How do family offices evaluate defense tech and space startups differently than VCs?

JASON EP 123 - FULL W TRAILER.txt English (US) 00:00:00.000 — 00:00:07.440 · Speaker 1 We were able to make an investment in space back in 2019. Collectively, that was almost $2.5 million total. 00:00:07.480 — 00:00:16.200 · Speaker 2 What kind of separates you as a family office? How does that make you different than a traditional fund when it's your own capital, 100% at risk? 00:00:16.280 — 00:00:26.320 · Speaker 1 That's been the biggest challenge that I have, is like, I feel comfortable risking my own money because it's my decision. But if I had other funds, then of course if I lose their money, I would feel really guilty. 00:00:26.360 — 00:00:37.280 · Speaker 2 How do you kind of see and how be able to these defense tech companies get that early momentum, early traction? Getting these contracts is grueling. 00:00:37.360 — 00:00:46.360 · Speaker 1 We try to build relationships, at least to kind of network within the silos to tell us early on, hey, is there actually a need? 00:00:46.400 — 00:00:49.600 · Speaker 2 Let's specific examples of where like, that was the deal killer. 00:00:49.640 — 00:00:59.600 · Speaker 1 We've recently passed on several companies that valuations are extreme. If you are unrealistic about your expectations of what you think it's worth, then it's not worth our time. 00:01:01.820 — 00:01:38.540 · Speaker 2 Everyone, welcome back to $100 million exits. Today we have Richard Stroup on the show with us. Richard, I'm excited to have you on here because I think your background as an exited founder who sold two companies for an aggregate of over $50 million and has taken that money, bet on yourself as an allocator, and now manages a family office with over 150 million AUM. I think you're never a very interesting perspective to share with our audience that is keen to understand the the myth behind family offices and how they work, and how they potentially could either raise money or do deals with family offices. So, Richard, I'm really glad to have you on the show today. 00:01:38.820 — 00:01:40.780 · Speaker 1 Absolutely. Thanks for having me, Jason. 00:01:41.060 — 00:01:55.940 · Speaker 2 It's my pleasure. So let's kind of kick things off. Uh, tell everyone a little bit about Cape Fear Ventures and what kind of separates you as a family office versus what most people think of when they think of, like, a venture fund or things of that sort? 00:01:56.380 — 00:02:58.990 · Speaker 1 Absolutely, yeah. Cape Fear Ventures is a small venture capital firm that I created. Effectively pivoting from a family office model. Whereas prior we had both private capital, public capital invested and also real estate. But the private capital, which was mostly venture capital companies. We used venture capital or Cape Fear Ventures more or less as the brand or for that venture. So after thinking about making some changes about how we're doing deals, we've decided to kind of pivot it out from a family office model and move it more to a traditional VC firm model where we have a staff. Now we're actually, um, creating spvs for other, other sources of capital. Other other folks LPs we want to invest with us or alongside us, and at some point we'll probably raise a fund in the future. But again, we just are trying to understand how the fundamentals work with other, other people's money, because up until now it's been my own capital. 00:02:59.630 — 00:03:27.510 · Speaker 2 How's that feel? Like when you're, you know, typically writing high risk, you know, venture checks where, you know, for those that aren't familiar with venture, you know, they don't all work out. So typically most don't work out. Yeah. And you're you're not diversifying through other funds. Like you're going all in with your own decision making, your own allocation strategy. Um, kind of. How does that make you different than, say, a traditional fund? What is your own capital 100% at risk? 00:03:28.750 — 00:05:14.760 · Speaker 1 Well, that's been the biggest challenge that I have is like, you know, I feel comfortable risking my own money because it's my decision. But if I had other, other funds, money, then of course, if I lose their money, I would feel really guilty. Um, so I learned from other funds. I was a limited partner going back to 2009, 2010. I joined a group here in Washington, D.C., uh, that were doing small angel investments, but they were Collectively pulling their money together to make a larger investment underneath their LLC. So, you know, learning from them on how what works, what doesn't work, and then going through the repetition of looking at deals, looking at pitches, talking to founders, understand the mechanics of the financing side and the risk side and the legal side. And, you know, me being an operator, I, I felt like I could do this myself a little differently by being more of an operator led investor than, say, a traditional investor. So instead of making, you know, 16, 20 small bets, you know, I think small, I think like 50 K or 200 K, you know, seed pre-seed investments. You know, I'm more intentional where I can do 6 to 8 investments a year, bring my capital, bring my advisory support in all the lessons learned that I've picked up along the way, both as a business operator for my own experiences and also working with other founders, you know. Going back to last, you know, 12, 15 years. Um, it creates more to my opinion. It creates a better relationship. And then you can kind of control your outcome a little better as far as risk management. 00:05:15.160 — 00:05:16.560 · Speaker 3 So give the. 00:05:16.560 — 00:05:39.760 · Speaker 2 Audience some context on your thesis. Like what bets have you made? What bets are you trying to make in the future? Like how do you size up your checks? Because, you know, before we got online here, you mentioned you range from like a 75 K jag to like a $2 million check, which is, you know, a pretty substantial, uh, range for, for firm. So give us a little bit of context in terms of what your sweet spot, what you guys are looking for and some of your best bets. 00:05:39.800 — 00:07:14.490 · Speaker 1 Sure. So my background is software and technology. So obviously I don't make any investments in healthcare or crypto or other. The sectors that, you know, traditionally attract capital. I pretty much stick to the ones that I really understand and enjoy. So we. We invest in software startups. We also invest in AI, um, and also defense tech, since my background is in the intelligence community. So we have a deep bench of defense tech experience and then also the space industry, uh, we recognized that that was a growing trend back around 20 1718. So we decided to start making some strategic