Security through innovation: defence tech resilience

November 2024 | FEATURE | FINANCE & INVESTMENT

Financier Worldwide Magazine

November 2024 Issue

Despite a slowdown in venture capital (VC) dealmaking in the past year, defence tech remains a resilient sector. So far in 2024, $9.1bn has been invested across 228 deals, according to PitchBook’s latest ‘Emerging Tech Research’ report.

With 35 exits completed in 2024 to date, defence tech is on track for an upswing compared to other languishing sectors. Based on defence tech startups being acquired or going public, the number and value of exits, though not outstanding, are on pace to beat last year’s numbers, notes PitchBook. The sector produced 39 exits worth $2.2bn in 2023, compared to 35 exits worth $8.3bn in the first half of 2024 alone.

In terms of acquisitions, the North American aerospace and defence industry saw 28 M&A transactions announced in Q1 2024, worth a total value of $1bn, according to GlobalData’s Deals Database. The $600m acquisition of Terran Orbital by Lockheed Martin was the industry’s largest disclosed deal.

GlobalData’s ‘Aerospace, Defense and Security Industry Mergers and Acquisitions Deals by Top Themes in Q1 2024’ report helps understand the underlying fuel for M&A activity in the industry. By value, M&A activity in North America increased by 4 percent in Q1 2024 compared with the previous quarter’s total of $963.2m and fell by 0.88 percent compared to Q1 2023. Related deal volume increased by 33 percent in Q1 2024 versus the previous quarter and was 7 percent lower than in Q1 2023.

Trends in Europe

In Europe, the number of defence ventures has increased in the years following Russia’s invasion of Ukraine, though most are still young. Among the standout performers are Munich-based Helsing, which develops AI software to process and analyse vast amounts of data to create real-time pictures of battlefields. It raised a €209m series B funding round led by US VC General Catalyst in 2023 and is believed to be in the midst of an additional funding round at a $4bn valuation. Elsewhere, Finland’s ICEYE, which deploys radar satellites that collect images of the surface of the Earth at any time of day, in any weather conditions, has raised nearly $400m in funding.

“With 35 exits completed in 2024 to date, defence tech is on track for an upswing compared to other languishing sectors.”

Driven by the creation of the NATO Innovation Fund (NIF) – a €1bn venture capital fund backed by 24 NATO allies – and other notable factors, including Russia’s invasion of Ukraine, investment in defence startups across Europe is rising.

The NIF is intended to invest in disruptive technology that enhances the safety of the alliance’s citizens and NATO’s technological edge, to bolster deep tech innovation ecosystems across the alliance and to support the commercial success of its deep tech start-up portfolio. Germany, the UK, Italy, Spain and Turkey are among the 24 countries contributing to the NIF, which was first proposed in 2021. The US, Canada and France have not agreed to support it. The VC funds receiving capital from the NIF are Join Capital, Vsquared Ventures, OTB Ventures and Alpine Space Ventures.

In the years ahead, the NIF is expected to make an impact in the defence space. Notably, it will invest over 15 years, in contrast to most VCs that have to return their funds within 10 years. “We have a significant amount of capital to deploy during these long and capital-intensive R&D cycles” for deep tech, said Andrea Traversone, the scheme’s managing partner. “When it comes to defence tech, the market has grown dramatically over the past three or four years for the geopolitical reasons we all know.”

In addition, the European Investment Fund (EIF), part of the European Investment Bank (EIB), signed a memorandum of understanding with the NIF. The two organisations announced plans to cooperate to support start-ups, small and medium-sized enterprises and midcaps in the defence and security sectors. Marjut Falkstedt, chief executive of the EIF, said the primary objective is to develop the defence ecosystem. “Our goal is to raise awareness, get investors attracted into this asset class, and exchange information so that we all learn as we go,” she noted.

Investment in innovation

Going forward, innovations such as artificial intelligence (AI), autonomous systems and quantum technologies will create opportunities, as well as risks. AI adoption is growing rapidly with new applications. Advances in AI technology improve efficiency, safety and decision-making processes, enabling defence companies to streamline operations, enhance operational capabilities and performance, and innovate their business models.

According to GlobalData, AI-related deals in the aerospace, defence and security industry grew by 150 percent in Q2 2024, compared with Q2 2023. On a quarterly basis, there was a 200 percent increase in the number of deals in Q2 2024 over the previous quarter.

As a result of these and other developments, further dealmaking in the sector is anticipated. Against a backdrop of increasing economic and geopolitical uncertainty, defence tech will continue to grow and attract financial investment.

Richard Summerfield