Sinéad O’Sullivan is a former Senior Researcher at Harvard Business School’s Institute for Strategy and Competitiveness.
Adam Neumann is back, with a lot to say on… defence and national security?
In November, he was rolled out at Andreessen Horowitz’s American Dynamism Summit in Washington DC for a chat with Marc Andreessen and a16z’s American Dynamism Fund partner, David Ulevitch. “What made you decide to get back into the arena?”, Ulevitch asked Neumann, channelling Theodore Roosevelt via Chamath Palihapitiya.
The WeWork founder’s response was straight out of the school of Palihapitiyan un-wisdom: something about trying to make America more prosperous — lots of words, with very little meaning.
The VC-led defence summit conveyed as much as anybody needs to know about the state of American Pentagon-ish activities: there were some Very Serious People in attendance, speaking from government and national security backgrounds; there were some Less Serious People in hawaiian shirts and Birkenstocks (Neumann was, by the way, at least wearing sandals); and there were the VCs who didn’t seem to know which of these two groups of people they should cosy up to more.
American Dynamism, which started as the name of a16z’s $500 million fund to further the “national interest”, has now become a movement across the US. Crypto bros are now pro-defence accelerationists, and fintech investors are suddenly experts on US-China relations.
Meanwhile in Europe, crickets. “European Dynamism? I’m afraid that’s more wishful thinking than reality,” says Jonathan Luff, a London-based defence investor and former advisor to the ex-prime minister David Cameron.
Last week, London venture capital firm Air Street Capital released the first research memo of its kind on European Dynamism and Defense — or, more precisely, the lack thereof.
It turns out that while rockets, hypersonics, missiles, and security AI are complex technologies, the business of defence is easy:
— Step one: Build a technology that is marginally better than the 40-year old capabilities that governments currently have
— Step two: Sell this marginally better technology to the government for high prices
While the capabilities being built at the minute across Europe and the US are changing the face and pace of war, the investing case seems to collapse at Step Two: acquiring government contracts.
In the US, with a defence budget that has just surpassed a trillion dollars annually, unlocking the Bank of Uncle Sam is less of a problem. In Europe, investors are beholden to piecemeal, country-by-country contracts in a procurement system that was optimised during peacetime to be slow, careful, and prudent.
Today, with two conflicts on its landmass, there is no sign of urgency to change. European Lethargy is in full play.
Nathan Benaich, founder of Air Street Capital and co-author of the European Dynamism and Defense research, says that “Europe is fundamentally not serious about defence. Consider the reports suggesting that Germany has delivered only 10 per cent of the Leopard I tanks it promised to Ukraine, some of which were returned after malfunctioning.”
Yikes. Not a great look, Europe.
While global venture investment in defence tech surpassed $34bn in 2022, European VCs contributed a meagre $2bn of that, which would be just enough to cover defence American autonomy startup Anduril Industries’s $1.5bn latest Series E raise.
And while US VCs are only too happy to lack competition when accessing the best deal flow from the US and Europe, based on historical precedent it’s not unlikely that European ministers will soon complain about the lack of European sovereignty over the tech companies that are powering its own defence base.
One can’t help but wonder: without providing defence contracts and paying for innovation, is the strategy to wait until US capital markets have created the capabilities that Europe needs, before Europe tries to take a slice of the pie through regulation? Or even worse: is there any strategy, at all?
“All investors want for Christmas is European government engagement with deeptech. Unfortunately it looks like we aren’t getting contracts, we are getting the EU AI Act instead”, says Michael Jackson, one of Europe’s leading security and defence technology investors at Multiple Capital.
It will come as a surprise to nobody that the report uses post-Brexit Britain as a case study of chronic failure — in this case, it’s the Ministry of Defence’s (non-)efforts to procure defence tech in a way that drives innovation. Instead, most of the government contracts drive a preservation of the status quo through simply maintaining its degrading and out-of-date assets.
For all Rishi’s talk of the UK becoming a science and technology superpower, there is little evidence to suggest that its powers may one day include security prowess.
However, apart from the lack of desire to build European Dynamism, there are some real, structural reasons why there is no similar cult following for this investment thesis that mirrors the US.
The US has a comprehensive military strategy and so founders can easily build technologies that are on the government’s “wish list” or capabilities roadmap. Thus, venture investing in American defence tech is somewhat less risky. You can invest in the startups that are building technologies which are on a sure path to large, military contracts.
In Europe, chaos rules supreme; there is no common military defence strategy. Behind closed doors, when asking a group of European ministers about defence, it is not uncommon for the response to be: “Defend Europe against whom? My enemy is not their enemy.” Thus, the complexity of investing in much needed technology in Europe carries the additional risk that, without any defence plan, there are no contracts to procure. And without contracts, there is no revenue. And without revenue, there is no return on investment. Womp womp.
Some of this trend is starting to reverse. The European Defense Investor Network (EDIN) held its first European Defense Tech Summit in Madrid in October, and the closed-door session was waitlisted with an all-star cast of senior military and defence leaders, investors and government officials in attendance. Founded by American Eric Slesinger, with a track record of national security investing, EDIN has started to catalyse what could begin to resemble a European Dynamism movement.
And capital is starting to flow accordingly. Per Pitchbook, the first quarter of 2023 saw European VCs invest $3.5bn into defence tech ventures, nearly 1.5x the allocation of all of 2022. Plus, there’s a new whale in town. In August, NATO announced its flagship €1 billion Innovation Fund — the world’s first multi-sovereign VC fund — which will invest in cutting-edge security and defence capabilities across Europe.
But still, with conflict on its shores, and a supposed desire for European sovereignty, there is a persisting lack of public sector signal that it wants or needs novel capabilities. Or at least, there’s no signalling that the European governments are willing to pay for it.
The most horrifying thought of all is that maybe, just maybe, it’s time for Jiří Šedivý, the European Defence Agency chief, to take off his shoes and join Neumann in the arena. If for no other reason than to pretend he’s trying stuff.
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