Yeah. Probably one more exponential jump. Right? One more standard deviation better, and it'll be impossible for the naked eye to detect. And then you'll have to detect with technical means, and then I would say probably one more standard deviation jump. And maybe technical means will be, you know, rendered pretty obsolete. So I I don't know what the world looks like Mhmm. You know, two years from now.
Welcome to The Investor, a podcast where I, Joel Palafinkel, your host, dives deep into the minds of the world's most influential institutional investors. In each episode, we sit down with an investor to hear about their journeys and how global markets are driving capital allocation. So join us on this journey as we explore these insights. All right, so we are live here with Jake Chapman. He's a partner at Marquee Ventures. So Marquee connects defense customers with visionary founders.
Obviously, the US Department of Defense seeded the companies that built their presence creating Silicon Valley in the modern venture capital industry. So the internet, the touchscreen interfaces, GPS navigation, they all came from federally funded labs. So excited you know, just chat with Jake and learn a little more about, you know, his background, his career. So he's a top decile investor with a track record.
He's an experienced VC fund manager, has been around the block in asset management, and he's also been an adjunct at Rand and was also a former VC general counsel. So full circle, he's got a wealth of experience and knowledge. So Jake, thanks for coming on the show. Why don't we kick this off with just kind of a high level background of your your early career, what you studied, and kinda, you know, some of your transitions and and where you are now with Marquee?
Again, you know, would love to go super deep on just kinda the future of DefenseStack. Sure. Yeah. Yeah. Thanks for having me, Joel. Mhmm. Happy to dive in. So I I started my career as a lawyer. Went to Cal for undergrad, Cal for law school, started practicing in fund formation. So all my clients were VCs and realized pretty early on that I liked what my clients were doing more than I liked what I was doing. And, yeah, wanted to be closer to tech and entrepreneurship.
Wanted to actually be structuring the deals or or or making the deals, not just executing the deals. Yeah. So I practiced for a couple years and then left and and founded a couple companies, one of which I was fortunate enough to sell. Mhmm. And the acquirer of that business let me start their corporate venture program. So started out as a corporate VC. Yeah. Did really well there and was able to parlay that success into starting my own firm.
Okay. When I left to start my own firm, I had an epiphany, which is that I think early stage venture is a super high leverage way to shape the future. Mhmm. So I said, alright. Well, if it's high leverage way to shape the future, like, what's the future I wanna create? And Sure. The super geeky answer for me was the future as imagined by Gene Roddenberry in Star Trek, which I think is a beautiful vision for humankind.
And if you wanna go, like, deep into what Star Trek is, I think it's an allegory for self actualization. Right? Like, everyone in the federation is an explorer of one way, shape, or form, which I think is is pretty awesome. Mhmm. Anyway, realized I wouldn't be investing in warp drives and photon torpedoes, at least not right away. And so I said, you know, what is what does it mean then me to wanna to build that future? And the answer was deep tech in general.
So I started focusing my career on energy and applied AI and autonomy and synthetic biology and all the things that broadly fall under the the deep tech bucket. One thing I realized pretty early on doing that is that most new technologies in those sectors tend to have a defense application. And Mhmm. Most of the founders I was working with had no idea how to work with the government. So I started trying to plug that gap for them and and and help them bridge to to government contracts.
Sure. Very complicated space. But over time, I really fell in love with the mission and realized how important it was to be supporting, US national security and government efforts. Started working with a program called SHIFT that used to put active duty personnel inside venture firms, had more fellows out of that program than I think anyone else. And about five years ago, my career had moved, I guess, maybe six, seven years ago now. Man, time flies. My career moved more and more towards defense.
And, I decided that what I really wanna do was just to leave the firm I cofounded, start a new firm, and just start it from purely focused on the national security mission. This is like pre American dynamism. You know, there's maybe three or four firms that that do defense, In Q Tel, obviously, eight VC, Lux, DCVC. That was really it. And so I love to do that, but got sidetracked by a buddy who asked if instead I'd go try and fix Army Venture Capital.
