Resilience Conference 2024: How Governments Invest in Startups

Transcript

on the panel is Hugo James he's the managing partner at NF then we have Clayton Williams who you met yesterday he's the managing director of incel international then we have Patrick Schneider chowski partner at nif and finally we have Nabil Ben mahadi business development manager of the European investment fund and moderating this panel is a former Tech crunch colleague of mine ingred London European editor at Tech crunch give him a round of applause and bring him on out can you guys hear me okay hey darl okay thanks so so much for uh coming and doing this panel towards the very end of the conference so it's great to have you guys here so listen we've got um our I want to just go straight into this but I I have primed you guys on the first question I'm going to ask you because I think it's kind of important because you're coming from four different totally different organizations so I'd love to know if you guys can just do the kind of like one minute elevator pitch for how your organization your government organization invests in startups and you can kind of take that however you want you can answer how do we do it or what do we do or what do we wish we did we can start with you you since you're at the very end yes thanks very much um so NF in in short it's the government's uh corporate venturing arm for National Security and defense we have one overarching Mission which is really to accelerate uh the adoption and the understanding of advanced capability into the National Security defense Community uh we do that uh really with a hybrid model so we we operate a fund of fund strategy we have a direct investment vehicle we run R&D with companies to enhance and adapt and modify their product uh and we also run an Insight program so we're always collecting information from the market passing that back into government so that we understand um where the bleeding edge is and we can make more informed uh procurement and acquisition decisions uh so that's us in the nut cool thank you nael thank you well the European investment fund is part of the European Investment Bank uh Group which is basically the financial arm of the European Union and very roughly what we are doing is that we are translating you policies into Financial mechanisms in order to cater for those policies so at we focus on startups and smmes that we see as the backbone of the EU economy and the way we are to get into the today's subject the way we tackle um thematics such as defense is that we start with a pilot usually it's an equity pilot how the the bulk of our investments are done through intermediaries VC and private Equity Funds um that will um in turn Target uh smmes and and and startups so we start with a small pilot and then we try to scale it up as much as possible also depending on the on the funds that we are able to uh to raise for that particular thematic cool thank you Patrick thank you um yes so um I'm a partner of the NATO Innovation fund it's uh 1.04 billion Euro fund backed set up by NATO backed by 24 NATO allies to invest in deep Technologies uh strategic Technologies for um for dual use that can be applied to defense security and resilience uh we were set up a year ago we've uh We've started invest we started investing this year um and uh in addition to investing in commercially successful dual use startups we um one of our main missions is uh adoption as well as capacity building across the aliance okay okay we'll get back to that actually in a bit with the adoption of it uh clay Williams from from inkel uh uh we're 25 years old uh we are founded uh by the CIA in the US uh we now represent over uh a dozen agencies uh within the US intelligence Community the UK uh government and the Australian government as well um we're actually not for-profit uh so we're not government uh we're not for-profit uh and we are solely focused on identifying adapting and delivering technology into our government customer hands cool very very good thank you um so listen uh one of the big things for VCS when they invest in startups um is deal flow uh and you know the the the process of how they get how they figure out what it is that they should be investing in you've got you know scouts out there you know you've got very large firms with whole scouting networks you've got um people who are building like massive AI databases to uh you know uh literally read the internet to figure out who they should be investing in etc etc you've got you know obviously VCS who are you know apparently you know Geniuses just divining who to invest so how do you guys do deal flow how do you guys find who you should be investing in do you do it straight by inbound and then triage what you get or what um any of you can answer this question I'd love to hear from any of you on it yeah sure why don't you start yet yeah we have a a team a tech diligence team at Nel uh that's about 30 phds that look after cyber security or Quantum or whatever it might be uh and so our kind of networ or Syndicate of Co investors often reach out to us with deal flow because uh we can provide uh uh pretty good Tech diligence are they other VC firms or are they yeah right so not individual not not Angels or could yeah could be and we're stage agnostics so if it's really early stage it's usually an angel it's late stage it's a growth fund and do they apply to you to to do that or do you reach out and you find someone who you like the the look of and you say yeah yeah it's we talk to over a thousand new companies every year right um so so it's it's it's a lot of sorting the stack but um we have pretty good coverage I think Europe uh Asia is a little bit tougher we have smaller teams internationally actually Patrick why don't you tell me since you guys are I think the newest of all of this here um yes I you you can go on all the learnings of other well I mean so so like like inel we have a network of of co-investors other VCS um angels we uh you know including in Cel and enf U we also have a fund of funds program so we we we we invest in funds across Europe across those 24 countries so we get we get deal for from our portfolio funds um we also get we we have we have 24 Sovereign governments as our LPS and they have their own a lot of them have their