E565 | Nicholas Nelson & Daniel Carew, Archangel Ventures: Launching Europe’s Next Gen Defense Investment Platform

24:38And then this is like, we've learned all those lessons, right? And we've sort of pointed it at, at, at our frontier and said, okay, you know, we've got a different industrial sort of setup, you know, we've taken the best and we've really like doubled down on that and brought as much capital as we could into that, right? And that'll build deterrence. And then as Nick said, you know, that will bring jobs, right? And then we've got this hopefully self-fulfilling kind of loop that will generate this feedback, which will generate more prosperity and more jobs and, you know, more deterrence. So that's, you know, sort of how we get from the near term to the long term.

25:13When I had Stefan Rohle on the podcast, founder or co-founder of ARX Robotics, one of the conversations that I had with him was around the primacy or the need for people to be defense native. If you want to be someone that has any credibility in this space, I spoke to him about it from a founder perspective and a salesman perspective. But I'd love to hear your take on this as investors, because, of course, the defense conferences happen or the defense tech investor conferences tend to happen alongside defense and NATO and these types of bigger events in the ecosystem. What is the reception like for investors that are non-defense native?

26:04So on the surface, I'd say at the high level, we firmly believe that you need to have a rising tide lifts all boats approach where you have specialists, you have generalists, you have CVCs and governments all kind of rowing in the same direction. With that said, I'm going to use an example. I think you and I have talked about this previously, Andreas, but now I used to always say 34, now up to 36 raised funds in the United States, they either wholly or predominantly do defense. Because they are ahead, some would argue three, some would say five or even seven years ahead in the US, you can kind of look at that and say, hey, what was the commonality?

26:39And that commonality was that for those top quartile funds, they're on their third, fourth, or even some fifth vintages. One of their GPs came from either the special operations or the intelligence fields. That was it. That's the one commonality. And for that, that means that experience really matters. and also having come from the space ecosystem where I was involved more on the consulting side and the M &A side and Daniel on the investing side but also helping prioritize due to his engineering background, PhD. The same thing happened in space. So with the two nearest markets, we look at space and defense, you really need to have subject matter expertise in there.

27:15I view to be a credible early stage investor. As you get to growth, as things become less about potential and less about, hey, it's just this team with a great idea that may pivot, as things become more firmly identified as you go, hey, are they able to execute on their plan? Have they been able to close these key clients in series A, series B? Then that becomes, I think, more open to generalists. But I think having that credibility from the technical side, as well as from actually having been in the building, so to speak, having deployed, having spent time downrange, that is really critical to have credibility as an investor, but also credibility with startups when they're looking for value add.

27:54because I fundamentally don't believe early stage, especially defense tech, but even some other parts of deep tech as well, I would say, you can really have credibility if you don't actually understand the ecosystem from a technical and a day-to-day approach. And I believe you have to add value in that one. Some founders later stage may just be looking for money. That's great. Cash can be commoditized. I think that's kind of happened to a certain extent now in the United States, especially in later stage defense tech. That's not where the European market is right now. You do need early stage expertise.

28:25You need the ability, yes, talk to them and help them understand the markets, but also have experience going, hey, here are the organizations that can write you a check. Here is who you should talk to there. And here are their priorities that we're already aware of, even if they're not broadcasting them publicly yet, to be able to help them navigate that, whether it's engaged with clients, whether it's security concerns, whether it's new market entry. I fundamentally believe you need to have that credibility to be a good early stage defense tech investor. And there are good generalists who are coming into this market who I would say know what they don't know.

28:59And we're always happy to have those conversations. I've met great investors from all across the Nordics, the Baltics, as well as even the UK, who just are interested in learning, hey, this is a new area for us. I think the danger you run into is when people treat this as just another new hype cycle and start basically putting out a lot of noise about an area, but not a lot of signal. And I think that can muddy the launch for founders. That's where I try to hopefully be an asset, whether just the companies we invest in, or even the companies that we don't, but that we're always happy to talk. And I know Daniel has seen something very similar on the space hype cycle previously.

