There were defense venture capital funds both in Europe and in the world, but investing in this area, especially in Lithuania, was considered taboo. However, the war in Ukraine, when Russia attacked its neighbor, initiated changes in the defense sector, more attention is paid to innovations and startups that create them.
According to expert of the US analytical center "Atlantic Council", Giedrimas Jeglinskas, for more than 30 years the western world (the so-called "developed countries") and the emerging markets ("emerging markets") survived and prospered thanks to the peace dividend. The post-Cold War period from the 1990s, otherwise known as the period of US hegemony, allowed globalization to flourish, in the process of which economic growth reached even the most remote corners of the world. It seemed that by bringing Russia, China and other autocratic and transitional democracies into a global interlocking economic order, we would all continue to grow and prosper together.
"In general, defense funding fell sharply after the collapse of the Soviet Union and has been falling for many years. The structures of the armies were shrinking, the numbers of soldiers, the level of readiness of equipment and weapons dropped significantly until 2014, when it was finally realized that something was wrong. And only after the occupation of Crimea in Lithuania and other Eastern European countries did wake up and rush to raise defense allocations. The realization slowly returned that history is not over, that brutal wars are possible and happening, and that they are not so far away from us.
Defense spending is a multi-dimensional indicator. But basically, the defense expenditure line in state budgets is the indicator that tells how much countries are ready to invest in defense, in technology. When for 25 years this line of the budget in NATO countries was only shrinking, it would be difficult to imagine how else it was possible to encourage investments in defense", he points out.
Europe is waking up
According to G. Jeglinskas, investments in defense and security innovations were prohibited for many years. This is not at all surprising, because the EU gained its power and created various financial instruments - the mandate of the European Investment Bank, subsidy policy, scientific cooperation programs - at the very peak of the "peace dividend", where economic growth and globalization outweighed any security and military considerations. He points out that even the EU's research and development initiative Horizon is among such programs that do not associate themselves with security and defense investments.
"The European Union finances everything from technology to agriculture through joint programmes, but defense has always been taboo because security and military affairs are a national prerogative. But the war in Ukraine changes everything, democracies wake up, NATO wakes up, and even the EU wakes up," he says.
Rokas Tamošiūnas, a partner of the Open Circle Capital fund, claims that the "need to know" principle is applied in defense - if the information is not necessary, it is not disclosed. However, this limits the ability to learn what the forces' needs are and to share ideas.
"Innovations "live" where people of different competences communicate, so this paradigm of thinking has stopped defense innovations for a long time in Lithuania, Europe and around the world. However, this has started to change recently, and the latest phase of the war in Ukraine has catalyzed all of this," he says.
According to R. Tamošiūnas, this area was also unpopular not only because of secrecy requirements, but also because it is a market whose main customer is the state. As a result, there are political risks, slow processes, countries choose their own suppliers, so for a long time it limited the circle of investors who would like to invest.
Viktorija Trimbel, Managing Director of venture capital fund Coinvest Capital, a subsidiary of INVEGA, said that the fund's strategy was changed this year and one of the directions will be the defense sector and startups developing dual-purpose products. But until now, traditionally, venture capital funds could not invest in these areas, especially because ethical questions raised many doubts - "can you invest in things that kill people?"
"However, unequivocally, the war in Ukraine changed everything, the understanding of risks, how to prepare, what innovations are needed. The example of the Ukrainians proves the need for innovation so that we can defend ourselves and that no one wants to attack us," she says.
NATO invests in defense innovation
According to Jeglinskas, when it comes to investing in these transformative technologies, defense-related technologies are among the most challenging for a number of reasons. Most often, the first buyer is the state (army or other institutions), where procurement procedures are not focused on the purchase of new and innovative products and services.
"This leads to long timelines from concept to revenue, and often young companies end up in the so-called 'valley of death' without getting the next round of funding. And yet, political awareness is slowly emerging both at the national level and in organizations like NATO that we have to invest in these new technologies because there is simply no other way," he says.
According to G. Jeglinskas, the #NATO countries created the NATO Innovation Fund (#NIF) for the first time in history, in which 1 billion is allocated for defense industry investments. euros, this amount is planned to be increased later. #INVEGA, representing Lithuania at NIF, announces that Lithuanian companies and startups working in the field of defense and security or developing new solutions applicable to both civilian life and the military will have the opportunity to attract significant investments. The priority investment areas of NIF are artificial intelligence, quantum, space technologies, biotechnology, big data processing solutions and other innovations.
Investments will soon be launched under INVEGA's risk capital financial instrument MILInvest. INVEGA's Chief Project Manager Vilija Šveikauskienė says that "MILInvest" is a financial instrument that aims to promote innovative activities in the field of defense and security in Lithuania by investing in emerging and promising very small, small and medium-sized companies, to help develop the development and production of dual-purpose products, to develop the country's venture capital ecosystem.
13.5 million EUR was allocated to MILInvest from the Defense Investment Fund of funds. The implementation of this venture capital facility will include a pre-acceleration program, an acceleration program and financing for micro, small and medium enterprises (SMEs) operating in the defense, security sector. The pre-acceleration program is designed for team and idea formation. The acceleration program includes training, consulting on company development, team building, law, fundraising, public presentation of ideas, sales, product and other issues, defense industry, technology expert consulting. MILInvest will also provide investments to selected micro and small enterprises operating in the defense, security sector.
From cyber security to autonomous solutions
According to V. Trimbel, there are many things that can be applied in this area, from cybersecurity to technologies that have a dual purpose.
"It is important that the created innovation can be used in civilian life as well, such startups will be more attractive and they will have a larger market. And there are various products: cyber security, drones. It is still the beginning, but companies are emerging and we are looking for more of them. However, I want to emphasize that this must be a start-up company", she emphasizes.
R. Tamošiūnas says that currently investments are being made in what we know how to create and competences that the technology community already has are being developed. Two investment categories are currently dominating: drones or autonomous systems and cyber security. However, the field of interest is much wider.
"The science and technology organization created by NATO has drawn up guidelines on what the alliance and its member countries should pay attention to. These are new disruptive technologies (emerging disruptive technologies, - English), which include cyber security, but also include advanced materials, advanced sensors, biotechnology and others. Of course, when investing in such technologies, investors assess whether we have the competencies to create them. In Lithuania, some of these fields have units of scientists, and some, such as cyber security, already have entire communities," he points out.
R. Tamošiūnas claims that defense investments are experiencing a renaissance of popularity and this will continue in the near future. "Currently, this area is considered fair and ethical, and at the same time, states are increasing defense funding. Also, while markets are going through the uncertainty of a looming recession, defenses are currently immune from the economic downturn. These two things will stimulate the interest of brands and the growth of defense investments in the near future," he says.
The original text was published in Lithuanian language: