor, noted that defense startups are particularly concerned about potential cybersecurity threats from China.

In an interview on Bloomberg Television, Anduril’s Luckey was more blunt. “Everything that we’re doing, what the [US Department of Defense] is doing, is preparing for a conflict with a great power like China in the Pacific,” he said.

One sign of this lies in hiring. In Sydney, Anduril’s Asia-Pacific headquarters, the company is recruiting for roles in manufacturing and maritime engineering, among other sectors, to add to its 70-person team. The company has already had to change offices three times in a year to accommodate growth.

At a security conference in Sydney last April, Luckey said Anduril hadn’t shipped any equipment to Taiwan, but noted that this was due to “bureaucratic” hurdles, not a lack of interest. Reflecting on the geopolitical situation in Taiwan, Luckey drew an ominous parallel, describing a meeting with Ukrainian President Volodymyr Zelenskiy not long before Russia’s invasion.

“I want to make sure we’re not in the position we were in Ukraine,” he said. “We were asked to help them with a problem and we weren’t able to respond, and all of a sudden there’s an invasion. We’re feeling like idiots for not pushing harder.”

With assistance from Edward Ludlow.

related stories

• Putin vows Russian victory in war as Ukraine’s allies waver