top of page

Unleashing Defence Innovation: How Electronic Shares Bridge the Funding Gap for SMEs

Empowering the Innovators Defining Europe’s Security Future



In the ever-evolving landscape of European defence, small and medium enterprises (SMEs) have emerged as pivotal players, driving innovative research and development that shapes the future of defence technologies. 


However, despite their vital role, these agile innovators encounter significant financing challenges that not only hinder their growth but also threaten overall security preparedness.


The Vital Role of SMEs in Security & Defence Innovation


The burgeoning role of SMEs in the defence sector is undeniably transformative, as they spearhead the advancements in military technology that are redefining modern warfare. The shift towards electronics and automated systems, as evidenced by recent global conflicts, underscores the need for nimble and innovative approaches — areas where SMEs excel. With governments reallocating funds from traditional heavy weaponry to more strategic, smart weapons capabilities, SMEs are finding their niche.


The rise of inexpensive drones and precision-guided munitions has demonstrated that the future of warfare lies in agile, technology-driven solutions rather than solely in capital-heavy platforms. These trends offer a fertile ground for SMEs, which, while small, are robust incubators for intensive research and development, often requiring less physical capital expenditure. The agility of these enterprises enables them to adapt quickly to the changing demands of defence and security, positioning them as crucial contributors to the strategic overhaul of military capabilities.


The Financing Dilemma Facing Defence SMEs and Start-ups


Yet, this potential is at risk due to a substantial financing gap. Unlike their larger counterparts, defence SMEs and start-ups often struggle to attract necessary investments. 


Many institutional investors have implemented expanded ESG policies barring engagement with defence & security services providers. Upwards of $3.9 trillion falls under these broad exclusion policies as ESG factors become embedded in firm processes.


While most defence SMEs build technologies aimed at saving lives and furthering security, many still get caught in these exclusion filters. As the European Defence Agency (EDA) Defence Ministers stated in their November 2023 meeting, strict screening of any defence sector involvement sees countless innovative SMEs deprived of critical funding channels for expansion, research, and further advancement that could benefit societies:


The fact that many ESG indexes exclude companies with activities in the defence and armaments sector has wide-ranging negative consequences for the defence industry such as limiting the number of potential institutional and private investors, damaging its reputation and making it harder for the industry to attract talent. 

They urgently require capital to fuel their growth and research initiatives, yet find themselves at an impasse due to the slow-moving nature of government procurement processes, characterized by lengthy lead times and postponed payments. This misalignment fails to address their immediate financial needs, impeding their ability to scale and innovate, as outlined by EDA:


This is especially the case with innovative SMEs and start-ups as their financing needs are often short-term and cannot be sufficiently addressed by standard governmental acquisition procedures implying longer lead-times and delayed payments. Decreased access to finance therefore risks severely impacting SMEs’ ability to scale up and finance R&D operations, thus pushing them away from the defence market, which is reliant on innovation.

The scarcity of accessible funding severely impacts these smaller enterprises’ ability to develop and finance their research and development, thereby threatening to push them out of the defence market — a sector that thrives on continual innovation.


Private Equity: Fueling Innovation and Growth in Defence SMEs


Private equity investors are increasingly acknowledging the unique opportunities presented by defence SMEs. These investors are attracted to the innovative capabilities and synergies these smaller companies offer, especially considering their role in developing technologies critical for modern defence, as outlined by this recent SIPRI article. This interest is particularly heightened as these firms increasingly contribute unique tech solutions to the defence sector, leveraging the dual-use potential of their innovations for both military and civilian applications.


Europe’s defence SMEs are stepping into the spotlight, playing a key role in shaping the future of defence technology. Their contributions, especially in areas like AI and the Internet of Military Things (IoMT), are pivotal, signalling a shift in defence strategies towards more interconnected and technologically sophisticated systems. The involvement of private equity is vital in this landscape, providing the necessary capital and support for these SMEs to thrive and continue their trailblazing innovations in defence technology.


