Four Approaches to Open Innovation in Korea

Open innovation in Korea is slowly moving away from building R&D capacities to reassessing business and operational models by either building its own corporate venture capital arm or working with an external consulting partner (typically a VC or an accelerator). The purpose for most Korean companies would mainly to have a testbed in innovating its business model or developing new technologies. And by running the open innovation program, the respective company would update its biz model, secure new talent, tech, market insight, and approaches to customer acquisition, etc.

Of course, a company may decide to buy a well-oiled startup with the range of technologies the company would need. For instance Hanwha Systems recently bought Satrec Initiative and plans to equip itself with the nut sand bolts to launch its own satellite.

In Korea, open innovation really used to be investing in a company one by one or expanding its social impact footprint and its CSR program, e.g., Hyundai Car’s pitch program called H-On Dream, but it is now opening up to a much more open collaborative approach. 

  1. Digital Transformation with a consulting firm: One of the most well-known open innovation consulting firm is called 로아 인벤션랩. Its most successful case studies are with KT 국민은행 and working with fashion & cosmetic brand companies that were relatively slow to innovate, e.g., LF and 신세계. Side note: It also began investing in startups, ~20 last year, via an angel-based VC, Big Bang Angels.
  2. MOU-based with VC/Accelerator: A large startup/accelerator/VC signs a partnership with a corporation to reassess its business model. The example I witnessed was the one with Hashed, a blockchain fund in Korea. It worked with an array of companies, banks, LG CNS, and those even remotely interested in learning about blockchain, including SM entertainment and CTIA, a mobile telecom company. And in doing so, the corporation’s tech or new business department could pilot a business model and the VC funneled its startups to partner with large corporations.
  3. CVC: The corporation could also decide to build its a raw datasheet of startups by opening a “신사업” or new business branch in industries it already does business in.The most successful ones I’ve seen are Kakao Ventures and Samsung Next. Most Korean CVCs do not have a very strong international base, except for the Korean conglomerates that already have a presence abroad. 한화생명’s Dream plus 63 has secured a network in Tokyo and Shanghai. Even Smart Study famous for its animation and its song, baby shark, has hired one or two investment analysts to review startups that they could be a part of. And it was quite successful at it so far. The interested company could soft-land by participating in one of KITA Next Rise’s programs as a judge/mentor. 
  4. Introduction-based: KITA has done this really quite well. KITA is the parent company that owns the space in Coex Mall and has a free lounge for startups. Annually, it hosts an annual conference called Next RIse for the purpose of assisting with open innovation. Another program KITA is famous for is a program called Fortune 500 Connect. KITA hosts an open invitation for startups interested in working with conglomerate contacts, notably BMW and Chanel, in the States, etc., to make introductions. 

Open innovation may seem tricky to enter, but there are many new mediums in which the startup could enter the field of open innovation. I suggest all those who are interested to start attending the startup-corporate meet-ups and or read case studies of successful programs or acquisition models.

Demystifying DoD Contracts

What the Department of Defense has achieved through the Defense Innovation Unit (DIU) and AFWERX is quite incredible – the flow of money from the government itself has not yet become predictable. Here are some recent observations on DoD contracting programs and how startups may enter the field.

DoD Purchasing and Contracting

DoD buys equipment and supplies across the caliber with three large investment areas: stretches of logistics to move equipment, medical facilities, and IT networks.

Open government contracts and DoD’s SBIR funding, reviewing the past 2-3 years, shows the range of government funding propositions. The government contracts consist of tires and other services. However, even if the technology is promising, if it is not exactly what the USG is looking for and thus detailed in the open contract or or it is a proven solution, then it is extremely difficult to fund it into the stream. And each contract often demands a proven solution than the maturity level of technology a seed-stage company may have.

SBIRs for DoD has a more flexible risk appetite. For instance, for new materials or technologies, the SBIR is designed to gain solicitation to test the market and to adapt them to the new solution.

