The head of NATO’s 1 billion euro venture capital fund says investment in defence technology start-ups is accelerating in Europe, and he believes the region could spawn a number of potential multi-billion dollar companies to rival those in the United States.
The NATO Innovation Fund kicked off its investment program earlier this year by directly backing four startups, including Wales-based Space Forge, which plans to produce new materials in space. The fund has also put money into four venture capital funds focused on “deep tech,” including robotics, artificial intelligence, space and energy.
Andrea Traverson, the scheme’s managing partner, told the Financial Times that the fund aims to address a “market failure” where most traditional venture capital firms fail to invest in more ambitious, long-term technologies.
NATO’s fund invests over 15 years, as opposed to most venture capital firms that must return their money within 10. “We have a lot of capital to put into these long, capital-intensive research and development cycles of deep tech,” Traverson said.
“When it comes to defense technology, the market has grown dramatically in the last three or four years for geopolitical reasons that we all know,” he said, referring to Russia’s war in Ukraine and rising tensions between the U.S. and China.
Traverson said the trend started early in the United States, but Europe is now “rapidly catching up.”
The Netherlands-based fund also invested this year in ARX Robotics, a German company developing autonomous ground systems that can be used for both surveillance and transportation, as well as London-based Fractile AI, which works to make AI systems more efficient, and iCOMAT, a University of Bristol spinout company developing lightweight, strong materials for aerospace and automotive applications.
The NATO-backed funds are Join Capital, Vsquared Ventures, OTB Ventures and Alpine Space Ventures.
Traverson said Europe could soon have a home-grown rival to emerging U.S. leader Anduril, a developer of AI and robotics, including drones and surveillance systems, that raised $1.5 billion in late 2022 at a $7 billion valuation.
“There are a lot of companies in the geography that we cover that could become Anduril’s equivalent,” he said, “and we’ve invested in some of them. So we’re confident that things are changing, and they’re changing very quickly.”
He added that an increasing number of European entrepreneurs are becoming “eager” to build so-called dual-use technologies that can have commercial and defense applications.
Many investors, especially in Europe, have been wary of investing in defense-related companies for fear of violating environmental, social and governance rules.
But the war in Ukraine and government investments in drone, cyber and AI capabilities with wider applications are helping to change perceptions of the sector.
In May, the European Investment Bank, a key backer of venture capital firms on the continent, removed minimum revenue thresholds from civilian applications for dual-use tech companies it funds, opening the door to more deals for defense tech companies.
Another factor driving increased investment in defense tech companies, Traverson said, is a “cultural change” in procurement, which is typically a lengthy, cumbersome process that startups struggle to navigate.
“Ukraine has changed everything,” Traverson said. “It’s showing all of our allies that we can adopt and experiment with technology at a much faster pace.”
Recent investors in European defense tech companies include General Catalyst and Spotify founder Daniel Ek’s Prima Materia, which are both backers of German AI developer Helsing, while Air Street Capital raised €6 million in a seed round for Greece’s Lambda Automata in October.
Germany, Britain, Italy, Spain and Turkey are among 24 nations that would contribute to a proposed NATO Innovation Fund for the first time in 2021. The United States, Canada and France have not agreed to support it.
Traverson said the fund will invest to generate financial returns, but also act as a “middleman” between governments buying technology and startups developing novel products, with investments planned in areas including biotechnology, communications, security and quantum computing.
“The mission of the fund is to invest in disruptive technologies that enhance the security of allied citizens and NATO’s technological superiority,” he said.
