Latest / $100M Exits with Jason Kirby / EP 123: How a Family Office Invests in Defense Tech and Space Startups

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EP 123: How a Family Office Invests in Defense Tech and Space Startups · $100M Exits with Jason Kirby

• EP123 Richard Stroupe Cape Fear Ventures: We were able to make an investment in SpaceX back in two thousand nineteen collectively that was almost two and a half million dollars total. What kind of separates you as a family office? How does that make you different than a traditional fund when it's your own capital a hundred percent at risk? Well that's been the biggest challenge that I had is like I feel comfortable risking my own money because it's my decision. But if I had other funds, then of course if I lose their money I would feel really guilty. How do you kind of see and help be able to These defense tech companies get that early momentum, early traction. Getting these contracts is grueling. We try to build relationships at least to kind of network within the silos to tell us early on, hey, is there actual need? What's specific examples of where like that was a deal killer? We've recently passed on several companies that valuations are extreme. If you are unrealistic about your expectations of what you think it's worth, then it's not worth our time. Everyone, welcome back to $100 million exits. Today we have Richard Stroop on the show with us. Richard, I'm excited to have you on here because I think your background as an exited founder who sold two companies for an aggregate of over $50 million and has taken that money, bet on yourself as an allocator, and now manages a family office with over 150 million AUM. I think you're gonna have a very interesting perspective to to share with our audience that is keen to understand the the the myth behind family offices and how they work and how they potentially could either raise money or do deals with family offices. So Richard I'm really glad to have you on the show today. Absolutely. Thanks for having me, Jason. It's my pleasure. So let's kick things off. tell everyone a little bit about Cape Fear ventures and what kind of separates you as a family office versus what most people think of when they think of like a venture fund or things of that sort. Absolutely. Yeah. Cape Fair Ventures is a small venture capital firm that I created, effectively pivoting from a family office model. Whereas prior, we had both private capital, public capital invested, and also real estate. But the private capital, which was mostly venture capital companies, we used venture cap or Cape Fear Ventures more or less as the brand for for that venture. So after thinking about making some changes. about how we're doing deals. We've decided to pivot it out from a family office model and move it more to a traditional VC firm model where we have a staff now. We're actually creating SPVs for other other sources of capital, other other folks, LPs who want to invest with us or alongside us. And at some point we'll probably raise a fund in the future. but again, we just we're trying to understand how the the fundamentals work with other other people's money because up until now it's been my own capital. How does that feel like when you're typically writing high risk, you know, venture checks where, you know, for those that aren't familiar with venture, you know, they don't all work out. No. Physically most don't work out. and you're you're not diversifying through other funds, like you're going all in with your own decision making, your own allocation strategy. kind of how does that make you Different than say a traditional fund when it's your own capital 100% at risk. Well, that's been the biggest challenge that I have is I feel comfortable risking my own money because it's my decision. But if I had other other funds money, then of course if I lose their money, I would feel really guilty. so I learned from other funds. I was a limited partner going back to 2009, 2010. I joined a group here in Washington, DC. that were doing small angel investments, but they were collectively pulling their money together to make a larger investment underneath their LLC. So, you know, learning from them on how what works, what doesn't work, and then going through the repetition of looking at deals, looking at pitches, talking to founders, understand the mechanics of the financing side and the risk side and the legal side. And, you know, me. Being an operator, I I felt like I could do this myself a little differently by being more of an operator-led investor than say a traditional investor. So instead of making, you know, 16, 20 small bets, you know, I think small, I think like 50K to 200K, you know, seed, pre-seed investments, you know, I'm more intentional where I can do six to eight investments a year, bring my capital, bring my advisory support and all the lessons learned that I've picked up along the way, both as a business operator from my own experiences and also working with other founders, you know, going back the last, you know, 12, 15 years, it creates more to my opinion, it creates a better relationship. And then you can kind of control your outcome a little better as far as risk management. So give the audience some context on your thesis. Like What bets have you made? What bets are you trying to make in the future? how do you size up your checks? Cause, before we got online here, you mentioned you range from like a seventy five K check like a two million dollar check, which is, you know, a pretty substantial range for for a firm. So give us a little context in terms of what's your sweet spot, what you guys are looking for and some of your past bets. Sure. So my background is software and technology. So obviously I don't make any investments in healthcare or crypto or other the sectors that traditionally attract capital, I pretty much stick to the ones that I really understand and enjoy. So we we invest in software startups. We also invest in AI and also defense tech since my background is in the intelligence community. So we have a deep bench of d defense tech experience. And then also the space industry. we recognize that that was a a growing trend back around two thousand seventeen, eighteen. So we s decided to start making some strategic