bets there. And we were able to make an investment in space back in 2019. And of course, we did add to that position up until about 22 to 23. Um, and, you know, collectively that was almost $2.5 million total. So, so obviously, that has been a tremendous success for us as well. Uh, but again, that's a long term play. But but having having that early experience in space, um, allowed us to have conversations with other startups in that community around California, Colorado, Texas, and it's been beneficial for us to look at some deep level pipeline activity that's happening. You know, up until now. I mean, we see a tremendous amount of startups coming out in the space area. So we're we're very excited about that as well. 00:07:15.170 — 00:07:18.970 · Speaker 3 So how do you back. 00:07:19.050 — 00:07:44.810 · Speaker 2 A space start like a space exploration or a space focused startup, like when the capital requirements or at least perceived like CapEx and all that kind of stuff, deep tech, super hard problems like long investment cycle, probably lots of cash that have to go in. It goes to the assumptions I have coming into like investing in space tech. Like what's kind of your reality? What are you seeing and how are you trying to like, you know, diligence these opportunities? 00:07:45.730 — 00:09:39.940 · Speaker 1 Correct. Because the valuations are typically higher and the capital requirements are a little more aggressive for space. Types of startups, you know? Obviously we look at the team, we want to make sure that the team has deep domain experience. Um, in the area, you just can't, you know, fund a startup in space area without having some, some critical experience, either working at one of the large space companies or, you know, having connections in that area so that, you know, we do look at that very deeply. We look at the technology. Uh, we've been very fortunate to partner with several, uh, business development firms around the country who have a lead in some of the academic research. So we've been able to back space startups at Purdue University, Illinois, and also University of Oklahoma. And there, you know, we read the dissertations. We understand from a founders perspective, uh, is the is the technology patentable? Um, how much money, you know, is the the university itself or other, you know, venture, uh, clubs within the university, are they backing it? So there's a bit of a formula that we use to kind of risk the uh, the reward to, to risk ratio for a lot of those investments. But then again, we also, you know, talk to some of our other partners to make sure, like what does the traction look like. You know, is there a deep pipeline do they have inside Eloise. Um, who's on their advisory board? You know, who are they working with? So again, you know, you look at the team technology and traction. And if they all line up, then then we we feel it would be a good bet to make, because eventually we know that the later rounds will have a higher valuation. So we try to we try to find some of these space startups in the Pre-seed seed range. By the time they get to the A round, it's it's already pretty expensive and we're priced out of that area. 00:09:40.460 — 00:09:40.740 · Speaker 3 Yeah. 00:09:40.780 — 00:09:53.290 · Speaker 2 As I was going to say, it's like you come later and it's just like these massive nine figure transactions that, you know, for, for family offices, smaller checks would be hard to kind of squeeze, uh, squeeze into those. 00:09:53.370 — 00:10:38.730 · Speaker 1 Unless. Unless you're a space. I mean, my first investment in space was a 30 billion valuation. So, you know, I mean, there's there's there's different, you know, qualifications for the different companies. But it was the line and the things they were doing and they were just starting out with Starlink. Um, and I felt like they were moving in the right direction. And they have a great history of aggressive compounding when it comes to business development and expansion into new territory, just like what they're doing with the orbital data centers. Um, but yeah, it was a it was a strategic bat at the time. Um, and it's, you know, obviously paid off. But yeah, we do look for, um, you know, some of those early hallmarks and making some the newer investments in the, in those startups. 00:10:39.530 — 00:10:44.650 · Speaker 2 Yeah, I would say was it valued today? It was like two, 2.5 trillion. 00:10:44.730 — 00:10:52.910 · Speaker 1 Um, yeah, it's probably one and a half now. I mean, it's it's sold off pretty aggressively here in the last couple of days, but I think things will bounce back. 00:10:53.350 — 00:11:31.950 · Speaker 2 Yeah, still still a phenomenal return, obviously. Yeah. Anything seems to touch gets a lot of notoriety, both positive and negative. But the stock usually does well over in the long run. Oh, yeah. Um, and when it comes to one of your investments, I think it was Scout as one of your space investments that, uh, has recently raised a follow on series, eh. So going into your theory here, going early and then stay, you know, help them get to the point where they're a series A, I guess walk us through a little bit of that, that journey. Like how did you how did you find those founders? Um, how did you decide that this was the cap table that you wanted to be on? And what's kind of that journey like? 00:11:32.870 — 00:13:11.840 · Speaker 1 So the scout opportunity, again, was referred to us by some of the the groups that were connected with specifically, you know, there's a group here in DC called VC and DC. Um, and Scout was backed by one of those groups and we were talking about it. And this is before they were raising an A. So this was in between their seed round and their A round. And they were looking for some bridge financing. Um, so at the time they were going in with safes, however it had a discount to the A round. Um, and you know, Scout was was a pretty a nice opportunity since they, they're a software company, but of course they perform software services for space assets. So you talk about government agencies that are in control of all of the space assets. And, you know, think about a traffic control cop in space. So that's exactly what Scout does is that they track those assets. And that way they can, you know, manage them better, especially with the proliferation of of every country now throwing up satellites and other things. Um, so so we felt it was a good bet to make, you know, you know, obviously traction, looking through government contracts, looking at That how they were growing and how they were maturing the product, and that they were closing in on a realm at the time it was going to be about 6 to 12 months, which, you know, again, was about about the same time they did the A realm. So, um, you know, just by happenstance of being connected to the right people and being in the right spot, you can learn about some of these new technologies and, uh, being able to, to participate. 