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Commercial Tech is National Security (Michael Brown and Jamie Schneiderman) · Unstuck Pod

• Jamie Schneiderman: Hi everyone, welcome to the Unstuck Pod. very excited today to have Michael Brown here from Shield Capital. And I think my I I I will pass it off to Michael and let him tell you about his background, where he came from, everything he's done, and and where he's focused right now. So Michael, welcome. Michael Brown: Well, thank you, Jamie. Glad to be here. Yeah, my background is a bit unusual in the sense that most of it is a typical Silicon Valley career. having graduated from business school here at Stanford, went on to work primarily at two companies that were in the tech area, Quantum, which was a computer storage maker. I was there for 20 years and became the CEO at the end of that run. And then Symantec, which used to be the world's biggest cyber company until private equity decided to split it up. And it was at that point that my career really took a a turn, having met my now business partner, Raj Shaw, who was one of the first directors of the Defense Innovation Unit, which is a organization at the Pentagon formed to bring more commercial technology into the military. So Raj recruited me to join DIU and then I ended up leading it for four years after he did. And then I was very excited when that time came to an end that Raj asked me to join Shield Capital that he had since formed during the time I was running the Defense Innovation Unit. So part part of the time typical Silicon Valley and now focused in my career on national security. Jamie Schneiderman: just that. Right. I did this and now I'm, you know, now it's national security. So so let's let's go, let's jump forward into that because you know, I think national security and defense is always topical, but it feels like it's become increasingly topical, and relevant for sort of the the more market at large over the last several years. So maybe you can talk to some of that transition, what that looks like, how do you know, defense tech and other things that are happening and and how you look at it in general. Michael Brown: Yeah, well, I I couldn't agree with you more. And it's been a bit of a surprise to me. I would say that this really goes back. I'm gonna credit Ash Carter, a mentor of mine and Raj's, who really started having the thoughts in you know twenty ten or so that commercial technology, what Silicon Valley and other innovation hubs around the country are developing, was gonna be increasingly important to defense. It's a bit ironic that. Silicon Valley was really created from the defense industry if you go back to the late 60s and early 70s with the growth of the semiconductor industry, which came about for the space program, the Apollo space program, and miniaturizing electronics for nuclear weapons. That really led to the development. And then, of course, the sil the semiconductor industry took off when it saw applications in commercially in business and then eventually consumer products. But after that period of, say, the 1970s, Silicon Valley and the Pentagon started to take a divergent path where Silicon Valley was, of course, more geared towards what can it do to develop the computer age, the internet, and so forth. And many consumer applications were really driving the innovation in in in Silicon Valley, social media being an example of that. Ash Carter realized that these worlds needed to come back together some time ago. And then in twenty fifteen he formed Defense Innovation Unit with that in mind. We've got to get the Pentagon more up to speed on the current technology being developed, which are AI, autonomy, cyber, commercial space. very prescient. And then you have to add to that, the world has become a more dangerous place since that time, 2010, not so far from the moment when the US had won the Cold War. Now look how very different the world geopolitical stage looks compared to that moment, where we face many more adversaries, not only state actors but non state actors, which 911 brought home to us. And then Commercial technology, these same technologies we spoke about AI, autonomy, commercial space, have played such a much more important role in war fighting, true to Ash Carter's vision. And you really saw that with the war in Ukraine. So US tech companies were really supporting the Ukrainian government separate from whatever the US government and military were doing. A couple of quick examples Jamie Schneiderman: Yeah. Michael Brown: would be it was really Amazon, Google, Microsoft that saved the Ukrainian government from the initial cyber attacks of the war. They migrated the government data for Ukraine to the cloud so that when Russia in the initial moments of the war started with a barrage of cyber attacks. The cyber attacks, of course, were able to compromise servers, but the data was already safe and in the cloud. And that really allowed the Ukrainians to to move forward. similarly as a story we much many more of us know, Starlink, a US company, SpaceX, has enabled the communications backbone for the Ukrainian government at war. So if we've just been relying on cell towers, imagine How the government would not be able to communicate among itself, to its citizens, to the military. Starlink really enabled that. And that was not a US government move, that was a US company that enabled that. So we're seeing commercial technology be more important, commercial companies being more important to military efforts. and that's a trend I think we're gonna see continuing. So, world being a more dangerous place, commercial tech being much more important to war fighting efforts. That's led to this boom in what is now called defense tech, which is often commercially derived technology, sometimes military only purposes, but also for what we would say is dual use. A lot of times this technology, like the technologies we just spoke