Launched in 2022 with €1 billion and involving 24 NATO member states, the NATO Innovation Fund (which recently invested in Isar Aerospace) was designed as an unprecedented multi-sovereign venture capital effort. Its purpose: to support Europe’s strategic autonomy by investing in dual-use and defence technologies.
Initially, the fund aimed to align the interests of its partners, provide long-term funding for frontier technologies, and demonstrate the alliance’s ability to outpace global competitors in innovation. However, within just three years, this vision has been undermined by sudden leadership changes and growing scepticism about the fund’s operational approach.
Since mid-2024, four of its five original partners have departed, an exceptionally high turnover rate for an initiative of this scale and ambition. These exits have destabilised the fund’s investment leadership at a critical moment when Europe urgently needs to address defence capability gaps and accelerate the commercialisation of advanced, dual-use technologies.
Structural flaws and governance challenges
The NIF’s primary challenges stem from its unique governance structure. Unlike typical venture capital funds, where general partners hold equity and strategic control, the NIF operates differently: 24 sovereign limited partners committed capital first, then selected investment professionals who received neither equity nor carried interest.
While designed to be a dynamic, flexible investment vehicle, the NIF’s actual organisation resembles a government-backed development bank, complete with bureaucracy and excessive oversight. Sovereign LPs, typically ministries of defence or sovereign wealth funds, wield substantial influence, creating a board culture marked by caution, lengthy deliberations, and multiple layers of oversight.
This fundamental mismatch makes the fund vulnerable to sudden shifts in priorities or leadership styles. The lack of a transparent and efficient investment process is compounded by the absence of partner-level stakes in the fund’s long-term results, which weakens incentives for sustained success. As a result, senior team members struggle to operate with the speed and autonomy needed to meet both market demands and NATO expectations.
Strategic drift and loss of trust
National self-interest presents another significant obstacle. Though the NIF was intended to pursue a unified investment approach, sovereign LPs frequently lobby for allocations that benefit their domestic industries or technological priorities. This undermines the vision of a truly pan-European “frontier tech” initiative. Internal conflicts emerge as partners struggle to balance the alliance’s collective goals with individual national interests, often compromising both.
Conflict-of-interest concerns have further damaged trust within the organisation. For example, the fund’s chair, Klaus Hommels, simultaneously managed a separate Lakestar defence fund with an overlapping mandate and holdings. Despite compliance measures being implemented, insiders described the situation as a “walking optics nightmare,” which weakened team cohesion and eroded stakeholder confidence.
A wavering mission focus compounds these issues. The NIF’s goal to accelerate critical defence innovations is frequently compromised by political pressure to prioritise “dual-use” or “resilience” technologies. These categories often sidestep the most sensitive or transformative defence capabilities. This strategic ambiguity has slowed progress: in two years, the fund made only 19 investments, a modest number given its resources and urgent mandate.
These difficulties became evident through a series of high-profile departures: Thorsten Claus left due to disagreements, Andrea Traversone sought external opportunities amid board tensions, Chris O’Connor expressed frustration over the fund’s pace, and Kelly Chen departed to launch a new venture. Each exit further delayed operations and deepened questions about the fund’s future and purpose.
What’s next for the NATO Innovation Fund?
To address these disruptions, the NIF has implemented several structural reforms. The CEO role was eliminated, creating a flatter organisational hierarchy. Two new partners were recruited: Ulrich Quay, who specialises in industrial scaling and comes from BMW i Ventures, and Sander Verbrugge, who focuses on semiconductors and innovation. Vice-Chair Fiona Murray was tasked with shortening investment cycles, focusing on capabilities with deployable NATO value, and boosting morale within both the partnership and the broader LP community.
Despite these efforts, experienced analysts remain sceptical. The core issues, including misaligned incentives, complex multi-sovereign governance, and ambiguous technological goals, persist. Unless further reforms grant the investment team genuine decision-making authority and address the fragmenting effect of national interests, the risks of partner turnover and delayed capital deployment will continue.
The NIF’s difficulties extend beyond its portfolio. As Europe’s leading publicly funded defence innovation body, its performance shapes investor and founder sentiment across the continent. Ongoing leadership instability not only hinders its ability to fulfil NATO’s objectives but also discourages future venture capitalists and operators crucial for European defence independence.
Compared to US counterparts like the Defence Innovation Unit or AFVentures, the NIF’s slow execution and partner instability highlight the risks of public venture funds that lack clear governance and the incentives needed to compete effectively in the private sector.
