Subscribe
Share
Share
Embed
The venture industry offers innovative solutions that help make our nation more secure. In this episode, we discuss the impact of VCs on our nation’s defense and protection and how VC-backed startups can form better relations with the Pentagon.
Welcome to the Venture Capitol podcast, the place where politicians can impact the startup industry nationwide. Join NVCA President & CEO Bobby Franklin for a unique podcast that looks at public policy through the eyes of America’s venture capitalists — the people who are investing in the high-growth companies of tomorrow. This show brings together VCs, policymakers, and policy influencers to discuss and debate issues that affect our nation’s economic future.
Bobby Franklin (00:00:01):
Hello everyone. I'm Bobby Franklin and welcome back to Venture Capital, a podcast brought to you by NVCA where there's an O in capital is in Capitol Hill where NVCA advocates for policies that support the US startup ecosystem. Our nation just celebrated its 246 birthday so we thought it'd be a good time to focus an episode on America's national security and how the venture industry can help make this nation more secure. You'll hear about how VCs are impacting the way we protect and defend our country and how VC backed startups can better partner with the Pentagon to make America safer. Also, in this episode, you'll get to know a VC who has focused solely on helping veterans succeed in the venture industry. My next guess is Ted Schlein, Chairman and general partner at Ballistic Ventures and general partner at Kleiner Perkins. He's also a former NVCA board chair. Ted, welcome to the show.
Ted Schlein (00:01:03):
Thank you, Bobby. It's great to be here.
Bobby Franklin (00:01:06):
Well, it's great to have you. And for some of our listeners that may not know your impressive background, let me just share with folks. Ted has been in the cyber security space for 35 years. He's been at Kleiner Perkins making venture investments for 26 years. He served in over 40 public and private boards of directors. He's on the Homeland Security Advisory Council. He's on the Cybersecurity and Infrastructure Security Agency advisory board. He's done numerous special projects with the Department of Defense. I can think of no one more qualified to talk about the subject we want to talk about today. Ted, it's such an impressive background. Let me start by asking you, what have you seen over these 20, 30 years you've been doing this? What's been the biggest challenge in the past that you have seen?
Ted Schlein (00:02:00):
Well, Bobby, if I go back to my earliest days, my very first foray in the world of cyber security was doing all the antivirus stuff for Symantec. And quite honestly there was 30 or 40 viruses and there was only a few of us that cared about them. I could gather them all on one floppy disc and we could secure people's computers. But the risk was pretty negligible. It might be a message that pops up and scares people, or maybe even a server is taken down and everything. So you'd argue the risk was relatively operational. Clean it up, get the server back up and running, et cetera. And if you fast forward to today, 35 years later, the risk is strategic to catastrophic potentially. And the amount of resources being deployed against the problem area have just gone up so many fold and that the players that are in this space now are major nation states as well as just criminal elements. And by the way, a lot of times those things are blurred in today's world.
Ted Schlein (00:03:02):
But if you just think of the sophistication of the ransomware attacks that we've had lately and the implications of those attacks. So it's been an amazing transition to watch. I can also tell you from just my own interactions with say the largest companies in the world, quite honestly, I'd say seven years ago, no one called me up and said, "Hey, Ted, will you come talk to our board of directors and tell them what's going on in the world of cyber?" I regularly am talking to ... I'm talking about fortune 100, 200 company boards about the trends of cybersecurity. I mean, the boards of these major corporations now care about this topic, as well they should. As well they should. But it's indicative of its importance in today's society and how corporations view this in terms of protecting shareholder value.
Bobby Franklin (00:03:52):
Well, I got to tell you, I mean, this is anecdotal, but it's just happened to me. I woke up this morning and I had four emails. Two from an online pet delivery company that delivers my dog food saying, "Yeah, your new order is ready to ship or we got your order." And then two from PayPal saying, "We're going to approve this." And neither one of them are to me. And somehow somewhere PayPal and Chewy in this case had something happen clearly and somebody's trying to order dog food on my account. That's just a small example. What you're talking about is so much bigger.
Ted Schlein (00:04:32):
I actually think one of the more fundamental issues that we face as an open society, which is the ability to trust. And that's fundamentally what's getting attacked. When a letter arrives in your mailbox at home, it was delivered by the US Postal Service. It's in your mailbox. There's this level of trust around the whole thing. You open up that letter, you say, hey, it's [inaudible 00:04:55]. But online, because of the anonymous nature of being online, because of the nefarious elements online, it's getting very hard to trust. That's a big deal. That gets at the core of an open democracy and how this country functions. When you can't trust what you're looking at, you can't trust what's being sent to you, what you're reading, that gets at there's a level of trust that affects corporations and enterprises and government entities, but It's just a level of trust that affects really the everyday user. I find that quite worrisome.
Bobby Franklin (00:05:30):
It affects companies that are trying to, over the last decade, have reimagined how we engage, how we purchase things, where we purchase things. And when it involves the internet, as we know, just like you said. If the trust level isn't there, that's going to impact lots of different businesses and lots of different people.
Ted Schlein (00:05:50):
Yep. Absolutely.
Bobby Franklin (00:05:52):
Now let's look through the front windshield. Talk to us about what are some of your biggest concerns that you see in the unique chairs, plural, that you get to sit in, particularly with our government and various government agencies that are responsible for our security. Talk a little bit about what you can share about the concerns in going forward.
Ted Schlein (00:06:18):
Well, it's a big meaty question. I'll tell you one of the things that is highlighted quite a bit, the Russian Ukraine conflict is the effect of globalization. And I'll bring this around to answering your question. The world has become one big interconnected economy. Tom Friedman wrote about the world as flat years ago. And the question really is the benefits of that and the potential pitfalls of that. And I actually think we're starting to see some of the potential pitfalls of globalization that we need to be aware of and deal with. And as a country, I think we're struggling with this. If you look at the world as one big interconnected economy, you have to figure out when something like Russian Ukraine happens, how does it affect me? And me being usually a government entity or a corporation. And I'll give you some statistics.