about, are very important for the commercial world and for the military. Jamie Schneiderman: So, I mean, listen, the whole really it's fascinating because of the impacts it ha I don't know, a lot of technology has a lot of impact, but this, you know, it's living in the world every day and we're seeing it happen you as you're describing like in a war in Ukraine. so let me ask I I wanna actually get into one of the things that as you're bringing this up, it it brings me to some of the inherent Challenges, difficulty, call it where where are lines around things? Like if you read up on and look at these things, it's you know, take the Starlink example. which side is Starlink on? who's Starlink supporting? Who w are they doing something that's good or are they doing something that's bad? I I actually I'm not actually trying to wade into that specific set of questions Michael Brown: Right, right. Jamie Schneiderman: at all. I I'm simply putting it out there as. How much as much as this has exploded, this whole area, how much does the convergence between commercial technology and defense start to create a different set of challenges around optics, politics, other things? I'm just trying to you would know better than I would. So so w what do you see there? Michael Brown: Well, as your question implies, it creates challenges and opportunities. So the challenge is it's become more complex than a world that the Pentagon was used to living in, where we're gonna buy ships, tanks, and planes. We know who to go to for that. and those suppliers are really completely dedicated to our interests. So if you go to Northrop Grumman or Lockheed, those companies are have configured themselves to support the Pentagon and its needs, no other competing interests. Okay, well now we have firms that both have an interest in selling to the military, but also have commercial interests, and those commercial interests are global. So that's a more complex environment. At the same time, the opportunity is there are many more technologies that can have an effect for the military. So we can move beyond the capabilities of just ships, tanks and planes. to autonomous systems, AI that can do the work of what many people would do much faster. We've seen that with the Maven Smart System that the Pentagon is now employing. Commercial space, now we can have much more awareness of what's happening around the globe than ever before because of the number of satellites that are in place that are commercial, not government owned. I mean, think about the intelligence win that that created. It was the commercial satellite imagery that allowed the US government to share with Ukraine, our allies, the press, and the American people that the Russians were going to move in on Ukraine. You might remember in the days right before the war, there was controversy around that. Zelensky himself was saying, No, I don't think they're gonna be foolish enough to do that. But the US government was pretty steadfast and we could do that because we had commercial imagery. We didn't have to reveal the the government. information that we had from exquisite satellites, it was all there in commercial imagery. And when Putin was showing pictures of tanks being loaded on rail cars in in social media posts saying, no, w this was just an exercise and the equipment's on its way back to Russia, the satellite imagery didn't lie and said, no, the forces are amassing and actually increasing along the border. So we could call him out in and that lie. And we're able to do that because of commercial technology. Really I think that gave the intelligence community the biggest win they've had in a very long time. Jamie Schneiderman: So no no and so listen, I I see the for me just to be clear and and the benefits on the on the defense side are huge. I can see the defense. I I'm actually I'm I'm curious, and it's and it is, it's a real true curiosity about the challenge that you're investing in companies based on their capability. you need to know the capability. What are the sort of general complexities of investing in a company based on its capability, its potential, but also recognizing the pull the pull between the commercial side and the defense side. Is it more complicated from that perspective? It seems like it is. Michael Brown: it's a it's a bit more complicated because as we know, the military is not an easy customer to work with. That's the experience that I gained working at the Defense Innovation Unit being on the government side Jamie Schneiderman: Sure. Michael Brown: and seeing how many obstacles there are, DIU's whole purpose was to reduce those obstacles and make it easier. So less friction to having smaller companies if you're not a Lockheed or Raytheon to be selling to the government. I'd like to think we were successful in that and now a lot of what we pioneered. Is actually being expanded across the whole Pentagon. That's very gratifying to see. We can talk about some of that if you want. But the companies that are gonna be successful there need to be thinking about some dedication in the go-to-market strategy or the sales and marketing approach that they're gonna take with the government versus what they would do with commercial customers. So those tend to be different motions, but certainly can be managed. And maybe not the smartest thing to try and do both at the same time. So a lot of the companies that we work with will choose a the commercial side or the military side to get started with before they expand and and try and serve both. But I think it gives those companies who are able to do that a much bigger potential in terms of the market, maybe more stability in the market if they can sell to the military. The government tends to buy, you know, for very long periods of time. and Also more exit opportunities. so from an investment standpoint, it's a plus, big plus, if you can be a dual-use company. So that's mostly what we're