Investor Spotlight - Marlinspike

NAME: Mislav Tolusic, Co-Managing Partner and CIO

COMPANY: Marlinspike Disruptive Technology Fund I (MDTF I)

FOUNDED: 2022

HEADQUARTERS: Annapolis, MD

TECHNOLOGY VERTICALS FOCUS: Aerospace, Artificial Intelligence and Machine Learning (AI/ML), Autonomy and Robotics, Cybersecurity, Space

PREFERRED ROUNDS: Series A & B, Considers Select Opportunities in Seed and Late-Stage

CHECK SIZE: $250,000 to $10 million

NOTABLE INVESTMENTS: Anduril, Privateer Space, Voyager Space Holdings, Elroy Air, Rendered.ai, Hypori, and Cambium Biomaterials

Background:

Mislav Tolusic is the Chief Investment Officer and Co-Managing Partner at Marlinspike. Prior to joining Marlinspike, Mislav was CIO and Partner at AIM13 | CVP Partners, an investment vehicle co-managed by Crumpton Global and AIM13. Before joining Crumpton Group, Mislav worked as a Senior Portfolio Analyst with Highland Capital Management where he was part of the distressed private equity team and focused on working with companies in industrials and aerospace. Prior to Highland, Mislav worked as a strategy consultant for Dalekovod, a Croatia-based transmission and distribution line manufacturer, where he worked on corporate strategy development. Mislav started his career at Airbus UK where he worked as part of the internal strategy team. Mislav has a Bachelor of Science in Aerospace Engineering from the University of Zagreb in Croatia. He graduated first in his class and was awarded a Dean’s Medal. He came to the United States in 2003 and received his Masters in Business Administration from Vanderbilt University. He is a proud American citizen, currently living in Alexandria, VA with his wife and two young boys.

Q: Marlinspike invests exclusively in companies with innovative solutions that are critical to national security. How did this focus become an important part of your investment strategy?

Great question and one we believe is pivotal to our national security. I have been watching the deployment of commercial products into the public sector for over 15 years. It started with cybersecurity and drones – the private sector developed technologies and the U.S. government was one of the customers. As new technologies proliferated in the private sector, our adversaries have taken advantage and are quickly closing the gap with regard to disruptive advanced technologies. Today, America’s national security is upheld by our technological advantage on the battlefield, and we want to keep it that way. We believe that a dual-use strategy is not only important to maintaining our warfighters’ advantage, but also offers an attractive investment opportunity providing the resiliency of the public sector contracts and massive scaling of commercial business. In 2020, my co-founder, Neil Keegan, began pressure testing our dual-use strategy through 11 investments which included Palantir, Voyager Space Holdings, Shield AI, Elroy Air, Red 6, and several others. It was during that time that Neil and I began discussions on building a team and designing a dedicated investment fund. We kicked off Marlinspike Partners in January of 2022 and have been running hard ever since. We have closed on capital and have a base of amazing limited partners which span family offices, multi-family offices, fund of funds, and others. We elected to simultaneously raise and deploy capital. So far we have invested into seven dynamic companies.

Q: To quote Steve Wozniak, co-founder of Apple and president at Privateer, “Marlinspike has redefined value-add investing.” What does it mean to be a value-add investor and how should entrepreneurs vet for this when they are seeking investors with whom to partner?

We believe the hard work comes after the check is written. We take a private equity approach to building our portfolio companies. We have an extensive ecosystem of aerospace and defense primes, U.S. government agencies, and investors. We leverage our ecosystem to help founders 1. lock-in recurring revenues, 2. improve the product and increase their technology moat, and 3. evaluate the products throughout development. We don’t tell our founders how to run their business, but we are a strong advocate when it comes to growing their business. Our thesis is built on rolling up our sleeves and actively helping founders solve their most pressing strategic problems. Our entire team is built to maximize the support to our companies. When raising capital, founders should look for investors that can add value and evaluate those investors just like investors would evaluate them.

Q: Marlinspike has some amazing companies in its portfolio - Anduril, Voyager Space, Rendered.ai, and Elroy Air to name a few. How do you source these investment opportunities and what do you look for when deciding to invest in a dual-use or defense-focused company?

Our sourcing is a mix of hunting, referrals, and inbounds. When we hunt for companies, we develop our market thesis and then look for the best companies in that industry. Our ecosystem also refers companies to us. Finally, we get many inbound emails from founders looking to get in touch with us.

We look at four key areas when assessing an investment opportunity: the strength of the team, the disruptive nature of the technology, the funding syndicate, and the potential for industry growth. If a company is solid in those areas, we dig in and begin our due diligence process. Our underwriting consists of a comprehensive evaluation of management, technology, strategy, and finances. We have a fairly robust diligence process, we believe we owe that to our country and our LPs.

Q: It is never easy to raise venture capital (VC) and the past year has been particularly difficult, even before the collapse of Silicon Valley Bank (SVB) and other regional banks. How have you seen these macroeconomic conditions impacting investment in defense-focused startups?

