Stanislaw Kastory and Mikolaj Firlej, Co-founders and General Partners at Expeditions: Backing Europe's defence startups with €197m fund

0:00Stanislaw Kastory:Hello, welcome back to the Scaling Europe show. I'm Seb Jolson. Today on the show we have got some great guests. Mikolaj Stanislav of Expedition. Expedition is an amazing fund, defense-focused here in Europe. They have just closed their second fund of 197 million euros. Amazing news, guys. Thank you for joining me.

0:16Mikolaj Firlej:Thank you, Seb, for having us.

0:18Stanislaw Kastory:How does it feel to get it closed, get it done, out of the way, back to the day job?

0:23Mikolaj Firlej:you know really fantastic because it was a long process hundreds of discussions with investors long due diligence process from their side so a lot of struggle with onboarding as you can imagine we have 128 investors private investors and also six big big institutions so all of that took a lot of time, a lot of efforts. So it's great to finally share the news with the general public.

0:54Stanislaw Kastory:And how did you find going out to raise this second fund compared to the first fund, given that you had such a strong track record with that first fund?

1:04Mikolaj Firlej:You know, it was completely different, I would say. When we started with Miko five years ago, our investors in Expeditions 1 were mostly friends and family. That was a very close circle of people we knew very well. Private, only private individuals, no institutions, so it was only private fund. So the process as such was completely different. And also we were raising the fund as the first-time founders, as the first-time GPs. So naturally, second fund was a little bit different. Especially, first of all, we had a very specific strategy around defense. We'll tell you a little bit more why we decided to go into defense.

1:44Mikolaj Firlej:our number of residents, but that was very important. Second, we had already very good traction from fund number two, but we also needed to raise from institutional investors. We were unable to focus only on private ones. So the process was completely different, I would say, and we needed to build a structure around the process. It wasn't as, I would say, simple, straightforward as the first one. If I may, just to add to what Stanislaw said, It was, in a way, a graduation process for us and for many of the stakeholders around us. Because when we started pursuing this ventrising, by and large, most of the institutions still had plenty of restrictions around investments in defence, let alone weapons, munitions and so forth.

2:36Mikolaj Firlej:Some, they even couldn't invest in defence-first applications, not even weapons and munitions. So that was one of the main challenges, how to unlock institutional capital in order to get a scale. Second, as you know, Seb, very well from your reporting on other funds, it's actually quite tricky to raise the second fund after the first because you usually don't have much track record to show. We've been lucky, but our track record also has matured over the course of the fundraising. And the final bit was that the whole market of defense tech has progressed massively since we launched our fundraising.

3:19Mikolaj Firlej:And because of those three factors, we kind of grew as the market progressed. And even to us, the final outcome of the process was surprising. But I think it reflects well the journey that we all undertook.

3:36Stanislaw Kastory:And it makes total sense, right? I mean, in the last year, when you started 2021, you're right, it was very unconventional. I think we will look back at the restrictions that most institutional capital had as completely bonkers. But even in the last year, the acceleration of money flowing into Defence Tech, how a lot of the bigger VCs are now trying to get into Defence Tech, I guess has validated the bet that you made in 2021. But I imagine it has been massively helpful for raising the second fund. but also you have got a great track record in that first fund. I think companies like Alpine Eagle, New Quantum, some of these companies are really exciting.

4:12Stanislaw Kastory:How important were those specific companies or other companies improving that track record to those investors who came on board for the first time?

4:20Mikolaj Firlej:Massively. I can tell you that in fund one, when we started investing in defense, it was 2021, 2022, tour, there was roughly around 200 million euros of invested capital in Europe in this space. Essentially, to me, it was the breakout year. It really was the year that started the entirely new industry, that is defense tech. Before that, defense innovations were financed primarily or exclusively by prime contractors, and they were not quite effective in doing so. So this is a very critical year we've been fortunate to start in that that year and then um doing investments in 2021 2022 in defense tech was really in a way very uh interesting exercise because there was no competition but also many of the it was challenging to find the funders of of good quality uh to back and we started with um actually a company called labless technologies in the uk we were uh the first backers together with two other small groups from the UK.

5:30Mikolaj Firlej:And the company did very well, then raised funding from Project A, plural. They progressed the product. It is a very interesting product for coordination of large teams at scale. Dual use, but they started with defense industry. And then some of the other portfolio companies from Fund One really matured. So specifically, we've got the biggest success with Blackwall, cybersecurity company that is dealing with how to protect their website against bots, malicious traffic of bots. And bots represent over 50 % of traffic on the internet. And they found a really amazing product to go after this market.

6:07Mikolaj Firlej:And they are growing massively this year. Again, 2x for the last four years, I think they grow 2x or more. And with excellent unit economics. It's one of the hidden gems in Europe. It's still a largely unknown company, but it's one of the highest growth stage companies in Europe. And then also we've been lucky with our quantum investments. New Quantum, which is the leader in quantum networking. Horizon Quantum, which is the leader in quantum computing. We've backed both companies very early. In fact, we led the seed round of New Quantum. And then Horizon Quantum recently went public. They are now trading over 1 billion US dollars valuation.