00:13:12.840 — 00:13:15.480 · Speaker 4 And so I know you mentioned. 00:13:15.480 — 00:13:42.800 · Speaker 2 A couple of points. You kind of like go, oh, you're checking contracts, but like, these are like very material conversations, like how many deals have blown up because it didn't have certain traction or didn't have certain boxes checked, like what made it stand out? And let's just use Scout as an example. That was like, okay, this is the deal that checks the box. Like, what did they achieve? What did they have that, you know, the 50 other deals you said no to didn't have? 00:13:43.560 — 00:15:13.490 · Speaker 1 Well, with scouts specifically. You know, they had the government contracts and they were being renewed, um, on time. So we knew that, you know, once you get a government contract and you're performing really well, then it's very hard to kind of unseat an incumbent, especially if they're performing some mission critical services, like a scout, for example. Um, you know, case in point, look at Palantir. When Palantir entered the DoD several years ago, they only really had a couple of contracts. Now look at them. You know, the expansion's been real, and now they're they're a mainstay. And pretty much, you know, every director within the Army. So scout very similar. Once you've proven yourself on a couple of contracts, then it makes it very easy to win other contracts. And we knew that the amount of funding was increasing for the DoD and the space area. Um, so again, we just kind of, you know, induce the fact that there's going to be more assets in space. It's going to be a crowded environment, and they're going to need more support to help manage these services and the competition. You know, really Scout was was out front and the first to market and and as I mentioned, you know, being in the federal government and understanding, you know, how hard it is to unseat of incumbent unless you're failing at what you're doing. But of course, we read the reviews and we talked to some of the referrals that they were working with. And they they had, you know, solid marks across the board. So it was a it was a pretty easy decision. 00:15:14.130 — 00:15:28.530 · Speaker 2 No, that's great to hear. And when it comes to, um, you know, the deals that you end up saying no to and you're looking at all these deals, like what typically leads you to passing on the deal. 00:15:30.850 — 00:17:40.420 · Speaker 1 Well, again, we look at the four T's and how we evaluate we the team uh, we we we do a deep dive on the team, the background, the pedigree where they went to school, who they're connected with, do they have the right experience or you know, so the team, you know, really gives us a lot of red flag green flags from the beginning. You know, we we want we want to back a team that has experience, has grit, you know, perseverance, determination to kind of get through some of the challenging times because it's not a it's not an easy task to grow a business and to, to own own your own company. And we need certain personalities to do things. Um, that's that's the first thing that obviously we look at the technology itself that they're, they're using, um, you know, do a Swot analysis on the tech. Is it patentable? Uh, is there a provisional file? What's the competition look like? Um, then we also kind of built our own, uh, I guess you can say AI enabled due diligence, uh, operating system that we load all of our artifacts into, and, you know, to, to kind of eliminate the bias, you know, to be more objective in trying to do a strategic review of technology. You need something like this. So so that helps. And then the traction, um, we look at the traction. We want to understand, you know, who your customers are. Who are you talking to? What's the pipeline look like? Um, you know, what's the CCaC? You know, how hard is it to acquire your customers? Because it all comes at a cost. Um, and then we look at the Tam, you know, is this a market of expansion? Because if you're making asymmetric bets, um, you know, then that risk reward profile can tell you. Is this a good investment or not? And, you know, yes. Like you mentioned, it's a very high risk, high reward environment. But again, as long as you frame it in a certain way that it's a solid team with great experience, the technology is sound. It's patentable. The competition really isn't where they need to be. The traction is working. You know, it all kind of works in together. Um, and then it kind of, you know, makes a go no go decision. And that's kind of how we we look at it. 00:17:41.020 — 00:17:42.060 · Speaker 4 That makes makes a. 00:17:42.060 — 00:18:27.090 · Speaker 2 Ton of sense. And I know it sounds like a focused diligence process, but, you know, I think what I want to get to is like when what's like a specific detail that you've come across where it's like, that's not the deal for us. And like, you know, look at all these materials. And like, a founder's job is to check all the boxes you just mentioned and they're like, pouring their heart and soul out to you about why they're perfect and why they're going to be a unicorn. Um, but ultimately, you got to say no. You can't say yes to every deal. Like what? What's ultimately the trigger you maybe draw from? You can maybe anonymize some of the companies or whatever, but like what's specific examples of where like they had this and that, that was the deal killer. 00:18:28.250 — 00:21:47.070 · Speaker 1 We've we've recently passed on several companies that valuations are extreme. And it could be just a trend of today where they're writing safes. Well obviously, you know doing a price round early is you know, in my opinion, it's it's it's not needed obviously. But you know, you look at safes which are effectively, you know, not obligated debt instruments. So you're taking a high risk and you start seeing the the valuations become extreme and around the space industry around the AI because they are getting a lot of attention. Um, they think immediately if they have an idea and it's a novel, you know, solution to an unmet need, then immediately it should be a 20, 30, 40 million valuation. Um, you know, and then we're just like, look, we're we're not going into this high. Like, if you are unrealistic about your expectations of what you think is worth, then it's not worth our time. You know, so obviously, you know, again, early on, if we disagree on valuation, we're going to, you know, disagree on a lot of things down the road. So it's a nonstarter for us. So we have a valuation cap. And what we