ON THE RECORD

What is the rationale for your military technology investing strategy?
If you look at what's going on around the world, in places like Afghanistan and Iraq, you see the downsizing of military forces and the move to smaller and more mobile units. The key dependency of these units is technology that provides them with timely information via dependable secure communications.

In terms of where the innovation is happening in the aerospace and defense marketplace today, most is coming from small companies, typically in the $15 million to $100 million revenue range. As these companies grow, what they tend to run into is a need for capital and for additional experienced management.

It's a very fragmented marketplace, growing exponentially. Most of the opportunity to create significant investment value is in smaller companies. We want to bring some of those companies together and grow them organically over a long period of time.

what are the hottest areas in military tech right now?
We happen to focus on three that we believe have the best opportunities for investment. The first is secure communications. Whether it's in the Department of Defense, national security agencies or law enforcement agencies, the requirement for increased technology in that space is growing exponentially. The second is detection and surveillance. When you think about border security, being able to see what's happening from an electronic intelligence perspective is very important. The third is command and control advanced avionics that specifically relate to unmanned vehicles. These companies aren't necessarily building the vehicles but they're developing the underpinning technology that allows them to be more effective.

You have a lot of former military personnel on your team. How do you leverage that experience for your portfolio companies?
What we look at as we put the companies together is, “what are the key things that we need to bring to the table?” Obviously one of those is an understanding of base technologies. Number two is operational experience. But we also have the relationships in the respective markets that we invest in, whether it's law enforcement, national security, or Department of Defense. Some of us have come out of a military background, some of us have spent a lot of time in law enforcement intelligence. It's really important to understand the problems that need to be solved for the end users of the products that your companies provide.

How has your own experience at IBM shaped your investing?
I think having had the opportunity to work at IBM in a multitude of different areas gives me an opportunity to understand the challenges that these companies face. It's given me the ability to understand the technology issues, but more importantly I can advise these companies as they grow and work with larger entities. As an example, most of our small companies ultimately partner with a large defense contractor like General Dynamics, Lockheed Martin or L-3. When working with those large companies you need to understand what problems they're trying to solve, so you can guide your portfolio companies into building better relationships with them.

What are the specific challenges of investing in military tech?
Some sectors, like detection, are emerging and so you have a lot of different technologies in the marketplace. In addition, the companies that you're dealing with typically are under $50-$75 million in revenue, many of them are $15-20 million in revenue, and they typically do not have the normal financial and operational controls in place.

Many are also heavily skewed to one customer or contract, so you have business concentration risks. When you buy such a company you really have to execute a diversification strategy in the first year to minimize your risk.

I understand you're collaborating with Guggenheim Partners, the Chicago-based financial services investor, on a new fund. What is the current status of that fund?
We're getting ready to announce a first close on the fund over the next 30 days. Guggenheim is our lead investor, and they've been a phenomenal partner to work with.