own um National Funds they work with their local uh VC systems so we get a lot of inbound from that um yeah I mean we've looked not to be competitive but we looked at 1600 got some catch okay um what about either of you want to answer that I might just jump in on that point I think you the challenge in the market is is not supply you know innovators will innovate that will always happen especially these days exactly there is a myriad of you know entrepreneurial activity always happening the challenge for governments is very much demand so what are we interested in how do we communicate that out to the market um and that is one of the reasons I suppose most of our respective organizations have been created is to try and channel that demand communicate what our interests are into the market and the market can hopefully respond and one of the reasons why n was created and focused on the Venture Community because that is a world that exists on relationships and is built on trust and I think that is one of the most powerful things we can deliver into the market is this ability to to really trust what we're saying as a kind of validated demand signal yeah and entrepreneurs can then mobilize around those and start building technology naille how are you guys um making yourselves I mean you're largely doing indirect investing is that right absolutely yeah we're ining realm so from an LP perspective and for instance again um in in relation to to the topic of today defense when we when we look at a thematic such as defense and we did something similar for space we try to sort of build the ecosystem in the sense that we are going going to try to um provide funding to VCS that are going to be fully dedicated to to the Thematic or partially dedicated and what we what we want to do is to send a signaling effect to the market in order to act as an incore investor and of catalyze more on private investment and and make maximize our Firepower and make the most out of of of our mandate which is not huge and from a company level we also have our advisory activities that we usually don't need but we have Partners like such as the European commission and we also try to um um sort of um interact with companies and and promote interactions between investors and companies do you ever feel like you would be better serving um I don't know your stakeholders if you were being able to make direct investments in startups though I mean it sort of feels a bit powerless in a way you're you're sort of relying on other parties to make good decisions on your behalf um well it it has the advantage of being able to uh enlarge our reach because for for one Euro that we that we put in a VC fund it will translate into at least two to three or four EUR in in the final um benefit well in for for SES as a whole so that's uh so that's an advantage and we can actually do um direct Investments but we it's not the core of our business we do it on an opportunistic basis and we also we usually do it with a with um with a portfolio fund so whenever an opportunity comes up through a fund that we know well then we might come in and and match their investments in order to um potential scenario is where when a company wants to is is is on the On The Fringe of being acquired by um uh outside you that that type of thing can I just jump in there because I think I think institutions like the eif have a huge effect on the on the European Venture ecosystem and so eif eif sorry so so they're they're crowding in capital and they're building capacity across Europe and so in some ways you know you can have I guess it it depends it depends on you know the the scale but the um the the the the level level of impact they they have by creating new funds um actually helps us as investors as well right because it just lays the groundwork of a baseline of of funding that's there to tap for building the bigger rounds okay so I have some questions about that as well um but before I do that something you brought up about how you're sourcing um deal flow you mentioned like a really wide range of stakeholders there um you know from countries through to Nato itself through to you know um VCS you work with and so on so um and and Scouts how are you do you ever have come up against really really strong conflicts of interests between all of those different people I mean and how do you guys resolve that in what in in in what sense well if you've got if you've got different countries um not everyone is always on the same page you have different priorities from different people um different places uh and how do you resolve that you know I think that you know when you think about a VC I I keep talking about VCS but they are the kind of you know the comparative thing where you have LPS who have some influence but ultimately hand over some money and then let the G you know the partners make the choices is it following the same or do you have to somehow answer to the stakeholders in a more fundamental way no I mean I think the the LPS have entrusted us to make all the investment decisions and so they you know of course countries have their own National interest but that doesn't that that doesn't factor in our into our day-to-day operations um so yeah I mean they and and they they've all signed up for our mission and so they they they they let us do our job obviously they're happy if we come to their countries and look at Investments there but ultimately it's our decision and we we're investing in the best companies that align with our missions so there's no interference okay and maybe just to add to to Patrick's comment there so one of the benefits of using Equity is it creates alignment so going back to my trust Point um you know the investors the lp the GPS they're all aligned because their interests um uh very much focus on the financial outcomes in in the case of our um uh in our entities they're focused on whatever the impacts uh are from from those Investments so I think that's what we saw when we started undertaking Investments is that we were creating a much better Baseline for building these long-term relationships and then hopefully wider impact 3 days okay um so kind of want to shift the conversation a little to talking about this idea of dual use or what the purposes of like what what your end end game is or