In-Q-Tel CEO Steve Bowsher & VC Kirsten Bartok on Funding America’s Defense Tech Future

Transcript

okay first uh like to thank everyone for coming out today and especially uh Luke and Kate for this amazing Austin for America I think as our industry becomes more relevant and timely it's important that we have an opportunity to get together with the dynamic community that of people who are actually in the arena doing things so we need more of these convening events um today I had the honor of uh having a fireside chat interviewing Steve Bower the uh CEO of tell and while we had a this is Austin for America's first year I always like to think defense Tech has really been around for five years and each year we gain momentum in terms of mainstreaming people coming in wanting to be involved in this community but Steve and incel really were the founders uh incel just celebrated as 25th anniversary you've been there since 2006 um they were there before for defense Tech or national security investing was cool and I'd like to spend a little time today kind of talking with Steve about the history where they came along and and where you see things going today so all right well thank you very much uh for inviting me here it's great to see everybody out here and I'm uh excited to have the conversation today good why don't we jump in because the concept of the intelligence Community uh having an equity investing platform is a little heretical and it certainly was not thought of 25 years ago when you guys were found it how did how did they how did incel come about who are the brainchild so uh several people uh uh have claimed credit for uh founding inkel which I think means uh uh we've done something well right if everybody wants to be a uh a part of the founding team but uh uh I really give credit to uh uh three folks Within uh the Science and Technology director at the time uh Sue Gordon uh uh ruthanne David and Joanne eam and uh uh the fundamental premise that they had which is readily accepted today but much more controversial back in 1999 was that Innovation had shifted in the United States from large corporate R&D Labs like xox Park and Bill labs to the 10,000 plus Venture back startup companies at the time and they realized they didn't have the ability to access the Innovation that was occurring in these startup companies influen product Direction and ultimately ingest and deploy that technology in Mission and operational environments and and they decided they need to create something to do it the other people I would give credit to are George tennet and Buzzy kard who were running CIA at the time George was the director and Buzzy was the What's called the coup the COO uh um and uh uh uh they're the ones that took the idea from uh uh Sue Joanne and Ruth and turn it into you know uh uh something that that was real so um uh uh they created Inky tail and gave us the charter of figure out how to let us access it in innovation influence it and ultimately uh deploy it and that's what we've done for 25 years I like to say you know this space which is hot today to your point is a 20-year overnight success story uh uh uh because we were working on it for for a long time before it became uh uh uh sort of popular but uh uh you know if you think about it the best Technologies in this country are being built by these startup companies and it's it was a shame that neither CIA or DOD was able to uh uh have access to it is that better great sorry about that Steve with that you know we all know Venture funds take time to mature they take time to when did it when did the table turns and the tide turn internally where people like wow these guys are doing good thing you we talk about paler you had a lot of successes when was it a real recognition these guys are on to something and you know we need more of them I think it goes back to one of our earliest uh Investments was was in a company that was was developing a browser based interface for uh looking at Satellite imetry back then the state of the-art for agencies like NGA and nro were to use this really clunky old client server uh uh technology access imagery and we found this company that was building a browser based uh uh uh interface to do uh uh a satellite imagery for the commercial and residential real estate markets we invested in that company Google bought it and became Google Earth this product that was distributed widely and and and and that was the I think the first time that the light really clicked on for some of the agencies we were working with of like oh this is what Inky can do it can tell take this technology being developed for the commercial Market that has nothing to do with us turn into something that we can uh leverage and use and then we can also see it become a huge Commercial Success uh uh as well so that was really you know I think the one that caught everyone's attention and made them realize oh uh this model is uh uh something to offer us I think that was super helpful there's a little part of me wondered I helped stand up OC was in there at the and we kept saying why can't we do Equity why can't we do more you're not part of the dod over the years you have had more and more organizations throughout the government sign up and be your partner why why isn't it across the government and why are people so resistant to this Equity concept yeah I think uh there's a number