LDN - Business

Trump anxiety spurs investment in European defense startups

[August 22, 2024] By Martin Coulter

LONDON (Reuters) -Donald Trump's potential White House return has helped spur a flurry of investment in defense-technology startups across Europe, according to eight prominent industry executives and investors.

The Republican presidential candidate has threatened U.S. withdrawal from NATO and said he would not defend allies that did not increase their defense budgets. He's locked in a tight-run race with Vice President Kamala Harris in the Nov. 5 election.

Trump's unpredictability, combined with the war in Ukraine and tensions in the Middle East, has contributed to global military spending reaching a record high of $2.4 trillion in 2023, according to the Stockholm International Peace Research Institute (SIPRI).

In June, the $1.1 billion NATO Innovation Fund (NIF) announced partnerships with venture capital firms and defense startups across Europe, aiming to bolster security on the continent.

Meanwhile, the European Union earlier this year unveiled its first ever defense industrial strategy, committing more than $1 billion towards military innovation.

While the prospect of a Trump presidency was not the only factor behind those initiatives, it has been a significant driver of subsequent investments made by governments and venture capitalists alike in manufacturers of drones, robotics and quantum computing, the eight executives said.

Operating out of Munich, Vsquared Ventures is one of Europe's leading deep-tech investors, having recently raised a 214 million euro ($237.99 million) fund to invest in space, robotics, and other technologies.

"Trump's threats have made European states think very differently about investing in their own capabilities and giving contracts out, often to startups," said Herbert Mangesius, founding partner at Vsquared, which has partnered with the NATO fund.

"We want to see faster cycles, broader experimentation, and better capabilities. The planning in a ministry is so slow, and the VC world is one potential answer to this problem," he added.

Vsquared's portfolio includes IQM, one of Europe's leading quantum computing companies, and Isar Aerospace, a rocket manufacturer which has itself raised more than 400 million euros of private capital.

At present, the NIF is backed by 24 NATO countries, with eight remaining countries - including Canada and the U.S. - not involved. "My ambition is to eventually have all NATO allies join the fund," Andrea Traversone, the organization's managing partner, told Reuters in an interview.

Asked if Trump's potential return had influenced the NIF's activities, he said: "I don't think it will make a difference to our mission. This matters to anyone who is interested in our mission of protecting citizens of allied partners."

STRUCTURAL CHANGE

While Russia's invasion of Ukraine has been the primary reason for higher spending, some defense industry investors say Trump's approach towards U.S. allies has shaken leaders in NATO and across Europe. That has resulted in governments increasing their defense spending, investing in, and partnering with new technology companies.

Ricardo Mendes, CEO of Lisbon-based drone manufacturer Tekever, which has contracts with Britain, Ukraine, the EU and others, said: "The potential of a second term for President Trump brings various implications for both American and European defense enterprises."

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Republican presidential nominee and former U.S. President Donald Trump speaks during a visit to the Livingston County Sheriff's Office in Howell, Michigan, U.S., August 20, 2024. REUTERS/Rebecca Cook/File Photo

"Discussions are ongoing regarding the overhaul of procurement procedures, with a focus on more flexibility and introducing agility, which would favor smaller and midsize tech companies," he added.

As of 2023, defense and security spending across Europe had risen 16% to 552 billion euros since 2022, according to data collated by SIPRI.

ARX Robotics, a German startup which recently raised a 9 million euro funding round backed by the NIF, builds autonomous robots that can be deployed on the battlefield.

Asked if the potential for a Trump victory in November was influencing defense investment, CEO Stefan Roebel said: "Absolutely. That's something everybody has in the back of their heads. Europe needs to up its investment in defense, and you're seeing a shift in momentum now."

RESILIENCE

Around the world, VC funding faced a major downturn in 2023 as investors waited to see how their pandemic-era ventures would play out against a backdrop of rising interest rates and public market volatility. In Europe, overall startup investment fell 44%, from $103 billion to just $57 billion, according to Pitchbook data.

By comparison, investment in local defense technology startups remained relatively resilient, falling 21% in the same period, from $2.6 billion to around $2 billion.

Germany is easing red tape for investments into defense companies, Finance Minister Christian Lindner told Reuters in February, as Berlin ramps up its military spending.

Mangesius cited Quantum Systems, a German drone manufacturer which has recently signed deals with its home government, as a company that has directly benefited from Germany planning for a Trump return.

"It was a direct consequence of what Trump said. That made the German state react and put money into this because European countries need to be self-sufficient," he said. "You can’t outsource your own security to another country."

Bulent Altan, founding partner at Alpine Space Ventures, also based in Munich, told Reuters that Europe had been investing in defense-tech in order to be a better partner to the U.S.

He said: "And if that partnership should have hiccups along the way, you’re not standing there with nothing in your hand."

($1 = 0.8992 euros)

(Reporting by Martin Coulter in London and Krystal Hu in New York; Editing by Matt Scuffham and Sharon Singleton)

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