investing in today. We do allocate about a fifth of our capital that's going to military only. So those companies that you know might be doing drones as an example. We made an investment in a company called UFOs. They're doing Unmanned surface vehicles, so water drones, they're doing aerial drones, and they're doing ground drones. Well, there's not as many commercial applications for that. So if you're gonna make an investment there, you're gonna be investing in something that's that's military only. Jamie Schneiderman: Got it. for for what what would you say? So you're investing in lots of different companies, you're looking at their potential. where where have you found the greatest surprise in terms of where commercial capability has been able to move its way over into application in the military? Are there are are like you know, when you talk about drones and you talk about some of these, you it's I know the drone one, it was military specific, I heard you. Michael Brown: Mm. Jamie Schneiderman: I I I I am listening. So so the but but I'm but I'm trying to get at the the are there are there more surprising reapplication or are you or do you go into companies and go, you know, you may think this is commercial only, but we actually see application that are military. So how how does that work? I'm curious about that. Michael Brown: Yeah, yeah. Absolutely. Let me give you two quick examples. One of the investments we're most enthused about is a company called Code Metal. they are an AI they're a code translation company, meaning they use generative AI to take one source of code and translate that into another. There's a lot of interest today, obviously, in code generation that is AI based, Claude Code being the example of that. But this company, Code Metal, will take an existing base and there's so much code that's already written out there. Some of the experts will say that's technical debt because it's written in old languages, some of it in languages where we don't have the programmers anymore. That really needs to be updated. In their case, they started thinking we really want to be working with companies that have to write their code in languages that optimize for size, weight, and power or applications at the edge. So If I'm writing for a satellite or a drone code, it's easier for the programmers to write in a higher level language and then translate that into a lower level language that might have the processing capacity at the edge. So that's how their business got started. Got started commercially. So first customer was a logistics customer. And we immediately saw the potential for the military, got excited about that. Now their biggest contract is actually with the Air Force. They've just announced an eighty million dollar contract with the air force. But they still have tremendous potential with commercial customers. Raytheon is a customer, L3 Harris is a customer. They're being pursued by the automotive industry, the semiconductor industry, because everyone has bases of code and much of it needs to be updated. So it's it's Jamie Schneiderman: Yeah. Michael Brown: a very exciting company, tremendous technology that they have developed for validation and verification so that once they use a generative AI, it can be tested to make sure that the code is production ready. You can't just you know send a code base into Chat GPT and say, okay, give me output and st and run with that. It's it's probably not gonna work. So you need to have these validation Jamie Schneiderman: Yeah, right. Michael Brown: verification methods to make sure it's really ready to use in a production environment. Another example a company That we're excited about is Armada. Think about them as remote computing capability that's connected to the internet. So what that means is it's a data center in a shipping container. So imagine a shipping container that we see, you know, every day coming in on cargo ships, that's connected through Starlink. So now I can have a data center capability at the edge. I could put that compute capability in a desert. near an oil refinery or a a drilling facility, I could put it on a ship, I could put it in the Arctic, so places that previously could not have supported data center. So as long as I've got power, which I can generate on site, I can have this data center capability and connected to the internet. So that's making, you know, compute power available kinda anywhere in the world that you might need it. And that's has a lot of applications as I just alluded to for the military, because we're usually fighting in places that aren't necessarily optimal places to put a data center. But also Jamie Schneiderman: Yeah. Michael Brown: so many commercial applications I mentioned oil and gas. I think one of their largest customers is state of Alaska, which obviously has a lot of re remote locations where I might need to be sensing things, adding more compute capability. So Good example of a real dual use business. Jamie Schneiderman: So no, this it's terri terrific. I I'm curious, like for these companies, so they have interesting technology. The applications are the let's use Armada that you just described, which clearly lots of significant potential opportunity and and and and useful usefulness application. But I I'm curious, it feels like long Sales cycles, long long time frame to go from we have this idea, we've built something like a prototype, we we can extend it, and then who's committing and going there? What What does it look like from an investment point of view, from a building a company like this, as opposed to someone who's building like a consumer app where you can have it up and out and getting reactions immediately? Michael Brown: Well venture is a and form of investment capital that is somewhat patient compared to you know, what we might find either in private equity or certainly that a commercial bank would be looking for for repayment. And