Navigating the cutting-edge intersection of deeptech, dual-use, and defense technologies, investors face a dynamic battlefield shaped by scientific breakthroughs and ethical dilemmas. From robotics and AI to technologies serving both civilian and military purposes, these sectors are not only reshaping global security landscapes but also testing the waters of investment strategy amid tough regulatory frameworks. As geopolitical tensions change investment flows, the question remains: how can venture capital move through these turbulent waters without crossing ethical and legal lines? This article explores the complex dance of investing in technology that could either innovate or incite.

This article is written by Cem Adiyaman and Sefa Gecikli. Cem ([email protected]) and Sefa ([email protected]) are both part of the RSM Business Consulting team with a specific focus on International Trade and Strategic Goods.

Defining Deeptech, Dual Use, and Defense Tech

Deeptech encompasses a broad range of technologies driven by significant scientific or engineering advancements. This category includes areas such as robotics, quantum computing, and artificial intelligence. Dual-use technologies, on the other hand, refer to innovations that can serve both civilian and military purposes. Defense tech is more narrowly focused on technologies explicitly designed for military applications. Deeptech forms the largest bubble, within which lies dual use, and within dual use, overlapping but distinct, is defense technology.

The Investment Landscape

Investing in deeptech and its subcategories presents unique challenges and opportunities. The recent surge in conflicts, such as the Russia-Ukraine war, has softened some of the hesitancy around defense tech investments. European defense deals saw a notable increase, raising $614 million in 2023 compared to $408 million in 2022, according to Dealroom data.
Despite this, the stigma associated with funding technologies that could be weaponized remains. This is evident in the cautious stance of many venture capital firms. For instance, the NATO Innovation Fund (NIF) explicitly avoids investing in ammunition companies. This cautious approach stems from the legal and ethical frameworks governing such investments, which vary widely across jurisdictions.

Regulatory Landscape

Maintaining international security is critically dependent on the control of technologies and services with dual civilian and military applications, regulated under key frameworks in various jurisdictions. In the European Union, the European Dual Use Regulation alongside the Common Military Position governs the export and transfer of such items. In the United States, the regulatory backbone consists of the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR). EAR oversees the export of dual-use goods, technologies, and services, whereas ITAR is specifically focused on items intended for military use.

In the Netherlands, the regulatory framework includes several critical components: the Besluit Strategische Goederen (Strategic Goods Decree), the Wet strategische diensten (Strategic Services Act), the Sanctiewet 1977 (Sanctions Act 1977), and the Uitvoeringsregeling Sanctiewet 1977 (Implementation Regulation Sanctions Act 1977), along with the Wet op de economische delicten (Economic Offences Act). Compliance with these regulations represents a significant operational challenge for companies and investors, as it involves navigating complex legal requirements to ensure all exports are conducted legally and securely.

Implications for Investors

Under both EU and Dutch frameworks, there are potential penalties and restrictive measures against investees and investors in cases of non-compliance with sanctions and export controls. The EU’s sanction regime, for example, includes sectoral economic and financial measures affecting the provision of financial services or the performance of financial activities.

These measures cover a wide range of financial services and activities, including financing, financial assistance, investment, and investment services.
In the United States, financiers are held liable for facilitating or being involved in violations of sanctions and export controls. Any action by a non-US person that supports a transaction or activity prohibited or restricted by US sanctions or export controls poses a compliance risk. This includes actions related to financing.

Furthermore, the implications of non-compliance by investee companies with sanctions and export controls can severely affect the ability of investors to recoup investments. Entities that fail to comply with export controls and sanctions are often unable to obtain the necessary licenses to export their products or services. This limitation confines these entities to operating within their home country, severely restricting their growth potential and revenue opportunities. In industries that heavily rely on international sales, such as technology, the inability to access global markets can be particularly detrimental. 

The Ethical and Practical Challenges

Venture capitalists are increasingly divided on the ethical implications of investing in defense and dual-use technologies. At a recent SuperVenture conference, only a handful of investors indicated a willingness to fund defense tech, and even fewer were open to investing in weapon systems. Michael Jackson, a Paris-based VC, argues that opposition to defense tech investments is hypocritical. He points out that many LPs benefit from the security provided by advanced military technologies while simultaneously shunning investments in the sector. This sentiment is echoed by some investors who see superior military technology as a credible deterrent to conflict. However, others maintain a clear distinction between deeptech and defense tech. Adam Niewinski of OTB Ventures, for example, categorically avoids defense investments, focusing instead on dual-use technologies that offer broader commercial applications.

By controlling the export of dual-use items, export control regulations aims to ensure that these items do not contribute to international instability or conflict. Also, many of the sanctions are targeted at countries or entities involved in serious human rights violations. Therefore, by addressing the regulatory requirements in this area, deep-tech companies may attract more investment as they may explain the investors’ ethical concerns away. 

Forward Thinking

The debate over investing in deeptech, dual-use, and defense technologies is far from settled. As the demand for advanced technologies grows, particularly in response to global security threats, investors are likely to continue grappling with these complex issues. Some firms are exploring ways to broaden their investment scopes, engaging in discussions with LPs about expanding beyond dual-use technologies. Others, like Tholus Capital, are already raising significant funds specifically targeting defense and aerospace innovations.

The evolving geopolitical landscape and the corresponding shifts in public and investor sentiment will undoubtedly shape the future of this sector. For now, the investment community remains deeply divided, balancing the potential for significant returns against the ethical and regulatory complexities inherent in this field. Investing in deeptech, dual-use, and defense technologies presents a multifaceted challenge for venture capitalists. The blurred lines between these categories, coupled with stringent regulatory requirements and ethical considerations, create a complex landscape. As global security concerns persist, the debate over these investments will likely intensify, prompting investors to continually reassess their strategies and ethical boundaries.

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