The Kremlin’s Cap Table: How Russia Builds War Tech Without Venture Capital

Part 1: The Wrong Question

In the West, the conversation around defense innovation is increasingly centered around venture capital investments. With Silicon Valley investing billions and European defence VC funding at an all-time high, the focus is on startups. Ukraine’s battlefield-driven tech ecosystem has become the benchmark for agility, attracting foreign capital and prompting Western leaders to learn from its bottom-up approach. Large-scale initiatives, including the €1 billion NATO Innovation Fund, have been created to channel this entrepreneurial energy, aiming to secure a decisive technological edge for the Alliance.

It is only natural, then, to look at our primary adversary on the European continent and ask the same question: how does their defense venture capital work?

This is however the wrong question.

It starts from a false premise. It imposes a familiar, market-based framework onto a system that is fundamentally alien to it. We are used to our own model, where private capital seeks high returns by funding risk-taking entrepreneurs, that we assume our competitors must have some version of it, however distorted. They do not.

Russia does not have a defense venture capital ecosystem in the Western sense. It has a state-directed, debt-financed, procurement machine, not a market for risk capital. The Russian venture market, even in the civilian sector, is a shadow of its Western counterpart. It is small, heavily influenced by the state, and has been shrinking since 2021 as foreign funds have fled and high interest rates make government bonds a safer bet than risky startups. To ask how Russia’s defense VC works is like asking how a bear operates its stock portfolio. The bear might own things of value, but it does not think in terms of quarterly returns and diversification. It thinks in terms of survival, territory, and brute force.

To understand how Russia innovates in defense, we have to discard our own vocabulary and start from first principles. We need to look at the raw components of their system: a managed economy where the state is the dominant actor; a colossal, state-owned industrial base built for production quotas instead of profit; and a set of strategic imperatives dictated from the top down, where innovation is a tool for national security, not market disruption.

The real question is “How do they build?” The answer reveals a system that is in many ways the inverse of our own, one optimized for control, scale, and attrition instead of speed, disruption, and profit. It is a system built in the Kremlin’s garage.

Part 2: The State as the Sole General Partner

In the Western venture world, usually money flows from Limited Partners (LPs), such as pension funds, endowments, and wealthy individuals, to General Partners (GPs), the venture capitalists who manage the fund. The GPs then invest this money into a portfolio of startups, hoping a few big wins will generate enough returns for everyone. The system is decentralized, competitive, and driven by the pursuit of profit.

In Russia’s defense sector, this entire structure is collapsed into a single entity: the state. The Kremlin is the sole LP and the sole GP. Its “fund” is the national budget, which allocates a staggering portion of the country’s wealth to military needs, an estimated ₽15.5 trillion, or 7.2% of GDP, in 2025. Its primary investment vehicle is a contract: the State Defense Order (Gosudarstvennyy Oboronnyy Zakaz, or GOZ).

The GOZ is the lifeblood of Russia’s entire military-industrial complex (known as the OPK). It is the mechanism through which the state directs capital to achieve its strategic objectives. This is to say, everything drives straight from procurement, not venture funding. The way it is structured reveals the fundamental logic of the Russian system.

A Western startup receives venture capital as an asset on its balance sheet. It uses this cash to grow, with the understanding that it might fail. In Russia, the GOZ often works in reverse. The government does not provide upfront payment for production. This forces the defense company to take out loans from state-affiliated banks to buy materials and pay workers to fulfill the order. To manage this system and insulate major lenders like Sberbank and VTB from sanctions, the Kremlin consolidated this role into a dedicated “defense bank,” Promsvyazbank (PSB), which now services most GOZ cash flows and concentrates the sector’s credit risk. The company starts the project with a liability, not an asset. Its primary goal is to fulfill the contract on time and on budget so it can pay back its loan and secure the next contract, rather than achieve a 100x return.

This creates a system defined by debt and dependency, not equity and independence. Russian military-industrial producers are not designed to be profitable in the way their Western counterparts are. They are expected to operate sustainably, with “manageable” losses. The Ministry of Defence constantly pressures them to lower prices, and negotiations over profit margins are a traditional source of friction. This incentive structure is profoundly conservative. It punishes failure with bankruptcy and the inability to repay state-backed loans, not with a loss of investor confidence. It is a system designed to ensure the predictable, large-scale production of known quantities, not to foster high-risk, high-reward experiments that might fail. It is a command-and-control supply chain, not an investment ecosystem.

