00:00
Steve Baxter, welcome to Straight Talk, mate.
00:01
Thanks for having me, Mark.
00:02
So me asking you on the show has actually come off the back of you and I having a really interesting conversation, maybe a month ago, a few weeks ago anyway, now about the defense sector and all that encapsulates lots of things, investors, technology, defense capabilities, asking all the big questions about Australia and the rest of the world.
00:23
But before I get into that, I wouldn't mind just having a little bit of a dig into your background, like as to you growing up, et cetera, you know, where you grew up and what type of person. Because I noticed in the brief, you spend a bit of time growing up with a guy called Bev Slattery, who's a mate of mine.
00:39
Very nice.
00:39
And similar sort of entrepreneurial flair as you, Bevan. We went to school together. Mums are best friends.
00:46
Are they?
00:46
Yeah, they were.
00:47
My mum's passed, but yeah, they were best friends. How do you describe that? They are best friends. We'll go with R. Yeah. So you're a proud Queenslander for a start.
00:57
Yeah, I was born in Cloncurry, actually.
00:58
and then grew up in Emerald. My dad was in Queensland Rail. He went where the next promotion was, I suppose. So Cloncurry, Emerald, Rockhampton. Out of 36 cousins, aunties and uncles, I'm the only one not born in Rockhampton. So it's a bit of a regional, central Queensland family to say the least. And I was born in Cloncurry of all amazing places.
01:19
And you joined the Army at a young age?
01:21
Yeah. I mean, that's a pretty out-there thing.
01:23
Mind you, I guess up that way, though, there are Army towns, like Townsville, et cetera.
01:28
Well, there are, but that's not really impacting on that, to be honest. So there was a scheme at the time. I joined in 87, and within seven years, that scheme had been gone. So it was an army apprentice scheme where they could recruit sort of 15-and-a-half-year-olds. And we did two or three years. My trade was three years in Wodonga, Albury, Wodonga. And that was sort of fun. People ask me if I enjoy the army. I enjoy it a lot more now I'm out, to be honest, just talking about it. But yeah, I did that.
01:58
Signed up for a 15-year-old. Signed a nine-year contract when you're 15, which- Wow. Yeah. Well, your parents have to co-sign. So now as a father, I realize my mother was devastated. I didn't understand it at the time.
02:09
And now I have like mates with 15-year-old kids and I think, oh, that's way too young.
02:14
Because it was your idea, I guess.
02:16
Yeah. I was not doing well at school. I was just a mixed up kid. Puberty was just playing havoc with my common sense, if you know what I mean. I was going to fight, that sort of stuff. And then, so this was a pretty good opportunity, truthful.
02:26
He was out of the meat works in Rockhampton, to be quite blunt. Yeah. So would you say it's like not much opportunity in those days in those environments? Yeah.
02:34
No, but even back then, going and working in the mines was seen as like some sort of, it was a failure in life. You had to go work in the mines because you couldn't get another job. Now, like, oh my God, you're making bank in the mines. More than everybody. Yeah. So kids left school to go to the meat works and then all get an apprenticeship, which then you end up in the mines, essentially.
02:49
So what happened after you left the army?
02:53
Yeah, so I left the army in 1995. So a year before leaving, I actually started a business from home, a dial-up internet service provider. No, Aussie Mail. Yeah, actually Aussie Mail acquired us actually in the end. So we started that in 1995 and sold that in 2010. 2000, sold that in 2000, excuse me.
03:13
In Adelaide. So back then there was obviously a 30 cent local call tariff on the telephone call. So you could service a very large catchment of people for not much money essentially. And so there was very strong regional ISPs. So there was, if you know of Michael Malone out of Ironit in Western Australia, for example, we owned Adelaide to a large degree and there was another business out of Melbourne and Aussie mail sort of ruled the East Coast to be honest.
03:35
What got you to do that, though? Like, I mean, like, how were you thinking? Like, I don't understand it. Like, you're sort of, you know, ex-army guy, you know, apprentice, blah, blah, blah. And then here you are thinking about building a dial-up business to begin.
03:49
Well, I was a guided weapons technician, essentially, in the army.
03:51
So, back in the days. Guided weapons technician.
