Investments in defense technology start-ups are increasing in Europe, says the head of NATO’s €1 billion venture capital fund, who believes the region can produce several potential multi-billion dollar companies to rival those in the US.
The NATO Innovation Fund launched its investment program early this year by directly supporting four start-ups, including Wales-based Space Forge with its plans to produce new materials in space. The fund also put money into four venture capital funds that focus on “deep tech” such as robotics, artificial intelligence, space and energy.
Andrea Traversone, the plan’s managing partner, told the Financial Times that the aim of the fund was to address a “market failure”, where most traditional venture capital firms fail to invest in more ambitious long-term technology.
The NATO fund invests over a period of fifteen years, unlike most venture capital funds, which have to pay back their money within ten years. “We need to deploy a significant amount of capital during these long and capital-intensive R&D cycles” for deep tech, Traversone said.
“When it comes to defense technology, the market has grown dramatically over the last three or four years for the geopolitical reasons we all know,” he said, referring 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 quickly.”
The Netherlands-based fund this year also backed ARX Robotics, a German developer of autonomous dual-use ground systems for surveillance and transportation, and invested in London-based Fractile AI, which makes AI systems work more efficiently, as well as in iCOMAT, a A spin-out from the University of Bristol that develops 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, which raised $1.5 billion at a $7 billion 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 confident that that is changing, and that it is changing very quickly.”
More and more European entrepreneurs are becoming “excited” about building so-called dual-use technology, which can be applied to commercial and defense applications, he added.
Many investors, especially in Europe, have been reluctant to back defense companies for fear of running afoul of environmental, social and governance regulations.
However, the war in Ukraine and government investments in capabilities such as drones, cyber and AI, which have broader applications, have helped change the perception of the sector.
In May, the European Investment Bank, a major backer of venture capital firms on the continent, opened the door to more deals with defense technology companies by removing a minimum threshold of revenue from civilian applications for dual-use technology companies that receive its money.
Another factor accelerating investments in defense technology companies is what Traversone described as a “cultural shift” in procurement, typically a slow and arduous process that startups struggle to navigate.
“Ukraine changed everything,” Traversone said. “Ukraine shows all allies that you can adopt and experiment with technology much faster.”
Recent investors in European defense tech companies include General Catalyst and Spotify founder Daniel Ek’s Prima Materia, which has backed German AI developer Helsing. Air Street Capital, meanwhile, led a €6 million seed round in Greece’s Lambda Automata in October.
Germany, Britain, Italy, Spain and Turkey are among 24 countries contributing to the NATO Innovation Fund, which was first proposed in 2021. The US, Canada and France have not agreed to their support.
In addition to investing with the goal of generating financial returns, the fund also acts as a “matchmaker” between government buyers of technology and startups developing new products, Traversone said. It plans to invest in areas such as biotechnology, communications, security and quantum computing.
“The fund’s mission is to invest in disruptive technology that increases the security of the Alliance’s citizens and NATO’s technological advantage,” he said.