More money is coming to defence tech VC, but is the market ready?
After decades of being out of bounds for most European VCs, defence tech is in the frame. A conversation with Keen Venture Partners' Giuseppe Lacerenza
After decades of being out of bounds for most European VCs, defence tech is in the frame. This year appears to be a pivotal one for the resilience tech funding ecosystem.
In May, the European Investment Fund (EIF) — an LP in many if not most European venture funds — committed €40 million to the "defence, security, and space" fund by Keen Venture Partners, a firm based in Amsterdam. EIF’s participation was notable because it was its first time it had backed a fund solely focused on military (rather than dual-use, or no-military use) technologies.
"We are here to invest in technology that serves the purpose of the Ministry of Defence or the Ministry of Internal Affairs, directly or indirectly," the fund's partner Giuseppe Lacerenza told Resilience Media.
To fulfil its mission, Keen plans to work closely with MoDs across Europe. Lacerenza, who is himself a military school alum, said Italy and the Netherlands are examples of countries where the firm has been able to establish close connections. The fund has also formed an advisory board that includes former Dutch minister of defence Kajsa Ollongren and Jaap de Hoop Scheffer, former secretary general of NATO, among others.
"We are also extremely collaborative and we see a world where we co-invest […] with other funds that may fill our gaps," Lacerenza said. " Because in the end, investing in those relationships [with MoDs] takes a lot of time."
Fundraising pitfalls
Keen Venture Partners is currently working towards the first close of the fund, targeting €125 million. The firm plans to invest in a total of 20 to 25 startups, from seed stage and all the way to Series B.
Raising the fund has been "really hard" so far, Lacerenza admitted, partly due to the general dynamics of the capital market nowadays.
That’s despite the current geopolitcal climate where war with long-time adversaries is back on the frame, and technologies like AI and drones – built by startups that are raising collectively hundreds of millions of dollars – are playing an increasing role in the next generation of weapons. That is because despite all that pull, few have made the jump to exits, and that makes LPs bearish.
"There is a lot of blocked capital, not just in defence but in general," he said. "If you look at family [offices], a lot of [their] money is locked in. There are no exits, so people are still waiting for some liquidity."
Those larger issues are exacerbated by the challenges specific to defence tech.
"Defence per se is not a topic for everybody," he said. "Within the landscape of private capital, a lot of families and institutions are still making up their mind on whether they want to be exposed to the defence industry."
The appetite of potential LPs to invest in defence and dual-use technologies seems to also depend heavily on their location.
"The closer you are to Russia, the more the story resonates with you," Lacerenza said. "The further you are… Well, if you're in Italy, why would you care?"
The strings attached
Having the EIF as an LP creates certain limitations in the scope of Keen's investments. First of all, the fund technically invests in dual-use technology, which normally would mean that qualifying companies are required to have at least 50% of their revenues coming from commercial, non-defence clients. However, the EIF's definition of such tech has changed significantly this year.
"We are the first to embrace the new taxonomy," Lacerenza said. "[Now] you can also invest in single use, as long as there is a potential [of commercial] use cases in the future. That [still] clearly keeps out the weapons and ammunition, things that go boom."
This limitation doesn't seem to bother Keen very much.
"If we look at the deal flow, we track almost a thousand companies in Europe doing defence," Lacerenza explained. "Not more than 7%-8% [of them are working on] weapons. It's because weapons are a really complex market, and may not really fit the dynamics of venture capital."
The reasons for that range from heavy regulations in the field to the growth profile that's less explosive than traditional VC-backed startups. In Lacerenza's opinion, companies building weapons and ammo may even be better off raising working capital, securing credit lines, and tapping private equity financing.
Ukraine as a benchmark
Another limitation maintained by the EIF is geographic. The fund can invest in companies established in the EU, UK, Turkey, and Norway. But this list notably omits Ukraine, which became the hotbed of defence tech globally after Russia launched a full-scale invasion of the country in 2022.
Nevertheless, Lacerenza emphasised the fund's close connection to everything that's happening on the battlefield in Ukraine these days.
"We do believe that Ukraine and Ukrainian people are really pushing the boundaries of innovation," he said. "So when we define what ‘good’ looks like for a specific domain, we always set the bar at what is happening in Ukraine."
When it comes to investment, it also helps that many Ukrainian-founded startups set up their headquarters in the European Union, partly to streamline the fundraising process.
"There is a good inflow of Ukrainian [founders who] see this opportunity to set up an Estonian or Polish company with Ukrainian subsidiaries [to also gain] access to a bigger market," Lacerenza added.
What does the market need?
The EIF's commitment in Keen's fund came from the €175-million Defence Equity Facility, which has since also invested in the Real Tech 2 fund by Omnes Capital, as well as Sienna Hephaistos Private Investments, a private credit fund for small and medium-sized defence tech players.
While most defence-adjacent funds are focussing on early stages of startup growth, there appears to be little later-stage capital available for dual-use companies.
Presented with this question, Lacerenza mentioned that he "knows for a fact" about multiple defence tech funds raising growth capital — but also downplayed the importance of this challenge.
"There is a subset of [Series B companies] that will go towards the platform game, meaning building a prime," he said. "They do need growth capital. Now, there are the other companies [at this stage], which I'm assuming have good revenue already and 10-year contracts with an MOD. Why would they dilute themselves and not get working capital [instead]?"
What European resilience tech startups do need in order to survive and thrive, from Lacerenza's point of view, is a change in how defence procurement works across the continent. This change spans both the speed with which buying decisions are made and the openness to dealing with early-stage companies — both domestic and located in other European countries.
"It's not about only giving money to VC, it's about orders, buying stuff," Lacerenza said. "If you buy, we will put all the risk behind it, and I'm sure that private capital will follow. But you need to buy. If you don't buy, you're killing the industry."