Venture Capital Meets Mission Critical with Steve Bowsher, CEO of IQT (In-Q-Tel)

Transcript

[Music] [Applause] [Music] I'm Nikki Kristoff and welcome to Tech up today's guest is Steve Bower president and CEO of iqt it's an investment platform formerly known as inel the CIA launched the nonprofit 25 years ago and today it's a major fun of tech startups Steve's team focuses on finding commercial technologies that can also support our national security Mission from biotech to microchips AI to Space Systems today we're talking about the companies that iqt funds and what Steve looks for in a startup team thank you for coming in good morning thank you for having me I'm excited to be here and you're still on West Coast time that's all right I got got my smoothie here I'm ready to go got your smooth not a coffee guy we've covered this off it's okay DC is like a coffee and booze kind of town but yes you can have your smoothie because you're from the West Coast I'm super excited to have you on because I've been like you between DC and Silicon Valley in my career and been close to a bunch of startups in National Security space you guys have a bunch of money that you put into startups that can help the Intel community and DOD tell us a little bit about iqt sure so uh we were actually created by CIA 25 years ago uh in the fundamental premise which was controversial back then and much more readly accepted today is that Innovation had shifted in the United States from large corporate R&D Labs like zarx Park and Bell Labs uh uh and University labs to the 10,000 plus Venture back startup companies that were around in 1999 and CIA used to be able to go into places like xox Park and B labs and say show me the latest greatest stuff that you're working on and they'd show it to them and then CIA could also say that's really cool but you know what if you maybe added you know a level encryption to it or add a feature to it that makes it compatible with a certain version of scientific Linux that only we use anymore um we could really take more advantage of this technology and they make those uh uh feature modifications when CIA realized that inovation shifted they realized they weren't having conversations at the early stage with with people developing these new emerging Technologies they weren't able to sort of make feature requests and they were pretty bad at sort of buying technology from these start companies the government really doesn't know how to do business with startup companies yes right and so they they created Inky tell and so I said go solve this problem for us you know we you know dug in we figured out there problems on both sides of the equation right you know if your procurement officer one of these a gencies and you think about sourcing technology and your choice choices are IBM or Oracle or sap or North government or some startup company you never heard of is losing money has 12 months of cash on his balance sheet has you know a team you know of people wearing hoodies and jeans two meetings right you know they quickly toss that company out of the procurement process yet that company often would had the more Innovative technology at the same time the convential wisdom in cin Valley and other places uh uh in our country that had pockets of venture back star companies was the government is a great Market to win once you win it but it takes too long and too much money to be the first vertical Market that you go after because what people in DC don't understand about these startup companies is they get funded in sort of 12 to 24 month time frames and the founding teams the entrepreneurs you know they're constantly thinking what do I need to demonstrate in order to raise my next round of funding the most tangible form of progress to demonstrate is a purchase order so in the early days of company's existences they only want to talk to customers that can make a purchase or a decision in less than 12 months so that they can show tangible progress to their investors and raise their next round of funding the perception was government doesn't make purchase or this quickly so let's not talk to them so neither side really want to talk to each other and we came in and over 25 years uh we built up the trust with uh the government agencies that we work with and we now work with uh a large portion of the US intelligence and defense Community not just CIA anymore um but we build up the trust with those agencies for them to share their problems with us you sort of say these are the types of problems that we don't know how we're going to solve can you go out and find new Innovative Technologies that can help us solve these problems and then we build up the trust with the uh startup Community the entrepreneurs and the venture capitalist such that uh when we go talk to them and we say hey there might be an application of your technology to a US Government problem that either you haven't thought of or you thought of and decided was you know too complicated to go pursue we can get you an answer of is there an opportunity for you is there a market opportunity in less than 12 months and we can if there is we can get you to a purchase order and we have a whole process to that we call it investing to deliver capabilities so you're like Expediting the purchase by potentially by the federal government exactly so people think of us as an investment platform but part of what we do is to uh facilitate the piloting of Technology uh by an end user at one of more of those agencies of the technology from one of our portfolio companies and success for us is when the end agency adopts that technology deploys the technology into Mission and operational environment often times with the enhanced features that we helped the two groups come together on we do it at scale and we've delivered impact across a wide variety of uh uh us intelligence and defense agencies and now we have top tier Venture Capital firms who we've had successful co-investments with the past proactively showing us deals in their portfolio because they trust us to help them figure out if there is a government opportunity or not and you know now our space has become hot in the government where the government's finally realized that hey if we want to be uh uh equipped for nation state competition with China and Russia either on the kinetic Battlefield or through other uh asymmetric uh means that we the government need to understand and be able to uh uh leverage early stage emerging Technologies from The Venture ecosystem in the United States okay so I have a bunch of questions great so one question is and I know something about this not a ton about it we were talking before we got started my former