bets there. And we were able to make an investment in SpaceX back in 2019. And of course, we did add to that position up until about twenty two, twenty-three. and and and you know, collectively that was almost two and a half million dollars total. So so obviously that has been a tremendous success for us as well. but again, that's a long term play. But but having having that early experience in SpaceX allowed us to have conversations with other startups in that community around California, Colorado, Texas. and it's been beneficial for us to look at some deep level pipeline activity that's happening. You know, up until now, I mean, we we see tremendous amount of startups coming out in the space area. So we're We're very excited about that as well. So how do you back a space start like a space exploration or you know a space focused startup? Like when the, you know, capital requirements or at least perceived, like CapEx and all that kind of stuff, deep tech, super hard problems, like long investment cycle, probably lots of cash that have to go in. Like those are the assumptions I have coming into like investing in space tech. Like what what's kind of your reality? What are you seeing? And how are you trying to like diligence these opportunities. Correct. Because the valuations are typically higher and the the capital requirements are a little more aggressive for space type startups, you know, obviously we look at the team. We want to make sure that the team has deep domain experience in the area. You just can't, you know, fund a startup in space area without having some some critical experience, either working at one of the large space companies or, you know, having connections in that area. So that, we we do look at that very deeply. We look at the technology. we've been very fortunate to partner with several business development firms around the country who have a lead in some of the academic research. So we've been able to back space startups at Purdue, University of Illinois, and also University of Oklahoma. And there, you know, we read the dissertations, we understand from a founder's perspective, Is the is the technology patentable? how much money, you know, is the the university itself or other you know venture clubs within the university? Are they backing it? So there's a bit of a formula that we use to kind of risk the the reward to to risk ratio for our a lot of those investments. But then again, we also you know talk to some of our other partners to make sure like what does the traction look like? You know, Is there a deep in a pipeline? Do they have inside LOIs? who's on their advisory board? You know, who are they working with? So again, you know, look at the team technology and traction and and and if they all line up, then then we we feel it would be a good bet to make because eventually we know that the the later rounds will have a higher valuation. So we try to we try to find some of these space startups in the pre-seed seed range. But by the time they get to the A round. It's it's already pretty expensive and you're we're priced out at that area. Yeah, I was gonna say it's like you come later and it's just like these massive nine figure transactions that for for a family office with smaller checks it'll be hard to squeeze squeeze any of those. Unl unless unless you're a SpaceX. I mean, I my first investment in SpaceX was the thirty billion valuation. So you know I mean There's there's there's different, qualifications for the different companies, but it was Elon and the things they were doing, and they were just starting out with Starlink. and I felt like they were moving in the right direction and they have a a great history of aggressive compounding when it comes to business development and expansion into new territory, just like what they're doing with the orbital data centers. but yeah, it's it it was a it was the strategic bet at the time. and it it's know obviously paid off. But yeah, we do look for you know, some of those early hallmarks and and making some the the newer investments in the in those startups. Yeah, I would say what was it valued today? It was like two, two and a half trillion. yeah, it's it's probably one and a half now. I mean it's it's sold off pretty aggressively here in the last couple of days, but you know, things things will bounce back. Yeah, still still a phenomenal return. Obviously, you know, anything done. seems to touch, gets a lot of notoriety, both positive and negative, but those the stock usually does well in the long run. yeah. and when it comes to one of your investments, I I think it was Scout as one of your space investments that has recently raised a follow on Series A. So going into your theory here, go in early and then stay, you know, help them get to the point where they're a series A, I guess walk us through little bit of that that journey. Like how did you how did you find those founders? how did you decide that this was the cap table that you wanted to be on? And what's been that journey like? So the scout opportunity again was referred to us by some of the the groups that we're connected with. Specifically, there's a group here in DC called VC in DC. and scout was backed by one of those groups, and we were talking about it, and this is before they were raising an A. So this was in between. their seed round and their A round and they were looking for some bridge financing. so at the time they were going in with safes. However, it had a discount to the A round. And you know, Scout was was a pretty a nice opportunity since they they're a software company, but of course they perform software services for space assets. So you talk about government agencies that are control of all of the space assets and think about a traffic control cop in space. So that's exactly what Scout does, is that they track those assets and that way they can, manage them better, especially with the proliferation of of every country now throwing up satellites and other things. so we felt it was a good bet to make, you know, obviously traction, looking at their government contracts, looking at that how they were growing and how they were maturing the product, and that they were closing in on an A round. At the time it was going to be about, six to twelve months, which, again