This publication is part of the EU Cyber Direct–EU Cyber Diplomacy Initiative’s New Tech in Review, a collection of commentaries that highlights key issues at the intersection of emerging technologies, cybersecurity, defense, and norms.
Technology, security, and defense have always been closely related policy pillars and instruments of power, including in NATO. Observers have tended to see technology as an enabling tool that has helped NATO become more efficient, effective, interoperable, impactful, and resilient in its defined priority areas. The alliance has long counted on several platforms and ecosystems to embed science and technology into its operational and strategic concepts. This can be seen with bodies and forums such as the Allied Command Transformation (ACT), the Science and Technology Organization, the NATO-Industry Forum, and the NATO Industrial Advisory Group.
Amid the increasing demands of the technology-security-defense ecosystem, the alliance has taken a further evolutionary step with the launch of the Defence Innovation Accelerator for the North Atlantic (DIANA) and the NATO Innovation Fund (NIF). DIANA aims to make technology a NATO priority by engaging much more closely with the commercial sector through venture capital funds, start-ups, and deep technology firms and by supporting the conversion of early-stage start-ups into more mature companies for the defense market. The NIF, which is the world’s first-ever multisovereign fund, aims to attract and support investment from allies in those policy areas where long time-to-market timelines and high capital risks pose difficulties for the market to deliver alone.
The success of DIANA and the NIF will depend largely on the allies, which will have to ensure their internal coherence and coordination to address the challenges of integrating deep tech into NATO—challenges that span governance, financing, political willingness, and organizational mindset. While the allies are showing greater willingness and putting forward governance mechanisms to integrate deep tech and contribute to DIANA and the NIF, the shift in financial and organizational mindset is still a major challenge that will need to be duly addressed to ensure that NATO does not fall behind on the technological cutting edge and leave room for the growing influence of third countries.
Importantly, the success of any technological innovation that has been developed at the NATO level depends on its implementation and uptake at the national level, as well as across allied markets. That is why this analysis addresses two important questions of willingness and effectiveness. First, to what extent will allies seize the opportunity to benefit from DIANA and NIF activities at the NATO level to transform their national defense initiatives into new, disruptive advancements that provide security and defense responses through deep tech? And second, will the shift in mindset that is taking place at NATO, through DIANA and the NIF, have the expected long-term results in security and defense at the national level?
To respond to these two questions, it is essential to assess the various challenges that DIANA and the NIF will need to address. Their core task is to integrate the political attitudes of allied markets into a new ecosystem characterized by relationships with venture capital funders, builders, and start-ups and varying deep tech environments across the alliance.
NATO’s Technological Background
Since 2003, the ACT has made efforts to integrate technological advancements into NATO’s operational concepts and strategies. The 2010 NATO Strategic Concept also underlined the importance of technology to the alliance. However, the Strategic Concept referred to technology just four times and only in relation to terrorism and the need to adapt to challenges to military planning. The 2022 Strategic Concept mentioned technology twelve times—not only in the context of future actions but also as part of the alliance’s “Purpose and Principles,” which represent the central axis that will guide the operationalization of NATO’s road map in the coming decade.
While technology had always been a priority for NATO, what was new in the 2022 Strategic Concept was a focus on emerging and disruptive technologies (EDTs). In 2021, NATO defense ministers had endorsed an EDT strategy to guide the alliance’s development of EDT policy in specific areas. EDT policy had always been relevant to NATO’s goals, but the alliance put new and emerging technologies at the forefront of its priorities during its 2022 summit in Madrid.
Yet the very concept of EDTs poses the first analytical challenge—how to define and approach these technologies—because not all parties agree on what “emerging,” “disruptive,” and “critical” actually mean. The understanding, scope, strategic interest, and perceived usefulness of EDTs differ across stakeholders, especially states, which set their own priorities for EDTs—and, therefore, establish the tools to develop these technologies or prevent them from creating unwanted consequences—based on their perceptions of the threats and risks of the technologies. The lack of a common definition of EDTs internationally and in the Euro-Atlantic space poses serious challenges to the integration of these technologies into an alliance such as NATO, because actors have different strategic interests in investing time, financial resources, human capital, and governance efforts into EDTs.
