62 – Space & Aeronautics, Defense and Homeland Security – Space, Defense and from dirty… to the new “cool”

Our analysis of the Space & Aeronautics, Defense and Homeland Security industries from key trends to investment landscape… to perhaps, more importantly, evil vs no evil? Where are we now?Navigation:Intro (01:34)Why now?GeopoliticsAerospace and AeronauticsDefense and Homeland SecurityConclusionOur co-hosts:Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder of App Annie / Data.ai, business angel, advisor to startups and VC funds, @bschmittNuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedroOur show: Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news Subscribe To Our Podcast Nuno G. PedroWelcome to Tech DECIPHERED. In today's episode, Episode 62, we're going to discuss space and aeronautics, defense and online security. We are going to talk about key trends, why now is such a wonderful time to be looking at this space not only from a startup perspective but also from an investment landscape perspective. We'll also go into the whole evil versus no evil topic. Specifically, we will discuss why now, and the geopolitics of the industries, aerospace and aeronautics, defense and homeland security, and then we will conclude. Bertrand, why now? Bertrand SchmittWhy now? I think this industry, this sector, space, defense, homeland security has seen not just a lot of growth and quite a few very successful companies coming out, but it's an interesting complete turnaround, if you look at that from an entrepreneur or from a VC investor perspective. Why now? I think there has been, I would say, historically, there was a lot of scepticism, a lot of concerns by entrepreneurs, investors alike, centred around the military industrial complex. Bertrand SchmittWe probably all remember the famous Eisenhower's farewell address where he was sharing his distrust of that military industrial complex. And venture capital shunned these sectors also due to long sales cycle, in some cases only one client, the Department of defense for many startups, as well as ethical debates. Bertrand SchmittAt the same time, it's an evolving landscape. Startup came with disrupting legacy models. It's not just a cost-plus approach. It's a product approach. It's agile. It's innovation. The debate around, is it evil to is it something we must do in order to address global threats, basically coming to the forefront for investors and entrepreneurs alike. Nuno G. PedroIt's a supply and demand issue. It's not just that startups are not necessarily interested in it because it always creates this issue around, is it evil? Is it good? Are we doing something good or not? I think there's a lot of that. There's a lot of supply issue because of that angle. But it's also a demand issue. Contracts historically with military take a long time to be hashed out. They depend on doing trials and proofs of concept. Nuno G. PedroI think on the other hand, it's an industry that historically was very resilient and dominated by services. Particularly the US military want to own everything, and so, therefore, there was this notion that whoever was the provider provided it to provide it as a service for them. There are services that still need to be done today, but the industry has been largely productized, and there are a lot of products. I buy planes, I buy weaponry, I buy a bunch of different software systems that will allow me to operate, but they're productized. I think that's one of the big shifts that we've seen and why now is a good time to look at it. Nuno G. PedroIf I'm a startup, I don't need to go through 3, 4, 5-year cycles until I sell anything of scale. Then on the plus side, once I sell, it is at scale. There's a lot of money in the military. We'll talk a lot about the numbers later on, but there's definitely a lot of money in the military complex that warrants the focus of startups. Nuno G. PedroThe other part is venture capital firms. Venture capital firms, historically, maybe because of the whole evil versus no evil and perceived ethical issues have stayed away from it. But we have more and more active large firms in the space from Founders Fund, Andreessen Horowitz. We ourselves have invested in companies that are around both the Homeland Security and the military complex space. So as a venture capital investor, because then the cycles to sales are better, because then startups scale faster, the economic piece of it has been solved. Nuno G. PedroThen, on the other side, the whole ethical issue has been really put into perspective. There's clearly a lot of geopolitical tension right now. Defense as an industry. It's an industry that needs to scale properly where there are geopolitical interests at scale, but you need to put money where your mouth is. Bertrand SchmittWe will talk more about it, but I believe also we had one big example of an extremely successful company that really broke the dam in how you see these investments from an entrepreneur or investor perspective and how you can really win against these traditional companies, very entrenched companies. This is SpaceX. SpaceX really shown to everyone that, yes, you can build actually rockets. You can build better rockets. You can build cheaper rockets than everybody's. Bertrand SchmittThat was the poster child of, yes, there is a brand-new market opportunity that until now we thought was impossible to crack for young, talented tech entrepreneurs. Suddenly, everyone could see in some ways that the emperor was naked and that these big defense contractors were actually extremely weak. Bertrand SchmittFrom my perspective, they became weak. It was a two-way street. Also, the government makes them weak. You have only one supplier. You have only one buyer. At some point, it's about wining and dining clients. It's not about solving problem. At some point, it's garnering political support, not delivering great products. Bertrand SchmittI think there has been a slow path to extreme mediocrity, and mediocrity might be generous term, actually. I think there is, as a reaction to that, again, SpaceX example, shows that you cannot just make things 10% better, but you might make 10x or 100x cheaper and change the whole industry. Nuno G. PedroI do think the example you put forward is a great example on aeronautics and aerospace. On military and online security, Palantir was at that first breakthrough. You could argue it's still a relatively services-heavy company rather than a product, but it is a startup, it IPO-ed, etc. It's obviously a company that has done really, really well in the industry. We now have obviously the example of Anduril in the drone space and how that's scaling. Nuno G. PedroI think we have now a bunch of good examples to your point, Bertrand, as there has been an unbundling of pieces that were typically government-owned or only government pushed like NASA. With aerospace, you have this opportunity like SpaceX that just dramatically changes how things are done, where it eliminates all these inconsistencies and these inefficiencies. I think that's been true also of the defense and military complex side and how that has scaled. Nuno G. PedroMaybe moving to geopolitics, it's very clear that the US is the big player, spending a significant amount of its yearly budget on military by any admissions. Probably around 900 billion a year spent on defense in the US, which is incredible. The US GDP is 27.7 trillion as of 2023. This is a significant part of it, so obviously, the budget's much lower. The use of military in the US and defense is a huge percentage of its not only GDP, but also its yearly budget. US is clearly leading the way, obviously. We'll discuss other countries and where they're at. Nuno G. PedroEurope doesn't seem to have gotten the memo. I think the recent discussions happening around Ukraine and what's happening there show a little bit that not only it's lost the plot, but it's lost the power as well because it lost the plot. Bertrand SchmittI'm French. You're Portuguese from origin. For me, it's totally shocking why is Europe… It's been 35 years since the fall of the Berlin Wall, and it feels like the Europeans rushed to stop investing in their defense. There are some metrics in terms of German investments in defense spending, for instance, where we move from huge quantity of tanks to barely any tanks as Germany can bring into any battle. This is one example of how it moved from being a military superpower, same for France or the UK, to basically the shadows of their former self. It's quite unbelievable. Bertrand SchmittFor me, what's unbelievable is that even after 3 years of Ukraine war, some Eastern European countries have changed their defense spending. But the Western European countries have not changed much their spending. All these promises about increasing military productions, being able to provide military supplies to Ukraine. Bertrand SchmittYes, we sold them or gave them "some weapons", some typically older weapons, but at the end of the day, we are not even able to provide enough artillery shells, which is the bread and butter right now on the battlefield. Same with drones. Most of the parts are coming from China, on both sides of the conflict, by the way. It's a very, very scary situation. Bertrand SchmittI guess we are recording that one week after JD Vance spending some time in Europe and talking at a Munich conference about European security. It's very clear that the US is fed up from this perspective. As a result, I would expect actually a change in spending and priorities by Europeans. I guess they will buy some weapons from Europe, but also from the US. There have been some European initiatives like the JEDI initiative to stimulate faster tech adoptions....