At the center of this supply chain is one enormous “portfolio company”: Rostec.

Created by presidential decree in 2007, Rostec is a 100% state-owned corporation designed to consolidate and manage the sprawling, often-failing assets of the Soviet-era defense industry. It is a behemoth. Rostec oversees more than 800 enterprises organized into holding companies that are household names in the defense world: United Aircraft Corporation (maker of Sukhoi and MiG fighters), Russian Helicopters, Kalashnikov Concern, and Uralvagonzod (maker of tanks). It employs nearly half a million people and controls the vast majority of Russia’s defense production, from hypersonic missiles to infantry fighting vehicles.

Rostec is an instrument of the state. Its CEO, Sergey Chemezov, is a close ally of Vladimir Putin, and its supervisory board is appointed by the president. Rostec is the state’s factory floor, and the GOZ is its work order.

Recognizing the need to scout for new ideas, the Kremlin has also directed its state giants to mimic Western venture capital. In 2017, Vladimir Putin ordered major state corporations, including Rostec, to form venture funds to invest in small, innovative companies. Rostec subsequently announced a fund to support high-tech projects in IT and electronics, initially capitalized at 1 billion rubles. This was not venture capital in the Silicon Valley sense; it was state capital with a venture veneer, designed to funnel external innovation into the state’s 800-plus enterprises.

Part 3: The Illusion of Silicon Valley: NTI, Skolkovo, ERA, and the FPI

The Kremlin is not blind to the limitations of its monolithic, top-down system. It knows that the lumbering giants within Rostec are not agile enough to capture every new idea or respond to every technological shift. To compensate, it has built a series of institutions that look, on the surface, like Western innovation hubs. They have names like “technopark” and “foundation,” they offer grants and tax breaks, and they talk about startups and commercialization.

These are not genuine, bottom-up ecosystems. They are carefully constructed state tools, each designed to patch a specific weakness in the main state-controlled apparatus. Together, they form a tiered system for harvesting innovation without ever relinquishing control.

The National Technological Initiative (NTI): The State’s Startup Pipeline

If any program embodies Russia’s unique approach, it is the National Technological Initiative (NTI). Launched in 2014, NTI was designed as a sprawling, government-sponsored startup ecosystem, acting as an incubator, investor, and talent pipeline all in one. It offers funding to tech startups either as grants or in exchange for equity stakes, effectively operating like a state venture fund. Backed by billions of rubles from the state budget and contributions from large state-owned businesses, NTI has become a primary engine for funneling startup energy into state objectives.

Originally, NTI’s focus was broad, sponsoring projects from AI to biotech. The war in Ukraine, however, created an enormous domestic demand for defense technology, and NTI quickly pivoted. As one NTI-backed founder noted, by 2023 the only real market in Russia was for military drones. The program that once aimed to create globally competitive tech companies found its “product-market fit” with the Ministry of Defence.

A telling example is the startup Lab of the Future. The company developed a unique drone, the “Kanatokhod,” designed to repair power lines but struggled to find civilian customers.

NTI intervened, injecting approximately 450 million rubles in exchange for a 54% controlling ownership stake. This was a venture capital deal, Kremlin-style. With NTI’s backing, Lab of the Future ramped up production, but not for power companies. By late 2023, the company was producing 100 drones a month for the front lines and had helped establish an “Academy of Unmanned Aerial Systems” (ABAS) to train military drone operators. NTI used venture investment tactics to turn an ailing civilian startup into a state-controlled defense contractor.

Skolkovo: The “Potemkin” Tech Hub

The most famous of these institutions is the Skolkovo Innovation Center. Launched in 2010 by then-President Dmitry Medvedev, Skolkovo was explicitly designed to be Russia’s answer to Silicon Valley. Located on the outskirts of Moscow, it boasts a futuristic campus, a university (Skoltech, established in partnership with MIT), and five research clusters focused on IT, energy, nuclear tech, biomedicine, and space. Resident companies get significant tax exemptions and grants, making it an attractive place for Russian tech talent.

