Next week, in the watery and romantic city of Venice, the future of the €1bn NATO Innovation Fund will be hashed out.
The Europe-based fund, which was started as a new kind of public-private initiative by the NATO alliance and backed by 24 NATO allies, launched two years ago to find and fund innovative technologies. It invests into deeptech-focused VC funds and startups in areas ranging from defence, robotics and new materials to spacetech.
But it has already seen a lot of turmoil and turnover in its short life: the fund has lost three of its five founding partners in the last year; run into mounting tensions with its board; and had concerns raised over potential conflicts of interest.
NIF’s chair, high-profile German tech investor Klaus Hommels, is an active deeptech investor — and the VC firm he founded, Lakestar, is now reportedly raising its own defence-focused fund. Hommels shares at least two portfolio companies with the NIF — which has been flagged as a potential conflict of interest, as recently detailed by investigative outlet Follow the Money.
Despite the popularity and need for the technology the fund backs never having been greater, the NIF is at a critical juncture.
Fiona Murray, vice chair of the NIF, told Sifted in an interview that the fund is now working on “sharpening” its vision and the board has been “making sure that we’ve learned the lessons from NIF over the last couple of years,” aiming to ensure that the fund is well-placed strategically and organisationally to succeed.
But whether the NIF will be able to overhaul itself and fix its structural problems is the question now.
An unusual structure
When NATO leaders agreed to form the NATO Innovation Fund at the Brussels summit in 2021, they were venturing into new ground; nothing of this scale or ambition had been tried by a military alliance before. Between them, the 24 nations which backed the fund invested via their ministries of defence (MoDs), and government-backed funds. Murray says that about half of the fund’s LPs come from MoDs; other backers include Finnish state-owned investment firm Tesi and Estonian state-backed investor SmartCap.
The fund, a 15-year vehicle, is made up of the fund itself in Luxembourg, the investment management company in the Netherlands and a Dutch foundation overseeing them. Hommels, vice chair Murray, the associate dean of innovation at MIT, and Roberto Cingolani, CEO of Italian defence prime Leonardo, have been supervisors over all three entities.
The way the fund was set up was unusual: the LPs (funds or ministries from the allied countries) first committed the money, then the board was hired and then the LPs voted on the partners, who would actually invest the money as VCs. Any new partners are appointed by the board and approved by the LPs, according to the NIF. One person familiar with the fund’s structure described the process of hiring the partners as “hard” owing to the needs of the various ministries involved, the timeline and getting all of the LP nations to agree.
Sifted spoke with several sources with direct knowledge of the fund who requested anonymity as the matters are private.
The original five partners were founding partner Thorsten Claus, managing partner Andrea Traversone, and partners Kelly Chen, Chris O’Connor and Patrick Schneider-Sikorsky.
Since the partners are appointed by the board and not by each other, as is the case with a typical VC firm, one person close to the fund suggested this meant those hired lacked synergy.
Unlike most VC structures, the partners aren’t GPs as they don’t hold a stake in the fund — although Sifted understands they do receive carried interest (an investor’s share of the profits of a fund).
“This is uncomfortable for partners coming from VC,” the person said.
According to another source with direct knowledge of the fund, the partners and board struggled to settle on a clear strategy and goals for the NIF — including how much money would be spent on VC fund versus startup investments, which technologies to focus on and the timing of doing deals.
Murray says that the partners make investment decisions independent of the board and that the board is not involved in the investment committee.
Some suggest it’s not been easy to have countries and sovereign wealth funds as LPs. “Most countries are trying to force the NIF to invest in their country,” the first person, close to the NIF said.
One NIF investor, who requested anonymity to speak freely, said that while their overall experience with the NIF is positive, it “doesn’t mean that we were always in 150% agreement.”
“We were obviously trying to find out what is best for the fund, what is best for the nations, and also how best to align the various interests represented among the nations,” because some nations are represented by MoDs while others have invested via government-backed fund of funds (which are more experienced with fund structure and management), they said.
“Externally what happened was everyone wanted to use the NIF, the NATO brand, for their own purpose. Everyone thought they could […] carve out their little fiefdom, which doesn’t work when you’re a venture firm planning for 15 years ahead,” the source with direct knowledge of the fund told Sifted.
The two sources close to the fund tell Sifted that LPs looked into the structure of the NIF last year. The sources said it was a routine process but that there were concerns with the setup.
Murray says no formal investigation took place, but added that “people are talking about making sure that we have information flows between the board and the LPs; the LPs, very reasonably [as with] any oversight of something novel, just want to make sure that, ‘We wrote this [the structures of the fund]. How did you implement it?’ We were having very good and robust discussions backwards and forwards.”
A conflict of interest?
A lot of the chatter around the NIF centres on the role of Klaus Hommels. Sifted understands Hommels was put forward by NATO, although the decision was approved by the LPs.
Hommels is the founder and chair of Lakestar, a Zurich-based VC firm with €2bn in assets under management which has previously invested in defence and is currently raising a dedicated defence fund, according to reports.
Sifted understands Lakestar has been touting Hommels’s role as chair at the NIF in communications with potential investors for its new defence-focused fund. Lakestar declined to comment on market rumours.
Bringing in Hommels was “a mistake,” the person close to the fund said. “He’s just launched a competitive fund, which is hiring people at the same time the NIF is hiring,” they said. “He’s doing similar investments, [and] for me it is totally unacceptable.”
When Hommels was brought on, the NIF investor said that “of course, there were questions” about Hommels’s position as an investor, but they argue Hommels and the NATO officials who brought him on board answered them in a satisfactory manner.