Army Venture Capital was created by Congress in 02/2002. It was supposed to be the twin organization to In Q Tel. So Mhmm. Similar set of authorities, but instead of working for the intelligence community, it was supposed to work for the Department of Defense. Set up slightly differently and, wasn't hugely successful in its first, twenty years of life. So we were brought in to see if we could turn it around and kind of reimagine it for, you know, the modern ecosystem.
Spent about two years working on that. Realized at the end of those two years that, we could be much more successful, implementing the plan we'd put together if we were doing it through a private organization instead of through this quasi public quasi private organization, which was Army Venture Capital. Yeah. So we took the plan. We took the team. We helped army shut that organization down, and then we left, and we started Mark Ventures. So that's the that's the origin story.
Sure. Yeah. We are we're not funded by the Department of Defense at Mark Ventures. We're a fully private firm. We work pretty closely with the government, various government partners and stakeholders. But, yeah, all private funding for us. And what are some sectors that you're really excited about? You know, if you can kinda run through some of your portfolio companies in terms of just defense tech, like, what are what are, like, the the critical needs right now for the military?
Especially now with all that's going on, what's kind of top of mind? Is it munitions? Is it, you know, a lot of intelligence? I'm sure it's everything. Right? But some of the portfolio companies that you backed, what are some of the biggest problems that they're focused on and what got you interested and excited about some of those sectors? Yeah. I mean, it really is all of the above. Right? A lot of problems that need solving right now.
Yeah. But there's obviously things that are bigger problems than others or bigger opportunities than others. Manufacturing in general, big issue. So securing supply chains, securing raw resources, right, critical minerals for The US, and then being able to domestically manufacture in a way that if not completely cost competitive with adversaries like China who heavily subsidize their industry, then at least in a way that, is not cost prohibitive. So, lot of investment going into those areas.
Contested logistics. So how do you actually move things around the world if you have an adversary that's that's pushing back against your movement of supplies and people, for the last, I don't know, since the end of World War two, really. But I guess since the end of the Cold War, The US has been able to take their time and move things, to prepare for conflict without anyone able to credibly resist.
So if you think about the first Iraq War, I mean, or the second Iraq war, two thousand three, months were spent building what the DOD termed the Iron Mountain in, Saudi Arabia and Kuwait and other allied areas before an offensive was launched. And most of that buildup of supply and and men, it happens on, you know, planes that would would be vulnerable in a conflict against a peer adversary. So how do you actually move people around the world, not just engage on the front lines?
That's an area that hasn't been invested in in a while and needs a lot of work. Mhmm. Obviously, drones, a lot of people investing in, you know, autonomous systems and small drones and counter drone technology. I won't say we're not investing in those spaces. Mhmm. But I do think it's important to not over index on what we're seeing in Ukraine. Yeah. A lot of lessons can be learned, but that what's happening in Ukraine won't be the next war The US has to fight. You know? It won't map one to one.
And so Mhmm. You have to think hard about the differences there. Those are some of the areas we think a lot about and invest in. Yeah. No. That's really helpful. And then as far as obviously, we can't have this podcast without talking about AI. Right? So what are some of the key workflows or just areas of opportunity that you think will create some generational wealth on the AI side, especially when it comes to the defense tech. It's crazy.
I've been seeing a few movies now where there was one that was crazy. It was like the president of The United States was being duped with generative AI and the terrorists were using this technology to make it seem like the president was saying something when they really weren't. And they were getting the political leaders of all the countries to come in and film themselves so they could train these models. And they were using digital warfare to manipulate markets and nations.
So I don't know if that's something that because we're seeing a lot of this in and I think this was in the last Mission Impossible movie that was like the major terrorist attack. Right. So it's not a bomb. It's not COVID. Right? But it's it's digital terrorism. So I don't know if that's something that you're looking at as well in terms of, you know, defense tech opportunities or if it's a crowded space. Yeah. I mean, there are definitely companies out there working on deepfake detection. Right?