Ted Schlein (00:07:14):
There's probably 300,000 companies between the United States and Western Europe that have at least a third tier supplier in either Russia or Ukraine. That means you have no idea if you're violating all these sanctions, whether you're going to be able to get any of these products, whether you're going to get anything in the ... Which obviously directly impacts our supply chains. And every company and everyone's going to have to understand these supply chains. The supply chain risk to whether you can function as a company I think is highlighted in spades in today's world.
Ted Schlein (00:07:49):
Something that we're going to be dealing with and struggling with as a country and an economy I think for years to come. I actually think it has a potential ... And I put an asterisk next to that. Really great upside. I think the world economy could get rewired and nations that have been left out of this massive amount of growth might actually be brought in. Think about how awesome it would be if we retrained folks in Central America and South America to do chip design and chip manufacturing. Just to pick on something. And it's now closer to home. Raise a group of people maybe out of poverty from third world status. It might help us with immigration issues that we have in this country, et cetera. And I think all these implications are on the ground. So I'm trying to give you a mosaic of the kinds of things we end up talking about that come from some of these things.
Bobby Franklin (00:08:41):
I love it. I love it. Keep going.
Ted Schlein (00:08:43):
Well, then you get to how wars are fought. The Russia, Ukraine conflict is fascinating. I think it's the first example of modern warfare. It starts with some cyber incursions, which were taking place. It wraps into it technology, the use of social media, the use of data. It brings in the private sector. Think about the private sector highly involved in a war versus it just being government entities. That's what I think it's going to be like in the future. Remember a lot of the Ukrainian intelligence, it comes from places you would expect it to come from, but it also comes from just open source and people. You could log on and get a whole bunch of geospatial data and just sort of see where the troops are. The troop movement. The very first indications of troop movement of the Russians over there really came from a bunch of open source information that was able to be downloaded.
Ted Schlein (00:09:39):
But then you also see an attack on a Viasat to shut down. An attack on a private company to shut down communications in a war zone. Which leads to interesting conversations about policy. And I'm jumping around to lots of topics. We can go back to any one of these things. But we had originally said that an attack on American infrastructure would lead to some sort of engagement. Well Viasat is American infrastructure, but it only affected a locality, Ukraine for the most part. And we know for sure it's the Russians that did it. That's pretty well known. The United States hasn't actually said it's the Russians. And that's a little bit of a policy issue.
Bobby Franklin (00:10:22):
Yeah. I'm sitting here in Washington. I mean, there's the policy implication. There's how you do diplomacy in today's world. The way you talked about Russia and the Ukraine war and how there was a social media component and there's the private sector component. There's also the changes that impacts the traditional way governments deal with things and the diplomacy and everything else.
Ted Schlein (00:10:45):
I find it fascinating. Scary by the way at the same time and obviously devastating to the folks over in the Ukraine, which is just terrible. But the reason I bring this up and I really want to stress the private sector's involvement is wars are not just, "Hey, let's go send our soldiers and tanks and planes and boats somewhere and we'll use kinetic means to create some outcome." It is whole of country. Keep in mind 85% of the infrastructure in this country is in the private sector's hands. So I find it fascinating. If the pipeline attack happened now, it was done by a criminal element known to reside inside of Russia. To whatever extent you want to say by the Russian government. Sure. Go ahead and do that if you want to go make money. If that happened now, would that be considered an act of war versus when it happened?
Ted Schlein (00:11:42):
And what would we do? Would that trigger article five? Would NATO have to come? I pose these issues because it's ... If I am a cyber security professional that is responsible for large parts of the infrastructure in the United States, you have to actually start thinking about these things now versus, "I got to keep my networks up and alive. Yeah, there's these hacktivists that are coming in. I got to make sure my firewalls are configured properly, et cetera." You might get sucked into being a pawn in an actual conflict in the future.
Ted Schlein (00:12:12):
So it begs to ask the question, what's the role of the government? What's the role of the government in protecting the private sector? Last time I checked the constitution says something like, hey, the US military is there to protect the United States of America. Well, as I said, 85% of that infrastructure's in the private sector's hands. I certainly know what they'd do if I there's a kinetic attack, but is a cyber attack that different if it has the same outcome? And how should we handle it?
Bobby Franklin (00:12:40):
Well, cyber command was set up by General Keith Alexander, how many years ago? 10 years ago maybe? 12? It hasn't been that long ago.
Ted Schlein (00:12:50):
Yeah. It's probably nine years or so, but yeah. Yeah.
Bobby Franklin (00:12:54):
So we have a new way of thinking about this and you're right, it hasn't been completely probably thought through on the policy implications and what it means and how it's all interrelated. And I love the way you use the example that I think is fresh in our minds about Russia, Ukraine, and how things have changed and what that means.
Bobby Franklin (00:13:19):
So now that you've gotten us concerned. You're a venture capitalist and as I've learned working with venture capitalists, you're all eternal optimists. You think every one of those investments is going to do great, even though empirically you know that many of them fail. So give us some hope. Give us some excitement of some potential tools, products, services, solutions that entrepreneurs that you work with and invest in are ... What are they doing to help us here?
Ted Schlein (00:13:50):
What have I learned over my 35 years is as the attack vectors change, as the adversaries change, as the methodologies change, the technology changes too. People always ask me, "Ted, well, you've been doing cybersecurity stuff for 35 years. Are you're insane?" And it's like, well, you know what? No one wants to be less safe. It's a vibrant area to invest in because people are ... People meaning mostly corporations, are willing to spend money to get the latest and greatest to protect against these adversaries and new methodologies, et cetera. And the big companies in the cyber space, like all big companies, are usually relatively slow to react and eventually they get there and they'll either do it through M&A or will bring some of these new companies public and they become the big companies of tomorrow.
