Innovation in defence, security and resilience technology ("DSR") is not new. What is new is the pace of technological change in the battlespace. In fact, the battlespace now extends far beyond land, sea and air to include outer space, cyber, information and spectrum. The pace of this change is dictated by two things: (i) the need for agility to gain and maintain a competitive military and information advantage in a geopolitically unstable environment, and (ii) increasingly complex military and security operations in new domains that require new technologies to defend and exploit them. The added complexity for Europe is that in just a few short weeks, European allies have been forced to operate in a post-American defence and security environment, without its closest and most technologically advanced ally.
The fundamental challenge for the UK and other NATO allies is that traditional methods of defence and security procurement, adoption and deployment were not designed to cope with, let alone take advantage of the pace of change we are now facing. Nor has the UK been funding defence and security adequately. To put this into context, during the Ukraine conflict, approximately 70% of Russian casualties and up to approximately 90% of Russian military equipment losses have been caused by drone strikes, whereas the UK has historically underinvested in, and underprepared for, remote-first conflict.
So, how have the UK Government and its allies reacted to these challenges?
Funding
Increased defence spending
In February the Prime Minister committed to increase spending on defence (which has been redefined to include security) to 2.5% of GDP from April 2027, with an ambition to reach 3% in the next parliament. An increase of 2.5% equates to £6.4 billion of additional defence spending. The Chancellor then doubled down on this commitment, stating that she has set a target of 2.7%. Her stretch target would take the total increase in spending to £8.6bn. This Government's stated ambition is to turn the UK into a "defence industrial superpower".
Spending focused on Innovation
A minimum of 10% of defence spending will be deployed on novel DSR technologies that include AI enabled equipment and drones. The Government has ringfenced an additional £400m to invest in developing and procuring novel DSR technologies. Most of the increased cash promised by government will continue to be spent on major platform acquisition and maintenance, but a 10% commitment to novel technologies is unprecedented in the UK.
Stimulation to the UK's export market
UK Export Finance, the government agency that supports international trade by providing finance to overseas customers, will also get a further £2bn to increase loans to overseas buyers of UK exports.
Corralling Private Capital
DSR technology is not a typical asset class for venture capital or private equity. Traditional limited partners have shied away from the sector as the world continued to trade on the peace dividend. The peace dividend has now run out, and venture capital in particular is waking up to the opportunity created by global uncertainty and technological revolution. Category leaders like Anduril in the US and Helsing in Europe have shown that, despite the odds, neo-prime defence technology companies can emerge and that now is the time to back startups building in the DSR space. Large, specialist defence technology focused VCs such as Paladin and IQT have been betting on defence and security for decades, and the likes of the NATO Innovation Fund and the National Security Strategic Innovation Fund have a mandate to invest in defence technologies. But in response to the market opportunities, non-specialist funds are now also deploying into defence and security. VC investment into DSR has grown 30% in the last two years, against an overall decline of 45% in the VC market. In 2024 DSR investment represented an all-time high of 10% of all VC investments (Source: NIF Report - Defence Security and Resilience in Europe).
NATO's Defence Innovation Accelerator for the North Atlantic (DIANA) has been working hard to bring together venture capitalists to commit to strategically aligned investment principles. At a meeting convened by DIANA in London in 2024, over 30 venture capital firms came together to discuss the concept of allied capital, and many committed to these principles.
On 2 April the UK's Defence Secretary John Healey sat down with leading venture capital firms to agree a new "partnership" between defence and the private sector. Mr Healey said that the Government's commitment to increase defence spending would unlock a matched increase in private investment into UK technology and defence firms.
Whilst the press release from HMG of a “new partnership” between defence and the private sector doesn't go into the detail of how this could be achieved, HMG may wish to look to past instances of where private investment funds have been established with UK Government bodies as investors and investing on a "matched" basis with private institutional investors into funds managed by third party managers to invest in a specific asset class.
The Business Finance Partnership, launched by the coalition Government following the global financial crisis, successfully deployed funding to UK mid-market companies through third-party managed direct lending and credit funds. This tried and tested model could potentially be replicated to boost investment in the UK defence sector.
Procurement reform
Reforming procurement is a challenge that successive governments have failed to get to grips with. Commercial X, a recently formed group within UK MOD responsible for rapidly acquiring new technologies from SMEs, announced on 1 April that it has redesigned its contract framework to:
- simplify specifications and supplier responses
- reset the intellectual property terms so that the default ownership remains with the SME. This means that a startup's most valuable asset remains with the startup so that it can continue to innovate and improve the technology
- revised the default limitations of liability down, so that liability is more aligned to the insurance coverage a typical startup will carry
- relaxed, within safe limits, the security posture required for startups to demonstrate
This is a significant development. A startup's core asset is its privately funded IP. One key reason that private capital avoided investing in startups with government defence contracts was because the old frameworks compromised a startup's ability to retain and improve IP. Removing this barrier will stimulate access to private capital and thus increase R&D in DSR technology, creating a virtuous cycle of investment and IP development for the UK customer.
So, where are we now?
In a matter of a few short months, the state of DSR technology in the UK has changed more than it has done in the last 50 years. Government support and stimulation, increased access to private capital and positive early signs of procurement reform are all critical steps in the journey towards the UK's goal of becoming a "defence industrial superpower". The UK and its European allies remain a long way behind the US, and crucially, its adversaries, but the signs are good.
There has been a significant uptick in venture capital and family office investment into defence, security and resilience startups. Many of the UK's most advanced defence and deeptech startups as they raise significant amounts of seed capital, which is hugely encouraging. These same companies have demonstrated their technologies, many of which are in use in Ukraine via Operation Kindred or in advanced testing with the UK's Armed Forces. It is also encouraging to see larger US neo-primes such as Anduril make bold statements about their intention to invest significant resources into the UK, and some of the leading US and Australian defence and security companies as they expand into the UK, making good use of the AUKUS framework.
There are strong signals that the UK and its NATO allies are waking up to the new global reality and enabling their ecosystems to take full advantage.
To learn more about the specific defence technology assistance we offer at Mishcon de Reya, please contact Toby McCrindle or Steven Haywood.