The nascent relationship between Europe’s defence industry and VC investors may be anxiety-inducing for some, but that makes it no less necessary.
A recent Sifted op-ed argued VC and defence were unnatural bedfellows, given the long-term global implications of one and the perceived short-term incentives of the other.
It is true that, without the right motivations, experienced investors and operators providing guardrails, the two can be disastrously misaligned. An understanding of not only why this industry matters, but also what our militaries need, is imperative to delivering the right outcomes.
This is borne out by the fact that the top quartile of US defence VC funds (as well as their portfolio companies) have a general partner with military, special operations or intelligence community experience. Backgrounds, beliefs, and networks matter.
But to dismiss defence-focused VCs and startups out of hand ignores the reality of great power competition and innovation in this space. Defence VC is an asset; not a liability.
When done well, defence investment provides for both deterrence and prosperity. Each pound or euro spent on defence R&D enhances national security, while also growing advanced manufacturing jobs, strengthening university research and creating exportable technologies.
Over the last 67 years, US investment in DARPA and NASA, alongside more recent efforts such as the Strategic Capability Office, have demonstrated the financial and capability business cases for government and private sector investment in defence-first R&D.
According to a report from Dutch international banking giant Rabobank, the effective returns on investment for defence R&D has historically been 5.5x the returns on civilian-only R&D. These returns have provided the U.S. with deterrence and prosperity, enabled and backed by private capital.
Unfortunately, Europe was largely missing out. This has limited the sector's growth, Europe's own security and resulted in the stagnation of defence innovation and adjacent industrial verticals.
Those who oppose the further mixing of VC and defence should consider four key points.
First, Europe cannot afford to fall further behind. While new plans for European NATO members to reach 5% of GDP for defence and related infrastructure are to be lauded; dismissing VC, and solely focusing on current needs by buying existing systems alone will not address the structural weakness of Europe, and mean missing out on the broader positive economic effects.
Second, VC and defence not mixing is a myth, not a reality. VCs are not chasing growth at all costs. Credible defence VCs are patient capital which operate on long-term time horizons, not some imagined 18-month SaaS blitz scaling.
Companies in my own portfolio were built by experienced founders and innovators, solving real-world problems they witnessed first-hand either in uniform or in government.
These startups and scale-ups must win and retain work based on performance, not on simply incumbency. At a time when innovation is sorely lacking in European defence, VC-backed startups help introduce more transparency, new talent, enhanced competition and greater accountability into an ecosystem which can often be slow and structurally risk-averse.
Third, deterrence without innovation is an illusion. Credible deterrence is not measured by how much money you spend, but by whether one can field the systems that matter: autonomous platforms, secure communications, electronic warfare, AI-enabled analysis, unmanned air systems and quantum.
These are the technologies that startups build best and where Europe is lagging behind. In the end, deterrence is achieved not via technological restraint, but through credible capability, from conception to deployment.
Finally, Europe’s choice is to either be a builder or buyer. In this regard, the major question now facing Europe is not whether VC belongs in defence tech. It is whether Europe intends to remain strategically dependent on others or rebuild its own industrial and technological sovereignty, alongside its economies.
If Europe wants deterrence and prosperity, then it needs R&D, defence startups, and experienced defence venture capitalists, who understand the stakes and can build the capabilities that matter for not only the modern warfighter, but also for global prosperity.
