Britain’s secretive fund for spies comes out of the shadows

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LONDON — In James Bond films, Britain’s spies are kitted out with exploding pens and poisoned cigarettes.

Nowadays, spies are more likely to work with AI-enabled drones, specially encrypted communications networks, and quantum sensors able to avoid signal jamming.

And they might be funded by the National Security Strategic Investment Fund — a secretive fund with ties to Britain’s intelligence agencies like GCHQ, MI5 and Bond’s MI6.

After years of NSSIF operating largely from the shadows, the U.K. government is preparing to give a more prominent role to the fund — alongside a £330 million uplift to its financial firepower over four years. (NSSIF declined to comment when asked by POLITICO what its previous budget was. The figure is not publicly available.)

That cash will “strengthen its ability to invest in companies which address our national security and defense requirements,” as part of a renewed focus on “the increasingly critical intersection between dual-use technologies and national security and resilience as international cooperation for technology supremacy intensifies,” the government said in its recently published Industrial Strategy.

In turn, NSSIF is stepping up its public presence, hiring a communications officer and participating in more public events.

The fund’s emergence from relative stealth at a time of heightened geopolitical tension and rapid technological change is no coincidence, according to several people familiar with its work who spoke to POLITICO. Some were granted anonymity due to the fund’s sensitivity.

That not only reflects a growing consensus that future conflicts will be shaped by technology like AI as governments draw lessons from the war in Ukraine, they said, but that military advantage and economic growth both increasingly rely on adopting cutting edge innovation.

More conventionally, they said, NSSIF’s combination of making strategic commercial bets and breaking down barriers for startups offers a blueprint for tackling the U.K.’s perennial challenge of turning its most promising startups into established leaders.

The question now is whether its mission can survive a move into the spotlight.

What is it?

When NSSIF was established in 2018, the world was “entering a period of strategic competition and the idea that the West, democracy, was ceding technological advantage” to authoritarian rivals, NSSIF senior investment partner Edmund Phillips told an event in London this month.

The fund was the brainchild of Anthony Finkelstein, a cybersecurity expert and the government’s then-chief scientific adviser for national security.

“I was very, very interested in better ways that the U.K. national security community could innovate faster with greater effect … and also use that as a lever for U.K. growth,” Finkelstein told POLITICO, explaining that his thinking was influenced by In-Q-Tel, a U.S. venture fund that aims to create a pipeline of new technology for the CIA.

After an unsuccessful attempt to create a joint fund with the U.S. and Australia, NSSIF was founded under Conservative Chancellor Phillip Hammond as a joint venture between the government and British Business Bank.

“NSSIF invests commercially in advanced technology firms alongside co-investors, supporting long-term equity investment — ‘patient capital’ — and harnesses the government’s unique technology expertise,” a 2020 guidance document explains.

“Its objectives include accelerating the adoption of HMG’s future national security and defence capabilities and the development of the U.K.’s dual-use technology ecosystem.”

As well as channeling some money into other VC funds, NSSIF takes equity in startups identified as being essential to the U.K.’s sovereign needs. It also operates “work programs” to rapidly prototype and trial technology in government.

“We’ve basically enabled those who had an understanding of the capabilities to actually take a stake in the companies,” one technology specialist who previously advised NSSIF explained. “Then the [Ministry of Defence] can say: … ‘at least I know that the U.K. will have the ability to manufacture x, because the capital investment is being made here and the skills are growing up here.’”

In one example, Portugese drone maker Tekever announced a £400 million investment in the U.K. in May. Six months earlier, NSSIF had been among participants in a €70 million fundraising round for the company.

As of 2023, NSSIF had invested £220 million in funds and startups developing dual-use technologies, from quantum-enabled chips to networks of earth-observing satellites. There are no more recent figures available, and NSSIF declined to provide one when asked by POLITICO.

Many of its investments are kept under wraps, but for the most part “the technology isn’t secret. It’s who you do it to that’s secret,” Finkelstein said.

How it all works

Promising startups are drawn to NSSIF’s attention by a network of specially accredited (and security-cleared) venture capitalists on the lookout for tech which might one day solve a problem for the U.K.’s security and defense agencies. NSSIF’s sparse website lists 13 funds as “investment partners,” alongside which it regularly co-invests.

Officials in NSSIF also provide insight to security officials about notable developments in the market, aided by close links in personnel. LinkedIn pages show staff are frequently drawn from the Foreign Office or stints in British consulates overseas.

Finkelstein was succeeded as chief scientific adviser for national security by Alex van Someren, a managing partner at Amadeus Capital Partners, one of the first VC funds to partner with NSSIF and which regularly co-invests in companies.

More important than NSSIF’s investment ability is its ability to connect companies with customers in government, Finkelstein said. “One of the biggest contributions that government can make to driving innovation … is to be an early user,” he said.

A relationship with NSSIF helps startups understand the needs of the intelligence and defense community, while allowing it to shape technology at an early stage.