was about about the same time they did the A round. So you know, just by happenstance of of being connected to the right people and being in the right spot, you can learn about some of these new technologies and being able to to you know participate. And so on you you mentioned a couple of points. You kind of like go, you're checking contracts, but like these are like very material conversations like how many deals have blown up because it didn't have certain traction or didn't have certain boxes checked. what what made it stand out in and let's just use Scout as an example that was like, okay, this is the deal that checks the box. Like what did they achieve? What did they have that, you know, the fifty other deals you said no to didn't have? Well with Scout specifically, you know, they had the government contracts and they were being renewed. on time. So we we knew that, once you get a government contract and you're performing really well, then it's very hard to unsee the incumbent, especially if they're performing some mission critical services like a scout, for example. you know, case in point, look at Palantir. When Palantir entered the DOD several years ago, they only really had a couple contracts. Now look at them. You know, the expansion's been real and now they're they're a mainstay. And Pretty much, every director within the army. So Scout, very similar. Once you've proven yourself on a couple contracts, then it makes it very easy to win other contracts. And and we knew that the amount of funding was increasing for the DOD in the space area. so again, we just kind of, you know, induce the fact that there's going to be more assets in space, it's going to be a crowded environment, and they're going to need more support to help manage. these services and the competition, really Scout was was out front and the first to market. And and and as I mentioned, being in the federal government and understanding, how hard it is to unseat an incumbent unless you're failing at what you're doing. But of course, we read the reviews and we talked to some of the referrals that they were working with and they they had, solid marks across the board. So it was a it was a pretty easy decision. No, it's great to hear. And when it comes to you know, the deals that you end up saying no to. And you know, you're looking at all these deals like what typically leads you to passing on the deal? Well, again, we look at the four T's and and how we evaluate we the team. we we took we do a deep dive on the team, the background, the pedigree, where they went to school, who they're connected with, do they have the right experience? Or you know, so the team, you know, really gives us a lot of red flags, green flags from the beginning. You know, we we want we want to back a team that has experience, has grit, you know, perseverance, determination to kind of get through. Some of the challenging times because it's not a it's not an easy task to grow a business and and to to own own your own company. And we need certain personalities to do things. that's that's the first thing. Then obviously we look at the technology itself that they're they're using. you know, do a SWOT analysis on the tech. Is it patentable? is there a provisional filed? What's the competition look like? then we also kind of built our own. I guess you can say AI enabled due diligence operating system that we load all of our artifacts into. And, to to eliminate the bias, to be more objective in trying to do a a strategic review of technology, you need something like this. So so that helps. And then the traction. We look at the traction. We want to understand, you know, who your customers are, who are you talking to, what's the pipeline look like. what's the the CAC? how hard is it to acquire your customers? Because it all comes at a cost. and then we look at the TAM, you know, is this a market of expansion? Because if you're making asymmetric debts, you know, then that risk reward profile can tell you, is this a good investment or not? And, you know, yes, like you mentioned, it's a very high risk, high reward environment. But again, as long as you frame it in a certain way that it's a solid team with great experience. The technology is sound, it's patentable. The competition really isn't where they need to be. The traction is working. it all works in together. and then it kind of, you know, makes a go no go decision. And that's kind of how we we look at it. makes makes a ton of sense. And you know, it sounds like a a focused diligence process. But, you know, I think what I want to get to is like when what what's like a specific detail that you've come across it's like, That's not the deal for us. And you look at all these materials and a founder's job is to check all the boxes you just mentioned. And they're like pouring their heart and soul out to you about why they're perfect and why they're gonna be a unicorn. but ultimately you gotta say no. You can't say yes to every deal. Like what what's ultimately the trigger? You know, maybe draw from you can maybe anonymize some of the companies or whatever, but like what's specific examples of where like you They had this and that that was the deal killer. We've we've recently passed on several companies that valuations are extreme. And it could be a just a trend of today where they're riding safes. Well, obviously, doing a price round early is, in my opinion, it's it's it's not needed, obviously. But you look at safes, which are effectively, not obligated data instruments. So you're taking a high risk and you start seeing the the valuations become extreme. And around the space industry, around the AI, because they are getting a lot of attention, they think immediately if they have an idea and it's a novel, you know, solution to an unmet need, then immediately it should be a 20, 30, 40 million valuation. you know, and then we're just like, look, we're we're not going into this high. Like if you are unrealistic about your expectations of what you think it's worth. Then it's not worth our time. so obviously, again, early on, if if we disagree on valuation, we're gonna, disagree on a lot of things down the road. So it's a non-starter for us. So we have a valuation cap and what we feel is is realistic versus someone else's subjective opinion