The AFWERX Model

What AFWERX has done well is to get notice. After years of rift between the Silicon Valley and the defense community, the AFWERX has built the brand awareness and the dual-use open topics. Since the summer of 2018 pilot launch, which was successful, the value proposition for AFWERX has been that they could give money out faster – much like VCs and less like the traditional governments’ contracting cycles.

The two areas of struggles for AFWERX have been scaling the model and adopting the solutions. The government entities initially had attracted 150 proposals, which was followed-on by less, 100 or 50. The problem was the conundrum of the classic government innovation — slow, opaque, and difficult to follow. The government contracting process was not well set-up and was not entirely user-friendly. The second struggle was to get buy-in for the government customers. While AFWERX had given out the money to test out the solution, Air Force was not ready, either culturally or institutionally, to adopt the solution, the so-called Frozen Middle.

The flow of investment?

The investment into space startups is increasingly active. The startups who attracted the capital, high net-worth individuals, and institutional investors moved the money around to de-risk the capital allowing companies to win large contracts, such as Palantir to become multi-million dollar entities. However, selling to the large corporations could take easily two years to execute in the sale cycle, similar issue observed in governments.

If the government sees a company it likes, it would have to either introduce it in an existing contract or allocate new funding. A traditional government contract, which can be locked up for decades, is often with another larger supplier. They could ask the supplier to apply the company’s technology when shipping out the equipment. Or, they could create another contract, from which the government must find a budget. This could take one or two years of little or no communication with the interested company.

For small companies, the dynamic can be quite different. It is much more hands-on from the meeting to the adoption. It could take up to a month for a pilot and up to six months to commercialization.

Supporting Korean Businesses

Korean businesses can pave their way into DoD contracts through the SBIR dollars. To sell to the U.S. government, the Korean business would ideally need a U.S. subsidiary or create an LLC in the States. Setting-up the business itself is quite easy – only costing under $100 to create a company in Virginia.

However, the legalities of the business may be difficult to navigate. If the technology, however, is owned by a Korean, the United States has own the license to sell. The ownership of license is a matter of importance to the defense counterpart. Korean company would also need foot on the ground to build a salesforce and a team to sell on behalf of the company.

In short, the Korean business has to have a strong legal backing to establish its presence in the States and to navigate the difficulties of managing its assets, such as IP, in both countries. They also would need to set-up a strong salesforce to put the foot on the ground and to start generating revenue.

How an Entrepreneur Successfully Launched a Joint Venture in South Korea

South Korea has historically been reliant on foreign suppliers for the core technologies. Many of its advanced weapons systems are based on technologies developed outside South Korea.

One way to bring in foreign technologies into the defense industrial ecosystem is to work with local partners, suppliers, trading companies, and manufacturers that already have a contract with the ADD (Agency for Defense and Development.)

Here are five ways to enter the Korean market:

  1. Work through a trading company. This method is used when the foreign entity is not interested in establishing an entity in Korea, but in testing out the market. A contract is drawn between the company sourcing the product and a domestic import/export partner. The trading company in the deal receives an estimate from the supplier, sign a sourcing agreement with clients, and receives a set fee. Then they work with domestic partners, customers of the product, and negotiate ($/unit, etc.)
  2. License out the technology. Licensing or outbound licensing is essentially selling the intellectual property of the technology to commercialize the IP into the business. This is useful if the supplier lacks market knowledge, infrastructure, and resources to bring the product to market without the related R&D costs. The key here is to set reasonable and nondiscriminatory terms to avoid the likelihood of future IP litigation.
  3. Set-up its own branch here in Korea. At Big Bang Angels, I worked on a fund model to help U.S. and Canadian tough-tech startups with IP protection but without access to the market, network, and investors, to make inroads into Asia. The thesis was that the startup could secure IP protection in the international finance hub of Asia, Singapore, or Hong Kong, to attract follow-on capital on the specific technology. Then form a team agile enough to navigate the Asian market. Risky, but an appealing method for startups, especially AI or SaaS companies, for its agility.
  4. Partner with a local manufacturer or supplier that could establish itself as a sales partner on the ground. This could be a one-stop-shop solution to localize the production of the technology. They can ideally deliver on the technical capabilities, integrate the product into the niche needs, and utilize the sales channel to get the product into the market.
  5. Form a joint venture. It’s an agreement between two companies with different areas of expertise in the creation of a new, separate business entity. By sharing the risk, revenue, and technical know-how of two business entities, they can enter the market much more effectively.