AI detection. Definitely an interesting problem. I mean, you or I could go on, you know, one of, like, a half dozen free or freemium websites right now and make a a halfway credible video of Donald Trump saying anything you want Donald Trump to be saying. Yeah. And I say halfway credible in the sense that, like, we could post it on x and 50% of people would believe that it was true. Yeah. But if you look at it long enough, like, you could figure out that it's AI. Right?
Something will be a little bit off. Sure. But if you think about what the AI generated videos looked like six months ago or a year ago, it's a an exponential improvement. And so Mhmm. Yeah. Probably one more exponential jump. Right? One more standard deviation better, and it'll be impossible for the naked eye to detect. And then you'll have to detect with technical means. And then I would say probably one more standard deviation jump.
And maybe technical means will be, you know, rendered pretty obsolete. So I I don't know what the world looks like Mhmm. You know, two years from now with Yeah. Yeah. Because a couple years ago, we had fake news. Right? They were just fake, you know, blog posts. So now I think really transitioning the medium to video content and increasing the fidelity, could could cause some serious problems. But that I think there's opportunities too for detection of that stuff to your point.
Yep. Yeah. Yeah. Definitely opportunities. Mhmm. So that's a place where AI is is definitely being used to attack, and I could see that causing problems. In terms of just, like, interesting places in defense, you know, there's all this stuff that you might think about. So using AI for for targeting and and terminal guidance of munitions and those sorts of things, using AI to do battle damage assessment. Right? So after the the nuclear sites were bombed in Iran, what does everyone wanna know?
Everyone wants to know. Were the the bombs effective? Today, a lot of that work is done with human analysts who are Mhmm. Pouring over both imagery and other data that the department is collecting and trying to make assessments. Some of that can be automated and and might be more accurate through automation or at least have automated supplement. Then there's lots of boring stuff that AI can can help out with in the government. So, AI driven compliance. Right?
So lots of companies will spend hundreds or thousands of man hours every year just trying to hit minimum compliance to work with the government. If half that work can be automated or two thirds of that work can be automated with AI, then that's a it's a great savings. Mhmm. Yeah. I think related to that, people doing proposal writing. So I think the number of, grant applications to the department of defense has increased pretty dramatically in the last year or so.
And part of our driver for that is it's more salient, but a a big part of the driver is, that there are a whole bunch of, you know, at least a half dozen, probably more like two dozen companies out there that will use AI to help you automate your your grant proposals. So it it really it permeates everything from, like I said, sort of the tip of the spear, guidance systems, the way down to just like legal compliance stuff.
Mhmm. So we've also, you know, as investors, we've we've invested in a good amount of deep tech. And I would say one thing that I look at is the obviously all of these are very capital intensive. If you're getting into hard tech versus just a software play, you know, on the hard tech side as investors, we've had to really look at the tech barrier and just make sure that it's so such a high barrier that it's very competitive for others to come in and duplicate what they're doing.
So, would say if you could share some advice on how to build conviction or how to analyze or source and screen these types of companies, maybe for an incoming analyst or an associate to kind of build their investing shops. What advice would you give in terms of diligence in these types of companies? Yeah. I mean, specifically in defense, I think. Mhmm. So defense is an interesting space in that I think it is it's very hard to build a business, selling to government for a whole host of reasons.
But the the the silver lining to that is that because there are so many artificial barriers to building things for the government, you can see which, which gates people have have passed through or which hurdles they've jumped over. And it actually helps the diligence process out because there's, like, very tangible things to grab onto.
Sort of like, I I think of defense a lot as, like, SaaS was in, let's say, you know, 2012 or something where it wasn't a solved problem, and there were a few investors that were making a killing because they understood the various metrics and ratios you look at when you're investing in enterprise SaaS business. Sort of what the company was doing was almost irrelevant. Right?
But, like, you can see there's enough data in a in an enterprise SaaS business that you can almost just invest off the spreadsheet if you know what you're looking for. And SaaS has become, in to some respect, a solved problem now. Like, it's a very I think it's a much harder market to make good money in because there are enough investors who understand how to invest in the space that a lot of the alpha's gotten competed away. I think defense is in a very similar moment today.