your end goal is um it's been quite interesting because I think that at some point people thought about government investors as being very very focused on for example National Security or very directly national interests um I sort of feel like the conversation has evolved I mean even the name of this conference kind of says it all resilience it's a really wide wide term it can mean anything it can mean you know um you know clean you know alternative energy or a military startup um or cyber security um how are you guys kind of viewing that investment thesis nowadays um what what is your priority at like int I know you say you're a nonprofit and you sort of answer to a lot of different companies uh company organizations although really I still think in my head is very much more of a US focused um yeah that's correct I mean 95% of our funding comes from the US so so we're we're very us focused um but but I think the US recognizes that that they don't have an exclusivity on Innovation right in well you're here in London correct yeah and we invest about uh 15% of our portfolio is outside of the United States okay um so yeah dual use versus single use and all that it's a bit of we don't use the term defense Tech we don't use the term resilience we we use it uh yeah global global security is what we call it but it's really uh the technology is not uh usually that application specific it's the customers who have specific uses for the technology so we we have companies uh that primarily Service uh large Enterprise Commercial customers but that's exactly the same use case that the government needs and so if we can just adapt the product in some small way to make it usable by government well then it's an incredible money savings uh uh versus building a a Spoke intelligence Community solution so so we really try I mean it's a very expensive way uh to develop technology by going through a venture model and so we try to show the value uh uh through the use of multiple markets to pay for the version 2.0 or 3.0 is that like a kind of part of something you build into looking at or evaluating companies that I mean I think I would think that what he's just said is probably the blueprint for how a lot of you guys operate but let's say you you get a company that has a very pure it seems to have a a very specific use case that's not as uh applicable across multiple uh you know scenarios is that a dealbreaker are you looking for things that are inherently feel more uh um extensible in that way maybe I'll just jump in really quick because it's it's actually pretty interesting I comes to mind I was looking at two different added manufacturing companies uh a few years ago and and there was a clear market leader uh uh which which ones were they uh well so off the Record um uh uh we'll go off the Record we comparing dustop metal and mark forge okay and at the time desktop metal had uh a more advanced product and they had uh numerous numerous applications that could be applied uh but the software was very cloud-centric and kind of a mess to convert to government uh and then we looked at mark forge that had a very similar technology but had a much more streamlined offline capability it was much easier to adapt and they really cared and and and wanted to engage in the military Market so we invested in mark forge despite perhaps the more attractive Venture uh returns that that desktop metal would play now it turns out it was a good decision either way but um uh I think they're both now acquired by an Israeli uh uh uh Nano Dimension uh recently in the news but anyway it's it's it's not always uh the market winner that's the impact winner for government okay you guys have thoughts on that I me yeah Patrick I I agree with that but also on the flip side I guess we want to invest in companies that are resilient for the longm and that that means that they're they're well funded and they're able to um generate revenue and and and raise further rounds because you know a company that has a very specific application might not be able to stay in business for you for a very long time and then they're not a good um they're not they're not going to provide a good long-term capability for government so that's why we we want to look at companies that can actually um that that can move between markets it's not necessarily one one or the other or you know this first and then that second it can go it can go either way but I supp that's different from a normal VC really except we want we want companies that can be adopted by government that can be adopted by government that's that's yeah Hugo are you are you looking at I mean if you get are you looking for companies that have that kind of resilience to them as well or are you looking for I mean you have you have in the name of En is it's very has a very specific Focus um is that is that kind of your primary focus would you say are you have you trying to evolve that so I think the the public line is we're sector stage geographically agnostic we want to invest in the best technology that's going to give our mission Partners uh a Competitive Edge in the world that we live in um you know the happy byproduct of that is a lot of these technologies have massively addressable uh commercial markets so if I think about our direct Investment Portfolio there's there's Quantum Technologies in there there's AI there's additive manufacturing um and you know these are all Technologies that you know the rest of the market is investing in going back to Clayton's Point uh and the melds from earlier is that you know we want to crowd Capital into these technology areas that we see as critical not only for National Security but wider economic growth prosperity and resilience um do you feel that um you know there was a time when I in Cel I've written about tech for a while and you you it was impenetrable you know your name would appear occasionally appear on things sometimes times it wouldn't and then I would be told they're investing and then I would write it and i' would be please take it out of the article please take it out you know so you know there's this absolute to and fro over what's secretive what's not Etc these days I would say that there's um you're more likely to see the incel logo as they Des you know as as they say it on things um how how