Ted Schlein (00:14:38):
And if you look at the industry, we've remade the same segment numerous times. Whether it be endpoint stuff that I did at Symantec to CrowdStrike today. We talk about the sophistication in these adversaries. Well, you're going to need cool new tech. So whether it be supply chain, visibility, risk analysis, or whether it's ... People love to talk about zero trust, which is a great catch phrase, but underneath it is technology. Multifactor authentication. Micro segmentation. Authorities analysis. Each of those are rich with opportunity to be innovative and create. But I do think that ... I'll say this to my fellow venture capitalists or any entrepreneurs listening. Rethink how we do things. Don't be so additive and bandaidish. I actually think times call for a rethinking of our actual core infrastructure and how we look at it. And be bolder about that to make some more radical change if we're going to try and stay ahead, or at least on par with the adversaries of today. I just founded a whole new firm just to focus on this, Bobby, so yeah, I'm still in.
Bobby Franklin (00:15:52):
I love it. I love the optimism about this community and yours is infectious. You've been at this 35 years and you're restarting and rethinking and encouraging everybody else to do the same. Sometimes it's a challenge to get the government to be in a position where they can purchase the best new products and services from a young startup that has some cool new tech, who has taken your call to rethink things. Can you talk a little bit about the challenges that many VC backed companies have in selling into DOD and to other parts of our government?
Ted Schlein (00:16:32):
Well, Bobby, there hasn't been an executive inside of DOD at all levels over the last 25 years that hasn't come out to Silicon Valley and I invariably get asked to chat with them or I get invited to something and we don't have basically the same conversation over and over and over and over again. Which is what is up with your freaking acquisition rules? You have this problem, here's a tech that solves this problem. Buy the freaking thing and let's solve it. Makes logical sense. It's a similar conversation that we end up having with most of the major corporations, which are big bureaucratic behemoths as well. But they have a methodology.
Ted Schlein (00:17:14):
We'll test it for three months. If it works, we'll buy it, we'll deploy it. None of those rules apply when selling into ... Especially the Department of Defense and a little bit into the intelligence community as well. There's some different acquisition rules to do this thing, but it's this Byzantine navigation of bureaucratic processes put in place for God knows why. I'm sure somebody can set ... And nobody really ever wants to tackle it.
Ted Schlein (00:17:43):
They sort of will cite, "Hey, well, we have these ways around it." And I actually think a large part of it is cultural. If you really want to know the truth. I actually think it's a non-risk taking culture versus think about the world that I come from. We're all about risk taking. It's all about speed. It's all about speed to have impact and making all that happen. They don't get fired if they don't make mistakes. And by the way, some of this tech won't work. And so it's about changing that culture to say, "You know what? I get a raise or I get promoted or whatever we could do if I take these chances, if I solve these problems, or I bring this tech in." So if you're giving advice to an entrepreneur, it's patience, unfortunately. Get somebody that truly knows how to navigate the federal space. It is a different animal.
Ted Schlein (00:18:32):
Don't take your standard corporate rep and think that they're going to figure out how to navigate this stuff. A lot of it is based upon relationships. You've got to get in someplace to have an opportunity to demonstrate what you have. And can it be done? Sure. Look, I mean, large portions of most major companies are selling into the federal government today. But it's hard for the startup who has limited amounts of resources, limited amounts of time to put the time and energy into it. Which is a shame because it's usually those startups that have that innovation that our government entities really need and want.
Bobby Franklin (00:19:05):
Well, we're going to keep working here at NVCA to help anybody in Washington, including at the Pentagon and elsewhere understand that last point you just made. That a lot of times it is the new innovative entrepreneur startup company that has a much better solution that they need to deploy as quickly as they can. Ted Schlein, Chairman and general partner at Ballistic Ventures, general partner at Kleiner Perkins, and former NVCA board chair, thank you so much for joining us on Venture Capital.
Ted Schlein (00:19:36):
Bobby, thanks for having me. Really appreciate it.
Bobby Franklin (00:19:43):
My next guess is Mike Brown, the director of the Defense Innovation Unit, part of the Pentagon. Mike, thanks for being with us here on Venture Capital.
Mike Brown (00:19:51):
Bobby, thanks for having me today.
Bobby Franklin (00:19:53):
Now, you've got a super impressive background before you went into government service. And so I'd love if you would give our listeners a little bit of that background working in the technology industry that led you to DIU.
Mike Brown (00:20:06):
Well, great. Thanks. Yeah, I've spent most of my career in Silicon Valley working for tech companies. 20 years, the first part of my career after graduating from business school with Quantum Corporation, which is a computer hardware provider. Disk drives and tape drives. Started there as a market analyst and finished up some time as a Chairman and CEO. And then a number of years with some smaller companies. Companies in the storage space, like EqualLogic and then some companies in the music business, because I'm an amateur musician. So a little bit of time with a company called Line 6 doing digital signal processing, and then EchoNet doing music recommendations before taking a role as the CEO of Symantec, leading a turnaround there for a couple of years. And then that led me into government service. Not a direct path, but a roundabout one. And probably one of the most rewarding jobs I've had is leading the Defense Innovation Unit at the Department of Defense.
Bobby Franklin (00:21:00):
Mike, tell us what DIU does. And then maybe you can also add how does DIU interface with venture capitalists?
Mike Brown (00:21:08):
Yeah. Defense Innovation Unit was started by Ash Carter seven years ago. And I think the name is a bit of a misnomer because innovation is such a broad term. I think, and I've told Ash Carter this, it really should be Defense Commercial Technology Unit. Our mission is really accelerating adoption of commercial technology in the military. And what Ash realized seven years ago, even more true today, is so much of the innovation is happening outside of the beltway, outside of the defense primes. And for us to field a modern military using the best of the technology that we have, we've got to be relying on smaller, innovative companies and larger companies that are successful in the commercial sector. And we've got to make sure that technology is available to our war fighters. So that's really the mission of DIU. How do we accelerate the adoption of commercial technology for war fighters?