This is the civilian-facing facade. The reality is that Skolkovo functions as a dual-use technology acquisition engine for the Russian state. The FBI has been warning about it for years. In 2014, an agent wrote an op-ed stating that Skolkovo “may be a means for the Russian government to access our nation’s sensitive or classified research, development facilities and dual-use technologies with military and commercial applications”.

These warnings proved prescient. In response to the war in Ukraine, the U.S. government sanctioned the Skolkovo Foundation, its Technopark, and Skoltech, citing their deep and longstanding ties to the Russian defense sector. The U.S. Treasury noted that Skolkovo’s endowment contributors included numerous sanctioned Russian weapons developers, such as the makers of tanks and missiles. Its partner institute, Skoltech, has worked directly with defense enterprises to develop composite materials for tanks and specialized materials for aircraft wings. The Skolkovo campus has even hosted events for Rosoboronexport, Russia’s sanctioned state arms dealer.

Skolkovo is a semi-permeable membrane, designed to look open and commercial to the outside world, attracting international partnerships and knowledge, while selectively funneling technology and talent inward to serve the strategic needs of the state and its military-industrial complex.

ERA Technopolis: The Military’s Science City

If Skolkovo is the disguised dual-use hub, the ERA Military Innovation Technopolis is its undisguised, uniformed counterpart. Established in 2018 in the Black Sea city of Anapa, ERA was personally presented to Vladimir Putin by Defense Minister Sergei Shoigu. Its mission is unambiguous: to create military artificial intelligence systems and supporting technologies.

ERA is owned, operated, and directly supervised by the Ministry of Defence. It is a military research base with the branding of a modern technopark. It houses special military-scientific units, recruits promising students and scientists from civilian universities, and focuses on developing concrete military applications in fields like AI, robotics, and autonomous systems. Its residents, who work on projects like strike and reconnaissance UAVs, are granted a 10-year exemption from VAT and income tax starting January 1, 2025, a powerful incentive to dedicate their work to the armed forces.

ERA is a direct pipeline for military R&D, a place where the MOD can concentrate talent on its most pressing technological problems, from AI-enabled command and control to new drone designs.

FPI: The State’s Moonshot Machine

The third key institution is the Foundation for Advanced Research Projects (FPI). When it was created in 2012, Russian officials, including then-Deputy Prime Minister Dmitry Rogozin, were explicit about its purpose: it was to be Russia’s version of the U.S. Defense Advanced Research Projects Agency (DARPA). Its mission is to fund “high-risk” research into breakthrough technologies to ensure Russian military superiority and prevent the country from falling behind its Western partners.

Like DARPA, the FPI focuses on the technological frontier: hypersonic vehicles, unmanned underwater vehicles (UUVs), directed energy weapons, and advanced AI. It has backed projects like the “Cyclocar,” a hybrid-electric VTOL aircraft concept with both military and civilian applications.

The FPI is not a venture capital fund. It does not take equity in startups. It is a state foundation that provides grants and other forms of support to research institutes, universities, and labs working on projects aligned with its strategic goals. Its goal is a strategic return for the Russian state in the form of a game-changing military capability, not a financial return on investment.

Voentech: The Wartime Fast Track

In early 2025, the Ministry of Defence launched “Voentech,” a military technology initiative designed to create a combat validation pipeline. This program institutionalizes the battlefield feedback loop, allowing small teams to prototype technologies, test them directly with units at the front, and fast-track what works. It serves as a formal gateway for promising civilian and dual-use technologies to be rapidly adapted for military use, bypassing the slower, more bureaucratic peacetime systems.

These organizations are not a random collection of initiatives. They form a coherent, complementary system designed to solve the inherent problems of the monolithic Rostec structure. Rostec is too slow and bureaucratic to effectively scout foreign technology, incubate purely military R&D, or bet on high-risk, long-term science projects. So the state created specialized organs to perform these functions. NTI acts as the state’s venture fund and startup pipeline, Skolkovo is the foreign technology scout, ERA is the dedicated military R&D incubator, FPI is the state’s “mad science” lab, and Voentech is the wartime accelerator. This is an apparatus, not an ecosystem.

