#3 James Cross, Founder of Silicon Valley Defense Group and Co-Director of Private Investments -Franklin Templeton

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James Cross is the Founder of Silicon Valley Defense Group a non-profit focused on National Security and Innovation. As Co-Head of Private Investing for Franklin Equity Group and Managing Director of Franklin Venture Partners he specializes in investsing in private opportunities with mid- and late-stage companies that the firm believes are poised for transformative impacts across multiple industries.

Introduction: Welcome to building the Base a unique discussion focused on shaping our future national security industrial base. During this pivotal time in our nation's history for over 40 years, the nonprofit organization, business executives for national security or BENS for short has brought senior executives and best business practices from across our country together to address our nation's most.

Security challenges. The BENS mission is more important now than ever before. Ben's is embarking on a historic project, gathering the best ideas and minds together to define the future industrial base that the United States will need to remain secure and prosperous for our future. And now you have the chance to be a part of it.

It's a daunting task, a task the United States has not had to do at this scale since World War two. But it’s also a historic opportunity. An opportunity to leverage new technologies, new business models, new ideas, and new voices to improve our country for the decades to come Hear from top entrepreneurs and leaders from high tech, financial, industrial, and public sectors, as they share their ideas and perspectives about how we can all work better together to ensure our national security and prosperity.

We are excited to have you here with us. Here to begin. Today's episode your Hosts long time Ben's member and leader of the Benz technology and innovation council, Lauren, Bedula and former chief weapons buyer and innovator for special operators, sailors, and Marines. And now Ben's distinguished fellow Hondo Geurts.

Hondo: Hey, welcome everybody back to building the base here. We've got another awesome guest this time, as we talk about what should the future of America's industrial base look like? How are we going to get there and hear from experts that are in the trenches, thinking about this acting in the system every day and helping us shape this.

Lauren: Thanks Hondo. And today we have a really interesting. Who's coming at the issues we focus on really from an investment perspective, James Cross has been at Franklin Templeton for over two decades now and spends a lot of time looking at venture capital from many different perspectives, including defense applications, dual use technologies, and some of the issues we've hit on. in previous conversations and James is also the founder of a group called the Silicon Valley defense group. So, we're really excited to talk about your vision there, James, and the work you've been doing at SVDG as well.

Hondo: So welcome James. Hey, everybody's got a story of kind of how we got to where we are.
And, you know, part of this is, is hearing everybody's story. What got them to this. Some interesting things along the way. And so, you know, before we dive deeply into this very complex topic, what's your story, buddy? What so, got you to sitting here with us today?

James Cross: Awesome. So, I grew up on army bases and I'm a redneck from west Texas who accidentally ended up on wall street doing defense investing.

So, a little bit of an odd. I had a few what in hindsight appear to be geopolitical near misses along the way too. I was at the Pentagon the Thursday before nine 11 launching my coverage for my new wall street research job in aerospace defense at my day job, Franklin Templeton and a few other similar things growing up as an army brat, which I, I don't necessarily recommend it wasn't too bad, but it was I didn't know what I didn't know until much later in life.
So, 20 something years on, on wall. Mostly doing aerospace defense and industrials worked on a couple of portfolios and just, just around the military from a wide variety of perspectives, of course that whole perspective changed on nine 11 and then nine 18. When the markets opened up defense, aerospace defense had been a backwater on wall street for 10 years.

And then of course it became a high-profile sector and I just sort of stumbled into this policy stuff on accident. We'll talk a little bit later about the Silicon Valley defense group kind of origin story. It seems like every step of the way, I just kind of found myself in these settings in the middle of something and.
Tried to help out here and there. And one thing led to another. So, and then that's how we got in this room, I guess right now

Lauren: love it. And it's interesting. We have this theme of family mentors or stories that have made folks like you so passionate about the defense space and eager to be a part of it.

So excited to talk about that today, but before we do that, I think many of our listeners aren't familiar with how venture capitalism works in. Just the purely commercial technology sector. So, I was wondering if you could talk a little bit about your sense of that part of the ecosystem and how it operates and what you look at when you're talking to companies and looking for investments in technologies.

James Cross: I think there's a couple maybe misunderstandings about the venture ecosystem from the policymaker side. Let me just think about a DC. West coast, but maybe a real quick 1 0 1. One thing that's misunderstood is most of this money that's being managed by venture capitalist is like, and pension money from public employees.

So, this like firefighters and policemen and teachers and that sort of thing, and the VCs are managing a pretty small piece of that pie. It's like 15 or 20% of like CalPERS or Texas teachers, retirement systems overall pie. And they're trying to generate returns for these folks for retired. And I think one thing that policy makers scratch their head about is why are VCs so aggressive?

Why do they always try to make so much money in these investments? Why are they always chasing a 10 X or a hundred X? Well, that's their job. And that's what their clients are asking them to do because it's the small piece of the pie. The supposed to be hyper aggressive. I mean, they've got 30 or 40 or 50% of these things in municipal bonds that go up 5% a year.

So, this is, this is one slice out of the alternative investment part. And they're supposed to change the very highest returns take the most. And get the highest return. So, on average, a VC funds looking to triple the, the fund over the ten-year life of the fund, they invest for five years and then they harvest for five years.