03:54
Yeah. What is that? So, I primarily worked on two weapon systems, the low-level air defense, so missiles that shoot down aircraft, so RBS-70 and rapier technically. So, we looked after the guidance, the hydraulics, optics, the whole box. So, guidance is comms?
04:11
Guidance, no, is laser and all radar. Right. So, on the RBS-70, it was a laser guidance, it was a laser, you point a laser beam at the aircraft, the missile would ride the beam to the aircraft. And the operators had a saying, they said, go for the glass bits. So they'd like to put these things through the pilot's heads, essentially, if you know what I mean. So they're very, very accurate weapons, to be honest.
04:30
And so technical background.
04:34
And we used to go and exercise for four weeks to four months.
04:38
And back then, you know, you couldn't take enough books in four months to not go because it's actually really boring. You go, you drive for three or four days, you dig a hole.
04:46
Every few days, someone will bring you something to repair. And then that's how it sort of goes. And it's really boring. So you used to take books and you can only take so many books. So I enrolled in part-time university. So I ended up getting exemptions for me not finishing school.
04:57
did part-time university, which is a computing science in the end. And that got my, really fired my passion for IT. I hate the word IT, but for computers.
05:08
And then, you know, I did this one subject where it was called Linux, which is a very popular operating system now. And then, you know, I got booted up at home and plugged some modems in and went, holy dooly, you could charge people to use this. You know, it was just that sort of entrepreneurial brain fart. Actually, Glenn Richards from Shark Tank calls it entrepreneurial brain farts, which I think is a really good term. And then, you know, you start it. It's almost a bit like Gerber's, if you've read The Myth by Gerber. He talks about the accidental entrepreneur type thing. It was that. But we jumped through a window that was open into the internet in the mid-90s, which was probably the 25th or 30th internet service provider in Australia at the time.
05:45
Within a year, there were 1,200.
05:47
That gives you an idea of how much it ramped up, if you know what I mean. Good time to sell. Yeah, and we sold just prior to the .com bust. So, Aussie Mail were acquiring us, and they got acquired by UUNet, and halfway through that process, UUNet got acquired by MSI Wilcom. So, we're in the middle of three acquisitions as we're getting purchased.
06:05
For the time, it was a good win, a 5 mil win, if you know what I mean, almost 5 mil. That's a lot of money then. Yeah, big time.
06:10
I had a business partner then as well, so we were 55% of that business. So my mate Chris, he was 45, so I'm still a good match to him.
06:18
But I guess where I'm going to is why do you think – you decided to build a fund that's going to invest in defense?
06:26
Opportunity. In 2016, the army asked me to get involved with the renovation program. I was an ex-soldier boy, made good. I had a public profile. I was two years on Shark Tank at that point. Military PR job. Come to camera, get a picture with the general, pat it on the head. And that let me in the tent, so to speak. I just saw this amazing capability that was being created through non-dilutive grants out of government.
06:46
It was just incredible. It was like James Bond's weapons lab I walked into. It was amazing.
06:50
You walked into an actual lab? No, it was a demo day.
06:54
It was a display. It's called Army Innovation Day was the name of the event. They run a series of programs over the years and they culminate in this display at the end type things, graduation display almost. I thought it was all classified.
07:09
They're all getting around taking pictures and putting on LinkedIn. I'm like, oh, this is interesting. I asked, but where are the other investors? They said, oh, we don't trust investors.
07:18
I'm like, well, I'm here.
07:20
We trust you. I said, you just met me. I worked with the Army. I tried to work with the Army and then defense about the role private capital can play in early stage innovation. So it's all this amazing stuff being created and just falling into the valley of death, if you're familiar with that concept, the valley of death. Yeah. But in defense, it's a chasm and nothing gets out of a chasm. So these things just die. Yeah. So I thought, well, I know a better way to do this. And I know there's a larger customer, which is the US.
07:45
So the US Department of War at that stage was spending about $800 billion a year US on defense. We were spending about $30 billion US dollars on defense at that point.
07:54
And so there's an opportunity to take this great capability, find that exquisite customer user market, budget loan in the US, get into that market, get the high revenues, get the multiple uplift because they're very undervalued in Australia. So the real opportunity is the buy side equation. These things are that unloved.