The Evolving Role of Private Equity in Defence Innovation, the U.S. Office of Strategic Capital (OSC)


As private equity’s role in the defence sector accelerates, it becomes a crucial element in maintaining momentum within the defence SME sector. However, there’s a risk that private equity deals could lead to the consolidation of entire supply chains, a challenge that needs careful navigation. 


In response to similar challenges, the US has pioneered an innovative approach with the establishment of the Office of Strategic Capital (OSC) within the Pentagon. This initiative strategically combines government-backed loans and private capital to support the development of critical defence technologies, showcasing an effective model of fostering innovation while managing the risks associated with private investment in defence.


NATO’s DIANA Initiative: Catalyzing Defence Innovation Through Transatlantic Collaboration


NATO’s Defence Innovation Accelerator for the North Atlantic (DIANA) is a pioneering program aimed at driving technological innovation in defence. DIANA establishes innovation hubs and test centres across the Atlantic, focusing on emerging technologies critical to security. It focuses on bridging the gap between innovative ideas and market-ready technologies by fostering collaboration and providing support to start-ups and SMEs. 


DIANA could serve as a pivotal ‘product market fit’ benchmark for private equity in the defence sector, offering pre-selection of start-ups through expert mentors and acting as an early quality gate for potential private equity investors. This initiative underscores NATO’s commitment to maintaining a technological edge in defence, fostering collaboration among member nations to enhance security readiness.


French Eiréné Fund: A Case Study in Private Equity’s Role and Risks in the Defence Sector


In France, the Eiréné fund, managed by Weinberg Capital Partners, stands out as a pioneering example in the field of private equity for defence SMEs. This leveraged buy-out (LBO) fund is specifically tailored to bolster the growth of French SMEs and mid-caps in the security and defence sector. With over 100 million euros in commitments, Eiréné aims to foster the emergence of French and European industry leaders by taking majority shareholder positions in companies valued at approximately €30 to €100 million. As outlined above, these companies are characterized by strong organic growth potential and a dual civil-defence nature. The Eiréné fund’s approach, led by a team of sector-savvy professionals, illustrates the impactful role of private equity in shaping the defence landscape in France.


Defence Equity Facility (DEF): Empowering SMEs and Fostering EU Defence Capabilities


The Directorate-General für Defence Industry and Space (DEFIS) of the European Commission also launched in January 2024 the €175 million Defence Equity Facility (DEF) in collaboration with EIB which represents a significant move by the European Union to back private equity and venture capital funds. It focuses on funding the development of innovative defence technologies and collaborative projects. The DEF aims to enhance the competitiveness of the European defence industry, emphasizing the role of SMEs in driving innovation. This fund is a testament to the EU’s dedication to shared defence and security, providing crucial support for technological advancements.


Private Equity for Defence SMEs: A Balancing Act of Opportunity and Risk


Navigating the world of private equity can be a high-stakes game for Defence SMEs, where the promise of financial backing comes intertwined with a web of potential challenges. Take, for instance, the Eiréné fund in France, emblematic of the double-edged sword that private equity often represents. On one hand, it’s a beacon of hope for French SMEs, offering crucial capital. On the other, it harbours risks that could capsize the very enterprises it aims to uplift.


The first hurdle is the cost of capital. Private equity isn’t cheap; it’s peppered with hefty fees and interest rates that can nibble away at the profits of Defence SMEs. This scenario isn’t unique to Europe’s defence sector but echoes across the Atlantic to the U.S. defence SMEs, where every dollar counts in a market driven by innovation.


Then comes the issue of control — a cornerstone for SME founders. Private equity investments often dilute ownership stakes, leaving the original visionaries at the mercy of new decision-makers. This shift in control can steer the SME away from its entrepreneurial compass, a risk particularly acute in the defence sector, where agility and innovation are paramount.