or view. So that's a non-starter. and then again, we look at the the founders themselves. We've talked to some smart people, I mean MIT. Georgia Tech, Stanford, some really talented, smart individuals with no operating experience. They've never run a business. They, they may have a co-founder that can do some other stuff, or maybe one or two strategic advisors that's part of a team. But unless you've got some real experience, I I love military backed like veteran investors because we know they've gone through some difficult environments and they've got grit and they've got determination. And if you have to pivot hard, they they can do it. but sometimes you you you deal with some very smart people and they just don't have any business experience. And again that that raises your risk profile on doing things. You know, and then sometimes you you find opportunities that the technology is there, that it's a right it's a right fit technology, but the traction is just not there. You may like the team and you may like the technology, but the traction hasn't really matured. So we asked them, how come you haven't paid for pilots? How come you haven't, you know, given out some beta access just to get the feedback and get that that feedback loop going. and of course they didn't want to do that until they raised some funds. And I'm like, all right, well then how much money are you putting in this yourself? Like You gotta bootstrap it somehow. And then again it goes to the opinion, well, we're putting in time, energy, and effort. We don't need to put money. I'm like, okay, yeah, you do. So, so it just comes down to some, you know, philosophical decisions about how, you know, I think operators should act and some of the characteristics of their personality should behave. And then again, it all kind of frames out and it it kind of helps me make a decision. So Would you like to be asking our guests the questions? Well, now you can. I built this podcast and I've interviewed hundred plus exited founders, investors that have been through meaningful transactions. They've already been what you're about to go through. And you have these questions where you need answers. You want to riff and go back and forth. And while Claude and ChatGPT are cool, it's all generic advice. Well, I built exitboard.ai to help founders in your situation get real answers from real founders in real time. trained on this podcast and all the conversations that we've had in addition to my coaching sessions with other founders and real deals that I've been involved with. The answers that you get should surprise you in comparison to what you would get with ChatGPT. You can choose to listen to the moments that matter. So you're not having to scroll through a hundred podcasts to figure out which one's right for you. You can get that five minute clip that you need to hear right now. And you can hear the details of other stories that are relevant to your situation. So go check it out. Ask whatever questions you want, whether it's preparing for a transaction, dealing with co-founder issues, making tough decisions as a founder. All those questions are fair game with no repercussions. No one trying to read between the lines when you go to your board or your VC. That's why I build exitboard.ai as a safe space for founders to ask real questions, get real answers. So again, it's free. I'm not charging for it. Don't plan on charging for it. It's just a free resource for our community. Check it out at exitboard.ai. I think that's valid. And I think it's good to have those those criteria and those rules when meeting these people and th again, their job is to sell you on their investment and that's why investors have these these rules and these criteria. But I think one thing's different about you is you don't necessarily have an investment committee, So it really comes down to building that relationship directly with you and you know, proving these points, but Am I wrong saying that you don't have an investment committee? do you have a process that goes beyond you that ultimately makes the decision as a family office versus typically venture fund is they have to have certain criteria put into the documents about the fund they establish, plus they have a couple partners and they have, you know, the LPs that might want to have a say it into each deal. And that could potentially take time, effort, and blow up opportunities. So, how would say Cape Fear acts differently in that regard? Yeah, we we do have three venture partners. I made those acquisitions about four months ago. So again, pivoting from a family office where it's just my opinion and decisions with my own capital, I did decide to to kind of pivot into a traditional venture model. So we have three other venture partners that help us make a decision. So so we've built some internal mechanisms where We have all our our documentation and artifacts loaded. we've did a partnership with this company called Clockwork, who handles some of the analysis for us in the back end. So so we have a really good system now where if we get a pitch or a deck, we have one to two meetings. And then if it passes phase one, we go into phase two discussions where we can get a little deeper with the team, the foundation, the technology, do some demos. And then go right into the data room and look at some of the backlog and talk to some customers. ultimately, our our process is we try to make a decision in a month or less, but it does take some time when you're looking at, theoretically a hundred different deals a month now. but yeah, we have our own internal tracking, we've built our own AI-enabled operating system that cannot automate some of the due diligence for us. and then we assess a risk profile with every investment we make. And we try to whittle down, you know, theoretically, a thousand opportunities down to a couple hundred to maybe 20 to maybe four or five. So so we we've built a pretty aggressive filter. And we're using, you know, all the different tools and technology that's available to help us automate and again focus on the signal and and and really make some unbiased, you know, very objective decisions on going forward. And so switching gears here a bit, have you had to deal with a window yet? You know, you've been investing