Shane Wilson's Blog

When I was choosing my business school back in 2023, I knew I wanted to use the experience to evolve from a startup operator to a startup investor.  I spoke to a few trusted mentors and many said “Hey you know it may be easier to network for VC if you’re in NYC or SF.”  They were probably right.  As my job search heats up this Spring, the monthly spend on train and plane tickets to talks and conferences is adding up to the cost of leasing a new BMW. 

Last week, the script flipped as we had an incredible speaker come to us on campus in New Haven.  On January 29, Markus Federle of Tholus Capital came to Yale SOM on the invitation of the PE/VC Club, Aerospace & Defense Club, and Veterans Club to talk about investment in defense tech and civil resilience.  As I’ve written before, Defense Tech is one of the VC verticals that I find really exciting.  Changes in DoD’s procurement process to increase exposure to innovative companies is making investment opportunities that were previously a ‘pass’ due to asset intensivity viable.  The reintegration of defense spending in the innovation economy could bring the world more spaceflight, better batteries, and so much more.  Here are a few ideas from Markus’s talk that I took with me.

Defense and IT Innovation Divergence

In his opening remarks, Markus highlighted the fact that top innovations of the 20th century including the internet were a result of close collaboration between defense spending and high-tech research.  However, at roughly the dawn of the iPhone the siren song of business-focused and consumer-focused revenues led Silicon Valley to distance itself from its military heritage and cash-in on the app-and-SaaS lollapalooza that followed for the next 20 years.  Today, this means the defense community is no longer in possession of the latest-and-greatest tech and that’s a problem- your tier 1 enterprise is enjoying better information architecture, user experiences, and integration with new technologies like AI.  If we solely evaluate the DoD as an administrative body with hundreds of thousands of employees this translates to operational inefficiencies that put the lives of US service members and the mission of the Defense community at-risk.  

Dual-Use is not Ethical Protection

The biggest heat moment in this talk came from Markus’s comments on firms that brand themselves as Dual Use as ethical cover.  While Tholus does not invest in kinetics (things that go boom) as Markus believes Primes are best suited to create these products, it recognizes that when technologies with civilian applications are used in military contexts they will be part of a kill chain.  For example, a computer vision product that allows for target identification could be useful for a retailer that is quantifying its customer personae.  But if the target identification is being used to guide a missile strike, the added value to the military is increased lethality.  As such, committing to a Dual Use thesis obfuscates the gravity of defense tech investing. 

Large Defense Contracts (Primes) Struggle with Innovation

As the DoD’s innovation muscles have atrophied, so have those of the Primes.  Markus pointed to cost-plus contracts, an idea I covered in another piece.  Clipping here:
For decades, defense spending has been concentrated in large companies like RTX, Lockheed Martin, and Northrop Grumman.  These companies have grown rich from working closely with the DoD to develop vehicles, planes, and ordnance that match the specs of military organizations.  This leads to lucrative, long-term, cost-plus margin contracts that create little incentive for defense companies to produce their wares more efficiently- if Lockheed is over-budget on the delivery of an F-35 it’s of small concern as the DoD covers the entire cost of the project plus an additional margin to make the project profitable Lockheed.  [1] It doesn’t take an MBA to intuit what happens next- the cost of goods to the DoD, and ultimately the US taxpayer, balloons.  Until the Ukraine war, this was simply the cost of doing war business.  DoD is an exacting customer who needs partners that can create incredibly reliable products for niche capabilities at an enormous scale.  There are few companies who can fit this bill, and for those that can, they deserve to be rewarded- especially when we consider the fact that it is in the best interest of all US citizens that defense companies do not sell their wares on an open international market.  Yet when Ukraine’s troops are using an $800 drone equipped with an explosive device to eliminate enemy tanks with high precision, a task typically executed by a $200,000 Javelin missile produced by Northrup and RTX, it’s time to reevaluate business as usual.

Notes on the European Defense Tech Space

I am admittedly US-centric in most of my Defense Tech and defense spending research to-date.  Markus illuminated the importance of the EU market for defense with some simple market-sizing.  Since the Cold War, EU defense spending has been down roughly 30%.  In 1990, 4% of European GDP was spent on Defense.  Today that figure hovers around 2%.  If the EU returned to 1990 spending levels in 2025 this would imply an additional €388B in defense spending.  When a TAM of $1B is typically a sufficient market size for a startup, founders should pay attention.  In addition to the sheer size of the European defense opportunity, politics and national pride mean that this gigantic pie could be split between startups from different EU member states- an interesting market dynamic for VC investors to consider when evaluating similar solutions from different countries.

Wrapping Up
We were really excited to have Markus on campus last week.  This is just a quick-hit highlight reel of the topics Markus covered, he had great insights on cross-border collaboration, fundraising among LPs and the challenges Defense Tech funds with respect to ESG requirements, and more across the hour he met with us.  If you’re interested in Defense Tech I strongly recommend you follow Mission 2044, a global event company Markus leads in addition to Tholus Capital.  

About Mission 2044:
MISSION 2044 is the leading international series of events focused on innovation in Defense, National Security, Space, and Critical Technologies. 

MISSION 2044 brings together founders, VCs, investors, defense primes, military, politics, and thought leaders from the US, Europe, and other global allies to foster and connect these technology ecosystems and create unparalleled networking opportunities.

Source for above graph:
https://www.edwardconard.com/macro-roundup/western-countries-are-facing-tradeoffs-to-finance-increased-defense-spending-as-the-post-cold-war-peace-dividend-fades-in-the-face-of-chinese-and-russian-revanchism-with-20-of-31-nato-members-sti/?view=detail