And so, to do that, they've got to chase a 10 or 20 X in each investment. Cause some of them are going to go to zero. So hopefully that frames a little bit of why the aggressive nature of the investment specialization. Most PC specialized by stage some specialized by industry or focus mode. A lot of them are generalists.

So, there's early, mid, late. My team mostly does mid stage and some late stage, I think a second, maybe misunderstanding by policymakers is they, they say, well, we need to find some new technology to meet some new need or some emerging innovation. Let's go to VC. Let's go, go to the VCs out in Silicon Valley and find some new tech.
Well, the VCs aren't looking for new tech, they're looking for amazing new businesses that are going to become. And the tech is just an input and maybe some of its super innovative, maybe some of it super disruptive. Maybe it's just a new idea for a better way to do business. Like, like an Uber. I mean, in reality is that tackers, it's just a better way of organizing transportation.

So, the idea that VCs equal awesome new TAC yeah, maybe, but really, we're spending our time like awesome founders, big market. I think it was a throughput model. Tech is just the beginning, but it's gotta, you gotta build a prototype. And then you got to wrap a big, a real business around him with great, you know, great leaders.

And then it's gotta be driving into a massive market or a total addressable market. We call TAM locally has got some barriers to entry and great unit economics. All of that has the line up to get those 10, 20, 30 X returns. And the tech is just one piece of that. If that makes sense. So, hiring a bunch of scientists to go reverse engineer IP does not necessarily make a VC make.

Our strategy generally is we're looking for emerging category winners, and we are trying to put as much of our clients’ assets, the work at that magical moment where we've got a new confirmed winner or a highly probable winner. And it's hard to know when that magic moment happens. So, you can go a little earlier stage and try to get lucky.

And, you know, maybe there's this, you've got confidence intervals around your projections and your 10 or 20 or 30% confidence interval, smaller checks. If this company is cranking 50 million of revenue, they great, great, great growth at their current clients. Good gross margins awesome growth rates.

And there, you know, you've got a higher probability of identifying your kind of a new category winner. So that's sort of our investment philosophy. We try to identify the top 10 or 20 of those in big Tams and chase them and compete.

Hondo: It's interesting how many people think they understand, but don't understand. I mean, I even count years truly, you know, you, even in the last couple of months, learning that, and it's hard then to respect or put things in context, when folks don't take the time to get fundamental understanding and from understanding.
Trust and respect. And from that, you can then unlock opportunities. And so, you know, I, I, I think of you and, and the origin story of Silicon Valley defense group and, and how this all came about. And I think one of the key elements of that was to try and get some more, you know, combined understanding or shared, understand.

So that then there could be some trusts that, that went, that would then open up opportunities. So, take me back to that time in a, in a certain senator’s office and, and kind of how you started down this path from very successful financial manager to starting up this a really interesting, innovative non-profit

James Cross: sure. I, I feel like we kind of date the beginning of the Silicon Valley defense group to a certain day in 2015, where I was sitting in Senator McCain's office on his couch with one staffer Bill Greenwalt who's the founder in reality, I think it, it really started on the Thursday before nine 11.

So, there was this prelude and there's some other founders involved with us for along the way, working wall street and national security at that time. So, we were absorbing lessons around private capital and national security you know, working on things like JUONS I think, you know, a Joint Urgent Operational needs statement is etc.

So, a good friend of mine introduced me to the Senator and I went to visit and I didn't know what I was going to talk about when I got in the office. And it turns out Senator McCain wanted to talk about how DOD needed to work better with Silicon Valley. So, I'm sitting on the couch astounded. Well, sir, I I'm a defense investor and I live in Silicon Valley and I just launched a vendor.

Platform what can I do to help? And so, he said, Hey, work with my guy, bro, Bill Greenwald here. And one thing just sort of led to another. So, bill called up a couple months later, said, hey, can you put together a round table with some startups and VCs? We've got some questions off the Senate, armed services committee staff, and we'd like their perspective.

So, we did it and I hosted it from my Franklin Templeton's offices. And I thought, well, maybe we. Capture what everybody said, put it out anonymously, write a white paper. And I realized what we can't put the Franklin name on it. That doesn't make any sense. So, I just made up the Silicon Valley defense working group name on the spot, and it was pretty bad name.

Nobody likes it, myself included, but we hired a consultant to help us rename. And that's how we ended up with a Silicon Valley defense group paid $10,000 to drop the w a S. That, that kind of went on. I don't know, 12, 18 months I met the whole office staff. We're still involved with most of those people.

Chris Brose, Sammy Hiller, Drew Trojanowski Pablo. So that was awesome. Got, kinda got passed around. That's some SAC- D folks got into Mac Thornberry office. The awesome and honorable Mac Thornberry. Who's now an advisor to the Silicon Valley defense group. He was just outside the room there a minute.

