Pando founders Philip Mundy, Lydia Yarlott and Barney Gilbert
Credit: Pando
Pando, a messaging service built for doctors that can be used in areas with poor phone reception, has landed a valuable contract with the British Army.
“It’s a big proportion of our revenues and the Army are a really fair partner,” says co-founder Dr Barney Gilbert. “Unlike some parts of the public sector where you can be expected to do a huge amount of work before receiving any payment, they expect a lot but they are willing to pay for an excellent service.”
For many start-ups, the coronavirus pandemic has caused cash problems and led to an exodus of customers. Suddenly, long term defence contracts have become more important than ever.
“Come March, having a very deep-pocketed, consistent, sticky customer which is going to be able to continually pay the bills throughout this period becomes very attractive,” says Rob Desborough, a partner at Seraphim Capital, a space technology investment business.
New Navy vessels
The Government’s announcement last month of a £16.5bn rise in defence spending is likely to lead to even more defence funding spreading around the UK’s technology sector. Industry insiders say the push is likely to extend beyond contracts and will lead to more direct investments made by the military and security services.
Organisations like the National Security Strategic Investment Fund, a key advocate of the $500m (£370m) deal to acquire collapsed satellite operator OneWeb, and the Royal Marines’ Octo Ventures fund, are likely to gain increasing power to take equity stakes in start-ups.
But it’s not as simple as signing a defence contract or agreeing to a Government investment deal. Many start-ups face a sudden need to upgrade their computer systems and change their hiring policies when they begin to work with the defence industry.
“If we’re doing meaningful security applications we’ll probably have to set up a separate entity with its own specific electronic infrastructure that will have to be hardened,” Evans says. “We’d also have to start thinking about human resources policy.”
Any contract with the US Department of Defense means that start-ups have to set up an American subsidiary which can gain US government approval to operate in that country’s well-funded defence industry.
“For the US it has to be 51pc controlled by the US, you have to have US employees cleared to their standards which means citizens. It’s really difficult,” Baker says. “You need a much more grown up attitude, process and accountability. You can’t wing it anymore.”
Video game start-up Improbable has invested heavily into a new US-headquartered defence division, hiring a number of former Pentagon officials as advisors as it sells its wargaming technology in the US and the UK.
“Over the next year we’ll be investing very significantly in our UK and our US and rest of the world business so there will be plenty of growth,” says Joe Robinson, the chief executive of Improbable’s defence division.
Not everyone is happy about the prospect of working on defence contracts, however. Some employees can feel distinctly queasy about helping build military technology. Google scrapped plans to develop artificial intelligence (AI) for the US government’s drone programme after more than 3,000 of its employees protested in 2018.
“The Americans have still been better at it than we have in the UK,” says Rob Bassett Cross, the chief executive of defence AI business Adarga which supplies technology to Strategic Command, the group which oversees the British armed forces. “They’ve got a bigger tech industry in Silicon Valley and still they’ve found it quite difficult. It has been a tricky marriage but they seem to be making it work.”
Adarga chief executive Rob Bassett Cross
Credit: Paul Grover
Adarga began when he asked Ken Mulvany, a co-founder of drug discovery business BenevolentAI, whether he could licence his company’s AI for military uses. “He knew nothing about defence, I knew nothing about pharma, therefore it was a match made in heaven,” Bassett Cross says.
Despite the eagerness of many to licence their technology for defence uses, some start-up investors may find themselves facing a “moral dilemma” when debating whether to back businesses which have expanded into defence contracts, says Moray Wright, the chief executive of spin-out backer Parkwalk Advisors.
Many investors now follow ethics frameworks which could defence contracts as excluded activities. “Will those investors that are trying to deploy their capital more ethically find themselves missing out on the Government’s investment,” Wright asks.
There is also growing concern in the US and UK governments that Russian and Chinese intelligence services are attempting to gain access to defence start-ups by posing as innocent technology investors.
Some venture capital funds have had to advise portfolio businesses not to blindly accept money from overseas investors which may have links to foreign intelligence agencies.
The defence technology gold rush has seen start-up executives brainstorming ways to expand their services to work with the military in search of millions of pounds of funding and the cachet that working with the Army’s top brass can bring.
But a rise in defence spending isn’t enough to bring together the military and technology in harmony, says Bassett Cross.
“Defence is still very inaccessible to most,” he says. “They speak a different language. There are very high barriers to entry. The procurement system is … to say demanding would be an understatement. It’s going to remain extremely challenging.”
Despite these remaining issues, links between the military and the UK’s technology sector are closer than ever. It’s now a relatively common sight to see military personnel in combat trousers comparing notes with start-up employees in hoodies. All signs point to that becoming even more common in the years ahead.
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