It's in that twenty twelve moment where if you understand what to look for, there's a lot of alpha to be had. But if you don't, you're really throwing darts. And some of that alpha will probably get competed away over time should get competed away over time. So what do you look for? First, you've gotta make sure there's a a requirement. The government can buy $5,000,000 or something or $10,000,000 or something by moving money around, from one pot to the next.
But if they haven't run a requirements process, which is like the official government's recognition that they have a problem they need to solve and the only way to solve it is by buying something, they can't spend $50,000,000 a year for ten years to acquire that thing or that software, whatever it is. Mhmm. It's just a bureaucratic process. Takes a couple years. You need to understand when you're building something if there's a requirement today.
And if there's not, like, where does that requirement come from in the future? Like, who would own it? Mhmm. And Yeah. How could you influence that process or inform that process? So look for the requirement. That's number one. Yeah. Number two is, like, look for the end user. So there's a lot of Yeah. Use in national security. Mhmm. The end user who might be a soldier, it could be an acquisitions officer, it could be a lot of different people.
But let's say it's a soldier, they have zero budget, or effectively zero budget. They have no purchasing authority. They're the ones who need to use it, and, like, their opinion will matter. But Mhmm. They're not the buyer. So you have to find the end user, make sure the product you're building actually has product market fit with the end user. But then you also have to understand who the buyers are. Mhmm. So that's two things to look for.
Third thing to look for is where you are in sort of the budgeting process, the congressional budgeting process. So similar to requirement, money can get moved in the department without, direct appropriation from congress, but not real material sources of money. So not enough money to build a venture backed business successfully without congressional engagement, congressional involvement. So understand where a company is in that governmental relations process. Very important.
And then I see the last step is, like, really understanding where a company is in their government contracting process because the contract owner or contract holder isn't necessarily the person with the budget, and it isn't necessarily the end user. So like I said, lots of principal agent issues you have to sous out. But that's my advice. Like, understand those buckets, and then make sure when you're doing your diligence, you have addressed each of the the questions.
Like Sure. And then more broadly, what do you look for when hiring talent and for looking for a talented fund manager? What are maybe some of the hard skills and soft skills to maybe not even only be a good defense focused investor, but just an investor as a whole? What are some of those attributes that maybe you've refined when you were getting started and still refining now and what you would look for kind of bringing on somebody to maybe help take over some of your workload?
Yeah. Great question. Depends on on what someone's coming in to do. Right? Are they coming in to be, focused on on deals? Are they coming in to be focused on portfolio support, or are they coming in to help be like a GP, right, with the sort of admin side of the business, the fundraising side of the business.
So if you're trying to bring on a partner or you're looking to invest in a in a GP or something like that, I think, at that level, you you definitely need at least one partner in a firm to be a good XO or someone who is really good at managing the administrative side of things. I think founders are shocked how little of my time I get to spend talking with founders and looking at deals. As an angel, you could just spend a 100% of your time Yeah. Looking at deals. As a GP of a fund, I don't know.
Sometimes it's probably, like, 20% of my time or 15% of my time. That's the fun stuff. Like, that's what I wish I could be doing Mhmm. All the time. But so for a a fund manager, I think it's actually really important they can just, like, manage the basic business. I would be evaluating that. Yeah. Fundraising, totally separate skill from Can you unpack that as well, Jake, please?
So, like, when you say managing the business, you know, and I'll just off the top of my head, you know, obviously, there's LP updates. There's obviously talking to your your CFO, right? Kind of looking at the P and L of the entire business. And then there's obviously tax. Probably not. It depends on your funds, but probably not audit yet. Institutional wise, probably there is.
But I guess if you guys are going out to institutional LPs, there's a whole DDQ process that you got to go through as well. But those are just a few that I could rapid fire on the back of my head, but would love to hear from you in terms of like what you think it means to be a professional general partner and actually kind of operate and and, you know, handle the admin of the business as well? Like, what are some other key parts to to running an investment company?
