# An analysis of VC investment in the Defence sector and the MOD’s readiness to exploit digital opportunities
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-11-11
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: Rising Defence Investment: Seizing Opportunities in the UK
Meta Description: Explore the changing landscape of defence industry investment, from increased budgets to new VC opportunities, and the potential impact on national security.
URL: https://financedigest.com/an-analysis-of-vc-investment-in-the-defence-sector-and-the-mods-readiness-to-exploit-digital-opportunitieshtml

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_By_ **_Rupert Jones CBE_** **_,_** _Advisor at social impact firm_ [_WithYouWithMe_](https://withyouwithme.com/)

After decades of UK Defence under-investment, the stars are ever-more in alignment for a correction. Events in Ukraine have shaken many from their belief that a globalised [economy meant that everyone would play by the same set](https://www.financedigest.com/uk-economy-set-for-smaller-hit-in-2023-than-previously-feared-imf.html "UK economy set for smaller hit in 2023 than previously feared – IMF") of rules and that peace and harmony would endure. [Russian aggression has also served to bring the threat](https://www.financedigest.com/russian-threat-to-baltic-security-rising-estonian-intelligence-report.html "Russian threat to Baltic security rising – Estonian intelligence report") from China into starker relief; their economic imperialism is not benign, and we should not be surprised that they see the world differently to us.

**The evolving landscape of the Defence industry and VC investment**

In light of these events, there is wider recognition that our national security cannot be taken for granted. We are only as secure as we pay to be. For the first time in a long time, Defence spending is a major political issue. Budgets are on the rise, or at least political undertakings have been made. Three percent of GDP is the new two percent. However, only time will tell how much NATO governments will [really increase spending and what this will mean in practice against static or falling GDP and soaring inflation](https://www.financedigest.com/be-really-really-careful-on-inflation-bank-of-englands-haskel.html "Be ‘really, really careful’ on inflation – Bank of England’s Haskel").

In this context, there are encouraging indications that [investors are now more inclined towards](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes") Defence, in some cases because they care about national security, in others purely because it looks like a growth area with money to be made.

NATO recently [announced the launch](https://www.financedigest.com/pega-pool-announces-the-official-launch-of-its-eco-friendly-bitcoin-mining-pool.html "PEGA Pool Announces the Official Launch of Its Eco-friendly Bitcoin Mining Pool") of a new €1bn fund and accelerator, Defence Innovation Accelerator for the North Atlantic, catchily abbreviated DIANA, to attract VC funds. The aspiration is for DIANA to spend €70m annually for the next 15 years [investing in early-stage tech start-ups](https://www.financedigest.com/large-investment-success-for-basingstoke-cybersecurity-start-up.html "Large investment success for Basingstoke cybersecurity start-up"). All good so far. However, the fund won’t be operational until 2023 given the bureaucracy involved in co-ordinating member states. Indeed, some nations, including the US, have opted out of the fund altogether.

Time will tell what DIANA will amount to in practice, but it points to a shift in how Defence is seen among investors. Historically, many were loath to invest in Defence companies, some claiming that it ran against their ESG principles. Of course, they only enjoyed the freedom to espouse such principles because others were guaranteeing their safety and security, but no matter. Many now see the value in committing [funds to companies that will help keep our way](https://www.financedigest.com/6-ways-to-fund-university.html "6 Ways to Fund University") of life safe and we should applaud and encourage this.

**New** [investment brings new opportunities](https://www.financedigest.com/investment-opportunities-for-businesses.html "Investment opportunities for businesses")

Recent figures [reported by PitchBook indicate that $7bn had been invested](https://www.financedigest.com/manchester-united-tanks-on-report-glazers-may-avoid-sale-with-new-investment.html "Manchester United tanks on report Glazers may avoid sale with new investment") in the first 10 months of this year in VC-backed US aerospace and defence companies. This should [see 2022 exceed last year’s](https://www.financedigest.com/10-year-david-goliath-crusade-finally-sees-justice-for-off-plan-spanish-property-buyers.html "10 year ‘David & Goliath’ crusade finally sees justice for off-plan Spanish property buyers") record value of $7.6bn. At one level this may not seem surprising given global security threats, but it runs counter to the wider [trend of reduced investment](https://www.financedigest.com/top-5-investment-trends-to-watch-this-summer.html "Top 5 Investment Trends to Watch this Summer") in most other sectors brought about by the economic downturn. Companies that offer dual-use capability, not solely selling into Defence, are inevitably the most [attractive to investors](https://www.financedigest.com/5-ways-that-start-ups-can-attract-investors.html "5 Ways That Start-Ups Can Attract Investors") as commercial buyers secure initial revenue ahead of slower Defence procurement.

Much of this spend will be directed towards [digital technologies](https://www.financedigest.com/you-cant-get-faster-than-that-spring-statement-update-delivered-digitally-as-it-happens-with-app-driven-technology.html "‘You Can’t Get Faster Than That’ – Spring Statement Update Delivered Digitally As It Happens with App-driven technology") where tech start-ups have the potential to bring real competitive edge against our adversaries. This begs the question about how ready the UK MOD (and those of our keys partners) is to exploit these opportunities. The National Audit Office’s (NAO) [October report](https://www.financedigest.com/hurricane-matthew-causes-up-to-15bn-impact-to-us-and-caribbean-economies-in-october-according-to-aon-catastrophe-report.html "Hurricane Matthew causes up to bn impact to US and Caribbean economies in October, according to Aon catastrophe report") on the initial implementation of the MOD’s April 2021 Digital Strategy helps answer that question.