a fund life is typically ten years. So we have the time for businesses to develop and as you're pointing out, not everything has a consumer based app that's gonna catch on quickly. So we're fine as long as the fundamentals are there to achieve a business of scale, of waiting the time for you know, enterprise or government sales cycles to reach fruition. So our challenge is how do we identify those technologies and leadership teams that are going to be able to really make sure that their solution is a fit with the custom what the customer wants. And sometimes that's an iterative process. But if we can identify a promising technology solving a real pain point, and the company has the intuition, the grit, the ability to make changes by listening to what the customer is saying, that may take some time, but that has the potential to be a very big business. And that's what what venture is really all about. Jamie Schneiderman: Okay. So so where what are the biggest challenges that you see some of these companies or some your portfolio or other things that you you've you've worked in companies, you've you've led them, and now you're investing in these businesses that are obviously earlier stage. What what are the kind of what are the biggest challenges that you're seeing them run into? yeah. Michael Brown: Yeah, you're gonna find these are kind of pedestrian things that you would imagine they would be. So biggest challenge is always is do I have the right leadership team? Is the talent the best I can put together to address this problem or sell to this customer set? So we start and the most important part of our decision criteria is really the leadership team. How capable, how suited to what they're trying to do, how much experience do they have in in this space. you'd be surprised at the number of people who want to start a business, but they really don't have any background in the area, don't have any experience with the customer set. So the best entrepreneurs are those that maybe they've been the customer. they've been thinking about a problem for a long time and they have spent lots of time talking with prospective customers to get some feedback early on their idea. So Leadership is number one, making sure the management team is right and then helping those leadership teams expand because if they start with three or four folks, they're gonna need to expand. If they scale, how do we use our network to help them get a business development person or a CFO or g general counsel? Some of the other functions they're gonna need to fill out the team as the company scales. I'd say right after that would be go to market. So How is their go to market strategy crafted to what they want to do? Obviously, one of the benefits of SHIELD is the experience we have with selling to the government or being that customer so we can help them with what are the right things to do. One of the things that I think confuses a lot of companies trying to sell with the government is we spent almost as much in the Defense Department for research and engineering projects as we actually do procuring what's going to go to a warfighter. And it's great to be associated with an RD project, but the rate of transition, which means how many of those actually become a program that the government is buying for a number of years, in the past has been limited. that's one of the things that we focused on at the Defense Innovation Unit was how do we get what we call that transition rate up? And we got to the point by the time I left several years ago, probably higher now, where fifty percent. of the projects we started resulted in a production contract. In a sense, we were helping qualify the government as a customer, meaning, is there a agreement among leadership that this is an important priority? Is there budget to support it? Is the government ready to go to start evaluating solutions? So if you're a company and you're trying to sell to the Pentagon, it's confusing. Who do I talk to? You know, there's hundreds of admirals and generals, Am I talking to someone who really has acquisition authority or just someone who is, you know, an influencer, just someone with an opinion? so you really have to get to the programs where the buying activity is happening to be working with the part of the organization that can really lead to long term production contracts. And if you're just working with the research side, that can be fine, but you gotta realize that's not necessarily a path to an ongoing program, an ongoing revenue for the company. It might just be associated with a project where the government's trying to learn something. Well, that's beneficial maybe for both sides, but you have to realize what you're engaged in and how much time you're going to spend there versus really getting to that ongoing contract value. Jamie Schneiderman: And and does as your th you mentioned go to market, does you know there's the commercial and defense or commercial and government, if you like, as you as you split as you split them. D do does does the government relation the the connection to government or the pr the potential to sell into government or defense impact a company's ability on the commercial side? Like how how has that worked for you or with the organizations you're dealing with? Michael Brown: I think it's generally a positive because it's a validation of the maturity of the technology and the company's ability to support a large customer. So I think that's that's generally a positive. I don't see any businesses we're investing in where commercial companies have said, you're working with the Pentagon. Well, please go elsewhere. No. I think there's a there's a change in the environment. that we saw with the Ukraine war. I think there was a lot of skepticism about working with the government. If you go way back to the time of the Snowden leaks, the FBI suing Apple, trying to get access to iPhones in an unauthorized way. you