Sure. Yeah. I mean, there's the there's the basics. Right? Like, just managing payroll and making sure that, you know, paychecks go out on time and you're paying workers' compensation and taxes and stuff like any other business. Sure. There's the audit. There's dealing with the the lawyers that pop up here and there. There's getting your k ones out on time, which sometimes if you've invested in other LLCs means making sure that other people are getting k ones to you on time.
So it's like it's managing your tax stuff for your LPs. It's updates. I think people would be shocked how long it takes to put together a good update for your stakeholders Mhmm. And package it nicely. It's stuff like DDQs when you're out fundraising, which, you know, people might be shocked, but are, like, 30 to 50 page, very, very detailed questionnaires you have to fill out for some LPs.
And then depending on the way you you run your fund, like so my personal opinion is, to be competitive as a venture firm these days, you need to think of your firm as an ongoing business and what you offer to founders as a product that they would wanna buy. And so what are you offering to the founders that you're investing in that's not just money because money is is a pure commodity? And that can look looks very different from firm to firm.
But whatever that is, sometimes it's an actual business. And if it's an actual business, then that means you're managing people to manage that business, and you're doing business development and selling just as much as as your founders might be. So it's it's all sorts of stuff like that. Mhmm. And then let's talk about kinda you said there was two two other components that you thought were important too. So, obviously, the sourcing and the screening.
And then I think there was, like, a third pillar as well. Right? So can you talk through those other parts as well? Oh, yeah. I mean, so for portfolio support Mhmm. You know, you're looking Yeah. Generally for someone who's done it before. So maybe someone who's founded a business and is they're maybe they're looking for an EIR type role, so they wanna spend a a year or two with a firm and then go start something else.
Or they're just not sure what they wanna do next, but they have founded a business or they have run a business or, managed a p and l, in the space that you're investing, and then they can help support the portfolio. Right? I think that's that's a a certain skill set. That skill set can also make a great investor, but I think is is critical if you're talking about just supporting the portfolio companies. And then there's the the pure investing skill set. Right?
So deal sourcing and then being able to put together a diligence in companies and then be able to put together a good cogent argument for why one investment should be made versus another. I think there's a million ways to become a a good investor. No no single way to get there. But one, definitely understanding the market you're investing in and what's unique about it and sort of the dynamics, understanding, like, the where that market is going. So the the Wayne Gretzky quote. Right?
Like, try and skate to where the puck is going, not where it is. So in defense, two years ago, you would have invest investing in small UAS. This year, you're probably investing in counter UAS if that's where the puck is. But if you ask yourself where's the puck going, like, maybe it's not the tenth counter UAS company you see. It's like something else now. Right? Like, what does the world look like two years from now, three years from now, five years from now?
And that's what you should be investing in. Because if you're investing in what the world looks like five years if you're investing in what's hot today, it's not gonna be what's relevant tomorrow, basically. So Yeah. No. That's really helpful. What would be some of the, biggest learnings that you've had, you know, at at Marquee? Maybe the last maybe a couple months. I don't know, man. Every day is a surprise.
Sure. Yeah. I I think, you know, for us, we're we're, like, six fullish time people, and then we have a bunch of of fellows. See, one of my learnings is team is absolutely critical. I don't think Mhmm. I could be doing this if it was just me or just me and and one partner. Like Yeah. Really is a complicated space. It's a lot of work. It's a lot of emotional ups and downs, and it helps to have a team. So I I'd say my biggest learning is team is critical.
Both what we're investing in, but also just in running our business. That's helpful. And, like, there's a bunch of GPs that have been on this show that have talked about leadership. And, you know, there's there's a couple that have actually invested in, an executive coach to kinda build culture. So what are some ways that you've been able to build culture within your team and kind of have everybody have a shared vision, especially with fellows. Right?
Because fellows are probably not there permanently. So how do you get them aligned to your bigger mission and vision as a as a, you know, holistic team. Yeah. Yeah. Yeah. I am so I should say so before I ran Army Venture Capital, so before Mark Ventures, the firm I was running was, with a partner was called Alpha Bridge Ventures.
