At a startup event a couple of months ago, the founder of new materials startup TETMET, Tom Vroemen, ran into a representative for Nato’s investment fund — and like any entrepreneur, he jumped on the opportunity to deliver his elevator pitch.
To his surprise, he was cut short as soon as he mentioned that the company is HQ-ed in France. “They explained that they can’t invest in French companies because France doesn’t participate [in the fund],” says Vroemen.
Nato’s investment fund, the NIF, was announced in 2021 — a €1bn vehicle backed by 23 member states to finance deeptech startups. But France was one of the only EU countries — alongside Austria, Croatia and Slovenia — to opt out of the initiative. French officials have said the decision was made to allocate resources to a domestic defence fund instead.
Sifted understands the NIF is now short-listing the first companies to receive investment, and French startups have been surprised that they are automatically excluded from the fund. Many startups and VCs say that’s a missed opportunity.
France opts out
The NIF was created to boost deeptech and defence innovation and capabilities in participating countries by investing directly in early-stage startups and other VCs in fields ranging from AI to quantum through biotechnologies, space or new materials.
It acts as a standalone VC fund that is independent from Nato and is managed by a team of professional investors.
The funds come from the commitments of participating member states, which act as limited partners. It hardly comes as a surprise, therefore, that France’s refusal to be an LP means that the fund can’t back companies in the country. In fact, it’s explicitly stated on the NIF’s website that investments will target startups in the participating nations.
But many French startups and VCs were unaware of the small print — and only found out when they pitched to Nato’s investors in the past few months.
François-Xavier Dedde, a partner at French deeptech VC Omnes Capital, approached the NIF as early as last summer to discuss a number of portfolio companies.
“Of course, we were looking at this closely because with €1bn, it’s a huge source of financing for startups in our portfolio,” says Dedde. “And our investment thesis is very similar.”
“But we were told that France was not participating yet, so it was not possible to invest in France yet.”
Dedde says that it’s a significant loss for French deeptechs, particularly in the defence sector, which historically struggles to attract money from mainstream VC funds. This can be due to longer development cycles, potential constraints imposed by states and even reputational risk.
“The NIF is a great actor and we are deprived of it,” he says. “French companies are left out of a really good financing option.”
Sovereign defence funds
While the US has also opted out of the NIF, most major European tech ecosystems including the UK and Germany are participants in the fund.
The French government says that the decision to stay out of the NIF was a strategic one.
“France preferred allocating resources to its Defense Innovation Fund, which is financed by the Ministry of the Armed Forces together with [public bank] Bpifrance. The question of joining the NIF is not relevant yet,” says Nicolas Cordier-Lallouet, the director of France’s governmental agency for innovation in defence.
France’s Defense Innovation Fund was created in 2021 with an initial €200m to invest in growth companies. It comes in addition to Definvest, a pre-existing €100m fund launched in 2018, which backs startups and small companies at various stages of development.
In addition, in 2021, the French government launched “France 2030”, a €54bn investment plan that includes a strong focus on deeptechs.
Some VCs see France’s stance as a way to develop and keep sovereign deeptech capabilities in France, but others say companies need help from organisations like the NIF to gain access to other markets. International expansion can be particularly tricky for companies developing sensitive technologies.
“In defence and deeptech, it can be complicated to access different markets and clients,” says Alexis Houssou, founder of hardtech VC HCVC. “If the NIF facilitates this, it’s a huge game-changer for our companies.”
Growing NIF’s LP base
The NIF’s investment team wants to convince more NATO allies, including France, to eventually join the fund, according to two sources with direct knowledge of the NIF’s activities.
Last August, for example, Sweden announced that it would join the fund as an LP and add its contribution to the current €1bn as soon as it becomes a Nato member — showing that the door is still open to other countries.
There will also be an opportunity for more LPs to join the fund further down the line when the investment team starts raising NIF 2.
A Nato official said: "The NIF remains open to engagement with non-participating allies about future opportunities to join, or otherwise become a limited partner."
One source said that the team is also considering the option of allowing the NIF to invest in countries even if they aren’t LPs. This, however, would require participating nations to vote to relax the geographical constraints set out in the current Limited Partnership Agreement, and would only apply for future funds.
