HomefinanceNato Innovation Fund Makes Groundbreaking €1bn Investment in Startups and VC Funds

Nato Innovation Fund Makes Groundbreaking €1bn Investment in Startups and VC Funds

Nato Innovation Fund Makes Groundbreaking €1bn Investment in Startups and VC Funds


Defence startups have gotten a big boost from investors recently as VCs are increasingly getting onboard with the once-controversial space. One of those new backers, the NATO Innovation Fund (NIF) — a €1bn fund backed by 24 nations dedicated to investing in deeptech and defence technology — is today announcing some of the initial startup and VC recipients of its funding, from robotics to materials manufacturing.  

The fund, announced in 2021 and closed last year, focuses on areas that support defence and security and backs both companies and VC funds in Europe and the UK (the US is not currently a backer of the fund). 

NIF is also interested in areas it classes as “resilience” — including new materials and manufacturing as well as climate, energy and biotech, partner Kelly Chen tells Sifted. 

The team is also getting pitched a lot of spacetech deals, she adds: “As soon as we launched, all the space companies… jumped on very quickly.” 

Chris O’Connor, partner at NIF, tells Sifted the fund has made eight investments so far (including direct and fund investments) but declined to specify how much of the €1bn fund has been deployed.

Startup investments

Among NIF’s startup investments is Munich-based ARX Robotics, which is developing scalable unmanned robotic systems for defence and commercial applications and just raised a buzzy €9m seed round from other investors including Project A. 

NIF also recently invested in iCOMAT, a UK-based materials startup making lighter and stronger structures for vehicles in the aerospace, automotive and defence sectors.

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Along the materials vein, NIF also invested in Space Forge, a Welsh startup using the environment in space to manufacture materials for things like semiconductors. 

London-based Fractile also landed funding from NIF to develop computing technology to help large language models (LLMs) run faster and more efficiently. 

As for where NIF might be investing in next? Chen says she’s particularly interested in supply chain startups. “We have a ton of energy resources, raw materials that are pretty critical, as well as parts of our supply chain that are very dependent on various other countries. So how do we think about creating a more resilient Europe? 

“Supply chain touches everything, from the raw material all the way to manufacturing, assembly logistics and getting to the end customer, whether that’s commercial or government.”

VC fund investments

NIF is also investing in early-stage funds. Those LP investments include Munich-based deeptech fund Vsquared Ventures’ new €214m fund; central eastern Europe-focused deeptech firm OTB Ventures’ $185m fund announced earlier this year; Berlin-based early-stage fund Join Capital; and a €10m cheque of a target €160m fund for spacetech-focused firm Alpine Space Ventures, based in Munich. 

VC firms have been similarly eager to talk to NIF, the partners say. “We’re seeing funds pitching from all the countries that are represented in our capital base. We’re seeing a significant shift, I think, in strategies as well — not just NATO Innovation Fund, but a lot of these funds are starting to look more and more into these deep technology areas,” notes O’Connor.  

NIF also wants to funnel funding into geographies outside the main startup hubs. “I think that’s changing, and part of the mission of the fund is to change that. Not just focus on the UK, [or] Germany,” O’Connor says. 

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Defence tech landscape

Defence tech has been a bigger focus for institutional and private backers in the last couple of years, particularly in the wake of the Russia-Ukraine war. Still, some institutional investors and LPs are hesitant to invest in the sector — and draw hard lines around offensive tech, or weapons. 

“You still see people in the ecosystem who are taking a value stance and saying that they will still continue to not invest in defence technology,” says O’Connor. “But we are seeing a growing number of players in the ecosystem willing to take a stance on that. There are things that have to happen to enable that shift and we’re starting to see this in discussions with the [European Investment Bank] and some of the other institutions who are looking to reduce the limit on this type of investing.”

NIF poses another new source of capital for deeptech and defence-focused VCs, although the fund says it doesn’t invest in ammunition manufacturers. 

Still, the “discussions right now are far more sophisticated and nuanced than they were even a year ago,” O’Connor says.

“There’s a recognition that there’s so much commercial technology that actually goes into the security and resilience of our countries and NATO and the Alliance have to have this discussion. Now, it’s not as simple as just saying ‘we don’t invest in defence’ anymore.”

SourceSifted.eu
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