for, you know, ten, fifteen plus years. Like, what have you done when a company comes to you and or you recognize it's going to happen when it comes where it timed where it's like, hey, we gotta we gotta wrap this up? Yeah, I've I've been a limited partner in some funds that have had opportunities where different companies have had a wind down or they just fall for bankruptcy. and it happens. And you basically write off your investment. So, you know, luckily I haven't had those personally with anything that I've been doing myself individually. I mean, yes, there are deals that I've been locked up now going on 12 years. but you know, you've you've had a chance to take some chips off the table along the way. Which which is good to de-risk your your position. but honestly, up until a couple of years ago, I would make, my when I first started down this path, I would make investments in companies in the seed or pre-seed range. And then by the time they do an A or maybe an A two, I would sell my complete position and get out. And, you know, usually that was about a three or four X on my money. But depending upon if it was a two, three, or four year time horizon, then I could redeploy that capital and something else. But obviously I was paying taxes on some of the the gains and, you know, it was requiring a lot of time. And and honestly, we missed a couple of those that turned into billion dollar valuations. So so just being patient at a letting it, you know, ride, you know, with your condition, then then maybe it would turn out as well as you thought it would. So now I'm more, I guess motivated to making bets and then letting it ride, basically either it goes to a hundred or or goes to zero. you know, the more asymmetric type bet. And you know, that's that's our goal going forward. And again, as long as you can control your due diligence and have a filter and look at things and your objective and how you you you kind of make your decisions. you can control some of your risk, but some of these don't work out, as you mentioned. And unfortunately, you just have to write it off and and and talk about the lessons learned. Like, why didn't this work? What happened? Why did it fail? So we we do a you know, me personally, I do a post mortem on every deal that fails. And I'll try to understand and document what those red flags were. So that way going forward into a new investment, I can take that experience and say, Here's what not to do. Here's an, you know, here's an example of failure and and how that failure only looked. And here's an example of success. so that's kind of what we bring to the table. And talking about that, when it comes to a company maybe showing those signs of going on the trajectory towards failure, do you think it's in the VC or in your position, in your best interest to intervene and try to either comply, you know, get management to step it up or to make changes or, you know, cut some of the team or whatnot to basically turn this around. Or do you just be like, hey, we made the bet, we cut our loss, move on. What's your your take? Do you get your hands dirty? Do you recommend to get the hands dirty? Or do you just say like, hey, it's a VC, we're not going to get every hit. Right. Every investment we make, we always lean in on the operator side, you know, talking with the founders and the management team. And just to let them know, hey, we've got experience as operators. We're more than helpful and willing to help out. You tell us what you want. some companies will call us every single week. Hey, I got this problem, or what do you think I should do? And and I'm I'm fine with that. all of my CEO and founders have my personal cell phone and they can call me anytime. And a lot of them do, and I enjoy that. But there's a few that don't. They're just like, Hey, I got this. let me lead from the front. And I'm I'm fine with that as well. but when it comes to making some strategic pivots. and hard decisions, I lean on the board and whoever's on the board at the time. So I understand the management team has a has a job and and they have to execute and and and follow that path. But ultimately it comes down to governance and the board. and again, if we have to talk to the board to give them our opinion, we will, based upon the data they give us. But but ultimately it's the board's decision. we don't want to harass the board or the management team, we we live we leave them alone to let them do their jobs. But yeah, I mean, occasionally when if we have hard questions or we see things that maybe need adjustment, we will absolutely give them our opinion, but it's going to be at the board level so that the board can then make the decisions and then, you know, kind of dictate down to the management team on how to execute. Because I mean, I I I think of it as as if if I was the CEO of that company, And on the management team, this is how I'd want be treated. So I act as if I'm on the management team or I'm leaving the company. And I then position my my involvement and and advice as as as such. but then again, sometimes it doesn't work out and you just have to take your licks and and move on. But again, it's it's worth documenting so that you don't repeat those patterns. No, I think the documentation point is. mission critical and I don't always hear that from a lot of investors. They know it's it didn't work and then move on. But then, while you, keep the keep that knowledge while it's still fresh and and document it. But let's let's change gears. I want to switch over to kind of the the market and what you're what you're seeing, where is it going? You know, what markets are you avoiding? What markets are you going into? And I think let's cover from a broad perspective. And then I'd like to go deeper into some of the markets that you're actively and and have strong opinions are. So what what markets are you excited about right now? Yeah, well, we're very excited about space and the space industry as a whole. now that SpaceX is IPO, there's gonna be a lot of cashed out, employees and other investors. we're starting to see the elements of the renaissance in that industry. So with research. Or with SBIR grants and other government agencies, we we are seeing startups in these areas doing some really cool stuff. And and obviously