Started working with the HASC bounced over to the Pentagon, got introduced to like DASD for MIBP Eric Chewning at the time. I ended up working with DIU a lot Gen. John E. Hyten when he was at STRATCOM, did some stuff with the chiefs CAG. And it just seemed like there was always like responding to an inbound request.
So, for four or five years, the first for four or five years of our lives, it was a volunteer ad hoc. Kind of ran it in the part-time and w when, when I had spare time and just trying to help out, and it just kept growing and growing, growing finally, when, when COVID hit, some friends said, hey, it's time to set up the 5 0 1 C3.

They donate a small amount of money. And then we went, did what turned out to be a pretty, I guess, interesting. Five-week a webinar in the middle of COVID Eric Schmidt Will Roper General Votel Malcolm Turnbull, former prime minister of Australia, Hondo. You were on there. We had Seth Moulton, a bunch of great folks over.

Five weeks from CEO's and VCs, and just kind of talk through hunter. What I think you talk about what is, what does right look like in the future when we get to this new defense innovation, industrial base, I think it's both, by the way, we're very pro what people call traditional industrial base by the way, we're not, it's not a revolution here.
It's an evolution we think. So that went well. I raised maybe 500 K out of that. People were awesome. Totally supportive from all the community’s finance. Government corporate. And we were able to hire, you know, Sam Chubb's greater as our executive director with that and start and just get launched.

So here we are about a year and a half in and got three folks now on staff, a bunch of awesome volunteers, partners, advisers just seems like we're kind of filling a gap and there's a lot of demand for. Crowdsourcing policy ideas from, from these, you know, tack and finance experts. So, we'll see where it goes from here.

Lauren: So, you've talked about a number of things, whether it be watching wall street, pre nine, 11, and post nine 11 and looking at the industrial base and the evolution we saw on that front. And even from a security perspective, too, like looking at the past 20 years. Evolving from CT to China, Russia today, what's going on in Ukraine.

And even when we talk about this cultural division between Silicon Valley and the defense and national security world, a lot of that really came about because of the Snowden disclosures, but I'd argue we're in a much better position now than we were five years ago. And when you talk about SVG and this interest, I think really signals.

Need for collaboration, but also appetite to support mission, appreciate defense from more of an operational perspective. So, so much of our country's security and prosperity. When we talk about wall street and just economic security are directly linked to the industrial base that grew out of World War II.

And as we look to the future and this changing threat landscape, it's really clear that we need to build the industrial base. That'll help us maintain both security and prosperity. That's why I think your perspective is so interesting here and not over rely on the one from the past. And so, from your perspective, and really the financial sector and where you sit how, how should we approach this challenge, especially when it relates to the venture capital community and the types of companies you're interacting with on a daily basis, because you're really looking over the horizon from the technology perspective and what will work.And we're trying to kind of marry up that with the threat perspective.

James Cross: Yeah, it's a complicated question. It might be even characterized as a wicked problem. There's only one thing I know, certainly with certainty here and it's that, I don't know the answer to the question you just asked.
So, I've got. Two things to try to answer it. One is a, an idea of framework I've been toying with that we haven't really talked about that I'll throw out and love to see what you and listeners think of it. And number two, Silicon Valley defense group, what we're doing in this new phase of having resources and staff is trying to shift from just crowdsourcing ideas to.

And trying to do it in partnership with our sponsors and a cohort of companies. So, this effort is called the academy. We just wrapped up three days here in DC. About a three-month program of taking 10 to 15 super well back commercial tech companies. They've got minimum viable product and commercial side.

Good, good revenue momentum. And they haven't gone into the DOD market yet. We're walking them right up to the front door of the market to help them decide if they want to go into. And at the end of this journey, we'll be down in San Diego for three days, engaging directly with real customers. So SOCOMs the fleet and war fighters, SOCOM guys.
And it's going to be really neat to see that happen. I don't know if it'll work. We spent three months helping them think about this, look at partners. But I'm hoping to learn more about why it works and why it doesn't work and capture the lessons learned. We're parting with Institute on global co-op conflict and cooperation.

Good friend and adviser tie. Chung's helping out on the academic side. We want to capture this and turn into white papers and case studies open source; help lower the barriers entry. So hopefully somebody in, in that journey, figures out the answers your question on how to get emerging tech down, down range.

And that's what I'm really excited about with SVG first five or six years, we'll keep that going in the policy side and crowd crowdsourcing ideas. Now I want to roll sleeves up and get this community especially the entrepreneur. Out more towards the front lines, more towards the users, figure out how can we deploy out there and, and have the, the ultimate customers kind of have their voice in this community.

Cause I think that's the one that's missing. We've got policymakers, senior leaders, political appointees, the hill every kind of, you know, wall street and VC talking about. You don't see a lot of uniform users in the community. So hopefully that's something we can help with. The second idea I I've come up with, I think it's called emerging tech readiness and there's three parts to it.

The first principle here is we don't know what new piece of tech or innovation or disruption either that we will need, or we will need to be countering. And I think that was one of the lessons of the post school, cold war period to tie. Which was, if you read all the national security strategies and whatnot in the planning documents there was no description of the need for a capsulated blast proof V-shaped whole truck.

And yet out of nowhere, we blew $20 billion because we needed the field these overnight to counter a new threat down range and lo and behold, and this is something I really find fun about talking to the defense innovation mafia. Everything we talk about is dual use and as VCs, well, you know what this used to be called commercially developed military qualified CDMQ, and it was the wall street, private money 03 and 08
and the dream came true for five years.