29:34It's a great point, Andreas. And it's actually something that industry is worried about, The established defense industry is worried about suddenly there's a ton of noise. And they're worried about there is going to be a bust in certain areas. And that's going to harm the rest of the industry. So that group of stakeholders has that concern. I think founders, what Nick said, founders are going to have to take this sort of critical type approach in terms of thinking who can help. Maybe that's a better way of asking the question. And like I can say, I've seen Nick get contracts for guys, which are six months into building the product.

30:15They get on exercise where he has that level of connectivity. Whereas on the space side, I think having seen this sort of path happen once before, this sort of boom in the space ecosystem and forcing it was there sort of at the beginning and had a number of unicorns that got established in that sector, these trends are going to be the same. There are going to be people who are super excited about it. They get in and they invest. And we do need that. We do think this is a really long-term trend, but just defense is the hardest investment type to do. Just in terms of contracts take quite a long time.

31:00Sometimes the government's telling you one thing and they need another, you got to be able to read between the lines there and be able to continue to back the best tech and the best founders, even though the data might look different than what we might see from a SaaS or even another deep tech type business. Let me ask you a question that's a bit out of the pure defense space realm. Why Estonia and why Super Angel? You've just decided to base the fund in Estonia, operate it at least together with the Super Angel family there. I'd love to understand that decision and how it impacts the firm. When I had the opportunity, and I've known the Super Angel team for a few years now, as we touched on, and when I had the opportunity to talk to Velio over the last few years, Velio is the founder and managing partner of Super Angel.

31:47And it really comes down to that kind of tyranny of geography that I referenced in our last conversation, Andres, where it's not a matter if it's a matter of when for a lot of folks who are on that frontier, be it in Estonia, Latvia, Poland, even Finland, where it is the immediacy and the nearness of the threat. And that's really critical to them. It wasn't where I was talking to some other firms who had approached me who wanted to do dual use, or they wanted to hedge, or maybe it was this or that. It was fundamentally having the ability to work with folks that recognize the threat, that understood the criticality of it, and that were willing to do a defense first thesis.

32:22Because while it may sound even more, yeah, makes more sense today than it did when you and I first started talking years ago, it's still contrarian in a lot of circles, believe it or not, or at least push back on because of a whole slow concern. It's historical, ESG, LPA, as you highlighted. But at the end of the day, this is the focus we wanted to have. And that's why we kind of teamed up with them. At the same time, you look at the track record, Subgrange has been able to build out over the last two funds in Europe, sorry, in Estonia, it's been unparalleled and unmatched on that front. And I love working with them.

32:55And the other thing I would be remiss not to mention is Jan, who works with us. He's our senior associate, and he's joining us fully from Super Angel. He's been a finance guy his entire career, but also because of Estonian conscription, he's a 10-year Estonian Defense Force Reservist, and he brings that nearness of mindset and that mission-backed understanding. And that's what I think you need in a team as I highlight in our last answer. So for us, it was the opportunity to work in Frontier Market that's right on the border of the threat to obviously work with a team that I have gotten to know and like over the last few years and really to be able to get that prioritize as a speed to market.

33:35I also know, and I'll hand it over to Daniel because he also has some deeply personal reasons there as well that I think are willing to flag. Yeah, yeah. For me, my partner's Estonian. My son's Estonian. That's why it really matters to me. My brother was deputy commander of Canada's NATO Rapid Reaction Force. We have the responsibility of protecting Latvia. If something happens, my family's personally implicated in a number of different reasons. There's a bunch of logical reasons as well why Estonia. Estonia has been very much at the forefront of championing the new defense thing. They've put together a new defense fund at the national level.

34:17They've bought a lot of equipment. They've really supported Ukraine. But I think historically, what people may not know is Estonia went through this sort of massive, what they call, tiger leap, where they digitized the entire society in the 90s. And I don't know of anywhere else in Europe that has been able to kind of go through this sort of massive tech leap, right? And I think now, for me, looking at with my kind of analytic and strategic hat on, Estonia is in this sort of geographic position, but they also have these people who have kind of gone through this again. And Valio, who's with Super Angel, he was implicated in a lot of that and invested in a lot of the unicorns that come out of that.

