E520 | Nicholas Nelson, Archangel: I am only in venture, because I'm doing defense. I'm not in defense because I'm in venture

0:00What drives someone to dedicate their entire career to one mission? I'm in venture because I'm doing defense, not I'm in defense because I do venture. For Nicholas Nelson of Archangel, that mission became urgent when the rules of warfare started changing. We were already seeing, going back to 2013, 2014, different terror groups weaponizing drones or this broader democratization of tech that was caused by solutions that used to be just the purview of big nations going down to smaller nations, but also these non-state actors or terrorism groups. But Nicholas sees a solution that only venture-backed startups can deliver.

0:32Speeding up the kill chain to make your warfighter more lethal, your munitions more accurate as a result, and again, your country more resilient to attack or threat. The path isn't easy. Even the most innovative startups face one inevitable reality. You are going to have to work with these primes, tier ones, or national champions at some point in your life cycle. But the stakes couldn't be higher for Europe's future. That should be worrying for anyone who, to use a rather loaded phrase, values European strategic autonomy. How are Europe's founders closing the kill chain? Join us for this deep dive into the realities of building defense tech where it matters most.

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3:19Welcome back everyone to yet another episode of the EUVC podcast. I hope by now it's your go-to pod for all things European venture. Today we're diving into the heart of defense tech with a guest who's making quite some waves by doing what many shy away from, going all in on real defense. We're joined by Nicholas Nelson of Archangel or Archangel. Many pronunciations, I keep saying Archangel, which some say to me that's wrong, Andreas. Archangel is a fund that's putting a flag on the ground for years to teach you autonomy, just as many others. But he is actually someone who has been in this space for a long, long time, very committed, and not just one of those jumping on the bandwagon, if I should say it so myself.

4:03This one is for everyone who's building and backing Europe's future from the trenches. We'll unpack the Archangel thesis, challenges to the dual use dogma, and explore what it takes to truly move the needle in one of the most geopolitically pivotal sectors to date. Nicholas, welcome on the pod, my friend. No, thank you very much for having me, Andreas. It's good to be back on and always love the support that UBC has given to both myself and the community. So looking forward to today. So Nick, I shared it a little bit here in the intro. I said you've been in this space for a long time. You're not just a passerby or a tourist or an opportunist.

4:42Let's talk a bit about your journey into venture and where you come from and why you're so passionate about this space. Yeah, certainly. And I think what I always would say is I wouldn't be in venture if I wasn't in defense, if that makes sense. So throughout my career, it's kind of been a common thread. I started a long time ago back in the consulting side of the house, working with governments, working with large aerospace and defense companies in relatively highly regulated sectors to include defense. And I had a great opportunity after the first few years in that to go work within the U.S.

5:16Department of Defense and spent some time overseas in Afghanistan and further afield and really fell in love with the ecosystem, but also the mission. And that's really what's motivated me from there on out. And that took me on to roles within the startup community after I left service and during my MBA, and then afterwards, both advising governments and militaries, but crucially, startups and accelerators. And at the time, going back over a decade now, the nascent defense tech ecosystem in the US. But having been raised, split between the US and Europe, to include the UK, Belgium, and live in France and Germany now as well, it was always a desire to come back here.

5:57And going back to 2020, when I started looking at the European ecosystem and seeing the opportunity that really was there within defense tech. And so when I came back, it was with that in mind to help support this ecosystem and through roles in corporate venture capital, launching my own syndicate, working with a small dual use fund, and now launching Archangel alongside the great folks at Super Angel. This has been the common thread throughout the last two decades of my career. So as I said, I'm in venture because I'm doing defense, not I'm in defense because I do venture. To anyone watching this with video on, if you look at Nick and think, the last two decades, how old is this guy?

6:38He does not look very old. Nick has surprised me time after time, how old he actually is. Because you look younger than me, my friend, and I'm 36, but you're not. We're a bit older than that these days, Andres, sadly. Yes, yes. Well, sadly, I don't know. But so, Nick, let's get into it. I want to maybe start it like super provocatively almost. It'll obviously lead you into the whole talk around the creation of Archangel. But I'd love to ask you, why do you think now is the time to unapologetically focus on real defense? And let's just define what do we mean when we say real defense? Yeah, certainly.

