The E.U.’s intention is to become more independent with regard to defending itself, and it isn’t difficult to see why it would want such a thing. Even if we bracket the bloc’s longstanding aim of ‘strategic autonomy’, a word that has been used by successive commissioners since 2013, the United States has cast doubts on its willingness to defend its N.A.T.O. allies, any ceasefire in Ukraine will need a security guarantee, and, speaking generally, the world is volatile, there are geopolitical realignments underway, and at least the ability to act independently in such a context is highly desirable.
But if the E.U. spends money in the way it has in the recent past, it will get poorer results than it could. Given the urgency with which the E.U. needs to boost its defences, this is not an option. So Europe must turn away from those contractors adapted to a different context – one marked by peace, less investment in defence, and the need to keep strategic deterrence in working order. These legacy firms served their purpose well. But they will struggle to create at the speed modern warfare requires. Instead, Europe must start supporting its smaller, more agile, more innovative companies – the creative, energetic startups that can adapt quickly. Those startups need money to succeed. This is the deeper problem Europe is currently facing.
Up until recently, venture capital (V.C.) firms have been reluctant to put their money into defence startups. This is because investing in anything to do with weapons, war, or the military has been seen as out of step with environmental, social and governance (E.S.G.) commitments. Moreover, defence has long been seen as a dirty word in V.C. circles, due to its moral murkiness. This reflects a far wider and deeper cultural resistance to all things defence. Europe has often seen itself as a peace project – in fact, the most successful peace project in the modern world. Investing in missiles or surveillance technology has not felt in keeping with that vision, even if some of the European powers, as part of N.A.T.O., have engaged in recent conflicts.
But the world has changed. War is not distant or theoretical. The invasion of Ukraine and the bloody conflict that has followed brought war to Europe’s doorstep. There are rising tensions in Asia, … So Europe finds itself operating with an inadequate defence capacity at a dangerous geopolitical moment. If it wants to protect its values, borders, and people – and if it wants to build the independence it needs to safeguard peace or say ‘no’ to involving itself in future conflict – it needs to scale up defence. That means more innovation, which requires more risk-taking, and at greater speed.
One way to think about this is that Europe needs the same kind of transformation that took place in the biotech industry in the 1980s and 90s. Back then, big pharmaceutical companies had huge internal research and development departments. They poured vast sums into inventing new drugs in-house. But over time they realised something crucial: it was far more efficient to let the smaller companies do the early-stage development, then buy the most promising creations later. In other words, instead of trying to innovate internally, they turned outward. A whole ecosystem sprang up in response. V.C.s funded hundreds of biotech startups, knowing that even if most failed, the successes would more than pay for the losses.
That is the model Europe needs to copy for defence. Right now, whatever money does go into the sector tends to flow into the same big contractors, and this is, in my view, suboptimal for innovation. (We should note that defence innovation often has important civilian applications; let’s not forget the internet began as a US defense innovation.) Smaller, newer companies, many of them already working on bleeding-edge A.I. systems, drone technology, sophisticated cybersecurity, and ultra-resilient optical communications, must be funded liberally so they can thrive.
There’s another problem. This is that there could be better ‘exit’ opportunities. When a V.C. invests in a startup, they usually hope to get their money back by selling the company or floating it on the stock market. But Europe’s I.P.O. market is highly fragmented. Each country has its own rules, its own exchanges, and its own red tape. This makes it harder for the companies to scale and harder for the V.C.s to exit – which turns those investors off.
If the geopolitical climate continues to worsen – and that looks likely – then the case for Europe to create a single capital market will grow to such a point that it will be hard to ignore. A unified financial system would help Europe keep its talent, its ideas, and its money on the continent rather than losing it through ‘brain drain’ to Silicon Valley or other parts of the world keen to reward European creativity.
The good news is that the tide is beginning to turn. Defence in Europe is beginning to involve more commercial, off-the-shelf technology. Thanks to improvements in tech and manufacturing, many defence applications can be built on top of commercial platforms, and this is already attracting new companies and new interest. But if there are signs that things are moving in the right direction, they must move faster. If Europe wants to build a resilient, modern defence sector, it needs to back its startups and remove the barriers holding back V.C. investment.
We need Europe’s financial markets to start working for the continent’s defence.
Jean-François Morizur is the CEO and Co-Founder of Cailabs.
