The Unique Challenges of Defence Tech VC
Imagine needing to understand not just startups and venture capital, but also the intricate geopolitical landscape and the confidential needs of intelligence organizations. That's the daily reality for these specialized investors. Deal flow is incredibly proprietary, often forged behind closed doors between allies long before it's public. The serendipity common in typical startup investing? Almost non-existent here.
This unique environment means traditional European venture fund structures simply don't work. Building a management team that meets standard governance and diversity requirements while also being trusted by allied intelligence is a near-impossible feat. Defence tech doesn't fit the usual templates, and frankly, the requirements from Limited Partners need to flex.
As a result, the most impactful and networked European defence funds are typically small, often run by a single General Partner (GP). Take 201 Ventures, founded by Eric Slesinger, who also established the European Defense Investor Network. Despite being the first fund backed by the NATO Innovation Fund, 201 Ventures closed at just €19.5 million. While exceeding its target, this amount pales in comparison to the billions managed by US funds like Andreessen Horowitz and Lux Capital, which can meaningfully invest in "hard defence" companies like Anduril. Similarly, the first Nordic deftech fund, Final Frontier, recently raised a mere €4.5 million.
The Atlantic Divide: A Growing Chasm
This funding disparity creates a stark contrast between Europe and the US. If European institutions don't start deploying larger tickets quickly, US funds will inevitably siphon off Europe's most promising defence opportunities.
Some European fund managers are trying to navigate this by investing in "soft defence" – technologies that support defence but exclude weapons. For example, Balderton recently led a funding round for Quantum Systems, which split its operations into a reconnaissance-focused Quantum and a defence-focused Stark, to accommodate soft defence investors. While this aids overall European resilience, it doesn't directly boost Europe's capacity for kinetic warfare.
This dichotomy risks widening, especially as trust between Europe and the US becomes strained due to diverging interests in global conflicts and trade. The question then becomes: can US investors truly be trusted with European defence secrets? And what are the alternatives?
Charting Europe's Own Course
Europe is currently without a clear plan for a digital defence platform (the US has Palantir) or a new defence prime elect (the US has Anduril). While the US might be tempting European founders to relocate, Europe actually benefits from knowledge transfer in this space.
Countries seeking to accelerate their defence tech development, especially those bordering Russia, should consider building national investment vehicles akin to the US's IQT and NSSIF. These national entities, closely tied to local intelligence organizations, have been instrumental in fostering companies like Palantir, Anduril, and Finland's ICEYE.
The NATO Innovation Fund (NIF), while a step in the right direction, moves at the collective speed of Europe, which may not be fast enough for nations with a heightened sense of urgency. Some investors claim to be fostering European defence, but are actually just "defence-washing" traditional consumer deep tech. European institutional investors need to stop posturing and start taking decisive action.
Countries like Finland, which recently made a strategic investment into ICEYE through a non-traditional vehicle, still lack a dedicated home for impactful defence technology that can bridge local and allied needs. This needs to change, and fast! European institutional investors must urgently re-evaluate their strategies and truly commit to building a robust, independent defence tech ecosystem.
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