There was money for everybody. The bureaucrats got around all the rules. And if you had something that worked and went down range, you can get funded immediately, regardless of the far. And it worked so well, people started going public and having. And you try to explain that to the people today.

Oh, no way. That's never going to happen. We're never in a, you know, when there's a need, the DOD will figure out how to get cap, you know, get tie funds to the right people. Some of the things I learned in there is what made me think about this emerging tech readiness. So, if you buy off that, we really don't know.

Well, we think we know it's AI, so we've got the Jake and the Jake's doing great stuff, but we don't exactly know which situation we'll use and which, you know, which capability. So how about we step back and we just say, okay, we don't know, then we need to be ready when we do know. And so, there's three parts to that.
One is the, and this is where SVG can help. It's the community of the founders, the venture backers, the members of the board, the advisors, the retired bras that come out and get on these boards. If you look back at oh three to eight timeframes, and there's a great book about this called marketing so, the MRAP a lot of the providers of new tech in oh three and oh eight, they weren't ready and they didn't have connectivity to the DOD.

The executives in these startups, hadn't thought about national security. They hadn't, they didn't have a military background necessarily, so they weren't ready to sell in. Right. So, let's get that community like what we're doing with the academy, get them educated up, helping them think about how you sell a market and do business.
Number two would be given them connectivity to the policymakers ahead of time. So, they've got the network of relationships, you know, businesses, all relationally driven in spite of what the lawyers over in the Pentagon with. And then the third thing is having the policy pieces and the funding mechanisms already in place and functional.
So then when we know what the tech is and the innovation and disruption we're grappling with, and we've got the people ready to go, we've also got the mechanisms to leverage it faster. And if you study the MRI program, there's a two-year delay from when the first operational vehicles approve their capability before they got down range and volume.

And this lack of readiness. Hindered the flow of dollars and deployment. Cause some of the, some of the startup companies who had the IP, they just didn't know how, again, it didn't know how to deal with the DOD as a customer. So, you fix, fix all that in advance and then you've got pots of money and program offices that can scale.

They don't have to have. Capital right now. I mean maybe a hundred million, whatever it is, maybe 500 million. But when we know what that thing is, and we need to go to a billion to 5 billion and we need to do a rapidly, you've got the staff, the bureaucratic processes and the funding mechanisms in place ahead of time.

So, you can move at speed. So that's sort of this idea of emerging tech readiness. I know, and he's a lot of thought that was pretty long winded, but I think is where we're trying to drive our policy discussions towards.

Hondo: Yeah. I mean, it's you know, in my old SOCOM, rural special ops world, right. Plan for the unplanned.
You don't know what it's going to be, but that doesn't mean you can't start getting all the right mindset, all the right talent, all the right procedures in place. And then you just pivot that to whatever the challenge is and customize it for that challenge. And that kind of brings us to talent. And, and again, it was interesting when you were talking about what venture capital looks for.

One of the things that I've learned here in this last six months, is it's more about, is that the right team to execute this program then? Is that the right technology to get it done? The technology is almost like an auntie. You've got to have the technology, but just having the technology is, is not sufficient.

And so, and I'm sure you're sensing from your position there, kind of this war on. Or a, you know, scarcity of talent, I guess, maybe different than war on talent, the DOD struggled. I think you know, in the past of being perceived as bureaucratic, do you, how do you sense, you know, one what the talent level is kind of for this future industrial base?

How do we work together to both generate it and then? Deploy it in, in the most effective way possible.

James Cross: Wow. I, I have no idea that is such a huge question. I, this is a horrible answer, but I think it's first principles. I think it's civics almost. There's not a great understanding of I've got two teenage daughters, so I've got, you know, a focus group of two.
Well, they grew up with the military geek dads. So maybe not a great focus group, but there's no understanding. The need to secure and defend the democracy, culturally, socially, and militarily. That's what that's last by. I think the millennials I may be the Ukraine situation is their version of nine 11, obviously a different, but probably impacting their thinking and kind of waking them up to the idea that there's bad folks out there that do bad things.

It definitely was nine 11. Did that for the previous generation. So, a better understanding of geoeconomics and the techno then? security competition. After that, it's like, I don't know, make the, make, make a di digital equivalent of special ops and fighter jets. Like every kid grows up wanting to be, you know, Greenberg.
Navy seal team person or, you know, fighter jockey is there a digital equivalent? And I think the last thing is we need better connectivity from the new tech and big tech, big tech side of the business community, which I think is a new they're new members of the defense innovation, industrial base, and the, and what is considered the traditional defense industrial.
Huge opportunity for Benz in the Silicon Valley defense group. They're a free plug for our mutual organizations that, that connectivity those relationships, they don't, they're not organic and they don't exist really at scale the way that the traditional, the primes and SIS and whatnot have. So, I think there's a huge opportunity to build that out kind of, as you know, especially post Ukraine, the thinking in the valley and among the tech industries, there are.
And I think one of the things we're hearing out of the conflict is commercial tech was first in, in a lot of ways from the, from the NATO and the American side. Cause, cause Gulf tech couldn't go in and it's working and I'm hearing more and more stories. I think we look forward to getting that feedback and, you know, national security leaders had been, have been, you know, having trouble, trying to convince our democracy.