7:18So I think there's two things. So from a personal standpoint, this is the fund when you and I first started talking years ago that I would have loved to launch. And so it's always been a thesis I've been very dedicated to, have invested as an angel, as I mentioned before, as a syndicate founder, and then as well as previously in corporate venture capital and another fund. So this has been, my thesis hasn't fundamentally changed. I think the world around perhaps has evolved as in you well-known venture, there is such a thing perhaps being too early now. Yeah, if I should just make a note to that, Nick, because there are journeys in venture that are for the wrong reasons going in different directions, so to say.

8:01And then there are journeys that for the right reasons go in different directions or just reality. And to me, like you have been markedly focused on doing the same thing forever. But if you then go and say, what have you done in these last five years? You could see that, well, but then you joined a dual use fund and you were there for like, and that is just as I think you said it so well, it's just market realities that have changed. But ever since we first started working together, it was very clear what you wanted to do and what you brought. And I heard from many, well, how much startup experience?

8:41Don't you want someone who's more pure tech, like that type of thing? And I think that now is really the time where the broader LP base have come to understand the importance of someone who comes from real defense and real army background to really be able to make a difference here. Yeah, so I just want to commend your discipline and your hard work and the fact that being an emerging manager, many people think that at least from the outside, it can look like not that much of a hustle job. It can look as something that's cool. The reality is that it's a super hustle job and you've hustled through and made it to stay in a market that has been very, very difficult to navigate.

9:26So huge love from my side for doing that. And I only think it speaks to what you'll be able to build rather than anything else. I'm just putting it there because I think anyone who is meaningful, who listens to this and is thinking seriously about you, Nick, they should know this about you from someone who knows you and have seen your journey. No, I really appreciate that, Andreas. And I love to see also just while we're doing a love in just what you guys have built at UVC from the time it was the initial Slack community and everything. And so I've loved to be a part of the journey as well. But thank you for that.

10:02I think that covered kind of personal angle. I do want to focus in on the, I guess, professional where the markets changed, because I do think that's an important thing to go into. I firmly believe in show, not tell. Obviously, we're on a podcast, so that can be kind of tough. But let me just put some data behind it. I think a lot of folks going in right now are saying, well, it's changed because of the second Russian invasion in Ukraine. And to an extent, that can be optically right. But really, and where I came up with this thesis before, is this journey goes back a lot further when you look at the market itself.

10:33So you go back to 2014, all the way up through even the year before the second Russian invasion of the war, the gap in defense spending between dual members, so those European countries that were members of both NATO and the European Union, actually closed the gap on the US in terms of defense spending by 28.7%. So this is part of that longer trend. I think that's really what I try to get out to LPs, entrepreneurs, as well as other investors, that this isn't just because of a single event. This isn't just this fragile, a single event-driven or a single conflict-driven ecosystem. It's part of a longer journey and a longer trend.

11:10So I think that's important to notice. With that said, yes, the second Russian invasion has definitely galvanized people to go into this market and to have given a boost on defense spending side, European budgets, as well as stuff coming with the upcoming NATO summit. But this is part of a longer trend, I would like to say, mirroring some of what already was happening in Europe, but also looking over and seeing what happened in the US defense tech ecosystem. I think let's leave it at that because I think many people know this part, or at least, you know, I do think you frame it important and you say that it's more than, and that is one of the things I've thought about.

11:44Well, venture is a 10, 15 year cycle for your first investment to actually become what it should be. And then you look at this and you say, well, isn't the Russian war, Russian-Ukraine war over by then? Do we really need it? And I think that it's important to say that there are, as you say, it's more than just that. I guess you can also maybe, and we will dive more into the actual applications or the actual innovations that are being made, but maybe you could talk a little bit about this whole redefinition of what the war machine consists of. So it used to be tanks. It used to be F-35 fighter jets, billion, billion, billion dollar projects.

12:32And now we're looking at drones. We're looking at a completely different tech stack of war, so to say. Could you talk a bit about that just on a big scale? And then we'll dive into the individual innovations or things that are coming up later. Yeah, absolutely. And you really hit the nail on the head there, Andreas. What you talk about when you look at these, we call bespoke systems or high-end multi-emission assets. So your F-35s of the world or your high-end main battle tanks, traditionally how they were done was they were made on 10 to 15-year development cycles and these extremely long contracts that had a nasty tendency to be over-cost and over time.

