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I recently found myself in a room with more than 100 defence investors, startup founders and industry insiders gathered for an evening of talks on the state of defence tech. During one of the discussions, the audience was prompted: How many of you would fund defence tech? Maybe 15 hands shot up. Then: How many of you would fund weapons? Considerably fewer hands, maybe five or six, remained in the air.
The exercise hit on a debate I’ve been hearing more in VC circles lately. Defence tech and dual use — where technology has both military and commercial applications — have become considerably less controversial in recent years in the wake of conflicts like the Russia-Ukraine war. I was told a panel I moderated on the ethics of investing in defence tech at the SuperVenture conference a couple weeks ago in Berlin was the first time that defence was on the agenda of the marquee investor event.
More money has also been flowing into the current defence tech landscape in Europe. European defence deals raised $614m in 2023, up from $408m in 2022, according to Dealroom data cited in a new Sifted briefing on defence tech. Big backers — like the €1bn NATO Innovation Fund (NIF) focused on defence and deeptech startups and VCs — are adding to the deal value.
But actually investing in technology that could be used as a weapon remains controversial, as I’ve recently written about in this newsletter. This is where the debate becomes fuzzy. I’ve heard that VCs are considering going further and backing offensive tech; at the same time it seems that investors aren’t aligned on what defence tech actually is.
The NIF — which just announced the first recipients of its funding — says it won’t invest in ‘ammunition’ companies. Most VCs aren’t able to invest in weapons because of their LP agreements (LPAs) — which often include terms that say they can’t invest in things like weapons or pornography.
That may be changing. Uwe Horstmann, general partner at VC firm Project A, tells me the firm is having discussions with its LPs about broadening the scope of their investments beyond dual use, but they haven’t yet decided on their position for a next fund.
Others are making more concrete plans. “Superior military technology is the most credible deterrent to war. For this deterrence to be efficient, dual-use technologies as well as defensive and offensive capabilities are required,” says Markus Federle, managing partner of investment firm Tholus Capital, which is focused on areas like AI and Web3, and is now raising a target $200m defence and aerospace fund to invest in VC and PE funds and startups. Tholus is investing across that whole spectrum of defensive and offensive, but offers different strategies limited to just ‘dual use’ or defensive weapons based on its investors’ requirements.
What is ‘defence’ tech?
Navigating what defence tech actually means isn’t a new challenge, but it’s something that more investors seem to be talking about recently. Some define it based on what the technology was designed for (commercial or military), and others from a revenue split perspective (how much money commercial endeavours make versus military ones), says Horstmann, who also points out that there are concrete, legal definitions in place (which is how Project A defines dual use).
There are others who argue that defence (or, more broadly, dual use) and deeptech — a catch-all term which encompasses a wide range of technology, from robotics to quantum computing — are one and the same: “If you’re not ok investing in dual use, then you’re not ok investing in deeptech. Anything ‘deeptech’ is potentially dual use,” Michael Jackson, a Paris-based VC, wrote in a recent LinkedIn post in response to my earlier essay.
“Any European LP opposed to defence tech investing is, let’s be honest, a hypocrite […] Those same LPs benefit from the security of living in safe countries with commerce and trade and a way of life protected by militaries, police, and intelligence services. They wouldn’t exist without a robust and innovative Western defence sector,” he wrote. “So for them to be anti defence tech reeks of entitlement, and is little more than a luxury belief draped in superficial virtue signalling.”
It’s a strong stance, and something that some deeptech investors wouldn’t agree with. “We strictly do not invest in defence,” Adam Niewinski, cofounder and general partner of deeptech fund OTB Ventures, which is backed by NATO’s defence and deeptech fund, recently told me. “Dual use is a completely different concept: each and every earth observation satellite is a dual use business. Is it defence? No, it’s not,” he argues.
Nicola Sinclair, who spent 18 years in the UK’s Royal Air Force and is raising her first dual use fund, Twin Track Ventures, describes the terms as a sort of Venn diagram: Deeptech is the broadest bubble, and within that is dual use; within dual use — with quite some overlap — is defence. She says there’s some infighting in the community: “The defence investors do not like the dual use community that much, because it’s seen as, like, a cop out. It’s seen as, ‘You’re not really supporting the mission’,” she tells me. From her view, though, “VC isn’t a charity. You can only really back stuff from a VC model that is going to [provide a return]”.
Apart from just being a moral line for some investors, the distinction between dual use and purely weapons-based technology is about making money. “Our view is that a company that has dual use capacities has a higher chance of a greater return,” Neil Keegan, cofounder and CEO of US-based dual use fund Marlinspike, said at the recent defence tech event, which was hosted by Tholus Capital in Berlin.
Sinclair says she’s eyeing companies that can truly have those two customers at once, instead of those that might be sidetracked by government customers asking for modifications to their technology; she adds that the exit opportunities are also more attractive for dual use companies.
My hunch is that in the next fundraising cycle these definitions will start to matter less as more VCs raise funds with the ability to invest directly in technology that can be weaponised. The question is whether they’ll be able to find enough LPs to back them.
On that front, some investors are optimistic: “We do see more and more LPs also being open to doing essentially everything except controversial weapons,” says Horstmann, referring to a list of weapons that have been categorised as unacceptable by governing bodies, like chemical weapons.
As always, I’m very curious to hear from you: Do you think there’s ambiguity around deeptech, defence and dual use? Do you think VCs are leaning too much into one definition or the other to avoid more fraught conversations? Are you hearing more LPs talking about investing in more offensive-focused funds — and if so, who? I’m all ears.
Read the orginal article: https://sifted.eu/articles/defence-tech-dual-use-deeptech-vc/
