European Defence Tech Investment Surges Amidst Global Security Challenges

Europe is intensifying its investment in defense technology start-ups, driven by escalating geopolitical tensions and conflicts, as noted by the head of NATO’s €1 billion venture capital fund. This development reflects the region’s efforts to rapidly close the technological gap with the United States. The NATO Innovation Fund, which initiated its investment program earlier this year, has already directly supported four start-ups, including Space Forge, a Wales-based company focused on the production of novel materials in space. In addition, the fund has allocated capital to four venture capital firms specializing in "deep tech" sectors, such as robotics, artificial intelligence, space, and energy.

Andrea Traversone, managing partner of the fund, highlighted that the initiative aims to address a "market failure," wherein traditional venture capital firms often hesitate to invest in ambitious, long-term technological advancements. Unlike typical venture capital funds, which are required to return their investments within a decade, the NATO fund operates on a 15-year investment timeline. This extended horizon allows for sustained support of long-term, capital-intensive research and development cycles in deep technology fields. Traversone emphasized that the defense technology market has expanded significantly in the past three to four years, largely due to well-known geopolitical factors, including Russia’s war in Ukraine and increasing tensions between the US and China. Although the trend initially emerged in the United States, Europe is now rapidly advancing in this sector.

This year, the fund has also invested in ARX Robotics, a German company developing dual-use autonomous ground systems for surveillance and transportation, as well as in Fractile, a London-based firm focused on enhancing AI system efficiency. Additionally, iCOMAT, a spinout from the University of Bristol developing lighter and stronger materials for aerospace and automotive industries, has received support from the fund. The NATO Innovation Fund has also partnered with venture capital firms such as Join Capital, Vsquared Ventures, OTB Ventures, and Alpine Space Ventures, all of which focus on deep technology innovations.

Traversone expressed confidence that Europe could soon produce a domestic rival to emerging US defense technology leaders such as Anduril, which specializes in AI and robotics, including drones and surveillance systems, and raised $1.5 billion at a $7 billion valuation in late 2022. He noted that there are numerous candidates in Europe with the potential to achieve similar success, and the fund is actively investing in some of them. Furthermore, European entrepreneurs are increasingly enthusiastic about developing dual-use technologies that can be applied to both commercial and defense sectors. Historically, many European investors have been cautious about funding defense companies due to concerns about environmental, social, and governance (ESG) criteria. However, the war in Ukraine and increased government investment in technologies like drones, cybersecurity, and AI, which have broader applications, are shifting perceptions within the sector.

In May, the European Investment Bank, a key supporter of venture capital firms in Europe, facilitated more deals in defense technology by removing the minimum revenue threshold from civilian applications for dual-use technology companies receiving its funds. Another key factor driving increased investment in defense technology is a "cultural shift" in procurement processes, which have traditionally been slow and cumbersome for start-ups to navigate. Traversone noted that the conflict in Ukraine has demonstrated the potential for more rapid adoption and experimentation with new technologies, fundamentally altering the approach of NATO allies.

Recent significant investments in European defense technology companies include those by General Catalyst and Spotify founder Daniel Ek’s Prima Materia, which have backed the German AI developer Helsing. In addition, Air Street Capital led a €6 million seed round for Greece’s Lambda Automata in October. The NATO Innovation Fund, supported by 24 European nations including Germany, the UK, Italy, Spain, and Turkey, was first proposed in 2021, although the US, Canada, and France have not yet agreed to participate. In addition to pursuing financial returns, the fund serves as a "matchmaker" between government technology buyers and start-ups developing innovative products. It plans to invest in areas such as biotechnology, communications, security, and quantum computing. The mission of the fund, as articulated by Traversone, is to invest in disruptive technologies that enhance the safety of NATO’s citizens and maintain the alliance’s technological superiority.

Click here for a list of European defence tech VCs and angels