6:51Mikolaj Firlej:and Alpine Eagle, Comond are also companies from Fund One where we've been lucky to back them early and both are progressing very well. So track record of Fund One definitely helped us.

7:03Stanislaw Kastory:Amazing. There are some great companies. How are you thinking about Fund Two differently? Is it more of the same? Are you doubling down on certain sectors and what's changed?

7:14Mikolaj Firlej:Absolutely. We will definitely double down or triple down on our effort. The focus is to back early stage teams in defense and security. And we think about security in broader terms. So that includes advanced compute, including quantum naturally, cyber security, communication, space tech. But our bread and butter is traditional defense tech. So applications, innovative applications in defense industry. Because we think that this is the right thing to do. It is also commercially lucrative, but I think we think with Steinsdorf and the entire expeditions that we are in the incredibly important historical moment in Europe.

7:59Mikolaj Firlej:And it's really up to us to contribute to the European deterrence. Every one of us can add some contribution. And as it happens, we have some access to capital. We have some access to great entrepreneurs. So this is our contribution to this deterrence. but I really think about it as a pan-European effort. And more and more people, fortunately, think this way. So in concrete terms, we would like to do the 40 investments of the early stages, and then we would like to reserve at least a half of our capital for follow-on investments to back the companies that will grow to some prominence and maybe consolidate the market as well.

8:41Stanislaw Kastory:Sorry, Stenzer, you're mute.

8:44Mikolaj Firlej:sorry yeah sorry my bad and i wanted to add one thing because miko mentioned that we want to do 40 investments but but we have already 28 investments done in our second fund so we did our first close last year in march and we were very actively investing over the last year and a have. So as you can see, the significant part of our portfolio is already built. And I believe we already have the new champions of the defense tech sector, European defense tech sector, the ones that will really allow Europe to fill the gaps, the capability gaps we have, and will allow to rebuild our defense capabilities for all of us Europeans.

9:35Stanislaw Kastory:And when you look at those defense capabilities, and then Miko, you mentioned compute and quantum infrastructure as well as kind of more typical, whether it's autonomous or drones or whatever, where is Europe really underinvested in at the moment? Where do you think actually this is where we really need to focus to plug those gaps?

9:54Mikolaj Firlej:Yeah, that's a great question. I think the simple answer to this is that everywhere, everywhere there are capability gaps. We ran the research in our firm and we interviewed over 50 stakeholders, end users and policymakers to understand from their direct experience where the critical capability gaps lie in Europe. and we come up with a list of over 10 critical fields, such as, for instance, Space ISR or Data Fusion Platform, so similar to Palantir, so how to build the alternative to Palantir for Europe, or DeepStrike capability, so how to project your power in the territory of the enemy, as we can see from the Ukrainian experience.

10:42Mikolaj Firlej:They are doing that incredibly well. So there is a long list of that. over time we intend to publish that research and there are other numerous institutions including NATO that are conducting such research internally and I think this is the best blueprint for making investments in this space because it is informed not by our speculation but by real demand from end users from armed forces and I think also you know there are two different waves of investments I think the first wave of investment, which we witnessed over the last few years, focused on the basic big platforms, particularly air defense platforms, drones, loitering munitions, some basic capabilities, most of them informed on the basis of Ukrainian experience.

11:32Mikolaj Firlej:I think the second wave is really more about building a critical infrastructure to support those big platforms. So sensors, software systems, communication tools, and many others, also at the level of advanced compute and underlying systems that would power the whole enterprise of war. Because we are generally moving to the more autonomous warfare, where the critical dimension is time. We have to win the time domain.

12:06Stanislaw Kastory:And when I look at some of those companies from Funtool ready, they're moving insanely quickly. They're some of the fastest growing defense companies in Europe. Whether you look at Orca coming from Croatia, U-Force, which I guess is sort of Ukrainian, British, and then Cambridge Aerospace that is British. you know you've got these companies that are growing extremely quickly but across the whole of europe so how are you finding these companies and then when you find them how are you assessing them to decide that you think these are going to be the winners in their space i will leave

12:36Mikolaj Firlej:as thanks to comment on uh on the latter part of the question but i would just say that um we developed a very strong outbound practice we hugely believe that if you want to create a successful venture fund you have to go out and just speak with people and speak in many with many many people and try to go to the communities where there is certain concentration density of talent identify the leaders in those communities build a relationship with them and based on my experience this is how the best companies originate or the best investment opportunities originate when the companies are public then usually it's too late to invest for early stage funds so we try to build a network of people and we go out and spend long hours in different countries to develop those networks but over time particularly we see already in our fund tour and there is certain reputation that we ascribe to that i think is starting to work into our advantage funders from across europe recognize that we can move fast we can add value and they recommend each other to a partner with us and this is hugely um a hugely helpful process but also a great responsibility on our side who maintain that level of support and maintain that level of excellence in our practice.

