Defence startup CEO: A lot has changed but banks are still too "rigid"

Raising capital for young defence companies has become markedly easier than it was just a few years ago.

That is at least according to Dan Hermansen, CEO of Danish counter-drone specialist MyDefence. He says investor sentiment towards the defence sector has shifted dramatically since 2019, when MyDefence itself struggled to secure funding.

- At the time, we had a list of perhaps ten places where we could try to raise capital, he says. 

- It was not institutional money. It was more friends, family and fools - and business angels. A lot of potential investors lost interest as soon as they realised it was defence.

Today, the picture looks very different.

Growing geopolitical tensions and rising defence spending have helped transform the sector into an increasingly attractive investment proposition. 

Venture capital firms, specialist funds and even pension funds are now showing greater interest in defence and security technologies, says Hermansen.

- There are many more investors in the market today, if we were in the same situation now, there would be far more risk capital available, he says. 

According to Hermansen, new venture funds focused on defence and security are also emerging, further expanding the pool of available capital.

While private investors have become more comfortable backing defence companies, banks have been slower to adapt.

- Banks, by definition, do not take risk, says Hermansen. 

- Someone else has to take the risk first, and the bank then wants its own risk covered.

Although access to basic banking services has improved, securing loans remains challenging for many growth-stage companies, he argues.

Rigid banks

Hermansen believes the issue is not solely down to the banks themselves. Regulatory requirements continue to shape lending decisions across the sector.

- The system is designed to avoid the kind of risks that contributed to the financial crisis. But I would still like to see banks become a little less rigid, he says.

Instead, he points to public financing mechanisms, including guarantees provided by Denmark’s Export and Investment Fund (EIFO), as an important tool for supporting companies operating in higher-risk markets.

- There was a time when I thought that the banks also had that role, but I have since learned that they just don't, the CEO explains.

For MyDefence, access to capital is no longer a pressing concern. 

The company has been able to finance its growth through its own operations in recent years and has not needed to draw on financing facilities made available to it.

Nevertheless, Hermansen sees the change in investor sentiment as evidence of a broader shift in the market.

- Investments in the defence industry have become more lucrative, that is what is attracting more investors, he says. 

The result, he argues, is a defence sector that is far better positioned to attract growth capital than it was just five years ago - even if traditional lenders remain reluctant to follow investors’ lead.