Defence used to be a dirty word for European tech investors. But China’s crackdown in Hong Kong and Russia’s invasion of Ukraine have transformed the debate.
Nowadays, even institutional ESG (environmental, social and governance) funds are sinking money into defence companies, which promise to defend democracies from hostile authoritarian regimes. And VCs are also warming up to defencetech startups as they emerge as a hot new investment field.
To boost the sector, Nato is setting up a €1bn VC fund to invest in early-stage defence tech companies. Backed by 22 of the military alliance’s 30 members (but excluding the US), this innovation fund is currently putting together an investment team, which will operate on an independent and commercial basis.
Earlier this year, Nato also launched a startup accelerator called Diana (Defence Innovation Accelerator for the North Atlantic) to focus on several key technologies, including artificial intelligence, quantum communication and computing, biotechnology, new materials and spacetech.
These initiatives are intended to sharpen Nato's military power by adopting the latest technologies used in the civilian economy. “I sometimes jokingly say that Amazon is able to deliver a package to wherever I am and make me pay for it at the same time, while the military largely uses diesel trucks and Excel spreadsheets to do logistics,” says David van Weel, Nato’s assistant secretary general for emerging security challenges, in an interview with Sifted.
“We see commercial technologies now being very quickly adapted to use in military situations.”
For a long time, Europe’s few defence startups have struggled to raise money from mainstream VC funds, although some family offices have been more supportive. But they are now hopeful that the newfound interest in defence because of geopolitical tensions will spur a fresh wave of investment.
“I think that the Nato innovation fund is a gamechanger for Europe,” says Ollie Lewis, cofounder of Rebellion Defence, a British national security software company. “The fact that the US did not sign up for it was initially seen as a disappointment. But it will be jet fuel for the nascent European and British defence tech industry.”
There are several reasons why Nato has fallen behind when it comes to deploying the latest technology, according to van Weel. The defence sector has suffered from slow governmental processes and cuts in R&D budgets as Europe thought that war was a thing of the past. Against such a background, it was difficult to build a strong investment case for military startups.
But the war in Ukraine has driven home to the European members of Nato that they face a security threat on their own borders. It has also highlighted how fast military technology is changing with the widespread use of battlefield sensors, drones and geospatial data. This has rapidly reshaped the European security debate, particularly in Germany, says Ulrike Franke, a security expert at the European Council on Foreign Relations.
With the current war in Ukraine we have seen a lot of people realise that the armed forces and weapons can be used for good — or at least are necessary
“There really was a negative view about all things military in Germany. Anything related to war was bad. But with the current war in Ukraine we have seen a lot of people realise that the armed forces and weapons can be used for good — or at least are necessary,” she says.
One beneficiary of this sea change in attitudes has been Helsing, a German AI startup founded in 2021 that takes data from thousands of battlefield sensors and turns it into information that can be interpreted and quickly acted upon by troops in the field. When it was raising its seed capital Helsing could only find money from family offices. But last November, Helsing completed a €102.5m Series A round, €100m of which came from Prima Materia, the Spotify founder Daniel Ek’s new deeptech investment fund.
Torsten Reil, Helsing’s cofounder and chief executive, says he was surprised by how fast and how strongly perceptions have changed in Europe following Russia’s attack on Ukraine. “I thought it was unsettling that a whole generation of extremely talented people were not taking responsibility for protecting our societies and democracies,” he says. “But there is now a groundswell of people wanting to work in this space.”
Reil himself is an example of the general trend he describes. Before creating Helsing, Reil founded NaturalMotion, a games company that was sold to gaming giant Zynga for $527m in 2014. But he became convinced that defending democracy was becoming one of the biggest challenges of our age, alongside climate change.
Some civil rights organisations remain wary of how new technologies, such as AI, might be used by the military. For example, the Stop The Killer Robots coalition, which is supported globally by more than 180 NGOs, is campaigning to ban lethal autonomous weapons systems, or LAWS as they are known.
Van Weel acknowledges that Nato must convince startup founders that it will only deploy technologies in a responsible manner. “We have to prove to these companies and these entrepreneurs that the way we're going to use artificial intelligence, for example, is in line with our democratic values and will not be used in a bad way,” he says.
The ECFR’s Franke says that while there are legitimate fears about the possible use of LAWS, people are not so concerned about the use of AI for military logistics, for example. That point is echoed by Lewis of Rebellion Defence, which is focusing on providing AI-enabled software for cyber defence, battlefield sensing and logistics planning. “A lot of it is fairly mundane. DHL or Ocado can do things more effectively and the military needs to catch up,” he says.
Quantum and biological enhancement
Although AI and big data are of particular interest to Nato, van Weel also flags its interest in autonomous vehicles, space hypersonics and quantum communication, sensing and computing, which he says “is the next thing”.
According to a McKinsey report based on Pitchbook data, quantum startup investments doubled from $700m in 2020 to $1.4bn in 2021.
“A bit further down the horizon is human enhancement biotechnology, where we already see the first steps being made in the commercial world, but there will definitely be dual-use applications,” he says.
Digging deeper into what that human enhancements technology could mean for Nato, van Weel mentions “out-of-the-box ideas” like improvement of human senses so that you may not need radio frequencies to communicate, enhancement of eyesight to include night vision and improving physical strength so humans can carry a much larger load than today.
“It's all those kinds of things and then I'm not even looking at China where they're actually looking at genetic features of intelligence or aggression or certain emotional configurations. I mean, it can be a scary world, but it's something that's going to happen because technology will develop,” van Weel says.
“The question is, can we regulate it? And how can we use it for good?”
Nato will need convincing answers to these questions before it wanders too far into such far-out territory.