Mike Brown (00:22:03):
Many folks know that often we field pretty old technology in the military so we need to get caught up. We have better technology in our consumer lives, our war fighters have, with an iPhone or something similar than what they have often to use in the military. So we're trying to close that gap. And the way we work with the venture capitalists is if we want access to leading commercial technology, often those are venture backed companies. So when we have a problem to solve for the military, we turn to the market. 75% of the time that comes from a small venture backed company. So small business that would be under 500 employees. We're often surprised positively that the state of technology development and things like AI, cyber, autonomy, there are solutions in the commercial world that we had no idea existed. That's often the experience of our DOD mission partners. No surprise to anyone on this podcast. It just speaks to the tremendous innovation that's happening in the US system that really is the envy of the world. So there's no reason why that also shouldn't be available to our war fighters.
Bobby Franklin (00:23:12):
Well, it sounds like a great story to tell, but I know from talking to a lot of my members, sometimes it's not always as easy as oh well DIU or some of the folks in the Pentagon are impressed with the technology that you have. So maybe you can talk about it from the other side. What's the fundamental problem experienced by VC backed companies that want to be customers or partners or sell to the Pentagon or the intelligence community? Talk a little bit about the challenge that they have.
Mike Brown (00:23:39):
Yeah. Bobby, you hit the key question. We would like to make it easy and that's really DIU's mission. But we are trying to change a system that frankly is 60 years old. Believe it or not, developed by Secretary McNamara when he was at the Department of Defense during the Kennedy administration. So he really had this idea that we need to modernize how we're doing, what he calls requirements and how we buy things. And it was basically a systems engineering approach that's very sequential and arrogantly assumes we can predict the future. Maybe he was better at that in 1960 than we are today, but no one listening today would assume we could predict the future. And competing with peer adversaries like China, you can't be working in a system that is sequential and takes us three years to program a dollar of spending at DOD. Many of the companies that we're working with that are in the portfolios of your members, they would not even have developed their solution three years ago. They're moving at a much faster pace. So we've got to dramatically change the pace that we're operating and have a much more flexible budgeting approach.
Mike Brown (00:24:48):
And what we have recommended is that we need a parallel process for commercial technology. Because the Defense Department's process that McNamara envisioned was really all about defense technology. When we buy tanks or aircraft carriers or fighter aircraft. I could recommend a whole host of things that we should improve on that process, but that's not for today's discussion. We need a parallel process for commercial technology, which is not developed for a specific service. So often we have difficulty identifying who even should buy that technology within the department, things like commercial, satellite imagery or small drones. There's no one center for buying that. So if there's no one center for buying it, we haven't identified expertise for assessing it and we haven't budgeted for it. So it's that process that we're trying to solve. In fact, we've made some recommendations there called the fast follower strategy for technologies where the Pentagon's not inventing those and we need to be fast following what the commercial world is doing.
Bobby Franklin (00:25:40):
Is the Pentagon serious? Are they showing enough urgency do you think?
Mike Brown (00:25:45):
Well, I think I'm often viewed as a bit of a squeaky wheel because I'm saying the truth. We are not moving fast enough. We need to have a much greater sense of urgency about reforming this process. But everyone recognizes it needs to change. So it's not an issue of denial of the problem. It's how can we fix this? There is recognition by congress that we need to move here and reform that process that I talked about from 60 years ago, which, more Pentagon speak, is called the Programming, Planning, Budgeting, and Execution process. PPB and E. To your listeners it sounds like Greek, but everyone in the defense department understands what that process is all about. That's the part that's not fast and not agile and we need more budgeting flexibility. I can't even imagine any CEOs that are listening if they told their board that they have to do a budget three years in advance and then not make any changes, they would be laughed right out of the boardroom. That's what we're working with at the defense department.
Bobby Franklin (00:26:45):
I'm sure you've probably heard of if you didn't also read Chris Brose's book.
Mike Brown (00:26:50):
Fantastic book.
Bobby Franklin (00:26:51):
Is that something that also has helped perhaps you convince other Pentagon leaders of the sense of urgency in trying to get to the right place and solve some of these issues that you're mentioning?
Mike Brown (00:27:04):
Absolutely. The Kill Chain is one of the most important books written in the last decade or two, as it relates to defense and innovation. And Chris is really highlighting here what needs to change. So first of all, incredible role for commercial technology in defense modernization. My boss, Heidi Shyu, the Undersecretary of Defense for Research Engineering has identified 14 technologies critical for national security. 11 of those, 80% of them are being led in the commercial world.
Mike Brown (00:27:33):
So we need to make some changes, one, to adopt that commercial technology more rapidly. That's DIU's mission. But also change the process at the Pentagon so that ... I often think at DIU we've built a two lane highway so that there is a pathway, but that needs to be a freeway, a super highway so that we can digest much more technology at a faster rate. And if we do that, we're going to have more of the folks who are members of NVCA thinking about defense as one of the verticals that they want to go after. So we're not looking to create more defense specific companies. We want companies that have dual use as their market to be thinking about defense and we need more investors funding, those companies. That's the mission that I think we're on more broadly to ensure that we get the right technology to war fighters.
Bobby Franklin (00:28:25):
We recently put together a working group of investors that focus in this area and that have a lot of portfolio companies that either have or certainly desire to do business with the government. Usually through DOD and some of the security agencies that are related. What advice do you have for the folks in our industry? You talked about what advice you give others at the Pentagon and you're that squeaky wheel and so forth. What advice would you give us?
Mike Brown (00:28:57):
Well, I think change is happening. We would like it to be faster. I've been on record many times talking about what we need to do to make it go faster and we talked about some of the processes the Pentagon needs to change. So the good news is the change is happening. Before there was a DIU I think it was much more difficult to figure out what that pathway is. The two-lane road wasn't built. Now we have 100 first time vendors that we've introduced and those 100 vendors have $3.7 billion of production level contract revenue available to them. That's not enough. It hasn't happened fast enough, but it's a start. So the first thing I would say is have hope.
Mike Brown (00:29:38):
The second is we really have to identify within the department who your end customer is. So the defense department is not one monolithic customer, it's hundreds of customers. But we have to identify that end customer who cares deeply about solving that problem and brings budget. So I think the department often confuses companies, CEOs with, okay, there's lots of different pathways in, whether it's a SBIR program or the RDER program, that there are lots of pathways in, but if we haven't lined up that urgent problem, leadership support and budget, we don't really have the makings of a production contract. We have perhaps an experiment, a demonstration, someone's satisfying their curiosity to see what's available. But I know from being a CEO, it's very important to identify that customer who's going to provide recurring revenue or you're basically wasting some time.