SpaceX has brought the cost of ownership, of of working in those industries down so dramatically. Now you're gonna see you know more entries into that field. So we're we're pretty excited about that. So we have a good relationship with a lot of strategic advisory and business development firms. that feed into some of those startups that help them with hiring, finding capital. we we want to, be available to talk to those people and figure out what are they trying to do strategically? so yeah, we're we're very excited about that. And, being based in North Carolina, we don't see a lot of space industry startups in that state. so so we're trying to bring a lot of that into our region. Because it is a great place to have a company. But then again, all your customers are either in California, Tech or Texas, and Colorado, Washington, DC. So it makes it really hard to compete, especially when your customers are so away. but you know, space is exciting for us. You know, obviously AI is is a a leading environment, and there's a ton of AI-enabled companies. we we're looking for Companies that are using AI to disrupt industries, not necessarily an agentic AI service company. You know, the way the models are are developing today, the technology comes out, it's improving so dramatically, it's very disruptive. So I would, you know, we're staying away from some of those type of companies, but organizations that are adopting AI and are transforming, you know, old archaic models, software, technology. and then using AI to push modernization forward. You know, that's very exciting as well. I could talk about one of those if you want to. and then finally, defense tech. You know, obviously defense tech is very hot. the need is critical. we see, you know, a lot of pitches from from hardware and software of defense tech. So, you know, between those three vertical space, defense tech and AI enabled software disrupting startups, that's really where we focus. And so these are hot trends. And these are areas where there's a lot of attention, a lot of capital going into. Like, what's, you know, your kind of thesis within those categories outside of like, you know, catching the ones that seem to have the most traction, but are there any particular application layer or maybe recent bets you've made where you're like, This is the future with this particular application layer or whatever it might be. Like walk us through one of those. Sure. So a couple of years ago, we found this software technology company out of Wilmington, North Carolina, of all places. and they were trying to modernize to technology and business processing for for breweries because it's very labor intensive. And the technology that they were using is very old. we're talking 10, 15 years old technology, and no one's really using AI to forecast or keep track of inventory or sale campaigns. So you have all this data, this desperate data, but there's no way to capture the data, analyze the data, report on the data, and then act on the data until this company Ohanify, you know, started the coming in the market. And these guys actually were born out of a company called Encino, which Encino was a cloud company, which is now public, but effectively they were a cloud provider to a local bank that was in Wilmington because they needed that kind of service and support. So they invested in Encino. Well, these these employees decided to kind of venture out and say, hey, why can't we do something similar? for the brewery industry because there's a lot of breweries around the country and they all need this technology. When I first read about them, they were basically disrupting a supply chain. They were modernizing technology, they were enabling with AI, and basically they were disrupting a supply chain. And to me, that was a beautiful concept. And the fact that we're only two or three competitors and none of them were using any of the technology that they were using, I felt was very attractive. so I got, introduced to the company and spent some time with the founders and the management team and started to become more of an advisor to them. And eventually I helped them reorganize. We we did a raise, we did a friends and family, and we started to make some strategic bets on the distributor network because you know, a distribution, very similar to the breweries, they had the same challenges. But they're not, tapping into any of that technology as well. And they were leaving millions of dollars on the table, with margin compression. So, you know, fast forward a couple of years now, I've been the board chairman. We've done several raises. We just completed an A round. we had one of their major customers come in as a lead investor on the A round. and and the pipeline just looks so fantastic in the future. So That's been a really great success story on how you could take a technology enabled company today who isn't really using modern technology for whatever reason and and trying to implement a disruptive business model on top of the current business trends that they're doing and improve efficiencies through profitability. and know, like I said, that's been a great example of us to use as far as other companies that we work with and and how they can, not only achieve success from the customer point of view with technology driven innovation, but also, with margin compression and and expansion. So I I think it's a great example of, you know, kind of go back to a question I was asking earlier of like how do you get your hands dirty and how do you get involved and I think that's a really good example of stepping in the board and helping coach and advise on the gaps and the opportunities. and I I think that's a testament of being able to have your operator background because most VCs can't can't speak to that operating background. You know, they can't come in with confidence on how to act and how to operate in in those situations. So I'm glad you walked us through that story. What I'd like to hear now is in defense tech. it's it's a hot topic. offline we were talking about it. Europe's freaking out because the US relations are are you know getting weaker and they're gonna have to spend a bunch of money on defense that they're not familiar with. The US is generally always spending money on a lot of