Recently, defence startups have seen a boost in funding from VCs as they are more willing to invest in the once controversial space. The NATO Innovation Fund (NIF), a EUR1bn investment fund backed by 24 countries, is one of these new backers. Today, it announced some of the initial startup recipients and VCs of its funding.
The fund, , announced in 2021, and closed last year, is focused on areas that support defense and security. It backs companies and VC Funds in Europe and UK (the US does not currently back the fund).
Kelly Chen, NIF’s partner, told Sifted that NIF also has an interest in areas it classifies as “resilience”, including new materials, manufacturing, climate, energy, and biotech.
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The team is also getting pitched a lot of
Chris O’Connor is a partner at NIF and told Sifted that the fund had made eight investments (direct and fund investments included) but declined specifying how much of the EUR1bn funds has been deployed.
Startup Investments
NIF has invested in Munich-based ARX Robotics. The company is developing unmanned robotic systems that are scalable for commercial and defence applications. It recently raised a EUR9m seed funding round from Project A and other investors.
NIF has also invested in iCOMAT – a UK-based startup that makes lighter and stronger structures in the aerospace, automotive, and defence sectors.
NIF invested in Space Forge as well, a Welsh startup that uses the environment of space to produce materials for things such as semiconductors.
Fractile, a London-based company, also received funding from NIF for development of computing technology that will help large language models run faster.
What is the next investment that NIF will make? Chen says that she is particularly interested in startups in the supply chain. “We have a lot of energy resources and raw materials which are critical. We also have parts of our supply chains that are dependent on other countries. How can we create a more resilient Europe, then?
Supply chain is everything from raw materials to manufacturing, assembly logistics, and getting to the final customer, whether it’s government or commercial.
VC funds investments
NIF also invests in early-stage funds. Those LP investments include Munich-based deeptech fund Vsquared Ventures’ new EUR214m fund; central eastern Europe-focused deeptech firm OTB Ventures’ $185m fund
The partners report that VC firms are also eager to speak to NIF. “We are seeing funds pitching in all the countries represented in our capital base. We’re also seeing a shift in strategy, I believe — not only the NATO Innovation Fund but many of these funds are looking more and more at these deep technology fields,” notes O’Connor.
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NIF also wants funding to be directed at areas outside of the main startup hubs. “I think this is changing, and a part of the mission of NIF is to change it.” O’Connor says that the fund should not only focus on Germany or the UK.
Defence Tech Landscape
In the last few years, institutional investors and private investors have been more focused on defence tech. This is especially true in the wake the Russia-Ukraine conflict. Some institutional investors and limited partners are reluctant to invest and draw hard-line around offensive tech or weapons.
“You see people in the ecosystem still taking a values stance and saying they will continue to not invest” in defence technology, says O’Connor. “But we’re seeing a growing amount of players in the eco-system willing to take a stand on that,” says O’Connor. There are certain things that must happen to facilitate this shift, and we are starting to see it in our discussions with the [European Investment Bank] as well as other institutions that are looking to reduce this type of investment limit.
NIF is a new source of capital available to deeptech and defence focused VCs. However, the fund does not invest in ammunition manufacturers.
O’Connor notes that “the discussions right now are much more sophisticated and nuanced” than they were a year earlier.
“There is a recognition that so much commercial technology actually goes into the resilience and security of our countries, and NATO and the Alliance must have this discussion. It’s no longer enough to say, “We don’t invest in defense.”