Part 4: What is a “Russian Defense Startup?”

Given this state-dominated landscape, what does it even mean to be a “startup” in the Russian defense sector? The term conjures images of founders in hoodies pitching VCs on Sand Hill Road. The reality in Russia is very different.

A Russian defense startup is typically a small, agile engineering team, often with a thin civilian veneer, whose primary purpose is to develop a specific capability for its one and only potential customer: the state. Their journey is an audition to become a supplier to the Ministry of Defence or a component in the vast Rostec supply chain. Their success is measured by securing a GOZ contract, not by valuation or market share.

The Drone “Startups”: Masters of the Gray Zone

The war in Ukraine has thrown this dynamic into sharp relief, particularly in the world of unmanned aerial vehicles (UAVs). Russia’s drone industry is a fascinating mix of large state projects, co-opted civilian firms, and battlefield-driven “DIY” innovation.

A prime example is Integrated Robotics Technologies (IRT). Publicly, IRT presents itself as a maker of drones for agriculture and industry. Secretly, however, it uses platforms like Telegram to market its products to the military as “short life vehicles suitable for the delivery of mines” and one-way exploding drones. This dual-use facade is a common strategy. The company is also backed by the NTI, and its “Scout” drone is virtually identical to a commercial Chinese model, suggesting that Russian startups often rely on adapting foreign technology to fill urgent military needs.

Another case study is the previously mentioned Future Lab, the NTI-backed company that developed drones for repairing power lines. After receiving state funding and becoming majority-owned by an NTI fund, it helped establish the Academy of Unmanned Aerial Systems (ABAS). ABAS trains military drone operators and produces combat copters like the “Hornet” and “Dragonfly” for dropping ammunition and laying mines, a direct pivot from civilian work to military support.

The war has also unleashed a wave of bottom-up innovation from volunteer workshops and battalion-linked assembly lines, creating a “DIY” culture of battlefield adaptation. The state, recognizing the value of this agility, is now moving to formalize and scale it. The government has allocated billions of rubles to create eleven specialized regional drone production centers and is actively encouraging schoolchildren and university students to get involved in drone design and construction. In parallel, Russia has stood up domestic production of Shahed-type drones with Iranian help at the Alabuga special economic zone, which has recently been targeted by Ukrainian strikes, showing how sanctions pressure drives industrial improvisation.

AI and Cyber “Startups”: Extensions of the State

The story is similar in software, AI, and cybersecurity. The innovation is aimed at solving specific military problems. Russia is heavily invested in integrating AI into its command and control systems, air defenses, and especially its drones, where AI-powered autonomous targeting and object recognition are seen as crucial counters to Ukrainian electronic warfare. A key example is the upgrade to the ZALA Lancet loitering munition, which is reportedly being equipped with AI to allow swarms of drones to coordinate attacks and re-acquire targets without continuous human control. The “startups” working on these problems are effectively outsourced R&D labs for the Ministry of Defence.

The cybersecurity sector provides an even clearer picture. Companies like Kaspersky Lab, once commonly deployed in Western companies and Positive Technologies are mature, global businesses, but their operating model is instructive. While selling products worldwide, they maintain collaborative relationships with Russian intelligence services like the FSB and GRU. Their large public conferences have been identified by the U.S. Treasury as recruiting events for Russian intelligence. These firms are integral parts of Russia’s national security apparatus, not just vendors to the state.

The business model for a Russian defense startup is one of state capture. The process is simple: identify a military capability gap, develop a prototype (often using readily available commercial or foreign components), and demonstrate it to the Ministry of Defence. The ultimate “exit” is securing a long-term GOZ contract and being permanently integrated into the state’s military machine. They are auditioning for a role, not building a business.

Part 5: The Operating System: Incentives, Risk, and Speed

If the Russian defense innovation system were a computer, what would its operating system be? What are the underlying rules and cultural assumptions that dictate how it functions? Understanding this “OS” is key to grasping its unique strengths and weaknesses. It is an operating system optimized for state control and strategic stability, not disruptive innovation, which explains its paradoxical approach to incentives, risk, and speed.

