Hi everyone,
As you may know, For the Record is a monthly deep dive on one particular sector, thesis, idea, etc. And for this month, given, well, everything, we’re focused on defense. Putting his ideas down for the record is Ian Winer, founder of Center15 Capital.
Ian is a graduate of West Point and spent a career in investment banking working at Goldman, JPMorgan, and others, before launching Center15, which invests in growth stage defense companies. When I first sat down with Ian over a year ago, he told us that the defense industry was undergoing its biggest changes “since Vietnam.” And it seems like the changes have relentlessly continued since then…
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LESSONS FROM THE EARLY DAYS OF THE IRAN CONFLICT
Zeroing in on tactical strategic defense, Ian has some notable takeaways from the first 10 days or so of the Iran conflict.
The Math Doesn’t Work
There’s an enormous “asymmetry of cost” in “the way we’re defending against the drones and inbound missiles coming at various targets,” Ian said. Essentially, drones are now incredibly cheap, and the missile interceptors to combat them are incredibly expensive. At the same time, Gulf countries have ‘expressed concern’ that they are running short on these interceptors.
At a meeting in the White House last week, 6 defense companies (RTX, Lockheed Martin, Boeing, Northrop Grumman, BAE Systems, L3Harris, and Honeywell Aerospace) agreed to quadruple production of certain weapons, including interceptors.
The cost asymmetry isn’t a new problem, but Ian said the Iran war has hurtled it to the forefront.Stadiums and Airports Need Protection
The second big lesson Ian flagged is how critical it is to have counter-drone protection around commercial installations (which brings lesson 1 into even sharper relief). Iran has attacked multiple civilian infrastructure and transport networks, including Dubai International Airport.
“We have always focused on defending military targets, and I think that what this last 10 days have shown us is that commercial targets also need significant layered defense,” Ian said. “Everything from oil installations to potential nuclear installations to airports to stadiums.”
”We are woefully underprepared for that,” Ian said. “What keeps me up at night is the thought of how easy it is for a bad actor to control a handful of quadcopter drones and attach some kind of munition to them and fly them into a stadium or some kind of high-value target where there’s a lot of people.”Space is Now the ‘Tip of the Spear’
Ian says this is the “first real conflict I’ve seen where it feels like what we were able to do from space has played a much bigger role in the lead-in to all of this than we’ve seen in the past.” The new technology in orbit - everything from radio frequency detection to imagery to communications - has vastly increased “the speed with which we gather intelligence from the battlefield, and the ability to ingest that intelligence and turn it into something actionable,” Ian said. Essentially, the key word now and going forward is latency - just how quickly they can drive the latency of communications and intelligence sharing down.
A “GENERATIONAL OPPORTUNITY IN DEFENSE TECHNOLOGY”
From his position as Center15 founder, Ian says there is a “generational opportunity in defense technology.” He said Center15 is investing in companies they feel are going to disproportionately benefit from 3 aspects of growth.
First, the overall global pie of defense spending continues to grow dramatically and has no sign of letting up. It will likely be north of $3 trillion this year, driven by large increases in spending in Europe and the Middle East in particular.
Second, a huge shift within that pie towards new technology - partly because, for example, the large platforms are susceptible to asymmetric damage from small drones.
Third, a change in acquisition strategy, which is what Ian says the US administration is really pushing. Historically, companies would take 7 years to go from making a prototype to getting a contract to make real dollars. That “Valley of Death” always dampened investment in the sector. “What the administration has done is basically torn up the old playbook,” Ian said. They are going to give dollars to commercial companies and focus heavily on getting stuff made in as fast and as cost-effective a way as possible.
These 3 drivers mean a lot of new money is now entering defense. But Ian said that this influx is pushing up valuations in the early stage “to a point where it’s making it more difficult to us to find companies where we want to come in and invest.