feel is is realistic versus, you know, someone else's subjective opinion review. So that's a nonstarter. Um, and then again, we look at the founders themselves. We've talked to some smart people. I mean, MIT, Georgia Tech, Stanford. Some really talented, smart individuals with no operating experience. They've never run a business. They you know, they may have a co-founder that can do some other stuff, or maybe 1 or 2 strategic advisors that's part of the team. But unless you've got some real experience, you know, I love military backed like veteran investors because we know they've gone through some difficult environments and they've got grit and they've got determination. And if you have to pivot hard, you know, they they can do it. Um, but sometimes you, you, you deal with some very smart people, um, and they just don't have any business experience. And again, that that raises your risk profile on doing things, you know, and then sometimes you find opportunities that the technology is there, that it's a right, it's a right fit technology, but the traction is just not there. You may like the team and you may like the technology, but the traction hasn't really matured. So we ask them, how come you haven't paid for pilots? How come you have it? You know, giving out some beta access just to get the feedback and get that that feedback loop going? Um, and of course, they don't want to do that until they raise some funds. And I'm like, all right, well then how much money are you putting into this yourself? Like, you got to bootstrap it somehow. And then again, it goes to the opinion like, well, you know, we're putting in time, energy and effort. We don't need to put money like okay. Yeah you do. So so it just comes down to some, you know, philosophical decisions about how, you know, I think operators should act and some of the characteristics of their personality should behave. And then again, it all kind of frames out and it kind of helps me make a decision. 00:21:47.070 — 00:23:19.130 · Speaker 2 So would you like to be asking our guests the questions? Well, now you can. I built this podcast and I've interviewed hundred plus exited founders, investors that have been through meaningful transactions. They've already been what you're about to go through. And you have these questions where you need answers. You want to riff and go back and forth and, well, Claude and chat you back to your cool. It's all generic advice. Well, I built AI to help founders in your situation get real answers from real founders in real time, trained on this podcast and all the conversations that we've had, in addition to my coaching sessions with other founders and real deals that I've been involved with, the answers that you get should surprise you in comparison to what you would get with ChatGPT. You can choose to listen to the moments that matter, so you don't have to scroll through a hundred podcasts to figure out which ones are for you. You can get that five minute clip that you need to hear right now, and you can hear the details of other stories that are relevant to your situation. So go check it out. Ask whatever questions you want. Whether it's preparing for a transaction, dealing with co-founder issues, making tough decisions as a founder, all those questions are fair game with no repercussions. No one trying to read between the lines when you go to your board or your VC. That's why I built Exit Board AI as a safe space for founders to ask real questions, get real answers. So again, it's free. I'm not charging for it. Don't plan on charging for it. Just a free resource for our community. Check it out at Exit Board AI. 00:23:21.530 — 00:24:18.520 · Speaker 2 I think that's valid. And I think it's good to have those those criteria in those rules when meeting these people. And, you know, again, their job is to sell you on their investment. And that's why investors have these these rules and these criteria. But I think one thing's different about you is. You don't necessarily have an investment committee, you know, so it really comes down to building that relationship directly with you and, you know, proving these points. But am I wrong saying that you don't have an investment committee? Like, do you have like a process that goes beyond you that ultimately makes the decision as a family office versus typically venture fund is they have to have certain criteria put into the documents about the fund they establish. Plus they have a couple partners and they have, you know, the LPs that might want to have a say in HDL and that could potentially take time, effort and opportunities. So how would you say Cape Fear acts differently in that regard? 00:24:19.400 — 00:26:09.770 · Speaker 1 Yeah, we do have three venture partners. I made those acquisitions about four months ago. So again, pivoting from a family office where it's just my opinion and decisions with my own capital, I did decide to to kind of pivot into a traditional Venture model. So we have three other venture partners that help us make a decision. So so we've built some internal mechanisms where we have all our our documentation and artifacts loaded. Um, we did a partnership with this company called clockwork who handles some of the analysis for us in the back end. So, so we have a really good system now where if we get a pitch or a deck, we have 1 to 2 meetings and then if it passes phase one, we go into phase two discussions where we can kind of get a little deeper with the team, the foundation, the technology, do some demos and then, you know, go right into the data room and look at some of the backlog and talk to some customers. You know, ultimately our our process is we try to make a decision in a month or less. But it does take some time when you're looking at, you know, theoretically 100 different deals a month now. Um, but yeah, we have our own internal tracking. We've built our own AI enabled operating system that cannot automate some of the due diligence for us. And then we assess a risk profile with every investment we make. And we try to whittle down, you know, theoretically a thousand opportunities down to a couple hundred to maybe 20 to maybe 4 or 5. So. So we we've built a pretty aggressive filter. Um, and we're using, you know, all the different tools and technology that's available to help us automate and again, focus on the signal and really make some unbiased, you know, very objective decisions on going forward. 