Innovation increasingly key to defence technology as world stays ever ready for conflict

The Baltic States are a hotbed for investment in innovation for defence, not least as they find themselves closer to the front line with Russia

Defence technology can be a murky area but that has not slowed the pace of innovation in the sector. Ongoing events in Ukraine and in Gaza are testament to just how different and high-tech the world of conflict has become while features such as missile shields in their various forms are now common elements of defence strategy in a number of countries around the world.

And that is before you even consider the slightly less tainted but still highly controversial “dual-use” sector where technologies developed for civilian purposes can also have uses in defence programmes or in battlefield operations.

Europe’s Baltic States have become a hotbed for investment in defence technology and innovation. Earlier this month Estonian prime minister Kaja Kallas announced plans for a defence industry fund which will invest directly and through private funds in companies developing defence-related or dual-use technologies. Explaining the thinking behind the fund, Kallas said it would both “strengthen Estonia’s security and help boost the economy”.

“Estonia has a very highly developed technology sector, but there is a market failure in the use of this capacity to increase our national security,” the prime minister said.

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The focus on defence in Estonia and its neighbours has been driven in part by the expansionist ambitions of Russian president Vladimir Putin, as evidenced by the war in Ukraine and sabre-rattling across the region.

The increased focus on defence innovation has been welcomed by, among others, Markus Villig, founder and chief executive of the Bolt mobility group that operates in Ireland among other markets.

Villig spoke to The Irish Times at the Latitude59 tech conference in Tallinn, Estonia, about becoming a defence tech angel investor and the growing trend of defence tech in the region enabled by innovation.

“We’ve already seen [this innovation] happen in transport, in finance technology and many other fields. It’s not yet really happened in defence and I think it’s going to happen over the next 10 years.”

The investment “enables new start-ups to come into the space, which was pretty much unthinkable over the last 20 years. Now there’s an opportunity, a short-time window for start-ups to be created”.

Villig is an investor in Estonian start-up GScan, a dual-use deep-tech company using cosmic rays to determine the chemical compound of dense objects. It has many use cases. The muon flux technology detectors are harmless to humans, food and live animals but can provide security scanning at everything from postal services to ports and prisons – or on the battlefield. The technology can be used to scan heavy-duty military vehicles, buildings and bunkers.

The GScan team says it is currently in talks with a large potential customer in Ireland among others.

Estonia is also home to a Nato Diana (Defence Innovation Accelerator for the North Atlantic) programme aimed at dual-use start-ups. It provides the “resources, networks and guidance to develop deep technologies” and also gives participants “regular exposure to investment specialists” through the €1 billion Nato Innovation Fund.

Innovations from the programme to date include Anzen Technology, a British post-quantum security technology start-up which specialises in information security and data sovereignty; IceWind, an Icelandic start-up building military-grade, portable and deployable microgrids that combine hurricane-rated wind turbines, solar and energy storage; and Finland’s GIM Robotics, which enables tracing of friendly and hostile forces by armoured vehicles using sensor fusion technology in areas that are GNSS-denied. GNSS denied refers to the inability of a global navigation satellite system to deliver results because of a lack of clear line of sight between satellites and receivers.

Speaking about the calibre of start-ups on display at a recent Nato Diana demo day, Villig has his own opinions on what is needed in terms of defence innovation.

“I think there were some interesting start-ups in terms of dual-use but I mean, we’ve got to be honest, we’re not going to be winning the war by building just energy storage and communication systems. We actually need to build kinetic systems to defend ourselves and unfortunately there were none of those there,” he says.

“That’s where I would like to see a lot more activity with companies that truly build the stuff that really matters. Unfortunately it’s been a taboo subject. A lot of people don’t want to work in that space for ethical reasons, and there has been a big funding gap.”

But how much is it worth in terms of revenue returns for an investor to invest in the defence tech sector looking through the lens of a world that is not always at war? We saw the Covid boom and the subsequent negative impact it has had on investment as the pandemic subsided. Could defence tech investors be looking down the barrel of a similar gun?

“There are two possible outcomes. Let’s say the world is somehow magically going to find world peace and no conflicts happen in five years and all this money goes to waste, I think that’s a fantastic outcome. Unfortunately I think it’s very improbable,” Villig says.

“I think the far more probable scenario is that, unfortunately, there is going to be a lot more conflicts over the next 10 years and we will all realise that this was a good investment both in terms of national security and also a good investment because of the economic implications.”

One of the latest investment deals in European defence tech saw Lithuania’s Unmanned Defence Systems raise a €3.2 million funding round. The defence and dual-use start-up’s unmanned drones deploy “decisive attack and destroy capability, along with unprecedentedly quick, AI-supported, real-time analytics and decision-making” when used in a swarm battle-management system.

The company claims its drones were integral to Ukraine’s retaking of Snake Island in April 2022 after Russia’s full-scale invasion.

The lead investor in the funding round was Coinvest Capital, a sector-agnostic sovereign venture capital fund based in Lithuania that includes pure defence and dual-use tech in its portfolio. Not only is the fund fuelling defence innovation but, through it’s co-investor proposition, it is enabling angel investors to get involved in the sector. By limiting its return on investment to 6 per cent compound annual interest it offers co-investors a handsome return with the excess.

“What we need to focus on is to innovate and prepare to deter so we don’t even need to defend,” says Viktorija Trimbel, managing director at Coinvest Capital. “If we are strong and resilient we can hope not to be attacked but if we are we should have the ability to defend ourselves.”

Soviet times are still fresh in the minds of the Baltic States, polarising their need to “be ready”. Even now with the additional security of being in Nato, Latvia, Lithuania and Estonia know what is on their doorstep.

“I think everybody over the last two years has understood that democracies need to invest in defending themselves,” says Villig. “We can’t just hope that nothing bad is going to happen. We’ve got to be prepared for the worst. Europe is realising that we need to build our own defence and we can’t rely only on the US. And being on the frontier – in Estonia – that’s especially relevant for us and it’s very time-sensitive.”

This is more than a passion project for him and it is more than looking for a decent return on investment – Villig is not holding back. “I’ve been trying to raise the political awareness that actually we can do something. We shouldn’t have this defeatist attitude. Even being from Estonia, a small country, I think we can make a difference and try to get political support so that governments will put more money behind start-ups in the defence field.”