14:12Mikolaj Firlej:In addition to investment, we support companies with partnering and decoding the government go-to-market. I think all of the defense tech companies are trying to understand how to create a pan-European defense tech business. You know, in Europe, you have so fragmented market with so many different entries, with different rules and different armament agencies. It's really difficult to scale across the continent, particularly in the space. So part of our responsibility is to create dedicated teams that can provide informed feedback on how to, for instance, scale in Poland or how to scale in Germany, France, UK.

14:58Mikolaj Firlej:So have this large network. The team that you see on the Expeditions website is just a front team. But there is so much more beneath that of various people that we work with and support our work on a day-to-day basis. Most of them are end users, so active servicemen or the ones that just transitioned from special forces, intelligence units, and also people who just get that. you know they have basic business acumen because sometimes you may just transition out of military but you don't know how to work with private businesses so we try to look at the intersection of those two the understanding of the military domain at the same time having certain business acumen and based on our experience this is the best match and when it comes to some of our companies, yes, they are growing very fast, but it is still, I think, challenging to establish the specific company as a pan-European leader.

15:57Mikolaj Firlej:And I think there are certain areas where it's easier and in some areas where it's much more challenging. Because in some areas, the capabilities are not seen as pan-European, but unfortunately, they are seen as domestic capabilities. And we see that trend of domesticization and domesticization of capabilities across different countries in Europe.

16:22Stanislaw Kastory:So is that almost like European countries competing with each other or trying to have their own local champions as opposed to taking a European first approach?

16:31Mikolaj Firlej:You know, I wouldn't say personally that we are competing with each other, but definitely each of the countries would like to have their own novel prime. Like you have candidates for such a prime in Germany, like Helsing, Stark, Quantum Systems, or Cambridge Aerospace in the UK. And, you know, naturally each of the European countries would like to have their own prime that could later be a strong competitor on the European landscape. We'll see where we'll end up. That's a very probable scenario. But I wouldn't say right now that we are competing with each other. There's much more of an atmosphere of the collaboration rather than competing.

17:24Mikolaj Firlej:But naturally, there is also this race for having your own prime that will play a significant role on the pan-European market. Interestingly, on this topic, when you ask Ukrainian defense tech companies, and often some of them have similar products, are you competing with each other? It looks like you have exactly the type of product that your competitor has. Their answer is always never, because they are united in the war effort. So even if potentially in some programs they apply for the same pot of funding, they would never consider themselves, for now at least, as competitors. If for some reasons war will come to end, then obviously the situation would be different.

18:14Mikolaj Firlej:But now I think this sense of mission unites many of the players in the ecosystem. them but for instance in some cases like in germany particularly in drone industry the

18:23Stanislaw Kastory:competition is ferocious yes oh really yeah i mean i mean germany's doing really well whether it's start quantum health and they've got some amazing companies that's interesting i guess they're further away from the front line they feel more competitive internally yes so you know it is

18:40Mikolaj Firlej:actually a very good point because yes they're they're competing with each other very strongly But the important thing is to make a distinction between companies that are building for Ukraine right now, that they are solving the issues that we have, the Ukrainians, or we as allies have on the front line, and companies that are much more focusing on building the security of Europe. So they are not building for the war that is happening right now, or at least it is not their main focus. Because that completely changes the strategy, the mindset, the focus that they have on the product. In Ukraine, it needs to work.

19:26Mikolaj Firlej:It needs to work today. They need to be able to use it today, tomorrow. They need to scale fast. They will use Chinese components because they don't care. it is good enough for what they need. In Europe, if we are building for Polish, German, French, Minister of Defense, Army, you cannot have a product that is based on Chinese components. That's one of the examples. That's why Orca, for example, is such an important company for Europe. I think this is a crucial topic, just to double down on this message. There is a huge difference between financing the war and financing the defense of a specific region, such as, for instance, defense of Europe.

20:10Mikolaj Firlej:Because both types of financing are needed, but they have different structure. There are different entities that are putting money into financing of war and financing of European defense. And there are different mechanisms of success. So things that could work in the area of financing of war usually don't work in the area of financing of defense. For instance, the types of products that make sense. Stanislav alluded to that, the types of components that products are using. If you want to finance European defense, you have to meet a huge array of requirements for the product to be fielded. And it's much more challenging.

20:52Mikolaj Firlej:Ukrainians usually don't deal with such problems. But then, because they don't deal with such problems, they can innovate almost on a daily basis and create some of their very exciting capabilities. And there is a subset of capabilities in Ukraine in this area of financing of war that could be incredibly useful for financing the European defence and for European deterrence.

21:15Stanislaw Kastory:Yeah, that's really interesting. It's kind of, they're both turning the flywheel from different places. Well, we're out of time. Thank you so much for joining me. I think it's amazing news. I think you're backing some amazing companies. And I hope Europe continues to wake up to the threat and the need to really finance, you know, a hundred times more of these companies. But look, thank you both again. Congratulations.

21:37Mikolaj Firlej:Thank you very much. It was a great pleasure. Thank you.