And the whole thesis of Alpha Bridge Ventures was that companies that fail, after seed right around series a weren't failing from a lack of product market fit or technology problem. Usually, they were failing for very human centered reasons. Mhmm. So think like cofounder conflict, founder burnout, an inability to scale from two people to 50 people. Right? So you're an engineer, but you're not a CEO, and the handoff between those two things is very challenging.
And so we had a third partner who was a a clinical psychologist and a coach, and we built out a whole program that we paid for all of our founders to go through. That was a coaching and sort of a holistic wellness program trying to to nip those problems in the bud. So I I a 100% buy into the importance of culture, the importance of, for lack of a better term, self care, spending time thinking about how you get yourself across the finish line as much as the Yeah.
So what we do at Mark, we we don't have the the in house coaching, although I think at some point, it'd be great to have that. It is expensive. So It is. Yeah. Be nice to bolt it on at some point. But we we take at least one off-site a year. It'll be probably at least two this year, maybe more like three. We're a fully distributed team, so it's it's good to get everyone together and spend a few days whiteboarding and then also just kinda hanging out.
Say nobody on our team takes ourselves too seriously. I think we take the mission seriously, the job seriously, but not ourselves. A lot of memes, a lot of joking in Slack, a lot of stand ups. Right? So we've got Mhmm. Three team meetings a week plus a bunch that get filtered in. Sure. It's just, yeah, making sure that everyone's doing well and you're seeing everybody and everybody seeing each other a lot too much sometimes. Yeah. No. I I totally agree.
I think, you know, having people plugged in, you know, having at some some point some type of in person interaction definitely goes a long way. You know, there was somebody that I met last night. I mean, I that we we had we had, like, a cocktail event last night and there was two people that work together for for almost a year and they got to meet at our event, you know, instead of like their own corporate event. I was I was happy to happy to see them meet each other, but also happy to see them.
What's your advice for relationship building? So for emerging managers that are looking out to build relationships with LPs or just even build relationships with portfolio companies, what would you advise to maybe your fellows? Yeah. I mean, that's a that's a tough one, because I think there is no I mean, not sure there is a way to turbocharge it. But, really, it's just a matter of time Yeah. Invested in getting to know people in the ecosystem. And I hate the idea of, like, forced networking.
Sure. But, you know, like and I hate the term thought leadership, but, like, do some writing. Get your thoughts out there. Do some podcasts. Like, make sure people understand who you are. Mhmm. Like minded individuals will gradually gravitate towards you, set up a lot of, you know, just intro calls, get to know people and what they're doing.
I try and have, you know, two or three random calls a week with folks who have reached out that, like, maybe there's nothing in the short term that we can do with each other, but I just wanna get to know folks. And Yeah. It's just that I mean, I'm an example of that. Right? I think we got connected through a common friend, and here we are now on a podcast. And I'll tell you this. I mean, the podcast for me has helped me with my public speaking.
But also I've had a few LPs just DM me because they just saw a podcast that was interesting in there. And then we ended up connecting and they came to an event that we hosted. So I think to your point, doing things, I would say definitely thought leadership, the cliche term can help. But I think also if you just enjoy doing it, even when I do this podcast, it's just really a fun discussion among two people. And, you know, I always learn something.
I become smarter now, especially specifically now around defense tech. But, you know, the dividends kinda take time to compound, I would say. Right? So and I and I think if you can share more content, share more value, I think you'll get inbound, which makes the push and pull, much easier. So Yeah. A 100%. And I think I don't know who said it, but I've heard a quote for the last, I don't know, fifteen, twenty years floating around about Venture.
So it was probably, like, an elder Draper or, you know, like, somebody from, like, the seventies or eighties in Venture, right, when the the industry was getting started, said that you'll take 2,000 meetings a year, and only one of those meetings will matter. Sure. But you'll never know which one of the 2,000 meetings you take is gonna be the one that, like, is, you know, career trajectory altering.