Mike Brown (00:30:32):
And I'm very concerned about the opportunity cost of the vendors who are out there. We've got to make sure that we treat that as a precious resource, the same way CEOs think about it. That's what I would caution folks to think about. While there are a number of pathways in, you really have to identify that. At DIU, one of the values we bring is we qualify the DOD as a customer for you. So when we have a DIU project, we've already lined up the interest from the end user, leadership, and the budget. So we're trying to make that process easier by getting that part done for you up front.
Bobby Franklin (00:31:10):
And Mike, we at NVCA deal a lot with the folks up on Capitol Hill and other policy makers around Washington. I guess, what advice would you have for us as we talk to policy makers? What support does DIU need from Capitol Hill or from others here in town?
Mike Brown (00:31:29):
Well, first of all, Bobby, thank you for the partnership that we've had for a couple years now. I know we started working together when congress passed the Foreign Investment Risk Review Modernization Act. Again, more jargon, but that was all about CFIUS and what the jurisdiction of CFIUS could be. So you remember working together on that to make sure that it was friendly enough for venture companies given the objectives that congress had. So we really appreciate the partnership to work together on policy issues.
Mike Brown (00:31:55):
I would say in general, we can be tremendous allies on beating the drum that commercial technology is the way to go. We need the Pentagon responding, as I've already said, faster and moving more broadly to create this super highway so commercial technology can come into the military. That's going to benefit certainly the companies that are in the portfolios of your members, and it's going to benefit the military. So we have to make sure that this is happening on a much broader basis. The more we can get policy makers thinking about that, creating the right incentives, having DOD reform its processes to be more agile and go faster, the better off we're going to be and the more we're going to increase our ability to bring in commercial technology.
Bobby Franklin (00:32:39):
Well, as my stepdad is a retired two star general in the Army, you have a willing partner on my side anyway, here at NVCA and I certainly appreciate your time with us today. Thank you, Mike Brown, Director of Defense Innovation Unit, for joining us on Venture Capital.
Mike Brown (00:32:57):
Bobby, thanks again for having me.
Bobby Franklin (00:32:59):
Before we turn to our next segment I want to introduce you to another 2022 NVCA VC award winner. My next guest is one of this year's NVCA rising star winners. Shaan Gandhi from Northpond Ventures. Shaan, thanks for joining us today.
Shaan Gandhi (00:33:20):
Thank you so much, Bobby. Great to be here.
Bobby Franklin (00:33:22):
Well, Shaan, listen, before I ask you some questions, I just have to let our audience know a little bit about some of your pedigree before they hear you give some answers. First of all, I noticed that you are a Goldwater scholar, Coca-Cola scholar, an Elk scholar at Case Western Reserve University with a BS in biochemistry, but you didn't stop there. You got your doctorate of philosophy in medical oncology from the University of Oxford as a Rhodes scholar. Then you decided to go to Harvard Medical School where you were Joseph Skigin scholar and then get your MBA, I guess also while you were there as a Baker scholar. So it sounds like you are well prepared to be a venture capital investor in the life sciences. Thank you so much again for joining us.
Shaan Gandhi (00:34:05):
Oh, thank you. One would hope with that education I should be learning how to be a good venture capitalist. And of course, as I'm sure you know and I'm sure many other VCs in the space, we're constantly learning and we're constantly realizing that facts that we knew to be true are probably not true, but also vice versa. Things that we thought would be impossible to accomplish actually now are very much possible as I'm sure we've all seen over the last two and a half years.
Bobby Franklin (00:34:34):
You started as a ... Well you did your residency in internal medicine at Massachusetts General Hospital. You were an attending hospitalist there. Talk about going from working at Mass General to becoming a venture investor.
Shaan Gandhi (00:34:47):
It's a great question, Bobby. And it goes back to a lot of experiences and observations that I had while I was a resident at MGH and while I was an attending at MGH. There were so many experiences I had where the power of novel therapeutics to change the lives of patients for the better were made apparent to me. But there definitely were a few crystallizing moments in my career where I thought really carefully about where is it that I would want to have impact in healthcare? And the more I thought about it, the more I realized being very, very close to the biotherapeutics sector, helping entrepreneurs and scientists and physicians create the next generation of drugs that we need in order to treat the diseases that still afflict society, that's where I really wanted to have impact. So one story that really stands out for me ... It's not really a story, but more of just a set of observations that I had made during my residency training.
Shaan Gandhi (00:35:52):
I started as a resident at Mass General in 2015. And 2015 was a big year in the cancer immunotherapy field because the year prior, one of the first immuno-oncology drugs, Opdivo or Nivolumab was approved for use in melanoma. And then actually a few years prior to that in 2011, another drug, Yervoy or Ipilimumab was also approved for use in melanoma. Now in 2015, it was still relatively rare to get those two drugs. Most of the time patients who had access to those drugs were getting it through a clinical trial. And so for the vast majority of patients who were not enrolled in a clinical trial, they had the drugs that were typically available to them for treatment. And so I remember distinctly my time as an intern as a first year resident in 2015 on the inpatient oncology wards at Mass General, treating dozens and dozens of patients with end stage melanoma, with end stage non small cell lung cancer.
Shaan Gandhi (00:36:54):
There was one patient in particular that I distinctly remember because he was not that much older than me. He was married. He had two young children. His family was there with him every day by his bedside. And it was really a sad story. He had widely metastatic melanoma. I think he was 32 or 33. So again about my age. And we essentially were treating the symptoms of his disease. There was nothing that we really could do for him at that time. The drugs that could have treated him weren't working. And so we essentially helped with his symptoms and helped with helping him plan for the end of his life, unfortunately. And those experiences, his in particular, but a number of other experiences that I had in treating patients really stuck with me and really showed me how even though we have accomplished a lot in medicine, there is still a long way we have to go in order to treat a lot of diseases, that again, still afflict us.