defense. Yeah, but defense is hard. Like getting these contracts is, you know, grueling. It's not like you just show up and say, I got the greatest tech. They're like, Well, we don't have a budget for that. We like it. It sounds cool. It looks cool. We want it, but I don't know. The good Mr. Government over there says we don't have a budget for it. And it's like, how how do you kind of see and help these defense tech companies be able to get that early momentum, early traction? So you know, for the last twenty some years, I've worked in the DOD Intel community building two software companies and I exited both. During that time, I've made some, great relationships with key decision makers, advisors, and other organizations that do that type of innovative investment. So so one of the things that that you know makes us unique as far as having an investor is part of their their story, is that we can help them introduce them to decision makers, to individuals that can walk them into different government agencies. That can introduce them to the SVIR grant process because again, non-dilutive funding is is fantastic, especially for the government. And one of the things that you want to do early if you're a government, you know, facing organization, is you want to know: is there an appetite? Like, does it work? Is there a form factor for what we're trying to solve? And you know, we've we've got connections that can turn them into. give them some some high credibility evaluation very early to see okay, yes, this government agency needs your technology, or actually they're using technology similar to yours. Here's who they're using. so having having that type of relationship helps us determine, you know, just how far and wide and successful can certain defense tech companies you know, expand to. And of course. We want to try to shrink the time of that, knowledge because as you mentioned, working in the government is horrible. it's very bureaucratic. It's hard to talk to people, it's very siloed. you know, we try to build relationships at least to kind of network within the silos, to to tell us early on, hey, is there actual need? You know, is anybody using technology like this? Is this something that you think they would want to use or explore, okay, let's get them a phase one SIBR, which is a grant that gives them enough money to at least go through and start exploring opportunities. Like, you know, think of as it's a contract to explore whether or not you're going to succeed or not. And after the phase, and phase one funding is not a whole lot of money, but it it's at least it's a commitment that you're in the door and you're talking to the right people. So so the government will actually give you money to validate your technology to see if it's it's actually something that they wanted to use. And then if it is useful, then they'll give you a phase two SIBR, which is, millions of dollars. That's when it actually is executed, where they're taking your technology and they're going to the field and doing some some testing to see if it's something they want to outfit the entire organization with or not. And we've got clothing companies that that are doing exoskeleton type things for the you know for the soldiers. You know, obviously there's a lot of drone companies in the market right now doing some really sophisticated things. VR type technology, which is kind of cool. you know, but Androil does a lot of that. I believe Microsoft and Meta is now moving into that market. So so again, a lot of it is like. Are there large players already filling the gap? Is this an unmet need? is the need real? Is the first question. Then you say, is it unmet? are there any competitors out there? Are there Lockheeds, Raytheons, Microsoft's, Andrews? Is anybody out here actually filling the gap? And then that that that helps us make a decision pretty early on whether or not it's a viable opportunity or not. So how do you underwrite that? Because you know, I talked to the fence. Tech startups and it all looks cool, all looks awesome. But at the end of the day, it's like 90% of the money. I'm making up a number here. I don't know if it's the exact number, but a large percentage of the money is going to Raytheon, it's going to Boeing, it's going to Lockheed, it's going now, like SpaceX is getting its clip, Palantir is getting its clip. These are, yeah, obviously legacy brands that are now the safe to buy from these big contracts. Like how How do you underwrite not only a startup getting that early money, getting that early traction, but what's the game plan from there? are they going to be able to be a standalone $10 billion company or are they going to get acquired? what what kind of happens to these companies in your opinion? How do you underwrite the kind of life cycle of them? Yeah, it it's either expansion of contracts or acquisition, one of the two. because a lot of the other large contractors that are looking for new innovation, they acquire these companies pretty aggressively. And we know talking to major integrators, they're all conforming to a business model where they're doing more venture investment. Similar to Google and have, you know, Google dozen venture investments like they they've invested in Anthropic, they've invested in SpaceX. You know, the Lockeys, the Raytheons, the General Dynamics, the SAICs, They're all doing the same thing. They're all building a bench of venture-backed companies or assets such that in the future, when they deploy contract services, they're using some of their own technology. so yeah, we we we you know obviously look for the the chances of either being acquired by you know one of these large integrators or another defense partner that's in the industry or Major expansion of contracts. case in point, Scout, you mentioned Scout before. that's that's a candidate for major contract expansion. And we know the the DOD's budget for Space Force is gonna grow exponentially over the next four years. And we know there's gonna be more assets, being, orbited in the future. So it just makes sense that companies like Scout are gonna benefit from that. Well, that's what we kind of look for, you know. Whatever the defense deck company is, we try to look for that asymmetric bet and say, what are the chances of your technology