So you have to show up to every meeting as though that meeting could be the one, and just be your best self, and then let, you know, the magic happen. Serendipity. Yeah. So much serendipity in this industry. But it's not luck because you can influence the serendipity. Right? You can have more at bats, have more practice. Yeah. But so much is unpredictable. It's just Yeah. There's an investment banker friend of mine that's built a practice that's become very successful.
I mean, of the transactions are upwards of, like, 5,000,000,000 plus. You know? And, you know, his biggest advice I always ask at the end of every podcast, like, what advice do you have? And his advice was just say yes to everything. So take every meeting. If someone's willing to meet you, obviously, they have to be somewhat related. Right? You're not gonna take meetings with ballet dancers, right? If there's no, like definitely no directional connection.
But if there's someone that's maybe, you know, like an investor that has a community of allocators or if there's an allocator that is just a good person. I feel like something will come out of it if you just kind of invest in having relationships with new people building new friendships. But that feedback was really interesting. It was just like, just say yes to everything that 'll open up a lot of those doors to get those thousand meetings.
And then I think another one that was kind of new to me was, don't share if they don't care, right? So if no one's really asking you where you live or all the plans that you did over the weekend, if they don't really care about it and they're really more laser focused on something else, you might just be boiling the ocean, giving them a lot more information that's not even relevant. So I've mindful of that too, because I'm very passionate when I talk about stuff. I might go start rambling on.
So I try to be a little more focused in my conversations and that's been helpful too. But any other advice in terms of, like, just building building friendships beyond, you know, taking a lot of those meetings? Yeah. I mean, building friendships is really just taking it to the next level. Right? So trying not to to lose track of all the folks you've talked to. I mean, I certainly don't talk with every I don't have follow ups with everybody I've talked to. Right? That would be impossible.
And I think this is a business of of long term investment. I mean, investment in other people and and other projects. And so, you know, don't don't go into any conversation or any relationship expecting it to be relatively transaction transactional or to pay dividends quickly. It's much more about getting to know folks, helping them out how you can, when you can, and seeing what, comes back around in five, ten, fifteen years. Sure. So it's patience, I think. At the end of the day, it's patience.
Switching gears, with the type of companies that you're looking at, are you guys doing any hard tech as well, or is it mostly software types of investments? I and we're probably 75% hardware. Got it. You know? So with the return profile of those kinds of companies, are the exits mainly like an M and A transaction or an IPO, or is it some type of buyout opportunity for those kind of companies that are mostly hard tech? Yeah. I mean, it can be it can be any of the above.
Yeah. Traditionally, in defense, and a has been a a big exit pathway.
Sure. And traditionally, in defense, the multiples have been pretty compressed, usually because the the defense primes, so the five, six largest companies in the defense industry, they do a lot of work on cost plus contracting basis with the government, which means that their margin is quite small, which means their trading multiple is compressed, which means they don't like to acquire companies for a large multiple of their own revenue.
That's changing because companies like Anderol and Palantir and SpaceX have much larger multiples Sure. Have built businesses in defense. And so they're willing to be acquisitive at more traditional tech multiples. So that the m and a market is improving, I would say, in defense. The IPO market is still somewhat untested for venture backed companies. We have Palantir as an example.
We we'll probably have Androl as an example, I would say, in the next, you know, twelve to twenty four months depending on rates and the IPO window. But I I would expect them to go public soon. Maybe Shield, AI. And then, once they've tested the waters, I think we'll really see how viable the IPO market is for defense exits. No. That's really helpful.
And then on the portfolio construction side, you know, and you guys don't have to speak specifically, but, like, you know, hard tech types of funds, what type of follow on strategy would you recommend for them? Would you think, you know, especially, I mean, I'm assuming it also depends on if they're highly concentrated or if they're more diversified, but is it important to reserve a good amount of capital for follow ons, especially when you're looking at, you know, hard tech companies?
