As the NATO summit gets underway in Vilnius on 11 July, one of the key themes is defence spending. There’s nothing like a war on your borders to focus attention and, with fighting grinding on in Ukraine, NATO Secretary General Jens Stoltenberg has announced that 2023 will bring the biggest hike in defence spending in decades, with a real increase of 8.3 per cent across European allies and Canada. The summit has also extracted a much stronger commitment from NATO allies over the 2 per cent of GDP they are all supposed to spend on defence – Stoltenberg intends the 2 per cent to be a minimum spend rather than a goal.
Alongside this jump in government spending, private capital can offer a significant asymmetric advantage. This is particularly obvious when it comes to defence technology. With the swift advances in technology, defence is going through an epochal change and, as the CEO of a company focused on next-generation technologies, I know that investment from the private sector is absolutely critical in reclaiming the west’s competitive edge.
Tech and AI are utterly key in the modern military arsenal. Knowing your enemy – not just how they think, but where they are: their troops, supply lines, weapons dumps, weaknesses, strengths – has always been vital in war. But the cheap toy store drones currently being used in defending Ukraine have shown that even basic modern technology can outrun conventional military strategy. And, thanks to rapid innovations in AI, access to open and closed data sources also allows us to predict and anticipate our enemies far more accurately than ever before. We have to take advantage of this.
There’s a Mitchell and Webb sketch – Bronze Orientation Day – that perfectly lays out the vital necessity of keeping up with technology in defence. When Robert Webb’s caveman axe-chipper plaintively asks why they can’t just keep using stone axes, the bronze salesman, says: “Because the tribes with the bronze axes will kill you, and take your stone axes, and then throw them away because they’re rubbish.”
Our foreign adversaries understand this new reality only too well. Authoritarian regimes are prepared to direct almost limitless state-funding towards innovation in defence technology.
Yet, in western democracies, where our defence companies can’t just call on an apparently bottomless public purse towards innovation in defence technology, our response is hampered by the need to find private investment.
Private funding is therefore vital to advancing AI, cybersecurity, quantum computing, and advanced materials. Sometimes the private sector, with its agility, its speed, can just do things better and faster. The partnerships between government and private defence investing aren’t new, afterall, and can be good for both sides.
In 1814, the great banker Nathan Mayer Rothschild helped to finance the military campaign against Napoleon. Wellington, advancing north across Spain, needed money to pay his troops. Rothschild was commissioned to set up a network of agents who bought up coin and transferred it to Wellington in the form of local currency. It’s believed that Rothschild was approached because the British government had been unsuccessful in trying to establish its own such network. Rothschild later was said to have described these efforts as “the best business I ever did”.
Today, venture capital and private equity can allow innovators to get the investment they need for research, development, and building their businesses, while remaining agile in their dealings with government.
Collaboration between the UK private and public sectors is growing and it needs to. In China, for example, the fusion between military and civilian strategy runs everything, from awards campaigns looking for future warfare concepts, to monthly audiences where suggestions are solicited from civilians on military technological innovation. This has resulted in China’s People’s Liberation Army being able to target western democracies with cyber-attacks, social media influence campaigns, to compromise computing networks, to attack major state enterprises, civil aviation, health records, and energy grids. Potentially hostile superpowers are now using technology to attack national security infrastructure, as we recently saw in the hack on the telecommunications of the US air base on the pacific island of Guam – which seems to have been intended to hobble the US’s ability to respond to an attack on Taiwan.
It’s also particularly important for investors to take the long-term view – “patient capital” – which gives capital-intensive defence start-ups commitment and stability to start ambitious research and development efforts and to take calculated risks. Our adversaries are thinking years, if not decades ahead and we need to think the same way. The implications of data theft by a hostile state, for example, may not be immediately clear, but collating the data, getting it ready for use, with advanced or future technological capabilities, is very much in the enemy toolkit: data provides a central component to threat finance. The use of illicit financial networks and practices to fund activities like terrorism, organized crime, and cyber warfare is a ticking bomb.
We also need to make our defence tech companies more resilient. Largely privately funded, often small to start with, and with initial high-cost burdens, deep tech companies in the west can be very vulnerable, particularly as our adversaries are relentlessly seeking out western intellectual property: the Chinese spy balloon, shot down over the Atlantic Ocean in February, was kitted out with American technology. Keeping close collaboration between more agile innovators, operators, and investors is crucial to revolutionizing the defence industrial network, while denying opportunities for hostile states to infiltrate our innovation ecosystems through financing.
The recent collapse of Silicon Valley Bank brutally highlighted tech companies’ vulnerability. As US and UK start-up tech companies were left stranded, rival foreign states swooped in, offering to bail them out. Luckily our governments quickly responded to ward off the risk that desperate founders could lose control of their intellectual property to hostile nations.
As a result, private funders are increasingly identifying national security not only as an investment opportunity but a necessary one. We should recognise this under the cloak of socially responsible investing, on a par with current Environmental, Social and Governance (ESG) policies. We should add a second S for Security, acknowledging the vital role of technology businesses and signalling to impact investors that they have a key role to play.
As NATO meets this week, it is clear that we need a society-wide response. To protect our western democracies, the private sector, with the kind of speed, agility, and innovation that government agencies can only dream of, should stand ready to play its part in offsetting the massive state capital flowing into our adversaries’ defence tech – and be welcomed as such.
John James is the co-founder and Managing Director of BOKA Group, a technology company based in both the US and UK, which has significant holdings in the deep tech sector.
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