Forming a joint venture is a common method to set-up an entity in Korea between two companies from two countries. They share different cultural capital, market know-how, and through the JV, they share their areas of expertise in the creation of the new, separate business entity.

I recently had a conversation with an entrepreneur who grew a joint venture, or a business entity created by two or more parties with shared ownership, into a ~$690 million USD figure business in Korea.

Vacuum pumps used to remove air, gas, or oil particles from a device or equipment that can corrode the internal parts of a machine. It is used for various industrial applications in manufacturing units for optimal processing environments such as semiconducting materials, glass coating, etc. They are used even in medical applications that require suction.

In the beginning, he received an offer from the company to set-up a venture here in Korea with around 15% or so market share. When he began his business, he found that machinery malfunctions. The problem was that the company knew how to sell, not to engineer.

The Korea office would field complaint calls about tech malfunctions. Even if the specific equipment is around $50K or $100K USD per unit and the technology it supports is $10 Mns USD, it will not operate if the supporting tech does not work.

When he found the issue in the supply chain, the company did not have the capacity to fix the equipment but just to carry it into the country. And instead of delaying the issue, he created a study program for engineering students. In turn, they would help troubleshoot the mechanics.

The slogan became — “Fix First, Fighting Later.” As in, fix the equipment before they make the sales. They created a one-stop-shop to smooth out the process inventory to procurement. Competitors did not.

Eventually, the company sustained its customers and slowly increased its market share. The most popular use for the vacuum pump was in suppliers of semiconductors and flash memory chips. They began receiving offers investments from the parent company and the client companies like SK Hynix and Samsung Electronics, the South Korean memory chip powerhouse. It built its own facility to manufacture the pumps then exporting it from overseas and hired electrical engineers and field engineers. Engineering support was no longer a simple value-add, but its main competitive advantage to help design and set-up the system from ground zero.

There certainly many elements to the equation — the careful maneuvering of relationship management in penetrating the market, the internal R&D to continue improving the deployment systems piling on its many IPs, and others. But what gave the company the kick it needed to get off the ground was resetting priorities, creating another value-proposition, and building it into a core asset in the company.

Takeaways from Rich Dad Poor Dad

This book is a timeless classic. I can hear Robert Kiyosaki’s voice in my head saying, “Money in your asset class puts money into your pocket”

It teaches you the most basic fundamentals in personal finance and does so in a debunking the rules of a “well-lived, respected life.”

Growing up, Robert K. had two dads. His own dad was well-educated member of the government who had worked his way up, but he shied away from the subject of “money.” He grew up next to another dad, who taught him how to leverage money to his advantage.

This book reads easily. He speaks in in his own voice, giving practical advice reflecting from his own journey. He admits to a few things that he “likes” money, he had to work very hard for it, and that it was not always roses and peaches.

The book essentially breaks down the cash flow analysis the income statement (income and expenses) and balance sheet (assets and liabilities). Examples of assets are real estate, stocks, bonds, notes, and IP that flow cash into income with rental income, dividend, interest, and royalties. Liabilities are those that take money out of a pocket, like a car that needs repair, mortgage with mortgage payments, hence expenses.