In an attempt to provide a clearer overview of EDTs, the NATO report Science & Technology Trends 2020–2040 stated that “emerging” refers to technologies that are expected to mature between 2020 and 2040 and whose effects are not expected to affect the alliance’s defense, security, and enterprise functions, while “disruptive” refers to technologies that will have a revolutionary impact. Yet the technologies that the report later outlines are not categorized in line with these descriptions. NATO defines nine technology priorities as EDTs, with no distinction between emerging and disruptive. These are artificial intelligence (AI), data, autonomy, quantum-enabled technologies, biotechnology, hypersonic technologies, space, novel materials and manufacturing, and energy and propulsion.
Beyond conceptual and definitional challenges, a more critical question is how to prioritize and schedule the development and implementation of EDTs. Striking a balance between those technologies that could take longer to deliver but are more impactful and those that are low-hanging fruit but less groundbreaking is equally crucial. In this context, NATO has decided to jump ahead to the next level of EDTs: deep tech. The specific characteristics of deep tech pose further challenges to the alliance’s goal of greater security and to allies’ coherence, cohesion, and cooperation on research and development.
Deep Tech
Deep tech combines cutting-edge engineering with science to address major societal goals. According to Faÿçal Hafied in a report for Elcano Royal Institute, deep tech can be defined as
technologies with high barriers to development. These barriers are of two types: (1) the high capital intensity of the required investments; and (2) the high uncertainty about the future returns on these investments. Such properties of deep tech discourage private investment and imply the need for remedial state intervention. . . . Deep tech corresponds to the most advanced technologies, that is, those with the highest barriers to entry. Economists call these “technological frontier” innovations.
Yet deep tech also poses several conceptual, organizational, and financial challenges.
The Challenges of Deep Tech
The first problem is the lack of a clear conceptual difference between the meanings of “EDTs,” “technology,” and “deep tech” and the lack of a common understanding of the practical differences that ensue from their research, development, and deployment—in NATO in particular and across military organizations in general. It may be said that deep-tech start-ups are companies whose business models are based on a combination of research, science, engineering innovation, and societal impact. Deep tech represents a shift from the digital innovation of traditional start-ups based on bits to digital and physical innovation based on bits and atoms (see table 1).
| Table 1: Differences Between Traditional and Deep-Tech Start-ups | ||
| Factor | Traditional Start-ups | Deep-Tech Start-ups |
| Development time | Quick delivery to market | Long initial development phase |
| Competition risk | Network effect and market dominance as the main edge | Science-technology product as the main edge |
| Capital expenditure risk | Quick go-to-market with basic minimum viable product | Heavy capital expenditure ahead of revenues and product-market fit |
| Technology risk | Existing, proven technologies | Untested technologies |
| Market risk | Existing market demand, alternatives | Often no comparable product in the market |
| Source: The European Deep Tech Report: 2023 Edition, Dealroom, January 2023, https://dealroom.co/uploaded/2023/01/Dealroom-European-Deep-Tech-2023report.pdf. | ||
Deep-tech firms face several challenges that do not align with NATO’s organizational culture, which is security-oriented. The alliance members have a shared perception of security threats, and efforts to form a common strategic culture help allies cooperate as a community to promote their security, defend themselves against external threats, and guarantee peace. While deep-tech firms may have security considerations, their main purpose and deliverables are profit driven and business oriented. The emergence of deep tech will require a mindset change and cross-organizational culture-building between private civilian actors and governments to balance the interests of short-term, business-oriented results and long-term, security-driven strategic priorities.
Investment in Deep Tech
While deep tech is the second-most promising segment for venture capital investment in Europe, the continent lags far behind the United States, where such investment amounted to $166 billion from 2020 to 2022, against $52 billion in Europe. China, at $34 billion, was ahead of the EU member states, which invested $30 billion.