35:02And if I look for where in Europe would you think about who can kind of execute this jump from tech to defense tech being the thing which will lead prosperity? I mean, I'm biased, obviously. This is my personal connections, but I think it could be Estonia, right? And we just got to go in there and start to do the hard work about building that ecosystem and talking about defense of the Baltics and the border, right? It's not just Estonia. It's Finland. And, you know, it's Lafayette, Lithuania, down in Poland and so on. And we think that, you know, this configuration is the right thing to help make that happen.

35:41And one thing, just I think Daniel Bruce put a great point with the Tiger Weep aspect of Estonia was, yes, some of the digitization happened because they wanted to evolve society and technology. But a lot of the really rapid iteration that came later on, especially on the cybersecurity identity front, was directly because of cyber attacks and gray zone activities by Russia against Estonia. And so when you look at the threat perspective, they've already been through something like this on the cyber front. Hence why I think they've been really upfront on, Estonia and their military and government have been really upfront on addressing this, not just on the cyber front, but now on the potential kinetic front as well.

36:19Now let's do some myth busting, guys. I'm sure there's a bunch that you think people are getting wrong. Let's start with what I probably think is the main one and the biggest one that is giving you some issues, which is, of course, that a lot of people tend to think that defense is maybe just a bubble. Right now, we have a problem in Ukraine. Everyone talks about it. All the VCs see a possibility to grab some AUM. And that is kind of the gist of it. why is defense more than just a bubble? Well, again, I go back, you know, DARPA, I think, has proven for 67 years, right? That if you take, you know, defense problems and find tech that solves those problems, you build prosperity, right?

37:05I personally think, you know, kind of Europe's ignored this fastest track to productize advanced technology, which is, you know, imagine what it could do for defense and then help that guide you to build products. So, you know, I think we've got, you know, 65 plus years of data to prove that one wrong. Yeah. And at the same time, you look at more near-term trends, a lot of people say, well, yes, everything started with the second Russian invasion of Ukraine. But, you know, you go back to 2014 through 2021 and the leap to the invasion, dual members of NATO and the European Union, like the Baltics, for instance, actually closed the gap.

37:43Yes, still a large gap, but closed the gap in defense spending on the U.S. So it is part of this longer trend of defense spending and engagement when you go there. And on the basis of that, and as Daniel touched on, missing out on a lot of the technology boom that was driven by things like Daripol, that's a gap that is why this is not just a bubble, why this is more resilient. At the same time, we're staring down the barrel of, effectively, since the end of the Cold War, a lot of tech debt that needs to be addressed, both in terms of, yes, near-term acquisitions, but also fundamental R &D. As we've already shown, Daniel referenced earlier, through things like NASA, things like DARPA, have shown clear return on investment for the taxpayers in those countries, as well as the capability they developed for the military.

38:31And then even beyond that, things that have become even commercial products like duct tape, for gosh sakes, where it has had significant impact, generate new jobs and change just how the world operates either on a very basic level like duct tape, all the way through things like GPS and the internet, or even Google Maps, where it came from. So they've missed out on this because of those kind of antibodies against defense for all the reasons we've talked about, for me, historical, EST, et cetera. And while there is potentially, and I believe we are kind of entering into a hype cycle, there are long-term trends, be it defense spending that was already growing going back to 2014, be it the proven track record of organizations to prevent strategic surprise like DARPA, like NASA, as well as the later organizations like RCO and SCO.

39:16And now we have all these things kind of coalescing. So yes, are we in a hype cycle? Yeah, absolutely. We're getting into it. But there's still value behind the market, and there's still a lot of return on investment for both direct investors as well as taxpayers and countries at large. Am I right to say, it's just a feeling that I have here, but that maybe contrary to many other spaces where venture have gone into hype cycles, this is truly one of the spaces where specialist expertise and networks will allow you to see more clearly than a lot of the hyped up money that comes in. Yeah, I would say so, Andreas.