Gambling is not knowing what you’re doing. Finance basics are made up of the following:

  1. Accounting: Financial literacy to identify strengths and weaknesses of businesses, urn earned income into passive & portfolio income
  2. Investing : Creative strategies and formulas to get money working. Ex. How to buy real estate foreclosures, derivative trading, The 16 Percent Solution, commodity option trading, etc.
    1. real estate
    2. IP (idea, patent, license, franchise, information, music)
    3. Investments (stocks, bonds, notes)
    4. 현물 자산 투자 (귀중품, 예술품, 시계, 와인, 자동차)
  3. Markets: Is this investment cheaper due to supply vs. demand in the market? Check your pulse on your emotions (fear vs.greed) and the economics (is this an under-valued asset?)
  4. Law: Learn the tax advantages and protection mechanisms of a corporation entity, e.g., expenses that you can pay with pre-tax company dollars

Key Takeaways are the following.

  1. Emotion drives our decision-making. Fear and greed drives our thinking. Fear of running out of money motivates us to work hard, and greed and desire drives us to start buying things with money. Learn to use emotions to think and be an “observer” of emotions not be consumed by it.
  2. Money is not real. They are contracts, agreements, and exchange of mediums, e.g., services, information, etc. I chose to think about this concept to not think about money in nominal terms, but to think about it as a medium of exchange of goods. More we capitalize on our assets, more we can earn.
  3. Focus on an asset class, but learn a little about everything – banking, brokerage, law, accounting, etc.
  4. Be disciplined. In the learning process, you will lose money. Keep studying, be willing to take the rocky road, and attend seminars, etc.
  5. Learn how to communicate effectively and succinctly
  6. Learn the three management skills – of people, cash flow, and systems

There are certainly valuable lessons from the book in teaching the fundamentals. For me the biggest lesson learned is to find an asset class I would be excited about. Perhaps it is my dogma or my millennial attitude, but I truly enjoy working for myself. One thing I definitely want to try is launching a business I am excited about and learn the mechanics in theory and in practice.

In the meanwhile, I will develop hobbies, try new things, and see what I can do the best.

As I progress through my career, I look forward to the learning.

The VC Checklist

Here are some things you should know right away about VCs. Most VCs fail. They are just like startups. They have build and motivate management teams, source capital and strategic partners. They have to raise all the time from – pension funds, endowments, family offices, corporate and operating funds.

Here are some reasons why other funds though are not always the best idea. Accelerators/incubators get a huge volume of vetted opportunities and valuation can get inflated very quickly. AngelList stimulates the herd mentality of the stock market. You may need to spend a lot of time and money at University and tech R&D shops in investing into the idea. VCs model after PE practices.

Value comes from:

  • Cash
    • Does it have a meaningful budget? Does it use tech to share knowledge?
  • Brand
    • If it doesn’t have a strong brand image, is it co-investing with other shops?
  • Network
    • Does it have a CRM system? What kind of intros do portfolio companies need and can the team provide it?
    • Does it need to rely on external networks?
  • In-House Expertise
    • What is the fund manager’s background? Does the team have relevant background and operational expertise?
    • Does it have external consultants?

Good VCs come from:

  • Great management teams
  • Operational value creation expertise
    • Strategy scoping
    • Competitive positioning
    • Defining the target market
    • Scoping the product
    • Defining the right skill for each stage of the life cycle
  • Well-developed portfolio operator models
    • Optimize the team
    • Admin, accounting, legal, technical capabilities
    • Capital-raising
    • Recruiting
    • Identifying the right customers
    • Access to vendors and investors
    • Measure and understand metrics

