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Building a successful startup is difficult enough at the best of times. But for Viktoria Yaremchuk, co-founder of Lviv-based startup Farsight Vision, it’s clear that now is not the best time. A power outage, a missile attack, and the sudden conscription of his employees put Yaremchuk’s mission in extreme danger. “Working underground is not that cool. We’re in a basement in Ukraine, not a garage in Silicon Valley,” she told me.
Yaremchuk’s companyis one of many companies that provides situational awareness software for drones. Ukrainian startup companies They are helping their country fight back against Russian aggression. They also add new dimensions to warfare by rapidly innovating in response to feedback from the front lines and raising money from venture capital firms and wealthy donors to increase the country’s overall defense spending. I am. This privatization of war is being closely followed by NATO allies and has helped spark a surge in defense technology investment across North America and Europe.
Since 2019, VC investments in defense startups in NATO countries have quadrupled, reaching $3.9 billion so far this year, according to a study. deal room report It was released last week. The US accounts for 83% of VC’s defense technology investments, while EU countries and the UK have recorded 15% since 2018. Investments in this sector increased from 0.4% of VC funding in Europe in 2022 to 1.8% this year.
The case for investing in defense technology was raised by several company founders and VCs at the Resilience Conference in London last week. The urgent need to protect democracy is drawing many mission-driven entrepreneurs to this field. Many of these startups are also developing dual-use technologies that allow them to enter the consumer market.
For example, Farsight’s drone software can be used in the mining, energy, and logistics industries. Increased defense spending by NATO governments is a powerful financial magnet. And NATO has established its own €1 billion Innovation Fund to support defense technology start-ups. War seems to be in a bull market.
Magnus Grimeland, founder of Antler, a global early-stage VC fund, says that weapons systems are undergoing a platform shift as they become “smaller, cheaper and more connected.” If democratic societies want to protect themselves from hostile forces, they “need” to support the startups most capable of developing such software-enabled weapons systems.
“We can’t win unless the world’s best innovators innovate in this field,” a former Norwegian special forces officer told me.
However, many investors remain deeply wary of defense technology, suggesting it is currently in bubble territory. For long-term growth, startups will need more capital, streamlined regulations, and faster procurement processes. “The returns are not as high compared to other sectors, but the risks are much higher,” said one investor.
Many institutional funds and venture capital firms are prohibited from investing in defense technology due to ESG (environmental, social, and governance) concerns. Defenders of defense technology make a persuasive argument that protecting democracy is an irreplaceable governance good, the ultimate G. But investing in weapons, like tobacco, coal and gambling, remains off-limits for many fund managers.
“Some investors don’t want to develop technology that crosses the ‘line of motion’ and kills people,” one investor said at a resilience conference.
At another closed-door meeting of defense technology investors that I attended last week, some fund managers raised further concerns about how dual-use technologies developed by their portfolio companies could be used by the military in emergencies. did. The danger of “ethical violations” is real.
Some company founders despair of dealing with a slow-moving, bureaucratic Defense Department that is far more willing to buy from established defense companies than from random startups. But as one public sector investor says, there’s a reason why governments are moving so slowly. They want to be confident that new life-or-death technologies pose no collateral risks to their military or civilian populations.
As in Ukraine, the urgency of war is accelerating the process. The Farsight Vision example shows how defense technology companies can innovate quickly and contribute to the defense of sovereignty while offering the potential for returns to investors. “Three years ago, I never would have imagined that I would be working in this field, but I am very proud of what we do. , I think there is great potential in many other areas of life as well,” says Yaremchuk.
john.thornhill@ft.com