Yeah. I mean, these are definitely capital intensive businesses. Mhmm. 100%. When you are building for government, you do have access to nondilutive grant dollars and nonrecurring engineering, contracting along the way until you get to, you know, act actual acquisitions and procurement. But, and that can help defray the cost a bit. But, yes, like, this is definitely a space that requires multiple rounds, generally large checks to get companies to to some sort of exit velocity.
Sure. You know, I think I think it was Josh Wolfe who said it. But, basically, you want to invest at a time when, you see the magic, but you're you're still being somewhat contrarian. The whole market doesn't see it. But you need to believe that in two years when the company has to go back out and raise capital, it will become a contrarian bet. Right? So the the the capital will be there.
I think think some firms, you know, if you're a Sequoia or a Founders Fund, Founders Fund in particular because they like a concentrated portfolio strategy, they have enough capital that they could theoretically fund a contrarian bet from idea to exit, all on their own. They don't need, another capital provider. If you have a small to medium sized firm, like us, like, that's one of the things we diligence actually is is, capital risk.
So I can fund your series a, but I can't fund your series b. Like, maybe I can participate. Maybe I can't. That's all it's sort of irrelevant because you are gonna need someone to lead the series b that isn't me. So do we believe that this team, this product, the milestones they have laid out will be able to raise a series b two years from now? It's, like, a very important consideration for us for investing. That's that's amazing. Well, hey, Jake, this was really great.
I always end this podcast with just one piece of advice. So anything that you have to leave for us, it could be from a mentor. You know, you mentioned some great mentors that you've looked up to, but, like, any, you know, nugget of wisdom that you have maybe on the professional front or on the personal front from a leader or a mentor or or just from your personal learnings in your career? Yeah. I'll I'll give two. One is it's just something I sort of figured out on my own Mhmm.
Through lots of pain, and then one is from a mentor. So my my personal piece of advice is never tell yourself no for something that you want. Right? So this is sort of like the you miss, you know, every every at bat you don't have or whatever Mhmm. Or every shot you don't take. But a lot of people tell themselves no, and they don't even try. So you have to ask the world. You have to ask the universe. You have to ask the LP, whatever, the thing you want.
And they'll probably tell you no, or there's a good chance they can tell you no. I get a lot of no's in life. But they might say yes. And so you've gotta put yourself out there. So don't be your own worst enemy. You have to be out there fighting for yourself. Okay. That's one. Two, and this is when I was a lawyer, and the most senior senior most partner in my group told me this, which was when a client asks you a question, they don't really care about the answer.
What they want what they care about is they wanna know that you have it covered, and they just wanna, like, get off the phone without any stress, like, feeling like it's been taken care of. So he said, whether or not you know the answer, give them an answer with a 100% confidence. And then when you get off the phone, you can go figure out the answer and you solve the problem. They don't care how you solve it, really. They just wanna know it's solved.
And, there's a little bit of, like, hucksterism in there, but also some truth, which is, you know, people don't care about the details. They care about the the wave tops. And, as long as you've got it taken care of, they're gonna feel good about Yeah. No. I totally agree with that. In my professional life too, there there was actually a piece of feedback that I got when I was in the tech space.
So there was a time where somebody would ask me a question point blank, and I'd feel the pressure that I had to answer it in real time. My manager at the time is like, Joel, you don't have to answer the question right now. You can just tell them, and maybe this is what you're saying, but I'll just say, Hey, that's a really good question. Let me look into this and get back to you. That way you can take time out. You're holding accountability.
You do have it covered to your point, but you can take a moment to go back, do some research and have a very meaningful, accurate answer versus just trying you know, off the cuff, come up with something that you may not be a 100% confident about. So I'm wondering if that's kinda similar to what you're saying too. Yeah. Yeah. Yeah. Just let her know that you've got it taken care of, and then you go take care of business.
Yeah. Absolutely. Hey, Jake. Thank you so much for the time and for all the wisdom on, you know, being a better investor and also just investing, smartly into defense tech. So appreciate appreciate your time and, and really had a lot of fun going through these conversations. Same, Joel. That's great. All right. Take care, everyone. Have a great day.