being expanded in other contracts? Because if the army wants to use it, then the chances the Marine Corps and the Navy might want to use it. So we look at, some of those expansion models, but then again, we look at acquisition. So we keep track of of what these other companies are building, investing in, and what they're acquiring. so so we we try to map both, you know. opportunities or outcomes to to each investment that we make. So I want to ask question on these acquisitions. in your homework, how big are they? Are are these companies getting billion dollar exits or are they getting like ten million dollar exit, fifty million dollar exits? Like how do you see these transactions transpire? Like the big players like just lurking waiting for them to like miss a contract and they come in and buy them for parts, or do they like pay the premium? It just depends on the specific technology. I mean, working in the government is very lucrative. If you if you've built a solid track record and you have a history of executing at a high level, then it's very hard to un unseat yourself. Unless you do something spectacularly stupid or or fail at your job, you know, chances are you're gonna get more government contracts. you know, because again, the government, if you think about how the government procures and awards contracts, it's very risk diverse. Every RFP that's written today is all driven around cost reduction and risk reduction. It's who can do the job the cheapest, the best, and the safest? Who's got the most experience? And and a lot of times when you're applying yourself to RFPs, you know, one of the major questions is what other experience do you have doing exactly what we're asking for? So, you know, If you don't have experience doing these things, then it's gonna be very hard to win a government contract. So that's why when we look for some of these defense tech type opportunities, immediately we look at what LOIs have you signed. You know, are you are you you do you have sibers? Do you have any government contracts? you know, so again, we want to see that early traction because once you've got traction, it kind of compounds aggressively at that point, especially if you know what you're doing and you're successful at doing it. That's the benefit of government. Now, getting to that point of having early traction is extremely hard. You may sound like it's every company has it, but yeah, yeah. No, it's extremely hard. You're talking like maybe two out of every hundred, because it's relationship based. You know, there there is a certain level, you know, I wouldn't call it nepotism, but the there's a certain level of community that happens. where these decision makers get together and they do chit chat. And they're not rocket scientists. They're trying to make the best decision on the on the behalf of the government. And everything is relationship driven. So if you have invest in anything, it's really relationships. Relationships build trust. Trust builds accountability. That wins you government contracts. And it took me years to do that myself and even working in that industry. It's not something that you can obtain overnight. It takes a very, very long time, which is why a lot of these companies, they immediately go out and get three, four, and five star generals on their board. and then they they try to build that trust and and transparency and accountability from the beginning. if you look at one example of this is ID Me. ID Me formerly was TroopSwap. And it was what it was my very first investment I've ever did. As a private investor. I made I made the investment back in 2009 when they were TroopSwap, which of the basically was Groupon for the military. But the two things that stood out for me, it wasn't the technology. I mean, the technology was novel. Okay, you're giving discounts to military. Everybody wants a discount. You know, that's that's pretty, pretty novel. But what really stood out to me was the team that Blake Hall created. Not only did Blake have the experience. he he was in theater two rounds in Iraq and he's got great war stories. He was a commander, leader in the field. He had all the hallmarks of being a successful business founder. all the great determination and and the wherewithal to get through any battle you had to. That was solid. that was a A plus. But he also had a good team. He already had a board of advisors, and a lot of the advisors were these three four-star generals. And When you're talking about trying to do business with the DOD, you need credibility, especially at that level, to get you in the door to have those type of meetings. So, so unfortunately, my advice to a defense tech startup is you gotta create a board and you gotta go out and try to attract obtain some three, four, five star generals that are in the area that you're trying to penetrate so that you can get those doors open for you. Because Again, once the door is opened and then you start having conversations and you bring people that already have trust with that different organization, then it makes it very easy for you to at least have some beginning quote opportunities to see if if there's traction for your company. just a company off the ground with no experience and and no connections and relationships, it's extremely hard to to to find any success in in the DOD. Well, Richard, I think it's been great having you on the show and diving deep, especially into defense tech and some of your investments and what differentiates you from say a traditional VC, albeit you're now moving in that direction, but I think you have now this track record and background that differentiates you. but I would love for the audience to have the optionality to to learn more about you. Richard, what would be the best way for people that want to learn more about Kear or you? What would be the best way for them to do so? So I'm available on LinkedIn as just Richard Stroop, but also you can hit me up on Cape Fear dot VC, which is our website. Awesome. Well make sure to include those in the show notes. And and Richard, I've really enjoyed this conversation. I feel more educated on these sectors myself. And so thank you for coming on and sharing your insights. All right. Thank you again. 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