40:01I think at the end of the day, to understand defense, you really need to have had, I think to a large extent, lived it and different parts of your career and have that broader network that's engaged there. I think a lot of folks try to put a band-aid over it. They hire a retired general officer or former retired minister and think that I'll help them understand it. And that can be helpful. But at the end of the day, there's no substitute for actually having lived experience, I think, and having the personal and professional networks that you've kind of gained by being in the ecosystem. And that's really what I think a lot of early stage founders look for, particularly those who may not have had that experience themselves and need that value add in there.

40:40And to a large extent also, I may have said this before, but as this hype cycle progresses and other funds move on to that shiny object, the ones who were doing 18, 24 months ago, NFTs or crypto, we're still going to be here as we do believe this is a long-term enduring market for, yes, the defense sector. but also boosting that prosperity and this new economy for pan-European countries, but specifically across those, Jeff, we call the Jeff Plus countries, as we talked about previously, the Baltics, New Yorks, and the UK, that can really be a whole new ecosystem and generate new technologies and, as a result, new opportunities for their populaces and their own defense.

41:21Tell me, what else are people getting wrong? What's on your top list of things you wish you could get out of the ecosystem really quick? I think one of the biggest ones, if I start with probably my most contrary or controversial one, and I do think it's a conversation we need to have, and for a lot of folks, it's been almost a third rail, is we need to take the right lessons for Ukraine, not all of the lessons. So Ukraine has gone from zero to 100 in terms of being able to resist a much larger nation with a lot more mass and people to bring to fight. With that said, there are a lot of reasons it had to leverage the ecosystem it has so far, like some decentralization, for instance.

42:01So how their procurement system worked, they had to decentralize it because a lot of their initial ecosystem is effectively paralyzed at the more state level. So what that has done is allowed them to move more nimbly. But at the same time, it's also resulted in a very fragmented ecosystem. We have a lot of duplication of effort and a loss of economies of scale and just generally some lack of interoperability, which normally you would only see with multinational forces working together that you see happening there. And what that's resulted in is this really aggressive heterogeneous mix of technologies, be it from different countries, different solutions, different operating systems that doesn't always integrate together.

42:41And when we look at how another conflict could look like, we actually need more interoperability, not less. So having that from inception, which Ukraine did not have the luxury of being able to do, but we need to actually bake that in from the start. And I think the biggest takeaway for me really is a lot of what Ukraine has had to do have been essential stopgaps. So basically, life-saving adaptions. Hey, how do we survive the day? How do we stabilize our forces? But as a method for long-term competition, for what we call great power competition, or a multi-political world, however you want to define it.

43:17Basically, competition with Russia and with China. You need to have, or that approach really lacks the necessary coherence and backbone you need for long-term enduring effectiveness. And so at the end of the day, yes, there are a lot of really critical lessons we need to take from Ukraine, especially how quickly they've been able to iterate, build new systems, and adapt to changing realities. At the same time, we also need to take advantage of the innate advantages Western economies have, be it in NATO countries or in Eastern and Western Europe, or even the US and Canada, but also bring those to bear in mobilizing a much broader and deeper defense industrial base.

43:56How about a learning that I've heard from some, which is we show up with our super tested, super safe systems developed in the Western world, and we show up at the front line in Ukraine and the first thing they say is, what's that thing for? And then it's, well, that's to make sure that it doesn't run someone over. And then they're like, well, it's making it more heavy. Get that shit off. We've got to get to the front line. Or it makes it imperative that we have connection to it all the time. And for that reason, blah, blah, blah. And it's really a safety mechanism because it's required in the Western world or in the systems that we have kind of developed here.

