VCs and LPs should stop kidding themselves about ‘dual use’ …

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Many VCs are telling me how exciting defence tech is these days, and how they’re increasingly looking to invest in companies making technology or services to protect national interests. But if you dig a bit deeper, most of them will add that they aren’t willing to fund companies developing things that could be used offensively — i.e. to attack enemies.

Instead, most say they’re investing only in ‘dual-use’ technology — that has both military and commercial applications. But in my view, this ‘dual use’ label is a bit of a cop-out. Almost all of these dual-use technologies could be used to cause harm to people. VCs and their investors, LPs, should stop kidding themselves that they’re able to invest in this area without tackling the moral implications of funding technology used as a weapon.

“You could easily daisy chain back to say, ‘Okay, well if this is doing location tracking even better, at some point that’s going to lead to something offensive’,” one defence investor, who requested anonymity to speak freely, recently told me.

“If you want to be truly philosophical about this, anyone who pays tax is funding weapons. Full stop,” they added.

While there’s a difference between actively and passively funding weapons, they do make a good point: “If you’re a GP doing defence and you’re philosophically against weapons, you probably shouldn’t be doing it.”

“Even if what you’re investing is only defensive, if someone thinks that that will never play a role in something offensive, it just indicates to me that they haven’t thought through it fully.”

Obvious examples of these types of dual-use technologies that could be weaponised include drones and satellites — hot areas for VCs at the moment.

Some dual-use investors see things differently. “We are thinking [of this in terms of] armed versus unarmed dual-use technologies, rather than defensive versus offensive,” Christian Saller, general partner of German VC firm HV Capital, tells me. In HV’s portfolio is German AI drone startup Quantum Systems, which raised €63.6m in funding last fall, and would fall squarely in this grey area.

Saller points out that Quantum Systems develops unarmed air surveillance drones that are also used by the military. “This is a technology that we feel comfortable with, both from a [legal perspective with limited partner agreements] and also from an ethical perspective,” he says, adding that HV isn’t currently considering investing in startups making arms.

It’s not surprising why VCs are drawing a distinct line around dual use: much of the hesitancy seems to be coming from LPs, as Sifted has reported. It’s standard to have language in LP agreements (LPAs) that says VCs can’t invest their money in things like pornography or weapons.

But as defence tech has become less controversial, particularly since Russia invaded Ukraine in 2022, this has posed a problem for VCs wishing to invest in the sector but restricted based on their fund parameters. I’ve heard some VCs are trying to renegotiate their LPAs to let them invest in defence tech, while others are thinking about raising new funds altogether.

“Renegotiating LPAs is a complex process that most VCs shy away from,” notes Saller, adding that’s why most generalist VC firms currently focus on dual-use investments.

Some VCs argue that LPs haven’t interrogated their position on the issue enough. “I truly think it is mental laziness on the part of LPs,” the defence investor argues. “They just don’t want to spend the mental effort to think about where they stand on this.”

I can see the argument on both sides. After all, even something as ubiquitous as the internet can facilitate attacks and conduct surveillance. By that logic, what really is offensive tech? If a company makes most of its money from commercial — not military — applications, does that change things?

But I think VCs — many of whom are suddenly looking to invest in the newly-buzzing defence tech space — should be a bit more honest with themselves. If you’re tiptoeing on the line, you should have a long, hard think about your moral boundaries and where investing in dual-use tech leaves you.

I’m very curious to hear from you, VCs: do you disagree that dual use is a slippery slope? Have you thought about investing in defence tech? Would you only invest in dual use, or would you be interested in investing in offensive or armed tech (LPAs permitting)? What moral qualms do you have with defence tech? I’m all ears.