As NATO’s European members start to build up the continent’s defense technology capacities, they’re turning to an American social technology to get it done: Venture investing. Last week, NATO announced that 23 of its members had closed a €1 billion venture fund to invest in early-stage startups focusing on technologies like quantum computing and AI in participating states. European NATO nations have boosted defense spending in response to Russia’s Ukraine invasion, and as they do they're taking a page from the American playbook. Silicon Valley and the Pentagon have deepened their ties in recent years amid fears about overreliance on the largest defense contractors, hoping to build on the success of defense-linked startups like SpaceX and Palantir. Most of the largest venture firms now have at least one partner focused on the national security space, joining a recent crop of niche, defense-focused venture firms like Shield Capital, co-founded by Raj Shah, a former managing partner at the Pentagon’s Defense Innovation Unit, which launched its maiden fund last year. Wesley Clark, a former supreme allied commander of NATO, hailed its embrace of the VC-for-defense trend as a “very smart move” in an interview. He contrasted his experience commanding NATO’s 1999 bombing campaign in Yugoslavia, when he said Western air power shocked Russia and China, with NATO’s experience supporting the defense of Ukraine, where neither side enjoys overwhelming technological superiority. Clark cited Russian drone and signals jamming capabilities, as well as old-fashioned threats like landmines, as areas ripe for NATO tech investments as the alliance reorients to counter Russia’s overland invasion of a neighbor. The NATO fund comes amid serious debates about how Western governments should foster advancements in defense and security tech. For years, the Pentagon has struggled to integrate AI into military operations, and as DFD reported last week, lawmakers are looking to this year's defense authorization bill to work out some of the kinks. Some are already concerned about the risks of a closer relationship between defense and a new segment of American industry. In May, Sen. Elizabeth Warren wrote a letter to the Pentagon raising concerns that its Office of Strategic Capital — established in December to funnel investments to favored startups — had already become “too cozy” with private investment firms. Even among those who welcome tighter cooperation, not everyone sees venture funding as the best use of public money in the defense-tech space. Christian Brose, chief strategy officer at Anduril, a venture-backed firm that develops autonomous defense systems, argues that in an industry where nation-states are often the only buyers, a government has more dollar-for-dollar clout as a buyer than as an investor. That’s because a startup can go out and raise several times as much money from private investors based on a multiple of its revenue from a government contract, he said. “Don’t invest directly in companies,” Brose, a former staff director at the Senate Armed Services Committee, told DFD. “Act as a customer.“ Clark said allied governments should use both investing and spending to shape technological development. ”I like a blended approach,” he said. “If you see something that has direct application to military technology, and you have confidence in the development team, then perhaps it warrants a direct investment.” The Netherlands-based fund is set to announce its first investments next month. It will add a 24th limited partner, and additional capital, when Sweden’s accession to NATO, expected imminently, receives final approval.
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