Despite these sums, the deep-tech ecosystem has been diminished in recent years. During the administration of former U.S. president Donald Trump, the budgets of several technology-related organizations that collaborate with the Department of Defense were boosted, but deep tech faced obstacles to capturing investment from outside. Among these were trade disruptions, a lack of agreement between the Congress and the White House on increasing federal support for basic research and development, and strict immigration policies that prevented attempts to attract and retain talent. This mix of reasons has been a wake-up call for NATO to coordinate its efforts and encourage allies to invest in this area through DIANA and the NIF.
However, investing in deep tech is not only about injecting money. There are two main challenges related to funding. First, most dedicated deep-tech investors focus only on the early stages of the technology, reducing the capacity of start-ups to move beyond this initial phase to the breakout phase of development, not to mention the growth phase.1
Second, the types of investor are limited and unevenly distributed, and different types have different understandings of and attitudes toward deep tech. These factors can hinder opportunities to interact with NATO. There are six main types of funding: generalist venture capital funds; specialized deep tech funds; private equity funds; limited partners, including sovereign wealth funds and family offices; corporations; and governments and institutional research funds. While specialized deep-tech funds understand high-risk investment needs, they are limited in size. Private equity funds tend to perceive deep-tech investment as outside their remit. Corporations may understand the importance of deep tech but have limited flexibility and agility to invest in market disruptions that take longer. Governments and institutional research centers may be more likely to invest in activities that do not deliver to the market as quickly as traditional industries, but willingness to invest varies across countries.
DIANA and the NIF: Needs and Opportunities
DIANA and the NIF both aim to seize the opportunities presented by deep tech, but with different functions. DIANA provides access to grants and a network of eleven accelerators and ninety-one deep-tech test centers where innovators can de-risk, demonstrate, and validate their proposed dual-use technological solutions. DIANA also offers mentoring, a community of investors, the opportunity to test technology in operational environments, an industrial partnership network, and challenge programs, which started in 2023 and aim to host ten challenges per year by 2025.
Meanwhile, the NIF has set out an investment strategy of €1 billion ($1.1 billion) that prioritizes investments in firms accelerated by DIANA that have passed a challenge program. Firms are selected based on their responses to a specific DIANA challenge as well as the operational applicability, technological feasibility, commercial viability, and transformational nature of their proposed solutions. However, the NIF is a fifteen-year funding framework, which poses questions about its level of ambition to deliver groundbreaking results in the medium term and respond with technological innovation to the increasing security and defense demands of allied markets. To compare, the EU’s Defence Innovation Scheme has been allocated a total investment of nearly €2 billion ($2.2 billion) for the 2021–2027 budget period, known as the Multiannual Financial Framework: double the budget for two-fifths of the period.
The goals of DIANA and the NIF in leveraging deep tech are to foster coherence and to protect the alliance in two races: technological development and adoption. While NATO does not refer to any specific country when talking about EDTs, the alliance’s 2022 Strategic Concept has a full paragraph devoted to China’s ambitions to “control key technological and industrial sectors [and] create strategic dependencies.” Paragraphs that refer to Russia make no explicit mention of technologies. However, references to key technologies throughout the Strategic Concept are directly linked to concerns over the role of technologies in shifting the character of war, global competition, and success on the battlefield.
Referring to key technologies rather than to EDTs might be a way to overcome differences among the allies over their approaches to China. Eastern European countries and the United States are much more explicit in their opposition to China, while Western European countries take different perspectives: some, such as Germany, have a neutral stance; others, like Spain, use bureaucratic, nonpolitical arguments; and others still, like the Netherlands, have triggered economic security measures.
Fostering Coherence
The lack of coherence across allied markets might explain why DIANA aims to promote the goal of fostering coordination among NATO members. There is an important focus on reducing the gap between countries—mostly between U.S. start-ups and those in Canada and Europe—in terms of deep-tech capitalization to encourage the creation of large cross-border deep-tech ecosystems within the alliance.