Shaan Gandhi (00:37:54):
Now, thinking specifically about melanoma, fast forward three years to 2018. I was now a third year resident, a senior resident back on the same floor at Mass General, but now I was a supervising resident so I had a team that was leading. And by 2018, a lot of these other drugs like Nivolumab, like Pembrolizumab, like Ipilimumab and many others now were much more widely available. And so as a result, the patients that I was taken care of back in 2015 now were no longer in the hospital because they had received these lifesaving drugs and their disease was cured. And they were now at home with their families and their friends enjoying their lives because of the miracle of modern science. So comparing and contrasting those two experiences of me as a first year resident in 2015 to me as a third year resident in 2018, I was still a resident, still in training, but yet there was this massive sea change that occurred in cancer care over three years, where diseases that three years ago, would've been fatal for people now are curable.
Shaan Gandhi (00:39:11):
And now people who unfortunately get those diseases actually now have access to treatments that can actually cure them. And now they can go on and live their life. So that observation ... There were many others. But this one really stuck with me. That observation really crystallized in my mind, again, the power of drug development and drug discovery in changing people's lives for the better. By giving them tools and giving them medications that can actually treat their disease where none had existed before. And so that experience or a number of other observations I made about how widespread the biotherapeutics industry is in treating an array of diseases. Those experiences and those observations really told me that if I really want to have impact in healthcare, here's an area where I can have it. And in supporting the next generation of biotechnology companies that are trying to cure diseases that the world still has.
Bobby Franklin (00:40:12):
That's amazing story. I can feel the passion in your voice and those experiences and how it helped lead you to where you are today. And thank goodness you are. Let me ask you this question. You just gave a wonderful example of what can happen, particularly from the patient perspective, over just a short time period. You're now a venture investor. You are on the board of many companies. What are you most excited about to see either the next diseases that will have a cure, a therapeutic, or something else that you're invested in?
Shaan Gandhi (00:40:49):
That's a great question, Bobby. Two areas that really stick out for me are there are two sides to the same coin and it comes down to the idea of precision medicine. Where with precision medicine, we have the ability to understand diseases at a much deeper and a much more granular level. Not all patients with heart failure are the same. Not all patients with diabetes are the same. We are learning this very quickly that there are actually specific subtypes of these diseases. And so we now have the tools in order for us to understand what all of these different subtypes are, so that we can actually develop treatments that are specific to each of those subtypes. So to give an example, we're an investor in a company called Cipher Medicines. They have a really exciting diagnostics platform that essentially allows rheumatologists to understand which patients would potentially benefit from individual treatments.
Shaan Gandhi (00:41:49):
For patients with rheumatoid arthritis for example, by and large, a lot of them get a class of drug called a TNF alpha inhibitor. Many listeners may have seen advertisements for these drugs. The most commonly prescribed one is a drug called Humira. But we know that there's a certain number of patients for whom Humira does not work for them or any other TNF alpha inhibitor for that matter. But we don't know whose disease is going to respond and whose disease won't. But now with novel tools such as the tool that Cipher is developing, we now can identify which patients would actually benefit from which treatments so that we don't have to waste time. We don't have to try out different drugs and hope they work and in many cases, see the patient not do well on those drugs and we have to change course. We now can know upfront which drugs would work best for which patients so that we can give them the right drug at the beginning so that hopefully they can get better a lot more quickly.
Shaan Gandhi (00:42:48):
So that's just one example. But we see this subdivision of common diseases into subtypes that allow us to devise better treatments for those subtypes. We also see the other side where we now are able to identify really rare diseases. Patients whose diseases are very, very complicated, very unusual. We weren't really able to understand why they were ill or how they were getting ill. Now we do. But those diseases often can be so rare that you only have maybe 50 patients in the world or 100 patients in the world that are actually suffering from that illness. So how do you devise treatments to treat only 50 people or 100 people? And so that's an area of a lot of work that we are doing at Northpond and many of my colleagues are doing in our sector to understand how do we address those healthcare needs for those patients. And it all comes down to just our understanding of how complex disease is and our understanding of how many different types of disease there really are. It's really contributing to that work.
Bobby Franklin (00:43:55):
Shaan, don't be surprised if you get a call from me to join me on Capitol Hill, talking to policy makers about the amazing therapeutics on the horizon, what diseases can be cured and what's just around the corner. You did a great job of explaining it. It's no wonder that you are one of this year's NVCA rising star winners. Sean Gandhi from Northpond Ventures. Thank you so much and congratulations.
Shaan Gandhi (00:44:23):
Thank you so much, Bobby.
Bobby Franklin (00:44:24):
We also want you to mark your calendar for May 11th, 2023 for NVCA's big 50th anniversary celebration and leadership gala awards in San Francisco at the Four Seasons Hotel.
Bobby Franklin (00:44:40):
I'd like to welcome Brandon Shelton with TFX Capital. Brandon, thanks for joining us.
Brandon Shelton (00:44:46):
Bobby, it's a pleasure to be on. Appreciate all the hard work you and the team do at NVCA. Helps all of us out. So thanks for having me on.
Bobby Franklin (00:44:53):
Now, you started TFX Capital back in 2015 with a unique focus on veterans. What do veterans like yourself bring to the venture industry that's different or unique than people without a military background?
Brandon Shelton (00:45:07):
For the listeners, I am an Army veteran myself. I grew up in a rural town in Virginia. About 60 odd percent of folks that serve in the military come from military families. I was one of those. My father served, my brother served. I met my wife on active duty. But I used the military to pay for college. So everyone has their own story. So for me, my story was I was 28, left active duty in 2004, went to work on Wall Street, had a good undergraduate degree, had led people all over the world for six years. And I was offered a 22 year old's job. Because in the hiring manager's front, and I'll connect us to the venture capital industry here in a moment, they were de-risking it. They're like, "Thank you for your service. You sound good. I can vet your college education, but I have no clue what being an infantry officer, leading 40 people off an airplane, I don't know how that connects to being on this trading desk."
