Hoping to build an army of Hulks? Nato’s new €1bn venture fund may be interested

Defense used to be a dirty word for European tech investors. But China’s actions in Hong Kong and Russia’s invasion of Ukraine have changed the debate.

Today, even institutional ESG (environmental, social and governance) funds are pouring into defense companies that promise to defend democracies against hostile authoritarian regimes. And VCs are also warming to defense technology startups as they emerge as a hot new investment field.

To boost the sector, NATO is setting up a €1 billion VC fund to invest in early-stage defense technology companies. Backed by 22 of the 30 members of the military alliance (but excluding the US), this innovation fund is currently assembling an investment team that will operate on an independent and commercial basis.

Earlier this year, NATO also launched a startup accelerator called Diana (Defense Innovation Accelerator for the North Atlantic), which focuses on several key technologies including artificial intelligence, quantum communications and computing, biotechnology, new materials and space technology.

These initiatives are intended to strengthen NATO’s military might by adopting the latest technologies used in the civilian economy. “I sometimes jokingly say that Amazon is able to deliver a package to where I am and at the same time make me pay for it, while the military mainly uses diesel trucks and Excel spreadsheets for logistics,” says David van Weel , Assistant Secretary General of NATO for New Security Challenges, in an interview with Sifted.

“We see that commercial technologies are now being adapted very rapidly for use in military situations.”

For a long time, the few defense startups in Europe have struggled to raise money from mainstream VC funds, although some family offices have been more supportive. But they are now hoping that renewed interest in defense will spark a new wave of investment due to geopolitical tensions.

“I think the NATO Innovation Fund is a game changer for Europe,” says Ollie Lewis, co-founder of Rebellion Defence, a British national security software company. “The fact that the US didn’t sign up for it was initially seen as a disappointment. But it will be jet fuel for the emerging European and UK defense technology industries.”

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inertial drag

According to van Weel, there are several reasons why NATO has fallen behind when it comes to using the latest technologies. The defense sector has suffered from slow government processes and cut R&D budgets as Europe thought war was a thing of the past. Against this background, it has been difficult to build a compelling investment case for military startups.

But the war in Ukraine has made it clear to European NATO members that they face a security threat on their own borders. It has also highlighted how rapidly military technology is changing with the widespread use of battlefield sensors, drones and geospatial data. That has rapidly changed the European security debate, especially in Germany, says Ulrike Franke, security expert at the European Council on Foreign Relations.

“With the current war in Ukraine, we have seen how many people have realized that the armed forces and weapons can be used for good – or at least are necessary.”

“There was really a negative attitude towards everything military in Germany. Anything related to war was bad. But with the current war in Ukraine, we have seen how many people have realized that the armed forces and weapons can be used for good – or at least are necessary,” she says.

One of the beneficiaries of this sea change in attitude was 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 acted upon quickly by troops on the ground. When raising the seed capital, Helsing only found money from family offices. But last November, Helsing closed a €102.5 million Series A round, of which €100 million came from Prima Materia, Spotify founder Daniel Ek’s new deep-tech investment fund.

Torsten Reil, co-founder and CEO of Helsing, says he was surprised at how quickly and how much perceptions in Europe changed after the Russian attack on Ukraine. “I found it disturbing that a generation of extremely talented people didn’t take responsibility for protecting our societies and democracies,” he says. “But there is now a wave of people who want to work in this field.”

Reil himself is an example of the general trend he is describing. Prior to founding Helsing, Reil founded NaturalMotion, a gaming company that was sold to gaming giant Zynga in 2014 for $527 million. However, he was convinced that alongside climate change, defending democracy is becoming one of the greatest challenges of our time.

Some civil rights organizations remain suspicious of how new technologies like AI could be used by the military. For example, the Stop The Killer Robots coalition, supported by more than 180 NGOs worldwide, is working to ban lethal autonomous weapon systems, or LAWS for short.

Van Weel admits that the Nato startup founders need to be convinced that they will only use technology in a responsible way. “We have to prove to these companies and entrepreneurs that the way we are using artificial intelligence, for example, is in line with our democratic values ​​and is not being used in a bad way,” he says.

ECFR’s Franke says that while there are legitimate concerns about the potential use of LAWS, people are less concerned about the use of AI for military logistics, for example. This point is echoed by Lewis of Rebellion Defence, which focuses on providing AI-enabled software for cyber defense, battlefield intelligence and logistics planning. “A lot of it is pretty mundane. DHL or Ocado can do things more effectively and the military has to catch up,” he says.

Quantum and biological amplification

Although AI and big data are of particular interest to NATO, van Weel also shows his interest in autonomous vehicles, space hypersonic and quantum communications, sensing and computing, which he says are “the next thing”.

Investments in quantum startups doubled from $700 million in 2020 to $1.4 billion in 2021, according to a McKinsey report based on Pitchbook data.

“A bit further on the horizon is human enhancement biotechnology, where we’re already seeing the first steps in the commercial world, but there will definitely be dual-use applications,” he says.

Van Weel elaborates on what this human-enhancement technology could mean for Nato, mentioning “out-of-the-box ideas” like enhancing human senses so you might not need radio frequencies to communicate, improving eyesight, including night vision; and improving physical strength, allowing people to carry a much heavier load than they can today.

“It’s all of those things, and then I don’t even look at China where they’re actually dealing with genetic traits of intelligence or aggression or certain emotional configurations. I mean, it can be a scary world, but it’s going to happen because technology is evolving,” says van Weel.

“The question is, can we regulate this? And how can we use it for good?”

NATO will need convincing answers to these questions before it ventures too far into such remote territory.

Mimi Billing is Sifted’s Nordic correspondent and tweets from @MimiBilling. John Thornhill is the editor and co-founder of Sifted and tweets from @johnthornhillft.

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