know that was back you know 2015, 2016 kind of timeframe. more skepticism there, less entrepreneurs who are focused on what can we do to support defense. With the Ukraine war and what Putin has done there to show that, you know, there are still really bad people in the world and there's there's still good versus evil. Ukraine trying to defend itself against, you know, an attack from an aggressor who could believe that Putin was going to start the biggest land war in Europe since World War Two. more of a feeling of we need to support the good guys. so many more entrepreneurs, many more companies from that point forward focused on what can they do. To support defense. And as for the trends that we started out talking about a little while ago, it's now apparent that this is going to be big business. So the capitalistic system that we have that reinforces those who are looking for opportunity has kicked in to say, no, this this can be big business. And we already have now have some examples of that, none more prominent than SpaceX. But if you look right behind that, Palantir, which has been unbelievably successful as a public company now and Andreil right behind them if you've heard of them, one of what's called the Neo Prime. So someone that's developing a b big business focused purely on defense. It's beyond the traditional primes that we have seen, Raytheon, Northrop, Lockheed, etcetera. Jamie Schneiderman: Mm. And and sorry, one question that's popping up for me as I'm listening to this and thinking about it, d do you have and have you seen any limitation in terms of investing outside of the US? In particular if there's a potential for defense as a as an outcome or dispute. Okay. Michael Brown: Yeah, we are investing outside the US. There's a big opportunity, we think, in Europe. Europe is gonna want to not only rearm itself and defense, and there's been quite a bit of publicity about that. Maybe a trillion euros gonna be spent across Europe to increase its defensive posture, both because of what's happening in Ukraine and there's a lot of fear about what will happen after the Ukraine war and will Russia want to test. the NATO alliance even more now that so much of their economy is on a war footing. I saw some numbers that were kind of staggering. I think thirty percent or more of Russia's economy is supporting a war effort now. So how are they going to make a transition back to a peacetime economy or will they? it'll be very interesting to see. So Europe has to be prepared for that. The US, of course, with our policy has said you know, Europe you need to carry more of this burden on your own. you can't just rely on American taxpayers to fund your defense, even though we might still be very important for certain capabilities they can't do indigenously and obviously with the nuclear capability that we have. But point being, there's gonna be a lot more money being spent in Europe and a lot of that will be money that Europe will try and focus on European companies. So sure they'll be buying something from the US, but There's a premium right now on supporting European based defense companies. So one of the big investments we've made is a company called UFOs. Started out as Ukrainian, but now they've reincorporated in London with manufacturing in Poland and Portugal. And they've just now created some manufacturing relationships in the US so they can now supply worldwide battle proven technology for surface vehicles, aerial drones, and ground-based vehicles. And they have some amazing stats on what they've been able to do in Ukraine. I think they've sunk up to 20 ships of the Russian fleet in the Black Sea. they've engaged in operations where Russians have surrendered to purely autonomous forces. So imagine ground drones and aerial drones and Russians now holding up signs saying I surrender, because basically is no way out that was the right move for those Russians. But never before have we seen autonomy play such an important role in combat operations, not just something off to the side, not just a single drone hitting a tank, but engaged in operations that would result in a position being surrendered or a kind of multi domain being able to do something from the sea and the land and air at the same time. Jamie Schneiderman: I I could do this all day, but but we can't. and so right, I've I I love this. This is fantastic. Michael Brown: it's a fascinating area to be in. There's no question. Jamie Schneiderman: It really, it really is. it really is. And it's sort of that that crossing point between all of the different factors. I I I again it's it's been it's great, and I love the the way you're sharing it. So so thank you. how do people find you? How do they reach you, get hold of you, follow you? What what what are the ways that they can do that? Michael Brown: Well, eas easy to find on on LinkedIn, but I'll give you my email. It's Brown, B R O W N at ShieldCap dot com. We're always looking for great ideas, entrepreneurs to invest in. So that's that's what we do. and happy to talk to anybody who's thinking about starting a business and provide some advice on defense tech. It's it's not the easiest market you can go after. Maybe consumer based apps is easier. But there's a lot of opportunity and of course it's very mission oriented. Whatever we can do to support our warfighters around the world, to me is a is a very worthwhile cause. And I had a chance to get to know many of those folks in my time at the Defense Department. really I've never seen a more dedicated, talented, and mission oriented set of folks. Pretty inspiring. Jamie Schneiderman: That was awesome. so thank you so much, Michael. really appreciate it. I'm I'm sure everyone got a lot out of it. I certainly did. This is I loved it. it was great. And anyway, so thank you. and to everybody who is watching and listening, appreciate you. And until next time, thanks. Michael Brown: All right, thanks for having me.