Lakestar has invested in at least two companies that are also backed by the NIF: German rocket startup Isar Aerospace and German autonomous robotics startup ARX Robotics. While some are critical of the overlap, one person in the ecosystem points out there are few options for defence investors wanting to back a European rocket maker.
Hommels is, however, actively involved in advising some of these shared portfolio companies. ARX Robotics cofounder and CEO Marc Wietfeld tells Sifted he gets advice from Hommels, although not explicitly via his role at the NIF. “Klaus is someone I ask for advice… in, I would say, top level things; mainly VC-related and policy-related things,” he says.
A representative for Hommels and Lakestar directed Sifted to the NIF press team in response to a request for comment.
“I and the whole board are very comfortable with the fact that we have managed any both actual and perceived conflict of interest,” Murray said.
In a statement, NIF’s head of communications Amalia Kontesi told Sifted: “Suggestions that any NIF board members, or NATO and its employees have any undue or improper influence over our investment decisions are not just misleading — they are categorically and demonstrably false. We outright reject such insinuations. Where board members are required to provide oversight as part of our governance structure, our compliance policies effectively manage any actual or potential conflicts of interest.”
A string of departures
By July of last year, less than a year after the fund launched, NIF founding partner Thorsten Claus left the organisation.
Sifted understands Claus left owing to disagreements with then-managing partner Andrea Traversone, who had joined the NIF from deeptech VC Amadeus Capital. On his personal website, Claus wrote that although leaving was a “challenging choice, it felt imperative at this time. Various complex factors informed my decision, and I am confident that pursuing new professional endeavors that align with my long-term aspirations and personal values is in my best interest.”
But Traversone was hot on his heels, leaving the fund by September of last year.
Chris O’Connor, a third member of the five-person founding team, departed this June. An American and former Air Force vet who was previously a partner at US-based deeptech VC Harpoon Ventures, O’Connor was regarded by many as the NIF partner with expertise as the only one with a military background. Wietfeld, who had O’Connor on his board until his departure, described him as “very helpful”.
Wietfeld added that Schneider-Sikorsky, a former founder of deeptech seed firm Beast Ventures and one of the two remaining founding partners along with American Chen, who hails from US deeptech fund DCVC, is a “fantastic and super smart, well connected guy with a lot of experience” (Schneider-Sikorsky replaced O’Connor on ARX’s board).
In total, the NIF has done more than 16 deals, including startup investments like UK-based new materials maker iComat and fund investments into deeptech VCs Amsterdam- and Warsaw-based OTB Ventures and Munich-based Vsquared Ventures.
Murray says she isn’t surprised the NIF experienced churn in its first few years; she chalks it up to normal startup turnover. She says the NIF hired the team “quite quickly” and that “bringing in five people who’ve never worked together before is a very, very challenging thing to do”.
“Individuals decide that this is not actually what they want to do. They may not all get along. High performing teams end up having frictions, [and sometimes people] leave and the frictions don’t work themselves out.”
Murray says the NIF is bringing in new partners that are “significantly strategically aligned,” and that her aim is to ensure they are “continuing to learn the lesson”. Sifted understands that the NIF is bringing on two new partners — but it won’t replace the managing partner (or CEO) role, which was filled by Traversone.
A bold bet
Despite its early difficulties, many people in the ecosystem, including several who spoke with Sifted, believe the NIF is an innovative and important organisation that’s investing at a critical time for Europe.
Since the start of 2025, the EU has aimed to massively ramp up its defence spending as the US has grown far more protectionist. The war in Ukraine, meanwhile, has lingered on. It’s made defence tech a far more popular area for VC investment, and sparked a lot of hype around the sector.
Some observers believe the high turnover and structural kinks at the NIF are a normal part of the early days of such an organisation.
“It’s not only a new fund, it’s also a pilot — nothing you ever had before,” says Wietfeld. “They are pioneers in doing it this way in Europe. For that, I think it’s pretty clear that they need to figure out how and who are the right people and setups.” The NIF investor added that as it is the first fund of its kind, “obviously it’s a learning-by-doing exercise, to some extent”.
Other industry observers like Michael Jackson, an outspoken defence investor based in Paris, believe that “it’s all unfortunate, but still fixable. The powers that be need to put their egos aside and go back to the drawing board,” he argued in a recent LinkedIn post. “I’m rooting for the NIF, but it’s now or never to fix it.
“Its design flaws and structural issues desperately need to be addressed,” he added. “NATO and the investing countries need to understand that a shop in such disarray sends very negative signals to the market, and that has unwanted ripple effects.”
For Murray, now is the time to refocus on the NIF’s mission. The fund’s goals, spelled out in its LP agreement, are around commercial returns, capacity building (bolstering less-developed ecosystems) and supporting capabilities for the alliance. That last part is what the fund aims to put particular emphasis on.
“Our big goal is really to make extraordinary investments that are delivering capabilities across the alliance, both to the pressing, immediate defence and security needs, but also to finding future capabilities for industrial resilience,” says Murray. “We’re trying to be a lighthouse in that.”
A critical meeting
The future shape of the NIF will be discussed when its LPs meet in Venice next week.
Murray says the NIF has two such LP meetings every year, and that they will discuss big topics like the strategic framework and how the portfolio is performing, as well as discussing the organisation and its health and how they are structuring it as it’s growing. Also on the agenda: governance.
Several sources believe Hommels will be pushed out or leave. The NIF investor said: “I’m sure we’re going to have to talk about how we carry this mission forward.”
Read the orginal article: https://sifted.eu/articles/nato-innovation-fund-1bn-problems-conflicts/