**The Ministry of Defence’s barriers to success**

The strategy set out how the MOD plans to [transform digitally](https://www.financedigest.com/3-reasons-why-businesses-get-stuck-at-the-starting-gate-of-digital-transformation.html "3 Reasons Why Businesses Get Stuck At The Starting Gate Of Digital Transformation") out to 2025 and the report points to some encouraging signs, but not surprisingly also to areas of concern.

The scale of the challenge facing UK Defence is vast: the MOD by its own admission isn’t structured to [implement digital technology at speed and at scale; it is fixed by myriad legacy systems; they hold vast amounts of data which is not readily accessible; the department’s organisational processes are not well-suited to delivering digital technology; and critically they have a significant deficiency in digital skills](https://www.financedigest.com/mifid-ii-why-you-should-not-scale-back-your-implementation-efforts.html "MIFID II: WHY YOU SHOULD NOT SCALE BACK YOUR IMPLEMENTATION EFFORTS"). The MOD is not alone in facing these [challenges and a similar story exists in other government](https://www.financedigest.com/5-challenges-to-overcome-in-governance-risk-and-compliance-magazine.html "5 Challenges to Overcome in Governance, Risk and Compliance-Magazine") departments.

The Digital Strategy sets out the challenge effectively, but diagnosing the problem is the easy part. Developing a full [plan to deliver change](https://www.financedigest.com/exclusive-olympics-paris-2024-plans-games-relay-changes-fewer-torches-source.html "EXCLUSIVE-Olympics-Paris 2024 plans Games relay changes, fewer torches-source") is rather harder. Not only does the MOD not yet have this overall plan, the NAO judges that they also do not have the mechanisms to secure a complete and confident picture of progress.

The NAO also highlight the MOD’s dearth of [skilled and experienced digital](https://www.financedigest.com/utilising-digital-tools-to-close-the-finance-and-accounting-skills-gap.html "Utilising digital tools to close the finance and accounting skills gap") staff, although they are hardly alone in this. There is a desperate shortage across all sectors, both in the UK and across the globe. Most organisations are struggling to secure and retain [digital talent](https://www.financedigest.com/why-data-is-the-best-weapon-in-the-war-for-digital-talent.html "Why data is the best weapon in the war for digital talent"), but the MOD challenges are particularly acute. Like the rest of the [public sector](https://www.financedigest.com/guess-what-public-sector-adoption-of-e-invoicing-on-the-rise.html "GUESS WHAT? PUBLIC SECTOR ADOPTION OF E-INVOICING ON THE RISE!"), they cannot offer competitive wages, but just as importantly their deserved reputation as being overly bureaucratic is a major disincentive to dynamic, young talent.

[**Filling the skills gap**](https://www.financedigest.com/analysis-energy-hungry-europe-cant-look-to-u-s-shale-to-fill-any-opec-gap.html "Analysis-Energy hungry Europe can’t look to U.S. shale to fill any OPEC gap")

On the plus side, there is no [shortage of desire to address](https://www.financedigest.com/exclusive-danone-ramps-up-u-s-baby-formula-shipments-to-address-shortage.html "Exclusive-Danone ramps up U.S. baby formula shipments to address shortage") this skills gap. However, the path is laden with process and obstacles; it is just taking too long. Without the right [people the MOD will continue](https://www.financedigest.com/how-a-british-tech-brand-can-maintain-category-leading-position-and-continued-growth-by-investing-in-the-uk-people-and-infrastructure.html "How a British tech brand can maintain category leading position and continued growth by investing in the UK people and infrastructure") to be limited in making decisive strides. The Australian [digital skills company, WithYouWithMe, has been working closely with Defence Digital and the Services to understand their digital challenges and to help them in two key](https://www.financedigest.com/5-key-takeaways-from-the-finance-sectors-digital-transformation-revolution.html "5 Key Takeaways From the Finance Sector’s Digital Transformation Revolution") ways. Firstly, to identify their latent talent and then up-skill their existing workforce. Secondly, by working to source digital talent from among veterans and other under-represented groups to help fill some of Defence’s workforce gaps.

The imperative to get this right couldn’t be clearer and initiatives like these are vital if Defence is to deliver on its [strategy and be fit](https://www.financedigest.com/where-do-annuities-fit-into-my-retirement-strategy.html "Where Do Annuities Fit into My Retirement Strategy?") to compete for the future. The NAO judges that achieving the strategy’s objectives by 2025 will be ambitious. However, the opportunities are there. The department has a digital budget of £4.4bn in 2021/22 alone and VC [funds are showing a greater readiness to invest](https://www.financedigest.com/plastic-antibody-developer-strengthens-board-following-further-investment-from-mercia-fund-management.html "“Plastic antibody” developer strengthens board following further investment from Mercia Fund Management") in Defence, but they will need help. WithYouWithMe is one of a growing [group of companies](https://www.financedigest.com/incentive-fm-group-wins-contract-with-global-events-company.html "Incentive Fm Group Wins Contract With Global Events Company") looking to partner with Defence to help it succeed – and succeed it must.


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