Yes, the macroeconomic conditions have been challenging over the past 12-15 months for companies and investors. However, as I mentioned above, dual-use technology companies tend to be uncorrelated to the broader markets and if positioned correctly can be resilient as well. The Department of Defense (DoD)’s budget continues to increase, with a record high request this year for Research, Development, Test, and Evaluation RDT&E and procurement. We believe that the continued challenges facing the U.S. in an unstable geopolitical environment will likely lead to continued increases to the DoD’s budget for the foreseeable future. As Secretary of Defense Austin mentioned in his recent National Defense Strategy, there are two threats: an acute one, Russia, and a pacing challenge, China. We do not see that changing anytime soon.

Regarding SVB, yes, it was a huge shock to the system and made those that are risk averse hunker down even more. That said, as the collapse was unfolding, consistent with our private equity approach, Marlinspike went to work. After canvassing our portfolio companies in the heat of the collapse, we drew down capital from our line of credit and deployed funds into two of our portfolio companies on favorable and fair terms. We made sure that all our companies were able to meet payroll and navigate any short-term liquidity squeeze. We did all of that well before the government signaled that they would cover SVB deposits. In good and in challenging times, we view venture capital as a team sport where we help and support our companies. We showed our colors as a true partner to our companies and as a seasoned fund management team to our LPs.

Q: Raising pre-seed and seed capital can be particularly difficult for defense-focused startups because traction is often limited to Phase I and Phase II Small Business Innovation Research/Small Business Technology Transfer (SBIR/STTR) grants. What are some things these companies can do to position themselves for success when raising the capital they need to grow? Is there a certain level of DoD traction or customer validation that you need to see before investing?

First, we are huge fans of the DoD innovation ecosystem. NSIN, AFWERX, NavalX, In-Q-Tel, Army Applications Laboratory (AAL), and Defense Innovation Unit (DIU) are all critical to startups and to national security. Not only does the ecosystem challenge and push early companies and provide non-dilutive capital, but it also makes funding available when a typical VC firm may still be evaluating the opportunity. This is critically important to keeping the companies growing, keeping adversarial capital off the table, and providing opportunities to improve and refine products. That said, the more that can be done to strengthen the path to transition early on, the better. Candidly, having a service program manager be involved earlier would go a long way to de-risking VC investment. All too often, companies stay in the SBIR lane too long and struggle finding customers tied to recurring revenue and programs of record. So while SBIR investment is helpful, I would say the trigger for VC investment in a dual-use company is tied more to DoD traction than the amount of SBIRs obtained.

Q: Investors often encourage founders to focus on commercial traction first and then come back to the defense market once they have reached a level of maturity where their business can sustain itself. What is your perspective?

It depends. In some cases, it is better for a company to engage DoD first and pressure test their product or thesis in the most challenging situations. For example, we believe Elroy Air made the right choice to seek DoD traction while the Federal Aviation Administration (FAA) regulatory environment is still evolving. “Time on the wings” will help Elroy Air navigate the FAA process when the time is right. On the flip side, a software company such as Rendered.ai, specializing in synthetic data, can run faster in commercial markets and expand into the dual-use ecosystem. The key for every company is understanding the available bandwidth, building a targeted strategy, and forming a realistic path to execution before trying to take on both markets, as both are demanding in their own way.

Q: What is the biggest mistake you see defense-focused startups make when they pitch to investors? What are some common traits you have seen in the most successful dual-use companies, within or outside your portfolio?

This is a tough one and not necessarily straight forward. First and foremost, the company must understand the defense or government use-case they are addressing. By that I mean, they must be mindful that the DoD use-case is complementary to their commercial use-case. Having a “forked” solution, meaning one solution for the DoD and one for commercial markets, will complicate speed to market and scaling in both lanes. Startups must have a focused product roadmap and adequate resources to execute the plan. Then, founders need to roll up their sleeves and convert their plans into reality. We always advise our founders to be mindful of a military saying, ”No plan survives first contact with the enemy.” We expect our companies to pivot a couple of times before they figure out their go to market strategy. Successful companies can successfully pivot without losing their momentum.

Q: Chip Walter, another partner at Marlinspike, previously led the ventures and partnership program at Northrop Grumman. He has encouraged major defense primes like Northrop to improve how they partner with early-stage companies. Over the last few years, several defense primes have launched their own venture funds or partnerships with other VCs. What role do primes play in helping the DoD innovate? Are these types of investment strategies heading in the right direction for improving how the DoD acquires innovative technologies?

Chip’s point was spot on, the primes have an important role to play in sourcing and scaling innovative technology, with the ultimate goal of getting technology into the hands of the warfighter as quickly as possible. It goes beyond simple partnerships and corporate venture capital programs. Ultimately, primes need to be a part of the innovation ecosystem. Primes understand the use-cases, government customers, and Congressional landscape better than anyone. Given their size, primes can also provide DoD customers with the comfort that they will not go out of business in the next 12-18 months. However, primes are orders of magnitude slower and less innovative than start-ups. As much as the DoD needs to continually reform its acquisition process and accelerate technology incorporation, DoD and primes must figure out how to integrate startups into the ecosystem. Starting point would be to review DoD’s incentives regarding the reimbursable nature of internal research and development and balance that against requirements for direct investments by the primes.