13:11So they were being not delivered on time and at higher cost basis. And to an extent, that was okay. It wasn't really, but when I say it was okay, was let's look at the world where we were at the time. After the fall of the Soviet Union, you effectively had the quote unquote end of history. And we ended up in this conflict called the global war on terror, targeting extremism across the globe, the invasions of Afghanistan and Iraq. And what that involved was, well, we control the sky style. And when I say we, I mean, the West, or we control kind of the ground. So a lot of it was we had control about space.

13:47We're fighting effectively counterinsurgency operations or counterterrorist missions. So even though those solutions took a long time, it nominally was OK. The problem comes in when that started evolving. So, again, a lot of people will point to where tech became a huge deal now. If I go back to even my own career, my own survey overseas, we were already seeing, you know, going back to 2013, 2014, between different terror groups weaponizing drones or this broader democratization of tech that was caused by solutions that used to be just the purview of big nations going down to smaller nations, but also these non-state actors or terrorism groups.

14:21So we already saw that what ended up happening in Ukraine and the surprise people, there were already strands of this going back to really the insurgency fights during the global war in terror, or even like the Nagoro-Karabakh conflict with Armenian Azerbaijan, where people are already using drones for targeting and advance. The other piece of this that's really important was back during these long development cycles, these companies, so your large, what we call primes, which are just effectively companies that can service contracts across all five warfighting domains, cyber, space, land, air, and sea, they would have what we call vendor lock.

14:57They owned the data in a lot of cases, not the government, and thus to integrate anything, you had to work with them. So that resulted in these companies owning basically all the data that was produced and gathered. And we've seen issues with that across the board and the development cycles, as well as these platforms. So it is a concentration of issues between these high cost assets, vendor lock, and that they control the data for that made innovation extremely hard or longer term timelines. So the shift that's happening in the market is really threefold. It is a move by both governments and startups and scale-ups to go these open architecture models where everybody can integrate solutions into a single common operating picture.

15:39Second, because of the speed of warfare and really the commercial, I would say, flywheel, if you will, for new capabilities, iteration has to be done much faster. So you have to be able to build what you can, but integrate or buy what you haven't built or maybe even off the shelf. And third, that we haven't really touched on, we can touch on a bit later is also the change in the talent picture there between who was developing, both from a company perspective and a human capital perspective, those bespoke multi-mission assets, and now who's driving forward with defense tech. There's one thing that many talk about, at least the people I've spoken to.

16:15They talk about this move from, as you said, well, the 15-year cycles to now, Now, when you're seeing what's being developed in the solutions that are being developed in Ukraine, it's literally like hourly iterations. It's built it in the factory or in the shop, get out, use it, test it, and come back and do another iteration. And then you do the whole thing again. Can you talk a bit about that and why that is a hotbed for innovation and the importance of being in this part of the ecosystem, not thinking you can sit in Denmark and sit in your comfort and build something that's truly revolutionizing today?

16:57Yeah, I think the Russian war in Ukraine has been a wake-up call for a lot. And why that's been important is we had a lot of these systems made by venture-backed, in some cases, US defense tech companies, or even by the more traditional manufacturers that worked in their testing environment, worked on the test ranges back home, wherever that may be, in Denmark, in the UK, in the United States. And then when they got to Ukraine, either didn't work, or maybe they worked for a short while and then we're able to effectively not work and not adjust to the environment. So that was one of the really important bits of getting there was actually figuring out, hey, while these work on test ranges, the test range is a very different environment than live areas.

17:46And that's one of the biggest, I would say, key learnings that we're actually seeing in Ukraine is folks that are able to iterate this process and be in situ, if you will. So being able to take the solution, seeing what works, what doesn't, but then adjusting that going forward. But that's also why you really have to be on the ground in Ukraine or have people on the ground to show you what works today or this hour may not work by the end of the day or next week. And how do you adjust to that? Because on one hand, it may work, then suddenly doesn't, then becomes a liability that you can be targeted at.

18:21So to be able to rapidly iterate that, it's the same thing as you do through a software sprint. It's okay, in real time, we have to fix what's working. Well, use what works, but then adjust what doesn't and keep up that iteration in real time. And to those with video, we just had a small glitch on Nick's camera. I think that was some CIA interruption of the airwaves here. But we're back. We now fixed the problem and we can get back to the discussion. I wanted to ask you something else, which is around the real defense point. Why is it that you think it's so important to dare talk about or focus on real defense?

