Investment in defence technology start-ups is picking up speed in Europe, says the head of Nato’s €1bn venture capital fund, who believes the region can produce several potential multibillion-dollar companies to rival those in the US.
The Nato Innovation Fund kicked off its investment programme at the start of this year by backing four start-ups directly, including Wales-based Space Forge with its plans to produce novel materials in space. The fund also put money in four VC funds that focus on “deep tech”, such as robotics, artificial intelligence, space and energy.
Andrea Traversone, the scheme’s managing partner, told the Financial Times that the fund’s aim was to address a “market failure” whereby most traditional VC firms fail to invest in more ambitious, long-term technology.
The Nato fund invests over 15 years in contrast to most VCs, which have to return their funds within 10 years. “We have a significant amount of capital to deploy during these long and capital intensive R&D cycles” for deep tech, Traversone said.
“When it comes to defence tech, the market has grown dramatically over the past three or four years for the geopolitical reasons we all know,” he said, alluding to Russia’s war in Ukraine and rising tensions between the US and China.
The trend started earlier in the US, Traversone said, but Europe is now “catching up very fast”.
The Netherlands-based fund this year also backed ARX Robotics, a German developer of dual-use autonomous ground systems for surveillance and transportation, and invested in London-based Fractile AI, which makes AI systems run more efficiently, as well as iCOMAT, a University of Bristol spinout that is developing lighter and stronger materials for aerospace and automotive vehicles.
The funds receiving Nato capital are Join Capital, Vsquared Ventures, OTB Ventures and Alpine Space Ventures.
Traversone said Europe could soon have a homegrown rival to emerging US champion Anduril, a developer of AI and robotics including drones and surveillance systems that raised $1.5bn at a $7bn valuation in late 2022.
“There are many candidates to become the equivalent of Anduril in the regions we cover,” he said. “And we are investing in some of them. So I am very confident that that is changing and is changing very fast.”
More European entrepreneurs are becoming “enthusiastic” about building so-called dual-use technology, which can be applied to commercial and defence applications, he added.
Many investors, notably in Europe, have been wary of backing defence companies, fearful of falling foul of environmental, social and governance rules.
The war in Ukraine, however, and government investments into capabilities such as drones, cyber and AI which have broader applications, have helped change perceptions of the sector.
In May, the European Investment Bank, a significant backer of VC firms on the continent, opened the door to more deals in defence tech companies by removing a minimum threshold of revenues from civilian applications for dual-use tech companies that receive its funds.
Another factor accelerating investment into defence tech companies is what Traversone described as a “cultural shift” in procurement, typically a slow and laborious process that start-ups have struggled to navigate.
“Ukraine has changed everything,” Traversone said. “Ukraine is showing to all the allies that you can adopt technology and experiment at a much faster pace.”
Recent investors in European defence tech companies include General Catalyst and Spotify founder Daniel Ek’s Prima Materia, which have backed German AI developer Helsing. Air Street Capital, meanwhile, led a €6mn seed round in Greece’s Lambda Automata in October.
Germany, the UK, Italy, Spain and Turkey are among the 24 countries contributing to the Nato Innovation Fund, which was first proposed in 2021. The US, Canada and France have not agreed to support it.
As well as investing with a goal of generating financial returns, the fund acts as a “matchmaker” between government buyers of technology and start-ups developing novel products, Traversone said. It plans to invest in areas such as biotech, communications, security and quantum computing.
“The mission of the fund is to invest in disruptive technology that enhances the safety of the alliance’s citizens and Nato’s technological edge,” he said.
Read the full article here