of lawyers in the government that uh uh have concerns about government uh uh uh in equity uh there's also concerns um going back to the Loan program that Doe had that's slendro is part of uh uh we invest in speculative early stage companies and anybody that uh uh is familiar with this business I think most of you probably are know that in that stage of investing 50% of your companies go to zero right uh uh uh and the government isn't really a business model that's used to seeing uh uh Investments go to zero uh uh uh and so there there's discomfort with that uh uh as well well um finally you know and it's a little bit unfortunate there's always a little bit of resistance I think about the fact that we were started by CIA and we're perceived to be this sort of uh Toy if you will of the uh intelligence Community right and DOD wants to wants to doesn't want to take second uh uh uh uh uh position to anybody right so they I think they thought at times about doing their own thing as opposed to uh uh uh working with us but we do work with uh uh several different pockets of DOD and we we feel like we uh deler a lot of value to them and we're excited uh to continue to do that okay I'm going to double click on a comment you made because I agree with it that but I I'm always the person who thinks if there's people are rational you've been incredibly successful bringing new technologies into the government you've made the government a ton of money and yes Venture is risky but that's a pretty rational thought process to say we should be doing more of this especially since we're in the first the the worst ensive you know posture we've been in in decades yeah and and and and to be fair we are growing right so uh if we start out working with just with CIA today we're working with CIA NSA FBI uh pockets of DOD like I said uh NGA nro Dia uh parts of uh Homeland Security so uh uh TSA and CBP and DHS S&T uh uh uh so so we work with a number of uh uh agencies uh we work with space force we work with navy we work with uh uh uh uh other pockets of DOD that we haven't announced yet so so so we are growing but there is always a resistance there's always a sense of you know most of these government leaders come in they come in for two or four years in their jobs and they want to do something new they want to put their name attached to some sort of new initiative that they can point to and say hey I was responsible for doing that and working with a 25y old organization doesn't always you know catch their attention in that same way so uh uh uh uh uh but uh uh We've always believe that if we just put our heads down do good work deliver value to our customers uh good things will happen to us and that's our our our attitude and you've done that clearly thank you we got a lot of Founders here a lot of startup can you talk to them how your structure and setup is different incel is not the seveners partner firm it is a pretty large organization yeah so remember comes back to what is our mission right our mission is to ultimately see great in Innovative technology built by folks like you deployed in Miss operational environments so when we make an investment the investment is actually a very tiny part of what we do uh uh the heart of what we do is a contract in which we one uh uh provide NRE dollars non-recurring engineering dollars to the companies in order to uh either further develop the core product or add certain features that the government customers really want to see as part of the product but then the key part is we also purchase enough product to a pilot so in tell's customer we sign the purchase order the company gets a purchase order to show to its investors that says hey we have real customer here that uh thinks there's app applicability of their technology to a problem but we have the right to deploy that technology as part of the pilot agreement at CIA or NSA or one of the other agencies that we work with and then while that Pilot's going on and the end user figuring up thumbs up thumbs down does it address my problem we're working with the procurement people in the background such that the end user says thumbs up the agency contracts directly with the portfolio company for more stuff more licenses more gadgets whatever the company sells and we call that an adoption when there is now a direct contract between the agency and the portfolio company that's success for us that's success for the portfolio company because now they have uh a paying referenceable customer in the government and that's successful with the government agency because now they have Innovative new technology in M operational environments so that's that's that's the the the model that we pursue and any proceeds we generate that they just get reinvested into our model so we uh uh uh uh reinvest a proceeds we generate back into it as a discount to the taxpayer so how big is your organization exactly and how are you organiz uh 180 employees a lot of them are are technical people that one help with the evaluation of the technology uh uh uh that we are contemplating investing in they help with the uh uh uh architectures that we develop uh uh to work with our customers to sort of say this is where uh drones are today this is where drones are going to be tomorrow let's figure out what the gaps are that we need to go invest against uh uh uh and then we test the Technologies we invest