The UK, Germany, France, and Sweden have the largest deep-tech ecosystems in Europe, measured in terms of total deep-tech venture capital investment in 2016–2022, while Sweden, Finland, and Norway have the ecosystems that are most focused on deep tech, measured in terms of deep tech as a percentage of venture capital investment over the same period. However, these countries do not tend to work together, which limits the complementarity that NATO searches for across allies. Creating patient capital and establishing an ecosystem of confidence with trusted third parties and allied markets are key tasks, because it is up to the allies to procure contracts with start-ups that have passed all DIANA activities, and this remains difficult.
DIANA manages start-ups’ initiatives, but the allies are responsible for their implementation. Yet, not all countries participate equally in the accelerator scheme. More countries offer test centers than accelerators. While there is no geographic divide between east and west or north and south, it is remarkable that the countries with advanced industrial ecosystems are generally those that offer test centers. Both test centers and accelerators are strategic, but the former allow innovators to experiment with developed products to assess their market readiness, while the latter are mostly geared toward early-stage activities, such as research, development, and proof of concept. This means that countries with test centers might have greater access to contracts, as the companies in question are already established on their territory.
It is worth noting that Canada, France, and the United States have chosen to join DIANA but not the NIF. The main reason for this is to avoid duplication with existing national innovation efforts. So far, the only formalized forum to coordinate national efforts is the Data and AI Review Board, which is the focal point for NATO’s efforts to govern and operationalize concrete actions with allies on responsible AI development. However, allies join such initiatives on a voluntary basis, hindering coherence among NATO members on defense innovation.
Protecting the Alliance
Alongside the need to foster coherence and coordination across allied markets, it is important to secure data infrastructure, bolster technological resilience to minimize the unwanted transfer of technical intellectual property, reduce the risks posed by academic consortia, screen foreign direct investment, and support commercial entities in their export control activities.
Several issues arise when it comes to deep-tech start-ups. They must deal with sensitive information, which can make it more complicated for these firms to get funding from venture capital investors that need further details on how the start-ups will comply with due diligence requirements.
Regarding foreign direct investment, DIANA is so far looking at early-stage firms, which are unlikely to be susceptible to risk from the participation of companies based in non-NATO countries. However, some start-ups may be part of research consortia from such countries, so risk assessments remain important to ensure the protection of intellectual property, the prevention of access to certain sensitive data, and ownership over certain technological products that have been developed on national security premises within allied markets. Although the challenge programs do not contain classified or sensitive information, because DIANA supports technology readiness levels with the standard reference set 4-7, once these start-ups start participating in specific activities, some developments might become classified, requiring additional due diligence.
Likewise, it will be important to incentivize start-ups to join DIANA and enter contracts with national defense ministries at the last stage of the challenge programs. Venture capital funds tend to support development more than research because research is more cost intensive, which makes it harder to translate knowledge into marketable products. This also explains why certain countries have decided to focus on test centers instead of accelerators, and could have the unexpected outcome of creating different speeds and comparative advantages among allied markets.
NATO-EU Dynamics
In 2022, the French presidency of the EU Council pushed forward the creation of the Hub for EU Defence Innovation within the European Defence Agency. While this initiative is not comparable with the NIF, differing attitudes among the allies toward EU and NATO funding schemes show different levels of willingness to build up defense innovation through NATO. This situation confirms the idea that some NATO countries prefer to concentrate their resources on EDTs at the domestic level, with the result that there is limited room for cooperation across the alliance.
Another issue is the budget devoted to deep tech out of the total spending on defense innovation. In the case of the EU, the European Defence Fund has an overall budget of €7.9 billion ($8.8 billion), of which 33 percent is focused on defense innovation and research over 2021–2027. However, out of this €2.6 billion ($2.9 billion), only between 4 and 8 percent is devoted to the research and development of EDTs. A different story is the EU Defence Innovation Scheme, which proposes €2 billion ($2.2 billion) for defense innovation until 2027. Yet it remains to be seen what percentage of this amount will be dedicated to deep tech. The same question of what proportion of the total budget for defense innovation should be devoted to deep tech arises in the context of NATO.
