TheMarketForIdeas

At the 2022 Summit, which was hosted in Madrid, NATO officials presented an innovative multi-sovereign venture capital fund, now headquartered in the Netherlands. The establishment of the NATO Innovation Fund (NIF) in mid-2023 saw its 23 member nations pledging over 1.1 billion EUR in the first funding round to foster the Trans-Atlantic deep tech landscape. What has happened since then and can this mark the beginning of a “pot of gold” for Central and Eastern European states?

The idea for a quasi-private investment scheme was presented almost two years ago during one of the Summits, yet only by mid-autumn 2023 the NATO-backed venture capital fund officially commenced its first financial rounds. This was done to infuse defense and security-oriented start-ups with some acceleration or seed capital, aspects that would bolster the alliance’s technological edge and development of firsthand innovative solutions.

Hence, the Netherlands headquarters and teams, in tandem with regional ones – located in Poland and the United Kingdom – are managing and monitoring a collective budget of over 1.1 billion EUR, which has been committed by 23 Allied states, in a more or less equal manner, spread out across a wide array of micro-grants and investment frameworks. Despite including most of the European states, the fund (at least at this stage) only benefits from the declarative support of the US, as it is one of the most notable exceptions when it comes to its governmental allocations. Nevertheless, due to the positive regional contexts in which they are being operationalized, some of these budgetary lines might end up revitalizing the defense and security sectors across the CEE region, particularly since these states have already shifted their focus to grassroots regional solutions and building increased resilience.

In this context, the Innovation Fund is primarily dedicated to resolving (or at least bridging) some of the funding discrepancies faced by companies that are at the forefront of dual-usage (civilian and military) innovative, emerging or disruptive technologies, including in the digital realm. Thus, the tremendous task of building-up entire industries will be spread out over the course of a 15-year timeframe and is built upon direct investment in startups (both at the incubation and acceleration stages), alongside the indirect involvement offered within other financial mechanisms that are backing similar initiatives or encompass them in their portfolios.

Therefore, the whole format can be considered as one of the branches of a “one-two” punch that NATO makes, to broker its position as primary beneficiary, steer market engagement towards its own strategic directions and leave a footprint on key industries (while also securing its leverage). Therefore, on the other side of this coin, to support this comprehensive approach to the market forces, we can mention the already operational Defence Innovation Accelerator for the North Atlantic (DIANA) project. The latter successfully completed its first implementation stage in mid-August, launching a series of programs regarding disruptive and advanced technologies, across its 10 acceleration and 90 testing labs, and is expected to be scaled up in the near future.

“And for the ones in Europe, this is probably the first time in five centuries, and for our North Atlantic allies and friends, is probably the first time since the Second World War, when our technological edge is really contested by nations, starting with China, that are now in the verge of competing directly with our allies, with our nations, with our democratic countries for supremacy in some of the key technologies that will neighbor our societies, our economies and our armed forces to compete in the future, the first time in five centuries, the first times, first time in decades.” – Mircea Geoană, NATO Deputy Secretary General (speech at 1^st NATO Data and AI Leaders’ Conference)

Moreover, since the NATO Innovation Fund is modeled on US’ standard capital risk practices, its main objective is to operationalize investments across a diverse portfolio, which later can bring forth concrete solutions to be employed by NATO members. Thus, the fund strives to primarily engage with early-stage interventions (leaving the scaling to DIANA), from pre-seed all the way to Series B, by using funding up to an initial maximum ceiling of up to 15 million EUR. It is rumored that clearer follow-up mechanisms will be implemented soon.

Whereas NATO itself can be described as a giant, when it comes to sectorial procurements, through this approach the alliance seems to be interested in becoming a co-creator rather than remain a mere beneficiary of these services. In this regard, even the list of funding priorities reflects such an aspiration, as NIF focuses on AI technology, big-data processing, biotech and healthcare enhancements, novelty materials, quantum-operated solutions, spatial propulsion, communication and transport alternatives, logistic and crisis management, disinformation combating algorithms, etc., imposing strict limitations on the creation or manufacturing of weaponry. All of these can translate into an unprecedented window of opportunity for tech hubs all over CEE, particularly as there are numerous clusters already operating in some of these areas.

Furthermore, all these developmental pathways are steered through a non-executive board of supervisors, which reunites fintech, defense and security or VC experts, with names like Andrea Traversone (Amadeus Capital Partners – leading deep tech VC), Kelly Chen (DCVC – investments), Thorsten Claus (Northgate Capital – investment advisor), Patrick Schneider Sikorsky (Beast Ventures – seed deep tech in Europe), Chris O’Connor (Harpoon Ventures – early-stage AI VC).

 All of them will act under the board of directors encompassing Klaus Hommels (Lakestar founder), Dame Fiona Murray (MIT – School of Management), Roberto Cingolani (Italian Minister and founder of the Institute of Technology), with Prince Constantijn of the Netherlands (Dutch Tech Envoy), Kusti Salm (Permanent Secretary of the Estonian Ministry of Defence), Karl-Christian Agerup (Partner at Antler and co-founder of Northzone Ventures), Ebru Dorman (angel investor from Türkiye), Dr. Ari Kristinn Jónsson (former President of Reykjavik University), and Raj Shah (Founder of Shield Capital and former Managing Partner of the United States’ Defense Innovation Unit) also taking leadership positions.

Otherwise, these priorities have taken center stage on the global agenda in recent years, with numerous examples of private VC schemes showcasing appetite for the defense and security domains, especially since over-dependence on foreign companies has proved to represent a (weaponizable) systemic vulnerability for Europe. On the other hand, this phenomenon can be considered a “Willy Wonka’s golden ticket” for the CEE region, as the process can revitalize their military industrial complexes, infuse the economy with capital and know-how, funnel innovation, lead to the emergence of national champion companies, foster cross-sectorial competition and boost regional resilience. All these expected results are based on the fact that the area already presents a thriving and even aggressive startup scene, having an intrinsic edge when it comes to the ITC sectors and is currently well into the (re)development of its defense and security architectures, particularly through cooperative formats. Moreover, already having some of the Alliance’s operational and sectorial headquarters, alongside NIF’s regional one, might prove an invaluable asset when it comes to the facilitation of convergence, funding opportunities or access, and redirecting NATO’s attention to local or regional initiatives.

While the fund represents a promising effort, so much so that Sweden has pledged to bring another 40 million EUR to it once it completes its accession procedure, there are still several drawbacks when it comes to its effective implementation. Thus, there are already experts and practitioners that have pointed out the organization’s capacity to bypass the slow bureaucracy driven by lengthy checks and balances, particularly when reacting to the dynamic changes in the startup ecosystems, in parallel with the necessity to clearly establish red lines in terms of collaborating institutions, increased public transparency on investment (which contradicts the logic of secrecy), the acquisition or retention of usage rights for the solutions created by its contractors and the economic sustainability (profit-driven logic) of the projects. Therefore, the first few years will be crucial for both DIANA and NIF, as they need to prove that they are not just interesting programs but integral parts of the organization which can generate not only economic benefits but concrete elements that can foster the alliance’s resilience in the face of emerging threats. 

Photo source: flickr.com.