That the China is this scary adversary. We need to do something about at the societal level. Like people just don't care, they don't get it. You know, the Ukraine kind of crystallized that. Maybe we need to think about that a little more. So, we'll see where that goes. But I, the, the war for talent, I, I really don't know.

Hondo: Yeah, but I think, you know, both of your points of my sense that, you know, there are a group of talented people who are not just purely financially motivated. You know, you get a little bit in this, you know, every generation, the last generation was the last great generation until the new generation is the next great generation.
And so, I've seen, I think it started even before it, but this idea of service and service can look in lots of different ways. You can know it can be in uniform, it can be in a commercial company doing important things. It can be in a, you know, a, a, a nonprofit or something. This idea of serving. And connecting things together to get the best outcome. I think is, is really, really interesting.

James Cross: I mean, one of the things we hope to accomplish in the academy is to enable inside large organizations, these entrepreneurs who want to say, hey, I think we need to add national securities in line of business. And I'm willing to take some career risks or pivot into that.
And I'll make all I'll, I'll make the. For there's a return. And so hopefully there's some of that. And from getting back to demographics in this millennials favor is this sense of that, that they need a mission. There needs to be a purpose beyond making money. So, I think that's the upside opportunity and let's be honest, the stuff, the national security, the TAC and the admissions stuff, the national security community does is just cool.
Like, I mean, can you play with hypersonics in the commercial world? Maybe at a few VC backed companies, but not really.

Hondo: Yeah. I mean, part of, you know, part of why we stood up soft works was really to, because as a percentage of the, of the population in America, declines that is either in the military or has a family member in the military, you get this chasm of just lack of understanding.
And then when you don't have again, back to this, you don't have good understanding, then you don't can't appreciate. Either side and then you get it's maybe not completely accurate sensors of what, who people are and what they do. And one of the things we did was, you know, software brought a lot of you are like, wow, I can work on cool things and support my country, you know?

Cause there was a sense you could either work on cool thing. Or go in the military, not that you could actually work on cool things that could actually help a nation's prosperity and national security. So, it's really interesting to watch. I think again, having watched the academy folks here, there are some great leaders in there trying to take risk and not just chasing the highest dollar potential job, because they want to figure out how to take this technology and bring it to bear for those.

James Cross: It's fun to watch them grapple with that in real time, like they're asking thoughtful questions. These are hard business challenge. You've got a good number of like younger kind of mid-career leaders, kind of almost like executive coaching going on there. And I'm want to note about I think about the Silicon Valley geography specifically the 4 1 5 6, 5 area code four late.

It's not anti-military, it's just non-military it's not there. And you've got, you've got Lawrence Livermore lab. You've got Naval postgraduate school, but they kind of stay there. I think like you just, we just need more, more bodies, more people engaging in what is a relational, transactional ecosystem.

That'll help a time. So always advocating for more resources, resources for DIU, more headcount, more funding Congress, if you're listening. And then also just a note on the Silicon Valley defense rule, we named it that, because that was sort of the origin story. Like I shared with Senator mix. Eh, w we're focused on this innovation ecosystem globally, and we've got partners on our platform in Boston, San Diego, we're growing in Austin.

We're having conversations to launch the academy in Australia and the UK. I mean, this has meant to support that, that if you go to our website, you see our vision statement, the support that you know, the democracy of ours and our allies. So, it's, it's, it's named that. No, we don't want to be identified just with like that region of NorCal. It's more about the tech ecosystem.

Lauren: So, James you've So, launched the academy because there's this increasing interest in doing business in the national security and defense space. And I think many believe that the best way to spur innovation is to really maximize the number of new entrances into the industrial base.

And again, there are so many companies who are trying to wrap their heads around this problem. And it's a constant between the communities I think, is that they like solving hard problems and want to contribute to mission. And so. None of us would argue against having this robot robust set of companies supporting DOD.

Right. But it's not clear the DOD strategy of giving a lot of small awards to lots of small companies has been successful to date. And some believe we're actually diluting opportunities by giving to small amounts of money to too many unproven companies. I'm curious what you're seeing on this front.

James Cross: Yeah. There's a lot to think about there. I like what the policy maker and the service that did the thousand children of light a strategy. I think it was good. And I think what Anson is doing in the super early stages. Good too. It helps with a societal thing. I mean, I actually think that maybe that's not talked about a lot, but having that said there's a, there's an imbalanced situation here.
I think we need more balance. So, the DOD has done an awesome job in the earliest. But we need to be balanced across mid and late. We need an F an effective throughput model. So, we need to figure out, you know, effective policy and capabilities. I think according to our analysis in the mid stage, I think what DIU is doing in the late stage getting, you know, taking, getting requirements from users and bringing them solutions from the emerging tech community and getting them on production contracts.