00:26:10.610 — 00:26:30.890 · Speaker 2 And so switching gears here a little bit. Have you had to deal with a wind down yet. You know you've been investing for, you know, 1015 plus years. Like what have you done when a company comes to you and or you recognize it's going to happen when it comes to or timed where it's like, hey, we gotta we gotta wrap this up. 00:26:31.930 — 00:29:17.520 · Speaker 1 Yeah, I've, I've been a limited partner in some funds that have had opportunities where different companies have had to wind down, or they just fought for bankruptcy. Um, and, you know, like it happens and you basically write off your investment. So, um, you know, luckily I haven't had those personally with anything that I've been doing myself individually. Um, I mean, yes, there are deals that I've been locked up now going on 12 years. Um, but, you know, you've you've had a chance to take some chips off the table along the way. Um, which which is good to kind of de-risk your, your position. Um, but honestly, up until a couple of years ago, um, I would make, you know, my, when I first started down this path, I would make investments in companies in the seed or Pre-seed range. And then by the time they do an A or maybe an A2, I would sell my complete position and get out and you know. Usually that was about a 3 or 4 ex on my money. But you know, depending upon if it was a two or 3 or 4 year, uh, time horizon, then I could redeploy that capital and something else. But obviously I was paying taxes on some of the, the gains and, you know, was requiring a lot of time. And and honestly, we missed a couple of those that turned into billion dollar valuations. So, so just being patient and letting it, you know, ride you know with your condition then, then maybe it would turn out as well as you thought it would. Um, so now I'm more, you know, I guess, motivated to making bets and then letting it ride. You know, basically either it goes to 100 or goes to zero. Um, you know, the more asymmetric type bet and, um, you know, that's that's our goal going forward. And again, as long as you can control your due diligence and have a filter and look at things and your objective and how you, you, you kind of make your decisions. Um, you know, you can kind of control some of your risk, but, you know, some of these don't work out, as you mentioned. And unfortunately, you just have to write it off and and talk about the lessons learned, like, why didn't this work? What happened? Why did it fail? So we we do a you know, me personally, I do a postmortem on every deal that fails. And I try to understand and document what those red flags were. So that way, going forward into a new investment, I can take that experience and say, here's what not to do. Here's an, you know, here's an example of failure and how that failure really looked. And here's an example of success. Um, so that's kind of what we bring to the table. 00:29:18.920 — 00:30:00.550 · Speaker 2 And talking about that when it comes to a company maybe showing those signs of going on that trajectory towards failure, do you think it's in the VC or in your position, uh, in your best interest to intervene and try to, uh, either comply, you know, get management to step it up or make changes or, you know, cut, you know, some of the team or whatnot to basically turn this around or do you just be like, hey, we made the bet. We cut our loss. Move on. What's kind of your your take? Do you get your hands dirty? Do you recommend to get your hands dirty? Or do you just say like, hey, it's a VC, we're not going to get every hit right? 00:30:00.790 — 00:32:08.040 · Speaker 1 Every investment we make, we always lean in on the operator side, you know, talking with the founders and the management team. And just to let them know, hey, we've got experience as operators. We're more than helpful and willing to help out. You tell us what you want. Um, some companies will call us every single week. Hey, I've got this problem or what do you think I should do? And I'm fine with that. You know, all of my CEO and founders have my personal cell phone, and they can call me anytime, and a lot of them do, and I enjoy that. But there's a few that don't. They're just like, hey, I got this. You know, let me kind of lead from the front and I'm I'm fine with that as well. Um, but when it comes to making some strategic pivots and hard decisions, I lean on the board and whoever's on the board at the time. So I understand the management team has has a job and they have to execute and follow that path. But ultimately it comes down to governance and the board. Um, and again, if we have to talk to the board to give them our opinion, we will, you know, based upon the data they give us. But but ultimately, it's the board's decision. Uh, we don't want to harass the board or the management team. We leave. We leave them alone to let them do their jobs. But, yeah, I mean, occasionally when if we have hard questions or we see things that maybe need adjustment, we will absolutely give them our opinion. But it's going to be at the board level so that the board can then make the decisions and then, you know, kind of dictate down to the management team on how to execute. Because, I mean, I think of it as, as if, if I was the CEO of that company and on the management team, this is how I would want to be treated. You know, so I kind of act as if I'm on the management team where I'm leaving the company, and I kind of then position my, my involvement and advice as, as such. Um, but then again, sometimes it doesn't work out and you just have to take your legs and, and move on. But again, it's, it's worth documenting so that you don't repeat those patterns. 00:32:08.480 — 00:32:46.300 · Speaker 2 No, I think the documentation point is mission critical. And I don't always hear that from a lot of investors. You know, it's like, oh, it didn't work and then move on. But then, you know, while you, you know, keep keep that knowledge while it's still fresh and document it. But let's let's change gears. I want to switch over to kind of the, the market And what you're what you're seeing. Where is it going? You know what markets are you avoiding? What markets are you going into? And I think let's cover it from a broad perspective. And I'd like to go deeper into some of the markets that you're actively, you know, in and have strong opinions are so like what what markets are you excited about right now. 00:32:47.060 — 00:35:11.350 · Speaker 1 Yeah. Well we're very excited about space in the space industry as a whole. Um, you know, now the space is IPO. Um, you know, there's gonna be a lot of cash down, you know, employees and other investors. Uh, we're starting to see the elements of the renaissance in that industry. So with research or with SBIR grants and other government agencies, um, we are seeing startups in these areas doing some really cool stuff. And, and obviously space has brought the cost of ownership of working in those industries down so dramatically. Now you're going to see, you more entries into that field. So we're we're pretty excited about