in and then we help Implement and deploy the Technologies uh uh with the the customer so we have a lot of resources because solution transfer this process of getting technology out of the company and into Mission operational environment is hard and we've figured out over the 25 years that you have to throw people at that problem in order to uh uh uh uh to make these deal successful I always descri the negative thing and most people know this is that it takes a lot of bodies to navigate and be an advocate within the building and that's what you guys are one of the things one of the many things you're expert at thank you you have an intern AAL offices an international strategy where did that come from what was the Genesis there sure so uh you know we were in this business for a while and you know we figured out like everybody else that Innovation is not captive to the United States there's some Innovation uh occurring outside the US that's uh very impressive and uh while the US government will not leverage technology from certain countries around the world that I think everyone can understand uh uh uh there are other countries that they will uh leverage technology from and so uh uh uh we uh went out and created a program called inel International uh uh we've opened up uh four or five offices uh uh uh around the world uh uh and it does a couple things for us one allows us to work with uh uh two governments uh the British and the Australian government so we do help them uh in a similar but smaller uh uh uh uh uh scale uh uh the way we do the US government but uh even for the uh offices not in those countries what we are able to do is really get create situational awareness about where Innovation is occurring uh uh uh What uh uh Technologies may be out there that our customers can choose to take advantage of if they want to but at least they're aware of them in case the adversary takes advantage of them as well okay last question go tell then I'm going to pin on some policy stuff how do you make decisions is it investment committee like or how does that work is you have to have a buy in from you know some part of the government right so um uh we work with each of the agencies and each of the agencies have uh that I mentioned of the agencies have a deal pool uh uh which is the money that they allocate and they give us a problem Set uh uh uh each year that sort of says these are the problems we want you to go find deals for uh when we do find a deal that applies to the problem set we uh uh have our own internal investment committee which uh uh I lead it's three people it's myself it's the woman that runs our Tech Team and the gentleman that runs our investment team uh we approve all the Investments there but uh uh uh we also get an email of support from the uh uh agency that we work with s of saying we're going to do this deal on behalf of you against this part of the problem set that you describ to us and we're going to deploy it and pil it in this uh with this n user group and we get an email support from that agency saying yes we agree with all that and we support uh this semester we call that value statement thank that's super helpful um bringing you you like I said you guys have been doing this for 25 years you since 2006 it feels like we're at a precipice of a new time right you know the last are both administrations since Trump kind of alerted to the problem of our peer Challenger a peer adversary what do you think is going to change in the next Administration and how are you poised as you'd give advice you're kind of the the experienced Watcher of governments the impact what is something is the dod going to change is acquisition going to work be more faster Nimble or is Cost Plus done yeah all right uh there's a lot to unack on that question uh uh let me start also with with a little history first um so back in 2006 we invested in a company called palente it was a small company a bunch of X PayPal people uh uh right and uh uh uh what we got what over the next five years was a lot of calls uh uh from Top tier Venture capist saying hey Steve uh met palente here understand uh uh uh you're working with them we like the team we're intrigued by the tech but we just don't understand the market can you help explain to me uh this this market and I would try and do that and the P tier leadership would try and do it but ultimately most of these top tier Venture firms passed on the deal and they raised money through non-traditional sources uh uh at the same time although we were not investors I think a lot of that same stuff was happening with Scott uh uh SpaceX uh uh uh so you had two companies that were government first uh uh uh technology companies started by very high-profile teams uh uh that all the Venture capitalists knew about and and none of the venture capitalist really invest in those deals deals you fast forward to 2016 all of a sudden those were two of the five highest valued private companies in the world and they were exactly the type of deals that make the Venture Capital model work right they were deals that were going to return the fund power law for for their investors you know at least one time and maybe even two or three times if you were early early enough in those deals and the Venture capitals were like oh you know put your own curse word in there um we we we messed up right and so then you start to see