Q&A

  • Q1. What is the sector size? AUM? The latest fund size? Latest progress, strategic partnerships, follow-on capital?
    • A portfolio size should have 10 – 30 companies based on sector and stage of investment. For software venture fund, it may have as many as 30 companies in its portfolio. The capital needs are lower, risks are deemed higher, and growth rate of companies is higher. In comparison, life science companies need larger amounts of capital and time to reach maturation, so life science fund may have a dozen companies.
    • On a portfolio basis, funds should target a 20% or more on an annualized basis rate of 2 to 3 times the invested capital. The internal rate of return (IRR) is to make 10 times in 3-5 years after the exit or selling a startup ideally after investment.
    • Most fund managers should have a diversified portfolio. Average total investment amount per company are typically no more than 10 percent of the fund to gain back the period within 4 to 6 years from time of investments with patterns of capital needs, company maturation and exit timing.
  • Q2. What do the investors look for depending on the stage of each fund?
    • Capital efficiency and target financial returns. Does it allow for generating venture-like returns?
      • Seed stage  – validate ideas, understand risk, connect to the market, help to find customers 
      • Mid stage – syndicate the investment, putting the rationale and leading the round
  • What is the market opportunity? What are key macrotrends? Is it large enough to source good deals? Does it have a competitive advantage in the domain?
    • The investment strategy should match skills and expertise of the team with the given market opportunity to generate superior financial returns. For instance, underserved regions can yield opportunities due to pricing advantages.

I also recommend checking out “founder NPS” the founder Bloomberg net promotor score.

Hope this helps!

The Business of Venture Capital

Arabesque: The ESG Quant Fund

Arabesque is the first ESG Quant Fund global asset management firm founded by Georg Kell, the founder and former Executive Director of the United Nations Global Compact. It is focuses on advisory and data solutions by combining big data and environmental, social and governance (ESG) metrics to assess the performance and sustainability of companies worldwide.

It has its headquarters in London and a research group in Frankfurt and has offices globally. It analyzes the ESG data first and then finds out how much to invest based on the company model. The fund has a 32.5% return on investment, higher than global investment growth rate of 24%.

It all began with George Kell’s speech at the Davos forum. He partnered up with Bob Eccles, the founding chairman of the Sustainability Accounting Standards Board. The vision is to enable everyone to be able to invest in responsible companies to hold them accountable.

The technology of Arabesque S-Ray is based on the dimensions of the UN Global Compact – environment, human rights, labor rights, ant-corruption and excludes those who rate poorly in the fields of arms, tobacco, or gambling. Kell hopes to continue to move a critical mass of companies in the right direction and markets demonstrate responsibility of creating a shared future.

Five Approaches to Impact Investing

The idea of impact investing and how to allocate capital based on different approaches have diverged over time. Asset classes can be clustered according to the way investments would deliver financial return by the approach that they take. As illustrated by the below frameworks, impact investments are intended to align with an investor’s preference.  In the impact investing spectrum, one end has the traditional investing mechanism and the other philanthropy and can compare the extent of impact and risk in an impact portfolio. The categories in organizing impact portfolio to determine level of impact, moving from less to more integral impact, are the following:

  • Responsible: Also known as Socially Responsible Investing (SRI), this approach involves the negative screening of investments due to conflicts or inconsistencies with personal or organizational values, non-conformity to global environmental standards, adherence to certain codes of practice, or other such binary impact performance criteria. ‘Responsible’ captures investment activity that may proactively contain a social or environmental component in its strategy.
  • Sustainable: Sustainable investments move beyond a defensive screening posture, actively looking for investments that are positioned to benefit from market conditions by integrating Environmental, Social and Governance (ESG) factors into core investment decision-making processes. This can include corporate engagement, innovations, and new markets that are recognized as a path to growth, with positive social and environmental benefits, such as, for example, alternative energy.
  • Thematic: Thematic or mission investments have a particular focus on one or more impact themes, such as clean water or deforestation, and work to channel investment allocations in those particular directions. These are highly targeted investment opportunities, in which the social or environmental benefits are fully blended into the value proposition of a commercially positioned investment.
  • Impact-First: Investments that seek to optimize a desired social or environmental outcome, without regard for competitive return. They are open to trading off financial return for more impact where a more commercially oriented return is not yet available.
  • Non-Impact Investments: Investments made for the sole purpose of financial return, without any explicit consideration given to the social impact of the investments.
  • 100% Impact Investment: The intentional commitment by asset owners of 100% of their assets to positive social and/or environmental impact.