spouse started and in Cel um funded Nano satellite company um and then sold it to Google so Bravo um but when it when we were going through that stage and he's going up and down Sand Hill Road with his co-founders he was looking for this total addressable market right not just DOD the defense department we know has a huge budget but the Intel Community has a black box budget of like what a qu trillion dollars Steve just nodded no I Shrugged sorry excuse me Steve Shrugged um and so that total addressable Market is huge but to your point if you're looking for a seven-year exit as a venture capital firm it's going to take them a lot longer than that sometimes so you're fast-tracking them to make products that are specifically Mission oriented so they kind of know that they're likely to get in with a bigger contract exactly one of the challenges is uh uh Venture capitalists like to invest in things that they understand right and for a long time they felt like they didn't understand the government market and venture capitalist evaluate uh startup companies across three different paradigms they evaluate the team they evaluate the technology and evaluate the market and venture capital is a hits driven business 10% of the deals generate 70% of the returns in Venture Capital it's kind of like the movie business Hollywood makes lots of movies that lose money but occasionally they make a a movie that makes a lot of money and that pays for all the bad movies they made C Val is the same way early States Venture capitalists lose money on over 50% of the deals that they invested but as one of my uh early mentors told me you can only lose one times your money you know but you can make 10 20 100 times your money if you pick the right uh winner and it's Uber and it's Facebook and everybody has these you know dollar signs within the industry it's called you know uh a fund returner yeah can one deal you know a typical Venture firm fund May invest in 30 deals across an individual fund uh uh but they want to know that each of those deals if they work can return the entire fund if they're successful I've been at inel for uh uh 18 years now a lot of the firms that we invested in in my early days there uh um the venture capitalist would be calling us up and asking us like how big is this Market you know because because that's what they need to understand is like if this company Works can it be successful and it's hard to figure that out if you're not uh someone who understands uh government budgets and government procurement processes and uh uh so we've often times become either a translation engine of this is what the government really means when it says it or it tells the government this is what the startup company means when they say it but also we're we're a resource that's again trusted I keep coming back to that word trusted is an important word to uh iqt in terms of who we are and uh what we do we built up this trust over time where entrepreneurs and VCS trust us to tell them is it worth our time and energy to develop a version of our technology for this Market to hire a federal sales team you know to go off and do it so another question it seems to me intuitively and I don't actually know this that a lot of the products that might help the intelligence Community are Hardware versus software some are software right you might have ai but that you're taking a bunch of compute power or satellites or Rockets things that explode all the time and have high risk but that that takes more money right so it's more leveraged when you have these investors so maybe that's another shot in the arm is that true or not true uh certainly true for certain set of deals so we invest across a wide variety of uh technology so we certainly do software the part agencies we work with have large data centers right so they need all the software that a traditional Fortune 1000 company has to search data store data present it integrate it you know that sort of stuff and so those software uh companies look a lot like traditional software companies with you know one set of capital requirements the cyber security area is another area that we invest in it's also mainly software but to your point we also uh invest in a lot of Hardware related uh companies whether that's platforms whether it's drones uh uh satellites platforms on on the water uh that sort of stuff to components uh that go in those platforms to batteries to materials to gadgets you know that James Bond would use you know out in the field and so we're approximately 50/50 in terms of investing between software and Hardware okay uh uh which is unusual for most Venture capit firms are uh much more software center right they want an app because again it's consumer focused it's easy for them to understand exactly and to your point software companies typically require less money to build the product to start to get the initial feedback of whether uh there's Market on the Venture Capital industry is full of py little sayings and and when I first started in the Venture Capital industry for traditional Venture Capital firm back in 1999 not uh for iqt um one of the phrases I heard was when you got uh to the point where you built the product and you ready to go you know try and sell it you know some crusty old VC were say well it's time to see if the dogs are going to eat the dog food oh my gosh right I know they static people too eat your own dog food right yeah um but there's a lot truth yeah there's a lot of Truth most startup companies end up building the technology they set out to build it may take a little bit longer it may take a little bit more money uh uh to build it where companies fail is you know do people actually buy it right is is there market and is that market large enough and so typically the initial round of funding for compan is called the seed round next round is called series a and then series B very logical uh nomenclature after that and so uh where a lot of companies fail is in that series a series B time frame when they've built the product uh they're going to Market and you know a definition of of proof of that there's a market for my product is typically show me that you sold the same product same version of the product 10 to 20 times to to a set of customers that all want to pay you money for it to solve a similar business problem right you know and what happens is you know some people start selling one off like I sold a version of this product over here sld this problem a version over here s this problem that doesn't feel like a scalable uh market and so one of the advantages that iqt brings to the uh agencies we work with is when you get involved in those companies as they're trying