that. So we have a good relationship with a lot of strategic advisory and business development firms that kind of feed into some of those startups that help them with hiring, you know, finding capital. We want to, you know, be available to talk to those people and figure out, like, you know, what are they trying to do strategically? Um, so, yeah, we're very excited about that. And, you know, being, you know, based in North Carolina, we don't see a lot of space industry startups in that state. Um, so so we're trying to bring a lot of that into our region, um, because it is a great place to, to have a company. But then again, all your customers are either in California or Texas and Colorado, Washington DC. So it makes it really hard to compete, especially when your customers are so like, um, but, you know, space is exciting for us. You know, obviously AI is is a leading environment and there's a ton of AI enabled companies. Um, we're looking for companies that are using AI to disrupt industries, not necessarily an authentic AI service company. You know, the way the models are, are developing today. The technology comes out, is improving so dramatically, it's very disruptive. So I would you know, we're staying away from some of those type of companies, but organizations that are adopting AI and are transforming, you know, old archaic models, software technology, um, and then using AI to push modernization forward. You know, that's very exciting as well. Uh, I have to talk about one of those if you want to. 00:35:11.630 — 00:35:12.710 · Speaker 2 Um, yeah. Okay. 00:35:13.350 — 00:35:36.140 · Speaker 1 And then finally, defense tech. You know, obviously, uh, defense tech is very hot. Um, the need is critical. Uh, we see, you know, a lot of pitches from from hardware and software of defense tech. So, you know. Between those three verticals space defense tech and AI enabled software disrupting, uh, startups, that's really kind of where we focus. 00:35:37.020 — 00:35:37.939 · Speaker 2 And so 00:35:38.940 — 00:36:07.620 · Speaker 2 these are high trends, and these are areas where there's a lot of attention, a lot of capital going into like what's, you know, your kind of thesis in those categories outside of like, you know, catching the ones that seem to have the most traction. But are there any particular application layer or maybe recent bets you've made where you're like, this is the future with this particular, you know, application layer or whatever it might be like, walk us through one of those. 00:36:07.740 — 00:39:29.640 · Speaker 1 Sure. So a couple years ago, we found this software technology company out of Wilmington, North Carolina, of all places, and they were trying to modernize, um, technology in business processing for for breweries because it's very labor intensive, and the technology that they were using is very old. You know, we're talking ten, 15 years old technology, and no one's really using AI to forecast or keep track of inventory or sale campaigns. So so you have all this data, this desperate data, but there's no way to capture the data, analyze the data, report on the data and then act on the data. Until this company Ohana, you know, started coming in the market. And these guys actually were born out of a company called Encino, which Encino was a cloud company, which is now public. But effectively they were a cloud provider to a local bank that was in Wilmington because they needed that kind of service and support. So they invested in Encino. Well, these, um, these employees decided to kind of venture out and say, hey, why can't we do something similar for the brewery industry because there's a lot of breweries around the country and they all need this technology. Um, when I first read about them, you know, they were basically disrupting a supply chain. They were modernizing technology. They were enabling with AI, and basically they were disrupting a supply chain. And to me, that was a beautiful concept. And the fact that we're only 2 or 3 competitors and none of them were using any of the technology that they were using, I felt was very attractive. Um, so I got, you know, introduced to the company and spent some time with the founders and the management team. It started to become more of an advisor to them, and eventually I helped them kind of reorganize. We we did a raise, we did a friends and family, and we started to make some strategic bets on the distributor network because, you know, distribution very similar to the breweries. They had the same challenges, but they're not, you know, tapping into any of that technology as well, and they were leaving millions of dollars on the table, you know, with margin compression. So, um, you know, fast forward a couple of years now, I've been the board chairman. We've done several raises. We've just completed an A round. Um, we had one of their major customers come in as a lead investor on the A round. Um, and and the pipeline just looks so fantastic in the future. So that's been a really great success story on how you can take a technology enabled company today who isn't really using modern technology for whatever reason. And in trying to implement a disruptive business model on top of the current business trends that they're doing and improve efficiencies through profitability. Um, and, uh, you know, like I said, that's been a great example of us to use as far as other companies that we work with and how they can, you know, not only achieve success from the customer point of view with technology driven innovation, but also, you know, with margin compression and expansion. 00:39:29.680 — 00:40:49.980 · Speaker 2 So I think that's a great example of kind of going back to a question I was asking earlier of like, how do you get your hands dirty and like how do you get involved? And I think that's a really good example of like, you know, stepping on the board and like helping coach and advise on like the gaps, opportunities. And I think that's a testament of being able to have your operator background, because most VCs can't can speak to that operating background. You know, they can't come in with confidence on how to act and how to operate in those situations. So I'm glad you walked us to that story. Um, what I'd like to hear now is like, you know, in defense tech, you know, it's it's a hot topic. You know, offline, we were talking about it like, Europe's freaking out because the US relations are getting weaker and they're going to have to spend a bunch of money on defense that they're not familiar with. The us is generally always spending money on a lot of defense, you know? But defense is hard, like getting these contracts is, you know, grueling. It's not like you just show up and say, I got the greatest attack. They're like, well, we don't have a budget for that. We like it. It's so cool. It looks cool. We want it. But I don't know. The Mr. government over there says we don't have a budget for it. And it's like, how how do you kind of see and help these defense tech companies, uh, be able to get that early momentum, early traction. 