To navigate the following strategies, the report recommends adopting an incremental philosophy to explore opportunities in the program that builds upon the internal capacity, investment functions, and existing relationships. For instance, mission related investments are “financial investments made with the intention of furthering a foundation’s mission and recovering the principal invested or earning financial return.”  Socially responsible investing focuses primarily on (negative) social   screening and proxy activity in public equities, while mission-related investing is a proactive approach in use across asset classes.[7]

Impact investing is no longer a niche market. As more investors are interested in exploring impact, they are seen as a simple mechanism with expected financial return and an approach to impact.

Impact investing can offer the following opportunities when pursuing impact investing:

  • Banks, pension funds, financial advisors, and wealth managers can provide client investment opportunities to both individuals and institutions with an interest in general or specific social and/or environmental causes.
  • Institutional and family foundations can leverage significant assets to advance their core social and/or environmental goals, while maintaining or growing their overall endowment.
  • Government investors and development finance institutions can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals[8]

McKinsey & Company looked at financial returns for impact investments on 48 investor exits between 2010 and 2015 and found that they produced a median internal rate of return (IRR) of about 10 percent. The top one-third of deals yielded a median IRR of 34 percent, clearly indicating that it is possible to achieve profitable exits in social enterprises. The below figure shows some evident relationships between deal size and volatility of returns, as well as overall performance. The larger deals produced a much narrower range of returns, while smaller deals generally produced better results. The smallest deals had the worst returns and the greatest volatility.[9]

            Source: McKinsey & Co., 2018

Learn more:

[1] Jacen Greene, An Introduction to Impact Investing https://impactentrepreneurs.wordpress.com/2012/04/16/an-introduction-to-impact-investing/

[2] Jane Finkelman, Kate Huntington, Impact Investing: History & Opportunity, https://www.athenacapital.com/wp-content/uploads/Impact-Investing-History-and-Opportunity.pdf

[3] GIIN, 2018 GIIN Annual Impact Investor Survey,  https://thegiin.org/assets/2018_GIIN_Annual_Impact_Investor_Survey_webfile.pdf

[4] GIIN, What you need to know about impact investing, https://thegiin.org/impact-investing/need-to-know/#core-characteristics-of-impact-investing

[5] J.P. Morgan, Impact Investments: An Emerging Asset Class, https://thegiin.org/assets/documents/Impact%20Investments%20an%20Emerging%20Asset%20Class2.pdf

[6] NPC, Investing for Impact: Practical Tools, Lessons, and Results, 2015. https://www.thinknpc.org/wp-content/uploads/2018/07/KLF_Investing-for-impact_FINAL.pdf

[7] Heron, Expanding Philanthropy, Missionrelated Investing at the F.B. Heron Foundation, https://www.heron.org/sites/default/files/Expanding_Philanthropy_Mission_Related_Investing_at_the_FB_Heron_Foundation.pdf

[8] GIIN, Impact Investing Guide, https://thegiin.org/assets/documents/GIIN_impact_investing_guide.pdf

[9] McKinsey & Company, Private Equity and Principal Investors, https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/a-closer-look-at-impact-investing

So You’re Interested in Korean Startups?

The one I think most VCs outside Korea might start looking into might be Crunchbase— like this site here on VCs. It shows some acquisition history and the overall landscape, but not much.

Where Korean VCs and startups look into who invested into where is called thevc.kr. Yes, it is in Korean, but with a Korean speaker, you can look up any fund, who invested into where, and who are the hottest VCs are, and even filter by the technology, geography, and the stage of startups to get the latest funding round news. This is the site I recommend. This is a nice map to view the listings of angel clubs, communities, and foundations. Another place you can view a list of recent funding investing news is at Venture Square, run by a media startup.