to prove out whether there's a market there or not they're much more amenable to listening to Hey can you add encryption to it can you make compatible uh scientific Linux you know that sort of stuff because what they're desperately trying to do is get to 10 or 20 referenceable customers to raise their next round of money which is often times the scale round which is are we proven our market now let's go scale the company to go meet the needs of the market and hire a whole bunch of salese add Engineers who add add additional features that's stuff okay so this leads to sort of the next category I want to talk about which is the National Security Mission so you are as you said started by the CIA but it's a nonprofit so it's very Mission oriented and you're not just servicing the CIA you're servicing DOD NSA Dia nro the DC audience will know what all these things mean um so you've got a bunch of agencies which of course increases that market are the companies that you're investing in obviously there's a different kind of due diligence because you're doing National Security checks can they then sell to other countries too or no but once you all have invested in a company are they restricted as far as commercial use or other public sector use uh uh they are not restricted uh first of all uh uh second of all we are independent not for profit or 51 C3 and and so the important distinction there uh for people to understand is that means we're not investing to try and drive Financial returns as a uh strategic investor we are investing uh to drive uh impact to the government agencies so we measure ourselves on that pilot rate and adoption rate that I mentioned before the companies we work with if they are successful selling to the government are able to use that as references to go out and sell to other people both commercial customers and other uh government customers in reality it really means other Allied uh are government customers I think you know one I'm not sure China or Russia is going to buy American Technology probably not well they might steal it Sor I know but it's true I say stuff like that on this podcast steal it and then sell it back to us yeah terrific business model you know it would also probably tardiz the company's ability to sell to US Government customers but you know um look uh the US has been I think very clear in communicating that it believes it needs to build Allied relationships with folks like Great Britain and Australia through Aus uh the US government works very closely with NATO and so there's a whole set of alliances out there where it's good for the US to work on a common technology platform with its partner so you don't restrict right so you don't restrict them but they might restrict themselves if they went they might they might restrict themselves and by the way they are subject to uh all the uh cfus and FMA and Export control rules that exist out there okay so another question what are you most interested in what technology right now is sort of grabbing your attention I I'll give you a macro technology a very tactical one as well so on the macro level um you know China came out a few years ago and said you know Europe won the uh Industrial Revolution in the 19th century and that's why they were the world leaders the US won the it revolution in the 20th century that's why they've been the the global leader since World War II we believe that whoever wins the bio Revolution is going to be the leaders in the 21st century and we China want to do that so I think one of the most interesting areas of Technology right now is what's going on in BIO and I think there's u a couple different themes that one is AI applied to bio as it relates to drug Discovery I'm fascinated by this uh as you get a little older uh I'm a little older than you start to think about health problems the uh uh application of AI to one diagnose me better to uh develop new therapeutic drugs or medical devices to treat me better are all things I'm you know cheerleading for positive use of AI yeah modestly I want to live forever oh my gosh you've been in Silicon Valley you're going to freeze yourself and then uh they'll crack you open with all the other exactly uh um at a micro more tactical level um certainly if you're paying any attention to the conflicts going on in Ukraine or Gaz or or conversations about potential conflict in uh uh Taiwan drones are you know incredibly important and they've revolutionized I think the battlefield and what the truth of matter is is right now you can have uh what's called an fpv a first-person view drone operated by you know one operator who uh uh uh can you know guide and direct the drone on on his mission you can sometimes have those drones operate autonomously but getting a swarm of drones to operate autonomously together you know 100 drones to go out there and and work in in a coordinated pattern to uh to attack something that autonomy uh doesn't really exist yet and so I'm fascinated by this idea of who's going to develop the autonomy technology first to to manage a swarm of drones because again I think drones are the future and I know China's working on it we us are working on it Europe's working on it and it it doesn't really uh none of it is really ready for prime yet but I think that's a really fascinating area to focus on I'm super fascinated by drones too we had a guest on the podcast Sean Gurley he's a kiwi founder of primer AI well I know Sean great guy okay so sea came on and was talking about the idea that you could have you can have the most like hot you know fighter jet and if you've got a swarm of drones just jamming it up you can very cheaply take down something that we have always been advanced in which is these planes just with kind of offthe shelf drones if you can get it to do exactly what you said Absolutely I'll give a shout out to a guy we were talking about earlier Chris Bros who uh worked for Senator McCain on his DOD stuff has now the chief strategy officer at andil he wrote a book called The Kill chain uh uh which basically the the the thesis was in all the war games that they played about potential conflict with China China always won and China always won because the US deployed a small number of incredibly uh capable heavily manned platforms you know fighter aircraft carriers uh fighter jets those sorts of things by the way way those things are all really expensive right the right and China were to respond with a large number of really cheap uh ATT tributal which means you can lose them autonomous drones and they would you know disrupt uh the US operations and you look at what Ukraine's been do able to do to Russia they don't Ukraine doesn't have a Navy right they