00:40:51.260 — 00:44:50.280 · Speaker 1 So, you know, for the last 20 some years I've worked in the DoD Intel community building, two software companies, and I exited both, um, during that time, I've made some, you know, great relationships with key decision makers, um, advisors and other organizations that do that type of innovative investment. So, so one of the things that, you know, makes us unique as far as having an investor as part of their their story is that we can help them, introduce them to decision makers, to individuals that can walk them into different government agencies that can introduce them to the SBIR grant process. Because again, non dilutive funding is is fantastic, especially from the government. And one of the things that you want to do early, if you're a government you know facing organization is you want to know is there an appetite. Like does it work. Is there a form factor for what we're trying to solve. And you know, we've we've got connections that can turn them into, you know, give them some some high credibility and valuation very early to see like okay. Yes, this government agency needs your technology or actually they're using technology similar to yours. Here's who they're using. Um, so having having that type of relationship helps us determine, you know, just how far and wide and successful can certain defense tech companies, uh, you know, expand to. And, of course, we want to try to shrink the time of that, you know, knowledge because, you know, as you mentioned, working in the government is horrible. You know, it's very bureaucratic. It's hard to talk to people. It's very siloed. Um, you know, we try to build relationships, at least to kind of network within the silos to, to tell us early on, hey, is there actual a need, you know, is anybody using technology like this? Is this something that you think they would want to use or explore? Okay, let's get them a phase one cyber, which is a grant that gives them enough money to at least go through and start exploring opportunities like, you know, think of it, it's a contract to explore whether or not you're going to succeed or not. And after the phase in phase one funding is not a whole lot of money, but it's at least it's a commitment that you're in the door and you're talking to the right people. So. So the government will actually give you money to validate your technology, to see if it's actually something that they want to use. And then if it is useful, then they'll give you a phase two silver, which is, you know, millions of dollars. That's when it actually is executed, where they're taking your technology and they're going to the field and doing some, some testing to see if it's something they want to outfit the entire organization with or not. Um, and, you know, we've got clothing companies that are doing exoskeleton type things, um, for the, you know, for the soldiers. You know, obviously there's a lot of drone, uh, companies in the market right now doing some really sophisticated things, um, VR type technology, which is kind of cool, you know? But Android does a lot of that. I believe Microsoft and Meta is now moving into that market. So so again, a lot of it is like, are there large players already filling the gap? Is this an unmet need? You know, is the need real is the first question. Then you say is it unmet? Like are there any competitors out there or the Lockheed's, Raytheon's, you know, Microsoft's Andrews or is anybody out here actually filling the gap? And then that that helps us make a decision pretty early on whether or not it's a viable opportunity or not. 00:44:50.320 — 00:45:37.950 · Speaker 2 So how do you underwrite that? Because, you know, I talked to defense tech startups and like it all looks cool, all looks awesome. But the other day it's like, you know, 90% of the money. I'm making up a number here. I don't know if it's the exact number, but a large percentage of the money is going to Raytheon, it's going to Boeing, it's going to Lockheed. It's going now like SpaceX is getting its Palantir. It's good. That's good. But these are yeah obviously legacy brands that are now the safe to to buy from these big contracts. Like how how do you underwrite not only a startup getting that early money, getting that early traction, but like, what's the game plan from there? Like, are they going to be able to be a standalone $10 billion company or are they going to get acquired? Uh, like what what kind of happens to these companies, in your opinion, how do you get to write the life cycle of that? 00:45:38.030 — 00:45:46.229 · Speaker 1 Yeah, it's either expansion of contracts or acquisition. One of the two. Um, because a lot of the 00:45:47.230 — 00:46:51.650 · Speaker 1 other large contractors that are looking for new innovation, they acquire these companies pretty aggressively. And we know talking to major integrators, they're all conforming to a business model where they're doing more venture investment similar to Google and have, you know, Google does. And venture investments like they they've invested in anthropic. They've invested in space X, you know, the Lockheed, the Raytheon's General Dynamics, the six. They're all doing the same thing. They're all building a bunch of venture backed companies or assets such that in the future, when they deploy contract services, they're using some of their own technology. Um, so yeah, we we, you know, obviously look for the chances of either being acquired by, you know, one of these large integrators, um, or another defense partner that's in the industry, um, or major expansion of contracts, you know. Case in point, you know, Scout. You mentioned Scout before. 00:46:52.690 — 00:47:49.240 · Speaker 1 Um, you know, that's that's a candidate for major contract expansion. Um, we know the the DoD's budget for Space Force is going to grow exponentially over the next four years. And we know there's going to be more assets, you know, being, you know, orbit in the future. So it just makes sense that companies like Scout We're going to benefit from that. Well, that's what we kind of look for. You know, whatever the defense tech company is, we try to look for that asymmetric debt and say, you know, what are the chances of your technology being expanded at other contracts? Because if the Army wants to use it, then the chances the Marine Corps and the Navy might want to use it. So we look at, you know, some of those expansion models. But then again, we look at acquisition. So we keep track of of what these other companies are building, investing in and what they're acquiring. Um, so so we try to map both, you know, opportunities or outcomes to, to each investment that we make. 00:47:49.560 — 00:48:12.700 · Speaker 2 So I want to ask a question on these acquisitions, like in your homework how big are they are. Like are these companies getting billion dollar exits or are they getting like $10 million exit, $50 million exits? Like, how do you see these transactions transpire like the big players, like just lurking, waiting for them to like, miss a contract and they come in and buy them for parts or do they, like, pay the premium? 