Investment in defense technology start-ups is gathering pace in Europe, says the head of NATO’s €1 billion venture capital fund, who believes the region can produce several potential multibillion-dollar companies to rival those in the US.
The NATO Innovation Fund launched its investment program earlier this year by directly supporting four start-ups, including Wales’ Space Forge with its plans to produce new materials in space. The fund has also put money into four venture capital funds that focus on “deep technologies” such as robotics, artificial intelligence, space and energy.
Andrea Traversone, the scheme’s managing partner, told the Financial Times that the fund aimed to address a “market failure” where most traditional venture capital firms fail to invest in more ambitious long-term technologies.
The NATO Fund invests over 15 years, unlike most VCs, which have to return their funds within 10 years. “During these long and capital-intensive R&D cycles, we have a significant amount of capital available to deploy” for deep technologies, Traversone said.
“For defense technology, the market has grown dramatically over 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 US and China.
The trend started earlier in the U.S., Traversone said, but Europe is now “catching up very quickly.”
This year, the Dutch fund also backed ARX Robotics, a German developer of dual-use autonomous ground systems for tracking 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 develops lighter and stronger materials for aircraft and automotive vehicles.
Funds receiving NATO capital are Join Capital, Vsquared Ventures, OTB Ventures and Alpine Space Ventures.
Traversone said Europe could soon have a domestic rival to U.S. upstart 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.
“In the regions we cover, there are many candidates to become the equivalent of Anduril,” he said. “And we are investing in some of them. So I’m very sure that it’s changing and it’s changing very quickly.”
More European entrepreneurs are becoming “enthusiastic” about building so-called dual-use technology that can be applied to commercial and defense applications, he added.
Many investors, especially in Europe, were wary of backing defense companies, worried that they would run afoul of environmental, social and governance rules.
However, the war in Ukraine and government investment in capabilities such as drones, cyber and AI that have wider 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 the minimum revenue threshold from civilian applications for dual-use technology companies that receive its funding.
Another factor accelerating investment in defense technology companies is what Traversone described as a “cultural shift” in procurement, which is typically a slow and laborious process that startups struggle to master.
“Ukraine changed everything,” Traversone said. “Ukraine is showing all allies that you can embrace technology and experiment at a much faster pace.”
Recent investors in European defense technology companies include Spotify founder Daniel Ek’s General Catalyst and Prima Materia, which backed German AI developer Helsing. Meanwhile, Air Street Capital led a €6m 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.
In addition to investing to generate financial returns, the fund acts as a “matchmaker” between government technology buyers and startups developing new products, Traversone said. It plans to invest in areas such as biotechnology, communications, security and quantum computing.
“The mission of the fund is to invest in disruptive technologies that increase the security of the citizens of the alliance and the technological edge of NATO,” he said.