basically stopped Russia from doing anything you know uh with its Navy due to drones um you know Israel thought it had this great you know mile Shield you know and so I think that's been the real Revolution of both these two conflicts that are existing right now so that's the that's the way conflict is headed these drones are also useful for intelligence Emissions on the one hand the US has to figure out how to manufacture them much more cheaply and effectively like China can do with DJ uh with our own component parts we don't want to be buying exactly exactly but the second thing we have to figure out is the autonomy software to go on these things to help them operate in t okay I'm super interested in drones bio I had not thought about as the revolution that China was I think bio's the micro the macro technology to think about for the next uh years gener AI I think is pretty interesting but uh I think bio is is even more interesting although of course you know the two will probably intersect somewhere here but uh at the micro level the the sort of mission that exists today that I'm excited about it it's the autonomy for drones one of my clients I'm actually working on I'll just bring it up now an oped on how we need to open up experimentation for counter drone technology with the FAA anyway it's a little policy plug for one of my people you don't have to do it don't worry about it but they are focused be present for it be present for this plug um but it makes sense right because in addition to having drones we want to be able to counter drones so okay last question is what do you personally look for in a team we have a lot of people in Silicon Valley listening to this when you're looking not just for a product that can be tailored to fit the mission what do you look for in the actual team you're investing in yeah so uh it's great question I'll start by saying you know again another one of these py little saying that someone told me when I first got in the adventure business that like is winners keep winning you know and and so the first thing I always look for in a person is like have they achieved success at some point in their life it doesn't have to be in technology doesn't have to be in the area of technology that they're now representing to me that they don't want to go build but I'm just looking for something that says to those person this person is a winner right you know uh because because if they've demonstrated that uh before in some aspect of their life I think it's more likely that they will be a winner in in in this opportunity that they're presenting interesting so not just a business winner but just in general a successful person yeah a great athlete a great musician a great artist someone who was successful at whatever job he or she was doing you know maybe their first job out college right but I'm just looking for that trait I'm looking for that trait that says you know hey whatever is I that I decide to care about at some point in life I did well at that because I think that's a trait that remains in people throughout their life uh the next thing I look for is um uh is vision and the ability communicate Vision when you're an entrepreneur when you're starting a company for the first time a lot of what you have to do is is make your company appear bigger than it really is more real more substantive than it really is and make people whether it's employees you're trying to recruit investors that you're trying to get to invest in your company customers that you're trying to land for the first company make make them Believe in Your Vision in a way that they will do dumb things like they'll quit their job at a Google to go work for some startup company that has six months of cash Swagger I feel like it does a long way right you know so so look for vision and ability communicate the vision and then uh uh last thing I look for is um pertinence around the domain problem they're trying to solve so I'm a big believer that the best companies solve problems that the founding team really understand you know and so I'll spend a lot of time trying to understand what is the problem that you're trying to solve what is your understanding and and pertinence to it and is it realistic to believe that you've come up with some way to solve a problem that no one else has has been able to figure out yeah so those are three things I look for that's so specific I don't think I've actually ever had someone on this show or even my life explain exactly those traits but it makes sense that's you're going to hit probably more if you understand that they have some subject matter expertise and really get it yeah yeah by the way I think the one thing I didn't mention but disc me is is I do sort uh also innately evaluate grit and resilience because I foret the woman that wrote the book uh uh learning mindset uh um all of us who' raised kids have have read that book because we want to install grit in resiliant and our kids that that's become the buzz word these days you look for that as well cuz startups don't go smoothly you know this there's bumps along the way everywhere and it's easy for people to get discouraged and throw in the tow and the best entrepreneurs the ones that win are the people that are just so passionately about succeeding that they don't let any sort of Hiccup discourage them I love it grit and resilience I don't have kids but it's interesting to me to watch The Young The Young Generation who the time I'm this is like a different topic but sometimes a little thin skin so yeah you got to toughen them up exactly so that they can have their be face first in the pavement and then uh get their business still off the ground which it is really hard it's super hard to be a startup founder it's really hard to be raising money and building a product at the same time I'm delighted to have you come on the podcast explain a slightly different kind of fund than we're used to talking about and especially I'm like a national security uh Hawk democracy Super Fan so I'm personally interested in the mission and thank you for coming on well thank you uh we love people interested in what we do I came to iqt 18 years ago I didn't think I'd stay for 18 years but uh I can't imagine enjoying a job more than D today I love talking about it so thank [Applause] you and that's a wrap if this show gives life to your inner tech nerd Please Subscribe or leave us a fstar review anybody listening to this podcast knows that the algorithm needs to be fed and I really want to keep it ad free and independent you can find more content on YouTube Instagram and Tech up.com or if that's TMI you can just tune in every other week wherever you get your podcast