00:48:13.460 — 00:49:48.850 · Speaker 1 It just depends on the specific technology. I mean, working in the government is very lucrative. If you if you've built a solid track record and you have a history of executing at a high level, um, then it's very hard to unseat yourself unless you do something spectacularly stupid or fail at your job. You know, chances are you're going to get more government contracts. Um, you know, because again, the government, if you think about how the government procures and awards contracts, it's very risk averse. Every RFP that's written today is all driven around cost reduction and risk reduction. It's who can do the job the cheapest, the best and the safest, who's got the most experience. And and a lot of times when you're applying yourself to RFPs, you know, one of the major questions is what other experience do you have? Doing exactly what we're asking for. So, you know, if you don't have experience doing these things, then it's going to be very hard to win a government contract. So that's why when we look for some of these defense tech type opportunities, immediately we look at what laws have you signed, you know, are you or you do have servers. Do you have any government contracts. Um, you know so again, we want to see that early traction because once you've got traction it kind of compounds aggressively at that point, especially if you know what you're doing and you're successful at doing it. Um, that's the benefit of government. Now, getting to that point of having early traction is extremely hard. 00:49:50.050 — 00:49:52.330 · Speaker 2 You mean like every company has it, but yeah. 00:49:52.330 — 00:53:04.040 · Speaker 1 Yeah. No, it's extremely hard. You're talking like maybe two out of every 100. Um, because it's relationship based. You know, there is a certain level, you know, I wouldn't call it nepotism, but there's a certain level of community that happens. You know where these decision makers get together and they do chit chat. And you know, they're not rocket scientists. They're trying to make the best decision on the on the behalf of the government. And everything is relationship driven. So if you have to invest in anything, it's in relationships. Relationships build trust. Trust builds accountability that wins you government contracts. And it took me years to do that myself. And even working in that industry, it's not something that you can obtain overnight. It takes a very, very long time, which is why a lot of these companies, they immediately go out and get three, four and five star generals on their board. Um, and they try to build that trust and transparency and accountability from the beginning. Um, if you look at one example of this is, um, ID me, um, ID formerly was troop swap and it was it was my very first investment I've ever did as a private investor. I mean, I made the investment back in 2009 when they were group swap, which basically was Groupon for the military. But the two things that stood out for me, it wasn't the technology. I mean, the technology was novel. Okay. You're giving discounts to military. Everybody wants a discount. You know, that's that's pretty, pretty novel. But what what really stood out to me was the team that Blake Hall created. Not only did Blake have the experience, you know, he he was in theater two rounds in Iraq, and he's got great war stories. He was a, you know, commander leader in the field. He had all the hallmarks of being a successful business founder. You know, all the grit, determination and the wherewithal to get through any battle. You had to that was solid. Like, that was a a plus. But he also had a good team. He already had a board of advisors. And a lot of the advisors were these three four star generals. And when you're talking about trying to do business with the DoD, you need credibility, especially at that level, to kind of get you in the door to have those type of meetings. So, so unfortunately, you know, my advice to a defense tech startup is you got to create a board and you got to go out and try to attract and obtain some three, 4 or 5 star generals that are in the area that you're trying to penetrate so that you can get those doors open for you. Because again, once the door is opened and then you start having conversations and you bring people that already have trust with that different organization, then it makes it very easy for you to at least have some beginning, you know, opportunities to see if there's traction for your company. You know, just a company off the ground with no experience and no connections and relationships. It's extremely hard to to to find any success in the DoD. 00:53:04.360 — 00:53:32.270 · Speaker 2 Well, Richard, I think it's been great having you on the show and diving deep, especially in light defense, tech and some of your investments and kind of what differentiates you from, say, a traditional VC, albeit you're now kind of moving in that direction. But I think you have now this track record and your background that differentiates you. Um, but I'd love for the audience to have the optionality to, to learn more about you. Um, what would be the best way for people that want to learn more about Cape Fear or you? What would be the best way for them to do so? 00:53:32.550 — 00:53:40.390 · Speaker 1 Um, some available LinkedIn, as does Richard Stroup. But also you can hit me up on Cape Fear VC, which is our website. 00:53:41.030 — 00:53:51.670 · Speaker 2 Awesome. We'll make sure you include those in the show notes. And Richard, I really enjoyed this conversation. I feel more educated on these sectors myself. And so thank you for coming on and sharing your insights. 00:53:51.710 — 00:53:52.710 · Speaker 1 All right. Thank you again. 00:53:52.750 — 00:54:06.070 · Speaker 2 If you were inspired by today's episode then go ahead. Watch this next episode. Promise. It's worth it. And if you really enjoyed this last episode and you want to connect with the guests I had on today, make sure to leave a comment down below telling me why you would like an intro to this guest, and I'll make it happen.