firms like Andre and which create American dynamism you saw General Catalyst create Global resilience you saw bester Partners Founders fund uh Lux Caple a number of these other great firms all start to invest in uh uh uh uh uh uh defense Tech you know which is not a phrase I actually really love but uh uh uh uh it seems to be the one that the market has adopted uh all right and so now you've seen the second generation of companies come and build great products for uh uh uh uh uh uh uh the government think companies like andril skyio Shield AI uh uh uh van ofar Labs more recently companies like hadrien and uh uh uh uh Sanic you know and and others and uh um so the uh the Venture Capital industry has invested billions of dollars in great teams building great products for that at the same time the government started wake up to this and so in 200 uh uh 16 roughly right maybe uh uh 15 2015 if I think about uh DOD created diu aworks emerged uh uh osc came a few years later uh uh um uh uh the government started creating a number of different programs to try and access this technology better and to try and grally shift the spend of the dod budget from these five government prims that got a lot of the uh uh uh uh uh spend to these emerging companies and we're at this interesting point now where the Venture Capital industry is billions of dollars into this and they're looking around and sort of saying all right you know andreil is kind of achieving give us the prams yeah uh but we're not really seeing a lot of other companies hit that escape velocity yet they're like where are the programmer records where's the big dollar contracts there uh uh uh because if not we're going to think that this is an overinvestment fat and we're going to move on to the next uh uh uh uh great thing the dod is sitting there going you know some of the lessons that uh uh uh we just heard from uh Troy our previous speaker right is realizing that hey the future warfare is not uh uh uh very expensive very Exquisite very heavily manned uh uh things that the primes are very good at building the future of warfare is large numbers of cheap unand uh things and the the primes aren't so good at that right and and so dods are saying we got to shift the VCS are saying where's the money and I think this new Administration is seeing that and they're stepping up and sort of saying we got to act and so I'm fully expecting to see an acceleration from this new administration of of the shift and spin from the traditional Legacy primes to these merging tech companies and I think if that happens I think that will create a new set of products that will be successful uh uh uh uh uh for these various uh DOD entities uh uh in their missions whether that's in the South China Sea or in the Middle East or uh uh it doesn't sound like we maybe have that much of a mission in Europe anymore but uh uh um so I think there's uh uh uh I think it but if you don't see it happen in these next four years then I think this sort of current mindset of this is a great area to invest in in in a current mindset from the dod these are great uh uh uh companies to Source from I I think that's all going to get blown up and we're going to have to uh rebuild it in some form or another so his eyes are a little bit of bubble in optimism and I was talking about the Haves and Have Nots or not what are the things that would make this not happen that would not allow this new Administration coming in to make the changes in acquisition reform PBE that they think and do things quickly rein cut in the old ways and invest in the Innovative Technologies well so the procurement process of the dod right now is really set up uh uh some ways a lot like the Russians uh right on these fiveyear plans right you know and and it's not set up to be real time and and we've never really been a fast moving organization except when we're in crisis right after 911 all of a sudden the defense and intelligence communities REM really quickly uh uh uh and you know what I think a lot of us are trying to do is trying to say hey that moment is coming and and we need to start acting quickly now in anticipation of it instead of waiting for that but if we don't if this doesn't happen it'll be because we haven't been able break through the uh uh uh uh cultural resistance the procurement class uh uh uh uh sort of you know uh uh uh uh you know I don't get fired for for for not making a mistake uh uh uh um uh and I think that that will uh uh uh be what slows us down and so I think you know this new Administration does want to come in it wants to blow a lot of things up it wants to move fast and break things right and I think that's exactly the attitude that's needed uh uh in order to accelerate this this switch and if you hear adal paparo talk about what he needs in South China Sea and uh uh for IND paycom uh uh he's saying the organization is not moving fast enough he's saying he needs St stuff to happen more quickly and I think that message is resonating with folks back in DC we hear the message a lot we just hope they can make the actual changes right exactly I'm going make a quick pivot and then I think we're probably out of time what are the couple of areas you're most excited about you know we heard manufacturing at scale which we we know a huge issue but not quite Tech but a critical importance to how we fight is it the IC side of things the