Incentives: Contracts, Not Equity

In Silicon Valley, the ultimate incentive is the life-changing wealth that comes from a successful exit. Equity is the fuel of the entire system. In the Kremlin’s Garage, the primary incentive is the stability and revenue that comes from a state contract.

The state offers orders, not equity. But it sweetens the deal with a host of other incentives designed to steer the country’s technical talent toward its strategic objectives. These include significant tax breaks for IT and electronics companies, access to preferential loans, and direct grants. Special economic zones, like the ones at Skolkovo and ERA Technopolis, provide tax-free havens for companies and individuals willing to work on state-prioritized projects. This is about using economic levers to channel the nation’s intellectual resources toward the goals of the state, not creating a free market for innovation.

Risk & Failure: Programmatic Aversion, Battlefield Tolerance

The most striking feature of the Russian system is its bifurcated attitude toward risk and failure.

On one hand, the system has a very low tolerance for programmatic failure in research and development. The centralized, debt-based funding of the GOZ, combined with a highly bureaucratic oversight structure, means that a project that fails to deliver its promised hardware is a disaster. It can lead to a company defaulting on its loans, and its managers may face severe consequences. This pressure cooker environment discourages radical, high-risk experimentation. It incentivizes a safer, incremental approach that analysts call “retain-and-adapt”. Instead of designing a revolutionary new tank from scratch, the safer bet is to take a proven T-72 chassis and integrate new sensors, armor, and electronics. The system is not designed to “fail fast.”

On the other hand, Russia demonstrates an astonishingly high tolerance for failure on the battlefield. The war in Ukraine has seen the Russian military suffer staggering losses in both personnel and equipment, losses that would be politically unsustainable in most Western nations. This cultural and doctrinal acceptance of attrition creates a completely different kind of innovation pressure. The goal is to produce “good enough” systems in massive quantities that are, by design, attritable, not to build a perfect, invulnerable, and expensive weapon system.

This approach is the inverse of the Western model. Our defense procurement programs are famously risk-averse, pursuing “exquisite,” 100% solutions that often take decades and billions of dollars to field. Yet, the venture capital ecosystem that feeds innovation into our system is built on the exact opposite premise: a high tolerance for failure. VCs know that 90% of their investments will likely fail, but they make their money on the 10% that succeed spectacularly. Russia has a system that tolerates massive failure in combat, but it has no equivalent mechanism for tolerating, and thus learning from, failure in the lab.

Speed & Agility: The Wartime Paradox

This leads to a final paradox: the system’s speed. In peacetime, the Russian OPK is notoriously slow and bureaucratic, suffering from what one think tank calls “innovation stagnation” and outdated production chains. It is a system designed for stability, not speed.

But the intense pressure of the war in Ukraine has forced a dramatic acceleration. The rapid, iterative evolution of drone and counter-drone technologies is the clearest example. Small, agile teams are able to get new designs and software updates to the front lines in weeks, not years. The Ministry of Defence has recognized the need for this new velocity, creating initiatives like Voentech specifically to fast-track promising civilian and dual-use technologies into military service. This newfound agility is an adaptation born of wartime necessity, a departure from the system’s original design.

This entire operating system is a direct reflection of Russia’s strategic culture: a deep-seated belief in centralized control, a prioritization of state stability over market dynamism, and a high tolerance for human and material cost in conflict. This culture explains the paradoxes. The system is not designed to produce the single best weapon in the lab. It is designed to produce a good enough weapon in large numbers, throw it into the brutal reality of combat, and then innovate based on what survives. The innovation happens through attrition. This is a fundamentally different philosophy of technological development.

Part 6: Lessons for the West

Understanding the Kremlin’s Garage is a strategic imperative. The West is in a system-versus-system competition. To prevail, we must not only accelerate our own innovation engine but also understand the design, function, and philosophy of the machine we are up against. Trying to simply copy their model would be a mistake because our strength lies in our decentralized, competitive innovation base. But by analyzing their system, we can identify our own weaknesses and their strengths.