In the current context of international competition, NATO-EU cooperation is as important as ever. DIANA, the European Innovation Council, the European Commission Secretariat General’s Unit for the Coordination of Foreign, Security, and Defence Policy Implementation, and the European Commission’s Directorate-General for Defence Industry and Space maintain regular conversations and team up on ways to manage commercial expertise. The 2023 Joint Declaration on EU-NATO Cooperation mentions the need to cooperate on EDTs twice. However, there is no clear road map or time frame for this cooperation, unlike in the first joint declaration in 2016, which set out seventy-four common proposals.
It is therefore in the interests of both NATO and the EU to make further connections in three policy areas. First, the two organizations should cooperate more closely on investment approaches to EDTs. Second, they should devise joint evaluation and measurement tools to reach common, cohesive definitions of disruptive and critical technologies, as flagged by the EU Action Plan on Synergies Between Civil, Defence, and Space Industries. Third, NATO and the EU should adopt shared methodological approaches to effectively design, deploy, and assess road maps for the development of security and defense technologies.
Conclusion
Through DIANA and the NIF, NATO has recognized the increasing importance of deep tech. Their goals, mandate, and governance are clearly set out. Still, the two initiatives face several challenges, including their relationships with unprecedented actors such as start-ups and entrepreneurs with different business mindsets, the need to support activities that require long timelines, and the willingness of allies to engage with deep tech.
In terms of willingness, allies are becoming more enthusiastic about integrating deep tech from an organizational perspective but less so from a financial perspective. Most allies have offered test centers and accelerators as a way to contribute to DIANA’s efforts. Although countries have different priorities and resources, most allies are engaged in these efforts, which are led by NATO but implemented on a national basis. It is up to member countries to shape the network of centers that will host the start-ups participating in DIANA’s challenge programs, and it is up to national defense ministries to commit to arranging contracts with start-ups once they finish the full DIANA program.
Most allies are showing willingness to integrate new types of company, particularly deep-tech firms, although this stance will need to be accompanied by practical implementation mechanisms. The financial perspective remains one of the most pressing challenges, as developing deep tech requires high investment with a limited estimate of the potential returns on that investment. Likewise, although governments may contribute to this funding, venture capital funds still play a major role, which calls for greater public-private collaboration in an area that deals with sensitive aspects of security and defense.
As for whether the necessary shift in mindset will have the expected results, this will depend mostly on three factors. The first is the actual level of investment, not only in defense innovation as a general policy area, but also in deep tech in particular. The second factor is the appropriate adaptation of economic security tools to the world of security and defense. Concretely, this means supervising foreign direct investment in deep-tech firms and adapting risk assessment methodologies to evaluate the potential dangers associated with some policy issues, such as the protection of intellectual property rights. Third, despite a greater level of ambition to collaborate on a common goal, this cooperative model might lead to internal competition in which the most industrialized, technologically advanced countries can better leverage the benefits of DIANA than those countries that are less used to capitalizing on defense innovation and deep tech.
In any case, political willingness, organizational culture, and situational awareness of the importance of EDTs, particularly deep tech, are still the primary factors that will determine how countries and organizations move forward in the current technological and security revolution. There is a window of opportunity for NATO to embrace a new mindset. But overall, progress will depend on member states’ willingness to contribute to defense innovation and prioritize such innovation as a central element of the alliance’s competitive edge.
Raquel Jorge Ricart is a policy analyst at Elcano Royal Institute, where she works on the international technology governance agenda.
This publication has been produced in the context of the EU Cyber Direct–EU Cyber Diplomacy Initiative project with the financial assistance of the European Union. The contents of this document are the sole responsibility of the authors and can under no circumstances be regarded as reflecting the position of the European Union or any other institution.
Note
1 Funding figures for each stage of development are as follows: Early-stage funding includes pre-seed (up to $1 million), seed ($1 million–$4 million), and series A ($4 million–$15 million). The breakout phase of development ranges from $15 million to $100 million. The growth phase starts at $100 million.