To look other thematic funds in Korea, check out FundFinder. If you need contact information to the fund managers, here is a list of directory on KVCA. In Korea though, cold call or messaging almost never works. It is usually done through mutual connections or introductions.

Okay, now you need some templates and forms to begin.

  1. Korean Venture Capital Association guidebook for both startups and VCs. It’s an amazing resource. Definitely bookmark it.
  2. START Docs for early-stage Korean startups. Co-written by 500 Startups. You can log in your numbers, and you’re good to go. It’s been reused and vetted many times, so they’re pretty standard.
  3. ModuSign These are docs for between investors, MOUs, you name it. It also has a quick explanation next to it, so it’s quite good.

Bon Voyage.

How Venture Capital Impacts Defense: Conversation with Peter Thiel and Josh Wolfe

Harnessing and Securing American Innovation: How Venture Capital Impacts Defense

Josh Wolf is a co-founder of Lux Capital to “support scientists and entrepreneurs who pursue counter-conventional solutions to the most vexing puzzles of our time in order to lead us into a brighter future. The more ambitious the project, the better—like, say, creating matter from light.” Peter Thiel is a co-founder of PayPal, Palantir Technologies and Founders Fund. Plantir is an In-Q-Tel and Founder’s Fund-backed company.

Peter: By my count, there are only two companies that have been started since The Cold War, that are (1) focused on national security, and (2) have reached a billion-dollar valuation: SpaceX and Palantir. [4:00]

Peter: A lot of innovation gets driven by smaller companies. This is absolutely critical. When not many people are doing it— if you are one of the few who do it— there is a lot of opportunity. [4:25]

Josh: Strength comes in part from technological dominance. Technological dominance comes from brilliant engineers that are inventing cutting edge technologies. [6:20] 

Josh: Palmer Luckey, Trae Stephens, and Brian Schimpf [founders of Anduril Industries] are authentic engineers that are obsessed with technology. 

They are constantly thinking about: 

What does the warfighter need? 
Where is the white space? 
Where is the gap? 
What is China developing? 
What is Russia developing?
How can we put them [US warfighters] with the most cutting edge technologies out there?[6:35]

Josh: Many of these people [those inventing new technology] were inspired by Science Fiction. They are literally going back— 20 years into the annals of comic books and sci-fi movies— and saying it would be amazing if we had that. [7:00] 

Peter: If you can’t create a business that is worth a billion or more the venture capital model does not work that well. If you start a company that is worth $30 or $100 million that can be quite successful for the person who started that company. For a venture fund if that is the best we did we would be out of business. [9:40]

Have Palantir and SpaceX created a template for other startups to follow with the defense space? [Peter]: Well there is certainly proof that it can be done. In both cases, it took a wickedly long time. Close to a decade to start getting significant contracts from the US Military. In some ways, they were not conventionally venture fundable. [10:20] 

Josh: It helps to reduce market risk. You will have a lot of venture capitalists that say you are focused on the defense industry. The stereotypes of the defense industry are that the defense industry is slow-moving, bureaucratic, very political, they might not pick the best technology, they might instead give the contract the company they have been working with for the past 20 years, etc…So whatever you can do to eliminate that risk [is good]. [If not] It is like we are fighting with ourselves by not equipping the warfighters with the absolute best technology that is coming from some of these early companies. [14:30] 

Josh: The origins of Silicon Valley were in electronic warfare and defense. There is an aversion for people to want to work on defense-related things. That is a zeitgeist that is growing. [21:30]

Josh: I think there is a job society can do —and that is the retelling of a narrative that can galvanize some of the best and brightest to work on American defense. [23:10]

Peter: There is always this danger for a tech company to become overly bureaucratized. [29:49]

Josh: The one real edge you can have as an investor is a behavioral advantage. For us [at Lux Capital] that means having a longer time horizon than the average investor. We call this time arbitrage. If the average investor is looking for a signal of success in a year or two— and we are looking at something that might not give us a signal for 4 or 5 years —then by definition there will be fewer investors looking to fund what we are funding. 