The illiquidity of private equity stakes adds another layer of complexity. Exiting these investments isn’t a walk in the park and could leave defence SMEs in a valuation limbo, particularly those dealing with specialized technologies or sensitive contracts.


Moreover, the pressure to generate returns can push SMEs towards decisions like selling or going public prematurely, possibly straying from their long-term goals. Coupled with the regulatory maze that private equity funds navigate, this environment can escalate operational challenges and inflate costs.


Lastly, the reliance on debt in private equity models can set a precarious stage, especially in turbulent economic times. In extreme cases, it can spiral into bankruptcy and job losses, a grim reality witnessed in various sectors under private equity’s wing.


For Defence SMEs, the journey with private equity is akin to sailing in stormy seas — the potential for progress and peril coexist. It’s a tightrope walk where balancing the allure of immediate capital against the risks involved is crucial to maintaining the innovative spirit that is the lifeblood of these enterprises. What about increasing the shareholder base while reducing the risks involved?


Private Equity vs. Equity Crowdfunding: Democratizing Investments for Defence SMEs


Private equity funding and equity crowdfunding represent two distinct approaches to raising capital in the business world. Private equity typically involves high-net-worth individuals or institutional investors pooling money to take significant stakes in companies, often leading to substantial changes in business direction and control. In contrast, equity crowdfunding allows a wider range of investors, including the general public, to fund startups or early-stage companies in exchange for equity. This democratizes investment, without leading to a loss of control for the original owners and offering more flexibility in fundraising.


This is where we believe that equity crowdfunding emerges as a beacon of hope for Defence SMEs. It offers a financial instrument where early investors can directly fund Europe’s strategic SME innovators. 


By opening access beyond wealthy accredited investors alone, equity crowdfunding effectively democratizes the private market. 


Kryptoaktie.com: Revolutionising Defence Sector Funding Through Equity Crowdfunding


With kryptoaktie.com we stand at the forefront of transforming equity funding mechanisms, introducing a groundbreaking approach through electronic shares/ Crypto Shares.


Recognizing the urgent need for private equity among SMEs in this highly dynamic defence sector, electronic shares embedded in end-to-end investment platforms could serve as a comprehensive solution bridging the gap between visionary investors and cutting-edge SMEs. It enables investors to purchase shares in SMEs, thereby injecting non-dilutive growth capital. This method is especially beneficial as it empowers SMEs to maintain control and secure their intellectual property, key factors for successfully navigating government contract requirements. Importantly, electronic shares can be designed to accommodate investments of varying sizes, significantly broadening its investor base. This inclusivity is pivotal in democratizing the funding process, inviting a spectrum of investors to play a role in financially bolstering defence SMEs. 


At www.kryptoaktie.com, we provide the financial instrument that encapsulates the benefits of private equity without its downsides. Our platform is tailored to leverage the advantages of equity crowdfunding, offering a robust, investor-friendly pathway to propel the defence sector forward.


Conclusion: Bridging the Financial Gap through Electronic Shares


The landscape of European defence innovation stands at a crossroads, with the immense potential of agile SMEs and startups constrained by a widening financial gap. Yet in crisis lies opportunity. Equity crowdfunding has demonstrated immense promise bridging capital to ingenious minds across sectors. Now www.kryptoaktie.com presents a purpose-built portal to connect Europe’s foremost defence innovators with engaged investors, forging a vibrant ecosystem united by collective security interests.


By democratizing ownership and participation in enterprises that define the future of defence technologies, Kryptoaktie’s electronic shares empower everyday investors to fund and own a piece of the next generation of sovereignty. Defence SMEs gain access to nimbler growth capital suited to their innovation cycles while retaining the control crucial for their missions.


Blazing this trail to converge financial resources and breakthrough ideas, Kryptoaktie ignites a revolution in defence technology funding — one electronic share at a time.


Visit www.Kryptoaktie.com to discover how electronic shares work and reach out to us at info@ecrop.de to be a part of this transformative journey in financial innovation.

0 views0 comments

Comentarios


bottom of page