does how do your organizations feel about your names appearing um as Public public public backers of of companies do you are are you sort of do you disclose all of them I mean I will say like on the um E's website E's website there is like ver virtually nothing about what it is you guys do and actually the same with n you have a you have a few examples I think two examples on your site I think you're you've invested in a lot more than two companies um yeah how do you maybe one of you two can talk about that since you're you're probably disclosing a lot less than these to are these days um no I I think it's it's improving it's it's getting better we have a security and defense office now at uh in in EAB group and and actually if you look in our past investments before we actually had a dedicated defense mandate we invested in in technologies that at some point became uh defense related so it's it's I think I think it's it's it's an interesting um it's an interesting era because now we have a dedicated mandate but we we already have experience in in in investing in that in in that sort of Technologies so I I I would rather see it as from a journey perspective saying defense mentioning investing in defense a few months years back in EB group was obviously taboo and now it's it's now it's part of the eight priorities we have our I mean I'm I'm I'm part of a thematic team and I'm and it's I'm I'm officially covering the the subject of Defense along with other colleagues and we have a security and defense office and we are going to roll out our mandates and our investments are obviously going to be um um public so it's uh obviously it comes down to dual use uh our what we call defense but it's a it's a journey and and and I think it's uh we are on track for um to make progress what about you Hugo are you guys going to start being a little more public about what you're doing or yeah that that's definely the ambition as long as it's helpful and additive to to those companies and I think it's worth reflecting we're we're less than six years old so somewhat of a startup ourselves um but we invest out of a limited company you can find the portfolio on company's house if if you want to go and look for that um so deliberately not trying to mislead anyone um but clearly we're representing National Security and defense we need to protect their interests um and ensure that you know the wider National Security and defense capability is not vulnerable by the activ ities that that we're undertaking so yes the the answer is we want to be more open and connected with uh The Wider Community um but only do so in a way that's that's not going to create any Jeopardy for for our customers so we don't have a lot of time I just wanted but I did want to talk about something about the opportunities for your startups so now I know that a lot of them are obviously serving much more than just government entities um in terms of their target businesses um let's just focus just on um government deals though and and deal deal deals that they can deal their deal flow into government organizations now I know that um you know with with with with with a lot of government services they've got their primes as they call them you know the very big companies that are their main suppliers for different things how is it that the smaller startups um are they getting a better look in or is that a challenge still for them to actually connect with uh business within government organizations these days versus you know years back yeah I think the defense primes realize that they need to play in this this Market as well to stay relevant uh many of them have their own Venture arms that are strategic investors that we co-invest alongside um it's very important when we make an investment we understand how that technology could be adopted if it's if it's a widget that goes in a fighter pilot you know cockpit then you need to have locki interested uh or else you're just you're not delivering it to a place that's effective so so that's something we spend a lot of time when we make an additional as we envision if this is going to be wildly successful what does the end State look like and and and does that does that have meaning is that getting easier though um I'm assuming it must be with more startups doing more it's well it's not just it's it's also on the government's side to demand that they have open apis they have standards that that they can build interfaces to so that these startups can plug in uh to these kind of bespoke systems that have been built yeah Hugo have you seen any do you have thoughts about how that's working within the UK just EO you know Clayton's points you know primes play a critical role within our ecosystem you know they're called systems integrators for for a reason now clearly there is a an imperative for them also to access the best technology in the market and um you know I think at the at the moment that is not going to not not going to change and we work very hopefully collaboratively with our with our Prime Partners um Patrick I'd like to ask you a question before we end um with the fact that we've got so many massive events shaping our are kind of you know thinking about things like defense Tech um these days um how much of that is informing um where NATO targets its Investments or are you trying to kind of ride above all of that and just make really what you believe are important Tech Investments or are they very much shaped by world events well I think it's I we're shaped by short-term needs obviously but but we also have to think for the long term because you know there obviously there have been massive geopolitical shifts recently and that's that's affected how we how we very existence I would think yes but I mean so we were actually set up well we were conceived before Ukraine okay um but that's very much influenced um some of our decision- making but then we also have to think long term uh we have to be investing in in long-term te deep technologies that will provide a capability even in 10 or 15 years because our competitors are doing the same so we we you kind of have to do both yeah okay we have literally 4 seconds left so I'm just going to say thank you so much to all four of you thank you so much for those of you who came in to listen so thanks