44:35a learning is then, okay, we don't need that anymore. But is that something that is true for the future when you actually go to future battlefields? Yeah. And I think it depends on what the future conflict is going to look like because a future conflict of Russia with NATO will have some similarities, but a lot of differences with how the Russia-Ukraine wars will go on. And a fight between potentially the West, be it the U.S. or otherwise with China in the South China Seas, that is going to be a very different fight entirely. I think too many people get dragged into this. It's either tons of drones that are just going to be disposable, and that's it, just full return of mass to the battlefield, which is part of it, or those who still say, hey, we need all these multi-mission, we call bespoke assets, so high cost, years of development time, but very capable and very exquisite.

45:26And my answer is you need both. And I'm in either of these future conflicts, and you need those that are enabling. So things like collaborative combat aircraft or having drones that are enabled by a mothership type approach. There are a whole slew of these technologies we can run down. And to your point, we do need to get back to, I think, first principles when you look at power to weight ratios, when you look at what the different systems for safety, otherwise they're on there. And we have seen a lot of Western equipment, including some of the darlings of the US defense tech ecosystem under or outright not perform in Ukraine.

45:57But at the same time, You also need to make sure that those future systems take the right lessons from Ukraine, but are also optimized for those future conflicts and not just the current conflict. One thing that's been common, it doesn't matter the Cold War, the global war on terror, or into great power competition now, Western militaries have a long track record of preparing for the previous conflict, not the future conflict. And that's really what I would want to stop, which is we need to identify those right lessons, but not take all the lessons just because they work there. Because as Ukraine has proven, things evolve on a weekly, if not daily basis.

46:36So we have to prepare and bake in those right structures from now so that we're able to do that. Because right now, as we're currently constituted, while we've taken some lessons, European and Western military at large are not prepared to do that. Awesome, Nick. So we really don't want to learn those or draw those wrong lessons. Any other myths that we need to keep in mind? We covered the myth of defense as a bubble. Hopefully, we've comprehensively put that on the bed. I think there's the myth that it takes a really long time to get the product. That isn't the case as we've seen in Ukraine. If you have the right technology at the right time and there's real urgency, the US particularly has rapid contracting type capabilities and Europe is developing those as well.

47:20And so, you know, we've seen companies, even where it's just a few people, get up to contracts and revenue pretty quickly. I think that there's another myth around, you know, what sort of systems can, you know, be built by startups. And I would say it's almost all to play for, right? Like, you know, we've seen startups develop, you know, space rockets. And, you know, 10 years ago, people say, oh, you know, you're never going to compete with like Lockheed or so on, right? Even now, I've seen, when I was in Kiev in September, I saw people who were trying to develop stealth aircraft on the UAV type level.

47:57And I'll bet that's another thing that people would have said, oh, you can never develop a stealth aircraft as a startup. So even, I think the entire kind of tech landscape is up for grabs. How about venture versus public markets? We've really seen public equities like IronMetal and BAE systems kind of soaring these days. But why is it interesting to also be looking to the early stages? Well, I think it's true they have been soaring, right? And rightly so. But you have to remember, most of the primes have a sales pipeline, which is like 10 years long. So they have customers they need to deliver to.

48:37And it is true that those contracts are probably going to increase, et cetera, et cetera. But in terms of the real change in technology, I would argue that that's going to happen in startup land, right? All of the sort of really recent trends are going to be delivered on by startups. So if you want to access the really, really high growth, which people see happening in defense, it's probably going to happen in startups right now. I mean, what's great from our perspective is that on the prime side, they have a lot of cash, right? So, I mean, at some point they'll be looking to acquire. That's great for us.

49:09Let me ask you a bit about the incumbents. How should we think about them? Are they good for us in the startup land or are they more of a blocker and someone who are working very effectively on blocking new startups coming into their space? Really, I think the answer is, as always, it depends. So, primes, meaning companies, just like capital P primes, I guess, cover all five war fighting domains or contracts across all of those. And you also have the European flavor of national champions, the rules are wholly or partly owned by their respective governments. And so, they vary in terms of how they interact or with SMEs, so small means as enterprises or indeed startups and scale-ups.