18:59And why is it different? And how is it different from dual use? Yeah, it's a great question when I talk about a lot. At the end of the day, to make this very black and white or simple for everyone listening, defense is really about real defense or defense first, as we call it, is about first who you're serving. So in this case, either the whole or the majority of your current or future revenue and customers should come from defense, meaning your respective ministry or department of defense or aerospace and defense companies in the ecosystem. So that's the first bit. The other is just more of a qualitative look at it.

19:33But effectively, defense is about making your warfighter, so your actual end user, and your populace more resilient. That's point one or point two. or about making that warfighter more lethal, because that's what defense is at the end of the day. And this isn't about warmongering. This isn't about trying to encourage conflict. It's effectively future-proofing. Or I guess to put it another way, it's about deterrence, because deterrence is about having any adversary that thinks about interfering in your country, whether through misinformation, disinformation, cyber attacks, graze of conflict, or indeed actual kinetic invasion, making the cost to them.

20:10And as the old colloquialism goes, blood and treasure, so dire, that's not worth going in. Because we're not trying, war is good for nobody, business, people, or otherwise. It's about effectively making sure that you have, as Teddy Roosevelt used to say, walk softly and carry a big stick so you deter adversaries before going in. So that's for me what defense is. It's about who your end users and customers are, but then also qualitatively what your solution does. and why it's important is really this. In Europe, from the time I've grown up, especially at the end of the Cold War to now, there still has been some long-standing stigmas for reputational reasons, ESG reasons, which we can definitely get into.

20:53I know you and I've talked about it at length before, as well as just for market size, why people have not gone into it. And a lot of people will do what I call defense washing or dual use. So it's one time my company or one of my companies sold a widget to their respective MOD or DOD, thus go with God, they are now dual use. In theory, sure. In practice, absolutely not. Defense first, or real defense, as you termed it earlier, is about serving those warfighters and that resilience mission and that deterrence mission that I kind of talked about a bit earlier. And that's really the biggest difference.

21:33Now, that spans a whole gamut of things. It's not about bullets and bombs. at the end of the day, your common 7.62 ammunition is not going to be really venture backable to mass produce that. Go ahead. Sorry, Andreas. You said it's not about bullets and bombs. Do you mean it's not about bullets and bombs, or do you mean that it is not only about bullets and bombs? It's not only. That's a good clarification. Not only. At the end of the day, would I as an investor have any problems about investing in a domestically made 7.62 route? Absolutely not. Would that perhaps achieve venture returns? Probably not in that case.

22:08With that said, are there things about, say, facilitating better targeting? Are there things about intelligent surveillance or reconnaissance? Yes, those would absolutely be defense-first use cases. However, at the end of the day, there are increasingly a category of things that make either conventional munitions more lethal or more accurate, for instance, which falls in the lethality bucket, or indeed about other solutions that speed up what we call the kill chain. I know it sounds like an ugly phrase, but for investors, it's something they need to be comfortable with because everything that is done in defense should be, again, about that resiliency, but speeding up the kill chain to make your warfighter more lethal, your munitions more accurate as a result, and again, your country more resilient to attack or threat.

22:52When the mic is off, a lot of people that are true defense, so to say, or whatever, like being super derogatory here to those that are not, which is partly intended, partly not, whatever. What is your take on this? Is it good that we have these that don't like that brand themselves as defense, but then if anything has to do with improving the kill chain or lowering the cost per kill, as soon as it has that vocabulary, they're hands off. We're not touching it. We can't do it. Are these and not positive? What's your message to them? Or what would you wish we maybe did differently as an ecosystem, like the different players?

23:38Yeah. I think it's all about, as an old mentor might say, words are important. And what I mean by that is if you do dual use or that's what you're comfortable with, that is not necessarily bad for yourselves or for the ecosystem or for companies. Just be transparent about it. Be upfront about, hey, if you're saying we do defense, that comes with, it's a loaded phrase as we just kind of laid out. So if you're going to say that, you should be willing to invest in all these things. If you're out there saying, hey, we just do dual use, own that and be transparent about and that's completely okay. There is a whole nother thesis, may not be my thesis, but there's a whole nother thesis around commercial first.

24:14Great, go do your thing. I don't think that's bad as long as you're transparent about it. The thing where it becomes dangerous or at least damaging, I think, to the broader ecosystem is when one of two things happens. And the first, when they're not clear about that with the folks that they're talking to, the entrepreneurs, because especially early stage where I'm focused, so pre-seed, seed, and series A, if you can't do these things, you're going to end up wasting the time and the money of the entrepreneurs, which are their most critical things, as you well know, and your audience well knows for them.