That's great. It's working pretty well. We published a paper in 2018 to analyze a lot of this balance stuff and found the gap is in the mid-level. I mean, what do early-stage companies need? They're trying to build their team and to get their minimum viable product on. So, they need intros and early feedback and customer engagement.
And I think the DOD has done a pretty good job without what the Naval axes and app works and whatnot. From there they needed to get the five to 10 million revenues pretty quick and get engagement from their customers. Proof of concepts out there. Beta Contra beta contract. And kind of be able to break through and get their funding to move towards scaling.

People call this the valley of death. I don't think there's been enough analysis. Okay. How do you build a bridge? A brick by brick across the valley of death. So that's an opportunity there. I think for everybody at the table so another one is geographic balance. And now that I just, you know, in the previous question, made sure to diffuse the idea that we're just too Silicon Valley centric.
Let me get Silicon Valley centric for a minute. This is stale data. This is 2018. We analyze the budgets and, and the, and the head count of all the defense innovation units, 91% of the budget and the money was in the national capital region. With, with army futures command and getting set up, Texas is going to rise at that an 18.

It was only 5% of total. DC had 91% and the rest was scattered. Well guess how much dual use venture funding went into the national capital region? About 2.6% of total. Austin got 2.7. I just saw some numbers for lash. Last year, 90 billion of deals went down in the valley four and a half billion, went down to Boston, 5 billion without at Austin.
So, it, if we want to gauge the specific venture Backed ECOS. We're not putting the most boots on the ground on the most funding, into the geography where the deals get done and the most startups are, and then working out to the other innovation ecosystem. So, it's kind of an odd bias. So again, I think the idea of helping DIU partner effectively with the services and be their representative and their trusted broker let's go capture the most capital that's out there from the private one.

Maybe if you have more people hanging out and getting beers at the goose with the VCs in Menlo Park might help. Oh yeah. I'll take my six, five, oh, hat back off. We talked about the stage thing. I think what would really help from a policy adjustment. Everybody knows this and says it, but incentivize the requirements, folks to inject emerging tech into the, into the planning of the, of the requirements and acquisition process early on, like just formally.
And I don't know, create the benchmarks 15%. It's got to come from non-trads non-traditional and redefine small business, by the way, that's another pet peeve. Small business policy should be, is very effective. And the funding's all there for the small business programs, but VC backed early-stage companies are not small businesses.
You can't use the same policy in the same nomenclature for these two categories. No VC invest in a small business in Boston, an early-stage company. That's going to get the billion dollars or. Does it need different policy and different mechanisms? So, when I hear somebody, I think this is you didn't ask the question, but here's one of the reasons I think TCM struggled.

You listen to TCM folks talk and they're conflating small business in early stage is that tells you, I don't know that they've listened enough to the target of the TCM, which is the VCs. They want us to fill out a bunch of paperwork which is another reason I don't think it works. And I'm, we're supposed to get something out of that paperwork.
I'm not sure what that is. Anyway, a pet peeve off
Lauren: And for our listeners. TCM is the trusted capital marketplace.

James Cross: And, and the last thing on this it's bad news the VC market VC funding has grown considerably in the last five years. It's quadrupled. It went from about 88 billion in the U S in 2017 to about 329 billion last year.
Well, the market's frozen right now. The NASDAQ's crash interest rates and inflation are on the rise, right? Valuations are stretched so much over the last two years, all this hot money in the market because interest rates are zero and COVID made everybody think we're going to digitize everything.

And the next two years, when it wasn't going to take 10 years, what's it's not crashing back to earth. It's just re normalizing. So, we might've had an ER, the, the era of the most kind of free VC money for dual use and national security that might be behind us, or it might temporarily slow. The SPACs the same thing, 3 billion.

Inspect cash was injected into the space companies through. It's awesome. It's on their balance sheets. It's there for the DOD and the IC to leverage, but the SPAC market's completely dead right now. So, there's, you know, that was a one-time event, maybe. So, I mean, these are the kind of things I think the DOD needs a permanent institutionalized office and function that has connectivity to the capital markets, understands them.

And. Prepared to help the acquisition community, leverage them when appropriate and it worked awesome. And oh, three and oh eight. There was a lot of lessons we could have learned and institutionalized. We didn't institutionalize. Unfortunately.

Hondo: So, one of the one of the things I've observed is, is kind of, you know, continuing to smaller and smaller number of bigger and bigger companies, lots of, lots of small ones, but whether you call the valley of death, not making it through their stages or what.

Having a challenge scaling up and, and, and growing. I know, you know, from your early comments venture, capital's looking for those companies because of their model or technology or people, they're all about scaling. And so, if, if a goal is to rebuild the middle of the industrial base which I think personally is very important do you think there's a way to better align the VC and DOD kind of incentive?

You mentioned a couple of things, but is that a, is that a dream too far or you think we just need to you know, spend some more time thinking through the flushing’s we had from and coming up with some concrete and a lot of talk, maybe not a lot of action. Take some concrete action to get after it.

James Cross: Yeah, it it's flushing’s it's hard to say the thing in the two thousand was there was just so much crap. There was so much money for. That it wasn't hard for the DOD to be a good customer. So that's the advice be a good customer? Well, when you've got infinity budgets, it's pretty easy. When budgets are limited or there's tension between different priorities, that DOD can still be a pretty good customer.