Brandon Shelton (00:46:00):
And there's been an explosion in the last 20 years of headhunting firms and other resources to try to mitigate this challenge. So when you overlay that into the investment space, the problem set's actually worse. As you know Bobby and under the leadership of NVCA with Deloitte, we have a lot of improving to do. We're generally a white male dominated industry, and that leads to incredible biases against female founders, people of color, geographies. So I'm in the Southeast and we still are woefully ignored by the general venture capital industry, but that's changing, which is exciting. And then veterans. The military generally recruits from middle and lower income families across the country. We believe most folks that are in capital markets and venture capital come from middle income and upper income families.
Brandon Shelton (00:46:50):
So again, that civil military divide, language gap, translation gap is even wider. So if I'm looking at a founder and we're doing the proverbial 30 minute intro call and they send me their 20 slide deck, and it has the one slide with the four bubbles of the founders, they may or may not even disclose that they were in the military. And we actually think, well, no, no, that's actually a really, really important element because there's a lot of things that we can talk about later. We draw a lot of parallels between a startup environment and a small military team. But the traditional investor in our world doesn't understand that. And the founder doesn't have enough time, space or language to impart that. So I would say translation is one that we bring to the industry. And the second thing would be a service mindset.
Brandon Shelton (00:47:36):
We are a venture capital investor. We have investors who we've promised above market returns. So we're not a nonprofit, we're not a feel good story, but we have a service mindset. And so with that, we've noticed in the last six years is we generally fight alongside our founders every day, even when they're down. Some of our best performing companies had multiple near death experiences and some of the other investors gave up on them. We didn't. We stepped forward into the breach and said let's work the problem. Why? Because we, and that veteran founder have fundamentally done harder things. So that's just not our mindset. We have a service mindset saying if we can solve the problem and help those founders navigate to the next ridge line, we will all win financially. When I was asking venture capital professionals in that summer and fall of 2015, how do you build a VC firm, I had a lot of people asked me right out of the gate says, "Well, how many failures are you planning for?"
Brandon Shelton (00:48:32):
And for someone that grew up in my family and how I serve, planning for failure were words that I'd never really put together in a sentence and I didn't understand it. I mean, I'm respectful of it now. I understand what they're trying to get at, but we're not trying to keep everyone alive. But our marks to date is that we've invested in 13 companies working on our 14th. We've had three exits and we have zero failures. The rest of our 10 businesses are operating and indeed growing.
Bobby Franklin (00:48:57):
You have certainly been at the forefront, I think, in focusing on military veterans, but others are out there too. So what's different about TFX compared to others that are also focused on military veterans?
Brandon Shelton (00:49:11):
What I'm also proud of is when we looked around in 2015 at other firms, because we had this thesis and we said, surely with all the money going into venture capital, really smart people have figured this out. When we looked around, we only found really one other firm and I immediately cold called him. And he was like, "Thank goodness you're doing this. We need help." And now there's two dozen and it's still not enough. When you total up all of our AUM, it's still not enough. And we see that because of the human capital survey. This is a source of performance talent and a startup that can overcome the failure rates and find success. We need more funds like ours and then we need more people like us inside the Andreessens and Sequoias and Greylocks of the world to help that translation element.
Brandon Shelton (00:49:56):
So we exclusively invest in this attribution. Some of our peers are military veterans and dual use. So things that can work for national security or for commercial, others are sub tribes like I only invest in military academy graduates or stuff like this. And again, we try to share idea flow, we try to be transparent. Because that's the expectation that we should all work together collectively. But I think it's a great demand signal that when we got started, there was one other and now there's two dozen and I hope that continues.
Bobby Franklin (00:50:27):
That's great. You also mentioned the Deloitte human capital survey that both NVCA and our 501c3, Venture Ford, are participants in. You've been a part of that. Thank you for that very much. It's been interesting to kind of see where we are seeing trends. What trends have you seen in this human capital survey?
Brandon Shelton (00:50:47):
Yeah, I really appreciate the work Bobby, your team has done with that. And I appreciate Deloitte leading that because with their name behind it and yours, I think more people read it, which is great. And I want not just venture capital firms to read it, I want the propellants to VC. So I also hold accountable college endowment investors, family office investors, pension fund investors. They should be asking the questions on diversity of VC fund managers, not just VC fund managers of their portfolio companies. The trend I've noticed is that we have a lot of room to grow. I know there's some statistics that get put into the survey for veterans. There's one section at the end, which is great. But it's statistically irrelevant. So what it tells me is what we see every day, most investment firms, most accelerators and most startup conferences love to invite us. Please attend. Please attend. Please attend. So I said, "Okay, great. How many veterans are going to be there? How many veterans do you have in your ..." Or, "Hey, we should do a deal together." "Okay. How many veterans are in your portfolio?" "Don't know. Never asked." "You can ask. You should track it. Because if there's repeatability there, and you find that, ooh, hmm. Three of our last four success stories had a veteran in the senior leadership or founding team." Maybe I build on that. How do I build on that?
Bobby Franklin (00:52:06):
I've heard you talk about durable outcomes. What do you mean by durable outcomes?
Brandon Shelton (00:52:12):
Durable outcomes for us can take lots of different forms. The first and foremost is how we are marked, how we are all held accountable. And I'm proud to say our two funds, although they're small, are conservatively marked in the upper quartiles. So that's giving us early evidence. It's a small end. But it's giving early evidence that we may be on to something and it's kind of initial results. So that's number one. I think number two, the zero failures is really important to us. Some of the listeners are probably ... They're listening to this and they're on the run or working out, they're probably like, "Oh, they just keep bad companies alive." Nope. We pass on rounds. We give some pretty blunt feedback to our founders because of our backgrounds. So no, we don't keep bad companies propped up. We don't fund zombie companies for the purpose of marks. But they on their own are surviving and really problem solving. Again, the thesis. They're going to take three, four, five hits, like all founders do. Can they overcome them?