information AI what are what are the three areas you guys are saying this is high on the government's list we need to fix this and solve this problem yeah so first off I I do think uh revitalizing the defense industrial base uh and rein vitalizing uh manufacturing so China can't choke us with their control of the supply chain is absolutely critical uh uh to the United States we used to have can you make Venture money in it I I think you can you know we used to have a dual use manufacturing uh uh uh uh World General Mills used to make submarines Ford used to make satellites right you know a lot of companies that made stuff for the commercial World also made stuff for uh uh defense world and then we mve to this sort of bifurcated world where you know only a small number of companies you know that eventually became the five that are currently exist right now make stuff for DOD and we have all these other companies that make stuff for uh uh the commercial world so this is coming back you know and it's coming back aggressively whether it will be back in time for a potential conflict uh uh uh with Taiwan we we'll see but but uh uh that's coming back and I think there's been good legislation passed by uh uh Congress to help uh accelerate this and I think there'll be more uh legislation done so that re the revitalization of the manufacturing and defense andal is actually one area that we are very focused on uh investing in we're very proud of the number of jobs we've created in the United States uh through our investments drones counter drones electronic warfare uh uh uh uh uh Troy made mention that uh uh before that's absolutely critical uh right now and what is still missing from the US is this sense of uh uh uh uh low cost uh um if you talk to Ukraine operators in scale they're still using uh DJI Phantom drones made by China uh where they have to play this can Mouse game of hacking the firmware and you know uh China patching the firmware uh because uh uh uh the the mix of capability and price point it is still optimal for them compared to the US uh drones which are still too expensive we got to figure out how to come down in that price point uh uh uh the third area that we're uh uh uh or I'll give you two more I'll give you four uh I'll give you two more that we're investing one is autonomy uh uh we have the autonomy to operate an individual drone out there but uh this concept of swarms of drones swarms of satellites swarms of uh uh undersea uh Vehicles operating together making decision uh uh uh in uh decisions in real time at scale is doesn't exist yet you know and there's number of companies chasing that but uh China is chasing that but we we we don't see anybody having uh done it yet and finally I would say back to the supply chain a little bit uh uh uh it's actually critical materials and minerals and understanding how we Source them how we process them and do that in a way that we uh us can be confident in that supply chain that's a critical element as well uh uh and something we've been looking at okay last question you're a Silicon Valley guy you watched that that Network that ecosystem that flywheel go we're seeing a lot of out of elag gundo and Austin is really become a hubub what advice would you have here to make this the center of innovation what else does this community have to do well I I think you need a couple things and this community has a lot of it already uh one you need talent uh uh uh and you have a lot of technical Talent uh uh here in Moors moving in you plus you have a great University uh nearby that's producing uh uh uh young graduates uh uh every year so so you you have the talent uh um you have the capital uh uh uh uh there's a lot of firms represented I think in the audience and and more firms flying in from out out out side here um uh uh but you know the thing that still distinguishes Silicon Valley from other places is the risk profile and the risk appetite of uh uh uh uh humans you know in Silicon Valley it is vouge of honor to worked for a fail startup company ab and when you go work for a startup company and you get laid off everybody rushes in to re encourage you like hey that happens it happened to me don't worry about it look at you know all the great things I've done since then go off and and and your next one and I don't sense that that is quite uh uh uh still here there's still a little bit of uh sort of uh uh uh fear of of failure here and you really have to embrace it and that's really one of the magic things about cicon Valley is the way it Embrace failure as a way to get to success and so I think Austin is certainly heading that direction uh uh and we're eager to be here and we're eager eager to make investments here but I think it just needs a little bit more of that Steve thanks for making the trip thanks for joining us today at Austin fir America and uh thanks for all your leadership in the sector well thank you and I'd be remiss if I didn't say uh thank you to Luke and Kate uh uh for putting this on here I think uh Austin for America is great I came to one south or I'm not even going to say his name came to one other conference uh uh uh here in Austin uh uh uh once in my life was unimpressed by them when they put uh Snowden up as a keynote uh uh uh uh speaker and uh uh uh uh never came back after that so I'm thrilled to be here uh uh supporting a uh Austin for America thank you