But it's just different. So maybe looking at the early-stage press forward and give feedback on the tech and give input and cycles as they try to find minimal Bible. Maybe pay for some of the engineering, knowing that as they get to the mid stage, you're not going to be that great of a customer because it's going to take you three to five years to get on contract.

Congress wants to help with that now with some of that bridge funding. But I do think the market is big enough that once companies get through to the late stage and they've had enough time to navigate to production contracts. There's enough revenue they're justified. I mean, the government's 20% of the global economy.

On average. And every diversified company will have 20% of their revenue coming from government. And defense is the biggest piece of that. So, it is big enough today. It's just a little slow. So, DOD needs to try a little harder to be a good customer. When, when the, when the, you know, what hits the fan like right now, I mean, the DOD is being a great customer to AeroVironment switchblades.

So, cause they're working really well and they need as many as they can get. So those times will come and go. So that, that kind of it's dependent upon, you know, what the, what the current situation is.

Lauren: So, we've talked a lot about the academy and interest in entering defense markets. Do you have any advice you'd give to listeners who might be trying to wrap their heads around how to do this?

James Cross: I think take a pause before you decide to go in and it study the market and develop a strategy before you hire your federal go tomorrow. Team or maybe your first one conduct that. And that's, again, the Academy's trying to help with that. I know we're not the be all end all, but that's, that's what we're here for on that project.

Don't hire your consultants and lobbyists and go recruit a bunch of four stars right off the bat. Develop that strategy and define some extremely narrow goals. Cause outside of like the Juul. Or if you're AeroVironment with switchblades today, it's going to take a while. It's probably going to take three years and count the cost, like be transparent to your executive team and your board and develop a realistic time horizon.

If after you've done that, it still makes sense. And you have a business case, then I think you can start to proceed. So, I think companies rushing too much because they are maybe they're patriotically minded or maybe they're run by military founders, or maybe they've got dual use VCs, whatever. I think it takes a lot more thought in strategic.

And by the way, do not deviate from your commercial product path by one, one inch. And if you do make the D make the government customer pay for it. So, I think the most common mistakes are hiring too many and the wrong too many people in the wrong outside help D C people too. I think another mistake is recruiting a shiny board, putting your time into that whether it's your advisory board or independent board of directors and you end up with, with like it little great on your website.

But a lot of times these retired senior flag officers don't know much about how an early-stage high-growth company works. For example, a or they're on 10 boards already, and they're not going to roll their sleeves up and help enough. And they just need to take time figure out the right folks to put in those positions.

So do it slow and get it over. And then once you've done all that do hire outside help. That's the last piece. This market is different. You don't just hire a bunch of salespeople, give them their geography and a quota and an Amex and turn them loose. You do need to hire consultants. You do need to hire X mill folks.

People have connectivity to the program. Executive offices, you do need to hire lobbyists. You do need to understand how Congress works. It's a different market, embrace their reality and get the help you need over time. You can in-source it. I wouldn't recommend that in that early.

Lauren: You know, I, I, wasn't thinking of it when I asked the question, but I think that's actually really helpful advice for policy makers and folks on the U S government side to hear too, so that they understand the investment.

These companies are making to try to go to market here too. And just more transparency on both sides or awareness is, is so helpful. And when we talk about advice so much of our individual success. It really in your case, you've had this incredible career. And I don't know if you've had mentors along the way, but I'm curious if you can talk about maybe examples of those that have influenced your career path and how you think about mentoring others, whether it's through the academy or more broadly speaking, because it helps as we think about talent and workforce issues, but also just this awareness and appreciation. Mission and prosperity and the likes. So, any, any good mentor stories?

James Cross: Oh yeah. And I got permission to give this first answer, so I'm going to get in trouble, but I, I want to start with my family, my wife and daughters first them just supporting kind of putting time into this sort of thing. And actually, my older daughter, Natalie was our first intern.
She built our website when we did those five webinars and raised the money. So. Appreciate that. And my wife now is helping me host salon dinners and recruit like staff. So, I really appreciate Kelly's support there. On the, on the executive side, a name you guys might not have heard of a guy named Harry Sloan.

He's the one who introduced me to Senator McCain. He's half Hollywood, half wall street guys probably made some cool movies. You've So, watched and he taught me how to think like a deal guy. So, see the big picture, identify where the massive opportunity. Identifies the three variables that matter the most to have a strong opinion about them and then go delegate everything else.

I love that I'm in DC, a couple of retirement Marine, three stars, General Emo, Gardner and General Robert “Rooster” Schmidle ironically F 18 pilot, just like Chubb's understanding how the, like the office of secretary of defense works, the bureaucracy Cape, how the budget gets. DC, the hill stuff.

Awesome. Tutors, I would call them my partners, Bobby and Ryan Franklin venture partners kicking my ass every day to be the best VC team we can be. Sometimes it's fun. Sometimes it's painful. My co-founders on SVDG, crystal, Donald. We call them Odie, Chris Donaghy bill Greenwalt and shrubs, our exact director, just like trying to make SVG better and grow it, you know, way beyond my capabilities.
You asked about. I don't know, those guys are going to do it all the board, the partners y'all I, I, you know, I know my limitations and I think we've met them clearly. So, and lastly, I just think the, the folks that are passionate about these issues, it's a fun community. Like the people, the people in the defense innovation mafia, and we all go to defense, innovation theaters together and, you know, watch the show and it's kind of fun.