Lesson 1: The Power of State Direction vs. The Magic of the Market

Russia’s top-down model, for all its bureaucratic flaws, can focus immense national resources on a few top-priority goals with a unity of purpose that is difficult for a sprawling, competitive market economy to match. When the Kremlin decides that hypersonic weapons or electronic warfare are national priorities, the entire apparatus moves in that direction.

The West’s strength is the opposite: a chaotic but incredibly fertile ecosystem of thousands of startups and venture funds exploring a vast technology landscape in parallel. Our challenge has always been how to effectively bridge the gap between this dynamic commercial world and the rigid, slow-moving world of government procurement. We have created specialized organizations to act as these bridges: in the United States there is In-Q-Tel for the intelligence community, the Defense Innovation Unit (DIU) for the Pentagon, and now the NATO Innovation Fund for the Alliance. These are our best attempts to channel the magic of the market toward strategic ends. The lesson from Russia is that our adversaries have a system built for strategic direction from the start. We must ensure our bridges are wide enough, fast enough, and well-funded enough to compete.

Initiatives like the UK’s Project ASGARD show a promising path forward. ASGARD is a UK MoD program for building a digital targeting system that uses AI and novel communication networks to dramatically shorten the “kill chain,” reducing the time from target identification to strike from hours to minutes. Using a novel, rapid acquisition approach, the project went from contract to a prototype deployed in a NATO exercise in just four months. It brings together established defense contractors and innovative tech firms like Anduril and Helsing to rapidly integrate new capabilities. This model, which emphasizes speed and collaboration, is a direct answer to the bureaucratic slowness that often plagues Western defense procurement.

Lesson 2: Mastery of the Dual-Use Gray Zone

Russia’s deliberate use of civilian-facing entities like Skolkovo and thinly disguised military suppliers like IRT is a sophisticated strategy for operating in the gray zone between the commercial and defense worlds. It allows them to access Western technology, talent, and capital under false pretenses, bypassing sanctions and export controls.

We are trying to build walls; they are masters at digging tunnels. This poses a direct challenge to our regulatory and counterintelligence frameworks. We need a more nuanced understanding of this strategy, moving beyond blunt sanctions to a more sophisticated approach that can identify and disrupt these gray-zone networks without stifling legitimate international scientific and commercial collaboration.

Lesson 3: Wartime Adaptation Trumps Peacetime Perfection

Perhaps the most important lesson comes from the battlefield. The war in Ukraine has demonstrated that “good enough” systems, produced at scale and rapidly iterated based on real-time combat feedback, can be brutally effective. Russia’s ability to adapt its tactics and technology, particularly in drone warfare, has been a key factor in the grinding conflict.

The West’s peacetime procurement system, by contrast, often falls into the trap of pursuing a perfect, “exquisite” solution. This leads to programs that take a decade or more to field a new capability, by which time the technology may be obsolete and the cost has ballooned. Ukraine’s own success in rapidly adopting and fielding commercial technology is a powerful lesson for its Western partners. We must build a system that values speed, adaptability, and the courage to field an 80% solution now over waiting ten years for a 100% solution that arrives too late.

Lesson 4: Their Centralization is Also a Weakness

While Russia’s state-centric model provides unity of effort, it also creates critical vulnerabilities. The entire system’s financial health is concentrated in a few state-controlled banks like PSB, making it a single point of failure for sanctions or financial stress. Furthermore, the system is brittle due to its reliance on foreign components. Sanctions have exposed a deep dependency on Western and Chinese microelectronics for everything from missiles to drones, forcing Russia into smuggling and import substitution schemes that are not sustainable for developing cutting-edge technology. This reveals that while their system can improvise, it struggles with true strategic autonomy.

Ultimately, the competition between these two models of innovation will define the technological landscape of the 21st century. Russia has built a system that reflects its history and its worldview: centralized, brutal, and surprisingly resilient. It is a system that we in the West should not seek to emulate. But we must understand it. To compete effectively, we must play to our own strengths, our dynamism, our entrepreneurial culture, our deep capital markets, while learning the hard lessons Russia is teaching us about the importance of state direction, the realities of gray-zone competition, and the urgent, non-negotiable value of speed.

Find me on LinkedIn or shoot me an email.