The valuations will be lower— and if we are right —the returns for us and our investors will be higher. So we like to look at things that are further out which means they are riskier and more improbable to work. But when they do they work in a really big way. [30:46] 

A Chat with Team8, a VC from the Israeli Intelligence Unit

I was fortunate to tune into a conversation with Liran Grinberg the Managing Partner of Team8 Capital, a global cybersecurity VC. He founded Team 8 in 2014 with the former Head of Israeli intelligence unit, 8200, Nadav Zafrir.

Team8’s company-building Foundry model de-risk process to venture investing, which is a process of “co-founding and serial-investing.” This led to serial investing into enterprises such as the creation of Sygnia ($250M exit with x60 return in 3 years) and Claroty, the world’s leader in Industrial Cybersecurity, backed by Rockwell AutomationSiemensSchneider ElectricGeneral MotorsBMW Group and more.

Here are three main advantages to having 8200 as the backbone of Team8.

So what is Unit 8200, and how does it contribute to the success of Team8 Capital?

  1. Level of talent is high. In Israel there is a mandatory service, and Unit 8200 is an elite military Israeli unit. The Team 8 leadership had access to the 1% of the 1%, those who had can new companies or can help build new companies. They were security entrepreneurs, cyber operating partners, and top talent from the largest unit within the military.
  2. Training is high. They start practicing leadership at a young age in the military and in technology. Under Team 8, under the Cyber and Data division, they build products and services to protect from cyber threats for data at scale.
  3. Culture is failure-tolerant and bottom-up. As 18, 19 year olds, they military entrants have their first year, second and third year to experiment with their new ideas each year. The graduates of the 8200 naturally fuel the tech ecosystem and the “startup nation.” 

Another really interesting aspect to the model of Team8 was the venture-building model and the formation of the “Team8 Village,” a critical mass of mass of talent through which a platform- they built out a process for entrepreneurs, engineers, and the investors.

Instead of focusing on commercial innovation, Team8 geared attention to the VC world and the intersection of academia, inventions, and startups and how to enable the backbone of startups to be more influential. As incumbents, enterprises have a lot of resources and access to the markets like understanding of the customers, they are bureaucratic and it is hard for them to innovate. Startups solve very concrete problems. They don’t have much resources or any research capability, and the success rate is very low. So Team8 chose to ask –  how can VCs act as a platform to solve difficult questions?

Team8 helps enterprises digitally transform. The companies or LPs become strategic investors.They don’t often have the muscle power to build something from scratch. So therefore, they passively help build the model to impact the type of problem to invest in the company.

For a gate of four hours, Team8 brings a challenge and companies together with engineers and the leadership. They bring together companies without lack the technical domain expertise from different geographies with a similar problem. For instance, they brought together data scientists and enterprises that 2 entrepreneurs usually would do in the garage. Team8 then conducts technical due diligence to help them grow.

If the problem is big enough, they build the company from scratch. They have 12 companies so far. This whole model – the platform team, village, the process – the investors, and everyone – has de-risked the investing process. 

Liran began working closely with founding teams on the ideation of Team8’s first companies, including Sygnia which was acquired by Temasek for $250M, and Claroty which is backed with $100M in funding, alongside Illusive Networks, Hysolate, Curv and more. Liran then transitioned to build and lead Team8’s Go-to-Market Group across its marketing, business development and market research functions, alongside the formation of a tightknit community of hundreds of C-level executives from the world’s leading enterprises. Combined, the two initiatives have become a powerful and differentiated advantage of Team8 in accelerating the success of its portfolio companies. 

His venture-building model with Israeli’s top talent is not only tackling the world’s greatest cyber security challenges, but also the backbone of the startup nation Israel is today.