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Strikes on Iranian nuclear facilities will turn the spotlight on to the tools of war — and particularly those with a high-tech bent. Investors are getting on board: a €600mn investment in Germany’s Helsing announced last week values the artificial intelligence software-to-drones group at €12bn. Shares in Palantir, a data-crunching US company that serves the Pentagon, are up more than 80 per cent this year; its $325bn market capitalisation is quadruple that of BAE Systems.
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Like AI, defence tech is a broad church, spanning digitised information through to drones and other transport capable of autonomous targeting. PhysicsX, a UK start-up in the field valued at almost $1bn, harnesses AI to design products such as engines and drone parts.
To stay on track, companies in the sector need to secure supply chains, nail down deals with prime contractors — as the traditional suppliers of defence equipment are known — and get their hands dirty.
Defence tech companies are staffed by armies of the tech wunderkind you would expect to see in gaming or ecommerce; almost three-quarters of the 300-odd staff at DroneShield, the Australian counter-drone tech company, are engineers.
Even so, warfare’s new heroes can be hamstrung by snarled supply chains. Airo, with business including drones and avionics, flags “limited suppliers” in Europe and Canada for critical components and raw materials.
Tie-ups are one answer. Helsing, stretching beyond software into drones and other products, is buying composite aircraft manufacturer Grob Aircraft, enabling it to marry the “brain” side with physical nuts and bolts. US peer Anduril Industries has made several acquisitions, including Adranos, which makes solid rocket motors.
Partnerships also help in winning contracts. Palantir, which gets more than half of its revenue from governments, is an example. Smaller peers can benefit from links with the primes. While Helsing’s collaboration with German munitions manufacturer Rheinmetall quietly sank, the strategy lives on. Bavarian military software developer Blackned teamed up with the German defence prime, and the pair secured a €1.2bn contract from the German Bundeswehr. Anduril has also joined forces with Rheinmetall to develop drones for Europe. For its part, Helsing has a collaboration with Sweden’s Saab.
Access to finance, from equity to bank loans, remains tricky for minnow-sized players. Venture capital debt is plugging some holes, while governments are stepping in. This month, for example, the EU’s lending arm tripled its loan plan for defence industry SMEs to €3bn.
Where capital flows, advances will be made, if only through trial and error. During the second world war, many designs that passed muster on the drawing board failed in the field, among them the ill-fated Covenanter “cruiser” tank. Helsing’s drones only earned their stripes in Ukraine after being tweaked on the frontline. Real-world conflict creates not just demand, but also — sadly — opportunities to test and refine the product.
louise.lucas@ft.com