So yeah, like it, it took a lot of folks. I don't, I think we got a long way to go and it's going to be a lot of people that didn't need to get us there at James.

Hondo: One of the things I enjoy most about you is a and I talk a lot about, is the power of curiosity and curiosity, when, you know, connected to humility and boldness can be a really powerful combination.

We first got connected. When I was in the Navy, struggling with trying to, you know, really break some of the code here and figure out what the, what the barriers were. And you were very gracious. You are curious and, you know, we had no contract, we had no working relationship. It was more, just some shared interests.

And I, and I find a lot of folks sometimes don't appreciate the value of getting out of your own. You know, whatever your cylinder of excellence is, your own community is learning from others and learning with, with humility and, and opening up new opportunities. And so, while some point, sometimes you need that laser focus on your business activity and whatnot.

Other times you need almost a completely invert that and have kind of no focus and mix it up with folks who are completely outside your circle. What's your, you know, I find you very unique because. You've been laser-focused and super successful in the financial industry yet on the flip side, when completely unfocused and, and, you know, engage across this broad ecosystem.

What's your, what's your take on that? Do you, do you see it the same way? And, and any advice you'd give for those out there who are, you know, trying to make their way and whether it's up the chain in our company or, or in their government organization or, or, or whatnot, what's your, what's your sense of.

James Cross: Ah, Hondo. I love this last question and I love the one before it and this was awesome. Really made me think. You know, and, and when we were working with you and chubs on that little council, I mean, it was the middle of COVID. We didn't know that it would turn out. Okay. We were in a panic. One of the main projects was we were afraid these, all these great VC backed dual use companies would go out of business because they're not, you know, VC funding in the middle of COVID.

It's like we were worried about like Saildrone and ocean Aero, when these. It turned out. Okay. And I haven't reflected on it since then, until you, till we, you asked this question I think meeting with you helped me see the problem and the opportunity from a hyper busy executives view who had to deliver value on short term time horizons with a bunch of bosses getting on these calls and you barged in and your Hondoing.

And it was like, I gotta do this, this, and I got this problem. And this problem, what do you guys think? Well, I mean, we didn't have time to pontificate. There was no time for theory, that was all useless. You needed pragmatic practical solutions and you were asking private capital guys for ideas. So that, I mean, that was just fantastic.
I think that was one of the more transformational experiences. The SVDG kind of staff and team has had collectively cause it, I think it really kicked us into gear to move towards orienting action first, you know, and, and, you know, we've got the academy now. I got some other things in the pipeline, but I, I, there's a real conviction out of that experience if you're not doing don't talk.

And then the second thing was, you know, your, your broader question kind of, again, a good executive coaching. I think defense, innovation, champs, like ourselves definitely need to get out of our comfort zones. And there's two people. There are two types of people we the need to engage with. And I, I w I would tell the folks that love our salon dinners.

We'll go get into, go get on a little thing, like Hondo, how with some busy executive who needs pragmatic answers, and you're going to learn a lot. So, get out into the actions. There's So, plenty of good ideas. We don't need any more good ideas and the defense innovation world myself included. And then the second one is gone find those people that you think should care about this, the future of the industrial base or whatever you want to call it.
And they don't care and go confront that, like go meet them. Why, why don't you care more? For policy makers, I would say go meet some of those VCs who do not give a damn and would probably tell their port CO's do not sell to the DOD. You're not ready to wait five. Go ask them why look in their eyes?

Like, why are you, why don't you care about this really important problem? Because I think it'll, it'll help clarify their thinking on our side of the table and it's not pleasant. But I think is gonna lead to more effective outcomes and more urgency, more focus. And that's, you know, we were talking earlier, like whatever the future is, we need to give our best guess of what that is. And let's start moving.

Hondo: Awesome. Well, James, it's been a fascinating dialogue here. I, I know it's a special treat to get you on Mike. You're not a guy that's on Mike a lot and going to appreciate your really super interesting ideas. I go back to this, you know, the most effective folks I have found really driving change, have that unique combination of curiosity.
They want to explore. They want to go learn new things. But they have humility to actually learn, like some people ask questions and they think they already know the answer. Others actually really listen and think about it and chew on it. And then but then, but then at the end take bold action. They don't wait for perfect, but anytime we can Kindle that spirit, which I think is kind of the American spirit to begin with and get it oriented towards useful outcomes.

You know, I, I don't think that's a fair fight for annual. I, I think that's exactly, what's going to allow us to continue to be secure and prosperous, but it's not a given it, it takes action. It's not a given. And I think Ukrainians help. Maybe some who haven't understood that it takes action to see that in a, in a very Frank and in your face kind of way.
So, thanks buddy. Appreciate you being here.

James Cross: Thanks Hondo, Thanks Lauren.

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#3 James Cross, Founder of Silicon Valley Defense Group and Co-Director of Private Investments -Franklin Templeton
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