“You can sit in the abstract and guess at what you think a customer might want, but you really have to have a conversation with them and actually get dug into the details,” explained Anne Glover, CEO of Amadeus Capital.

According to David Sully, a former U.K. diplomat and founder of AI firm Advai, which received NSSIF investment, the fund’s support is vital in helping early-stage companies overcome the so-called “valley of death,” when startups are often crushed by high upfront costs.

The ability to cut through Britain’s notoriously labyrinthine procurement process is invaluable to startups working in sensitive areas, echoed Steve Brierley, CEO of quantum computing firm Riverlane, which has also received NSSIF investment.

Government contracts don’t just provide revenue, but credibility with private investors.

Ed Wood, vice-president of quantum startup Nu Quantum, another NSSIF beneficiary, said its support was “transformational” in allowing the company to invest.

“During our first meeting with NSSIF in January 2023, we were told the investment process could be ‘stodge free’,” he said “Admittedly, we were a little sceptical, but the pace, clarity and energy of our NSSIF lead quickly proved otherwise.”

Coming out of stealth

The expansion in NSSIF’s role comes as the U.K. and its NATO allies are determined to get cutting-edge tech to the frontlines faster in the wake of the war in Ukraine.

At a summit in June, NATO leaders agreed to “significantly accelerate the pace at which the Alliance adopts new technological products, in general to within a maximum of 24 months.”

Geopolitical tensions, including China’s weaponization of supply chains and President Trump’s trade threats, have also brought concerns about sovereignty and ensuring access to critical technologies front of mind.

That’s forced national security officials on a “cultural journey” to recognize that preserving technological advantage requires actively building links with the private sector, Finkelstein said.

Meanwhile, technology companies have become increasingly open to working with defense and intelligence agencies amid heightened geopolitical tension — and a historic increase to defense spending.

According to NSSIF’s Phillips, “four or five years ago, you didn’t see a huge number of entrepreneurs wanting to tackle this space. They wanted to do climate change, health and various brilliant things … There is a cohort of entrepreneurs now who want to go after this.”

That relationship will be essential to meet Prime Minister Keir Starmer’s recent call for the U.K. to “drive innovation at a wartime pace,” promising to allocate more of the country’s increased defense budget on cutting-edge technologies in the wake of a major Strategic Defence Review.

That will require “innovation and procurement measured in months, not years,” the review said.

The Ministry of Defence is undertaking major reforms to how it buys technology, including by creating a dedicated Defence Innovation unit, while the U.K.’s Department for Science, Innovation and Technology said last month it will work more closely with the MoD “to pull through innovative capabilities to mission at speed and foster a thriving and world-leading U.K. defence technology sector.”

In a long-term plan last month, DSIT said backing dual-use technology through better use of procurement and a greater share of R&D funding would not just boost the U.K.’s security, but benefit the U.K.’s broader tech sector.

Last week, DSIT told the U.K.’s national AI institute to refocus its work on security and defense, after rebadging the U.K.’s AI safety institute as the “AI Security Institute” earlier in the year.

The limits of success

In the U.S., startups backed by In-Q-Tel have been acquired by the likes of Google and Amazon, or else grown into giants in their own right such as Palantir.

In the U.K., some people initially doubted whether NSSIF would find similar success, the investor cited above said. “I went from being mad to being farsighted,” Finkelstein recalled. “Modesty aside, they’ve done some quite successful startups.”

As NSSIF expands its work, it can expect greater scrutiny of its record by ministers and the public. But DSIT said in a recent press statement that the fund has backed a number of startups which have reached billion-dollar “unicorn” status, crowding in private investment and creating jobs.

“The main thing that it [NSSIF] needed to do is to be bigger,” Riverlane’s Brierley said, adding that the prospect of more money could be “really transformational” and allow NSSIF to participate in larger, later-stage funding rounds.

Ministers have spoken publicly about replicating the NSSIF model to back other government missions, such as health or net zero.

But five people close to NSSIF said that despite its success, it isn’t a silver bullet for the deep seated issues start-ups face in the U.K.

While more cash and attention is welcome, NSSIF must ensure it retains its commercial approach and narrow focus on cutting-edge tech, they said.

In June, startup Oxford Ionics accepted a $1.1 billion takeover from U.S. firm IonQ, lamented by some as another example of promising British startups moving abroad. (Oxford Ionics says it plans to keep its research base in the U.K.)

But the deal is expected to see millions of pounds in profit returned to the Treasury, as NSSIF held equity in the company, which develops quantum systems.

Sully, of Advai, argued that these are the type of commercial deals that NSSIF should be making, with returns reinvested to back the next generation of founders.

What makes NSSIF unique is its commercial focus and “pure government self interest,” he said, arguing that it’s something the U.K. will have to get more comfortable with as NSSIF’s work grows. “We’re not as good at self interest as the U.S.,” he said.

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