Brandon Shelton (00:53:06):
Can they problem solve, critically think, and lead people to the next ridge line? Can they work in an austere environment? And then from us as an investor, like I told previously, can we provide relentless levels of support throughout? So even when you're in duress, please call us. We'll step into the breach with you. Let's do a meeting, let's do an offsite. Okay. Let me think through some of our investors and some of our network connections, let's get them in the room. Let's go. Crisis management, mission planning. Let's figure it out. But when you look at what they're trying to solve, the type of people we're investing in are not drawn to simple problems. They're not trying to digitize or automate because they are actually drawn to solve nasty problems that if they solve it or solve part of it, it actually makes that industry, that community, our society, our nation better.
Bobby Franklin (00:53:53):
Got it. Well, I think you've already given some great advice to other venture firms, which is basically if there are folks out there that want to know what you can do to look at the merits of veterans and invest in it, basically you're saying give you a call. You'll take all of the calls from folks in the industry and I think that's awesome. What about advice that you would have for military veterans that may be listening, who are looking to shift into an entrepreneur role and start a company?
Brandon Shelton (00:54:20):
We spend some of our time talking to veteran founders, but they're making widgets or other items that don't fit into our investment thesis, but we try to help them. We spend time coaching folks young and old who are getting out of the service and thinking about getting into a startup or venture capital. I think Kevin and I do about one a week. Again, time dilutive to the outsiders, but for us in our community, right thing to do, because you never know who that person knows. You never know who they served with. So we have to be relentless, good actors and pay it forward every day. And it brings us some joy. So through that process, we do see folks who want to get into venture capital or go into a startup. My advice to folks coming straight off active duty is do not do that.
Brandon Shelton (00:55:04):
I think venture capital is a unique industry with very limited seats and frankly bad functional processes. So if you're trying to come out and learn the commercial sector and you want to be exposed to HR, IT, finance, full suite, I think VC's a tough place to do that. And you're also an individual contributor so if you were really adept on a high performing team, you're going to be an individual contributor and it's going to be a tough environment to transition. Or if you're older. Let's say my year group. My year group's up to 23 years. I've recently been talking to folks who stayed in and did 17 deployments, spent seven years in combat zones. They're actually terrified of leaving. So they're like, "Man, could I go to a startup, a small team?" Because that seems familiar to them. I want to do something hard.
Brandon Shelton (00:55:50):
Seems familiar to them. Or I want to work in venture capital because I'm being told that leadership is really important in venture capital investments. And I give them the same advice. So the standard advice on all those fronts is go work at the most bureaucratically organized and publicly traded company you can. Do it in a city that you want to live in or nearby or whatever the situation is. Do it hopefully in a team and an industry that interests you. But care a little bit less about that first team, which is a mistake I made. Care more about okay, I need to put myself in a position to learn. I need about 36 months. I need two annual performance management processes, which that's the most like on like comparison to the military. How does that company do year end reviews? How does the military? In the military, if you're an officer or enlisted, it's the one standard thing that is front and center all the time.
Brandon Shelton (00:56:41):
And there's all kinds of classes you have to take and doing it and da, da, da. So it's an easy, okay, this is how I was doing it, this is how commercial sector does it. And then number two, I want you to understand the difference in the environment, both in venture capital and a startup or in a commercial enterprise. No one knows how much anyone makes. And I always underscore this to veterans. In the military, everyone knows how much everyone makes every day. The financial incentive is gone. I mean, literally there's no cash bonuses. Okay. You did this project. Okay. I have limited budget bonus dollars to hand out so I'm going to give you a little bit more. Another bit is everyone in the military, generally speaking, your bosses are always older than you on the officer side and a lot on the enlisted side.
Brandon Shelton (00:57:22):
And I'm going to crossover hard story to explain, but maybe your first job out, you're 35 and you report to a 24 year old. How do you handle that? So I tell you all that ... Oh, and the last thing I tell them is in the military, the beauty is that they take job and mission or purpose, and they glue it together. It's truly 24/7. Business, it's a job. And where I hear the most frustration from veterans straight into VC, straight into a startup or straight into an enterprise role is they come out wanting to replicate that. And what they do is they come off too intense to their coworkers. Because those people are there to make the money, generally speaking. And they're going 60 miles an hour compared to your 100 miles an hour that you learn. So I need you to work through that.
Brandon Shelton (00:58:05):
So if you do 36 months ... Same, by the way, when we invest. We no longer invest in people straight out of grad school or straight out of the military. I need to see if you have transitioned in the commercial sector, made some adjustments, grown older as a person, maybe unlearned some military stuff, maybe learned some good commercial techniques and then married the other stuff. I just think you're going to be a far better athlete and much more value add. So if you're going to go into a VC firm, you're leaning on your life experiences, military experiences, commercial experiences. I think you'll be more value add on that team and to your founders. If you're going to go be a startup you've been exposed to process and things that you know are non-existent in an early stage startup, you can bring that in. And ultimately that resilience and that grit.
Bobby Franklin (00:58:47):
I think that's wonderful advice. Brandon Shelton, with TFX Capital, thank you so much for joining us today on our podcast here, but mostly thank you for your service.
Brandon Shelton (00:58:59):
It was my honor. Thanks Bobby.
Bobby Franklin (00:59:04):
Before we wrap up this episode of Venture Capital, I want to let our listeners know about an exciting new NVCA event. It's called the Board Service Excellence Forum. A one day learning event designed in collaboration with our board of directors to provide VC investors with actionable insight and expertise to enhance effectiveness inside the boardroom of portfolio companies. New in 2022, this program features the perspectives of top VCs and entrepreneurs. The event will take place on September 15th at the Capital Factory in Austin, Texas. For more information, please visit nvca.org.
Bobby Franklin (00:59:44):
Now, before we leave you, here's another fun fact. There was a typo in the original etching at the Lincoln Memorial. It's been touched up since then, but the letter E was accidentally chiseled into the beginning of the word future on the north wall of the memorial. Again, thank you for listening to Venture Capital, a podcast brought to you by NVCA. Hope you enjoyed the show because investing in tomorrow starts with smart policies today. I'm your host, Bobby Franklin, wishing you good days ahead. Bye for now.