49:52With that said, the idea that a company can avoid working with them is nonsensical and also not desirable. I think too many folks who are new to the defense market, and I've seen some of this out there on social media or otherwise at some more tech-oriented conferences, will lambast these primes and say they're dinosaurs. They need to shuffle off this mortal coil, if you will, and startups are going to eat everything. not only would that be a massively missed opportunity, that would cripple Europe and any country's defense industrial base. You need collaboration. And what that means is in a startup's life cycle, you do want to eventually get to a point where you're working directly with government or military customers rather than through pass-throughs.

50:40But your fastest route in a lot of cases, especially early on, is working either through or with large contractors, such as the Prime's National Champions or even other SMEs. And so when you're looking at that ecosystem, there has to be a collaborative approach. Now, some primes or national champions are more collaborative than others. Some can be fairly usury. Others can be quite great partners, as I've seen through a number in our portfolio, as well as throughout my own career. We do need to do a better job of incentivizing them to work more and on a more friendly basis with startups. But by the same token, the ecosystem needs both.

51:16If you look at a company you mentioned earlier, like Ryan Mittal, Ryan Mittal, I think right now as ballpark has somewhere around a five to seven year backlog where they could just deliver on that and not have to do anything new. And so they really do need to meet those unmet needs or those things that, hey, we need these systems right now. At the same time, a lot of European governments, and this was most recently recognized both by Estonia in their recent announcements as well as in the Strategic Defense Review in the United Kingdom, they need to spend more on R &D to develop those key future capabilities.

51:48And companies like Klein, Mattel, and others don't have the resources, bandwidth, or time to be doing a lot of these bigger swings, so to speak. And so that's why you need startups and scalps in this ecosystem to do both. address those key gaps from the last decades of underinvestment from the big problems, so the primes can get after that and those big systems, but also these startups to develop the broader ecosystems and transformational capabilities. Nick, I'm asking you again, because unfortunately, Daniel is being the target of a cybersecurity attack to block his connection, to be able to get out his important messaging.

52:24So we'll end this episode just with you and I, and I'll ask you this question, which is, what do you think are the biggest risks executing a strategy like yours? The biggest risks, if you're looking at Europe as a whole and doing defense, is what happens, I think as any good investor, you have to go, what happens if the war in Ukraine ends tomorrow? There are a few different ways and we can break down the scenarios another time, or happy to do it here or now. But you have to imagine what happens then. Or if there's a stalemate, we end up with a temporary peace. At the end of the day, the risk you have is, I talked earlier about the tyranny of geography.

53:01And I think for some Western and Southern European countries, as some have even shown through their unwillingness to make certain investments already, the farther you're away from the conflict, the less immediate or less existential it is to you. So you're more willing to probably ramp down or go to the nearest crisis of the moment, and so not dedicate enough resources or long-term resources to investing in defense. And if you're sitting in certain parts of Western and Southern Europe, I think that's a very real concern. That's also one of the reasons that we chose to focus on the JAP or the Joint Expeditionary Force countries that I talked about to start, the Nordics, the Baltics, the UK, and Poland, is because these countries have that nearness of the threat.

53:43they have the historical reasons to support there, as well as in the cases of working together, I would say, in a much more enhanced interoperable fashion, that they go back even to the start of war, even look at the UK, has been the biggest backer of Ukraine since the outbreak of the conflict. And so these countries are much less likely to have that U-turn kind of mindset in the case of something ending. That's why we focus on them. But if you were, say, focusing as a pan-European investor, but focused on other markets, I would say, do you fundamentally believe that this market is going to have the willingness and the ability to continue on afterwards?

54:22I think that varies. It's the old Henry Kissingerism. Do I call it Uncle Europe? It depends on what capital you're in. Beautiful, gentlemen. I am so happy that we did this episode together. I'm so happy that you're now live with Archangel. I think you'll do incredible things for our ecosystem and our safety. So gentlemen, thank you. Thank you very much, Andres. Thanks, Andres. And as everyone heard, Daniel ended up being able to get through his firewall of problems, but he is here, hopefully unscathed by the cybersecurity attacks on him. So thank you, everyone, for tuning in today. And thank you guys for joining me on the pod.

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