08:12
They're very cheap to buy, to be quite blunt. So our role is to get them into the US, get them revenue, and get them rated as a US company to go from a two or three times revenue multiple, for example, to a 30 to 100 times revenue multiple.
08:24
Just explain it to me then, so let's just go through, unpack it a little bit if you don't mind. So when you say on the buy side, you're talking about the US as a buyer. No, us buying the equity here in Australia.
08:36
So you buy the equity here in Australia so you can get- So when we invest in the startup here, it's irrationally unloved. So for a variety of reasons, defense assets here at Russian are loved. The perception of the market is there's one customer being the Australian Defense Force. Right. And that's not true. There's 33 customers we can sell to. In Australia? There are 33 allied customers we can sell to. Right. With that being arrested as a gun runner. Right. So we have Defense Corporation, right? And each one of those has an Army and Army Air Force. God bless America, they've got Marines, Coast Guard, Space Force as well. Each one of those has at least one unit that can buy off tender.
09:07
Literally, you knock on their door and you can sell them stuff through the door. Without a tender.
09:10
Yeah. I'm being a bit flippant now. It's a very low overhead process.
09:15
Yeah. Right.
09:16
Typically uncompetitive process.
09:19
Which is good. So in fact, in the US Department of War, there are 275 organizations that have the ability to do that. Right. And budgets. And budgets. Yep. So the thing about the US Department of War is that they don't buy the best technology. They buy the best technology they can get on contract. So you might have the best tech, but if you knock on the wrong door and the person who can't spend... You got it wrong. So the opportunity there is to buy the equity in Australia, to invest in the startups here, and then to transition them into the US. We will not invest in a startup here that has material exposure to the Australian Defence Force.
09:50
The Australian Defence Force is a risk to its suppliers. Really? Oh, my word. Why?
09:55
Have you seen the headlines about the stuff ups with contracts and bringing capability in? I mean, I'm an ex-soldier. If they needed me to carry a rifle again, I'd do it tomorrow. They'd need to be pretty desperate. My knees are pretty bad, to be honest. But it's just – in all my investing career, it's about finding an investment and getting them into a bigger market. Great. You're the expert at this. I'm not. That's awesome. Now, let's get you the courage and the capital to get into a bigger market.
10:20
So, it's no difference in defense to some degree, to be honest.
10:22
Yeah. And the U.S. is a, it's not an easy market, but it's a damn sight easier than Australia. No government sale is easy. This is still a government sale. Yeah. So, but you've got a new U.S. administration there and the Secretary of War, the young chap, Pete Hegseth, is a young man in a hurry. Yeah. And I really hope he's just a young man in a hurry. He's not staring at a piece of intelligence and he's got to do what he's doing because he's being flagrant with capital over there. They're trying to bring this new capability in and they're happy to spend like drunken sailors to do it.
10:50
And I said, I hope it's, I fear what's coming.
10:54
You hope it's not reckless. You just hope it's like purposeful.
10:57
No, I hope he's reckless, to be honest. Because you can keep selling to him.
11:02
Yeah. No, because if he's not reckless, it means he's looking at a piece of intelligence, which means conflict's about to kick off. Oh, right. There's a background macro here, which is the demographic issues, the geopolitical issues around the world, and demographic, to be honest, exemplified by what's happened in Ukraine, the Middle East, and what China is threatening to do with Taiwan, to be quite blunt.
11:23
That's all the background. And so the US is re-arming like crazy.
11:29
And I started this back in 2023. The allied cumulative defense expenditures was 1.2 trillion US dollars. This year it's 1.7, next year it's 1.9 trillion.
11:41
Whoa. And none of that's gone to an extra soldier.
11:44
It's all gone to... So it's not staffing. It's not staffing. It's not bases. It's technology changing out as well. So in the popular press now, you see a lot about the expensive missile versus the cheap drone. Yeah. It's a lot more nuanced than that, but that's essentially it. So they're changing out arsenals and what I call the articles for conflict, they're changing those out into the more commodity stuff, the people we invest in essentially. So all that uplift goes into things that we can allocate capital into companies that can exploit that increase in budget.
12:16
So, is therefore in the US, is it a big retooling exercise? Very much so. Retooling the manufacturing of whatever it is that they're going to use?
12:25
When you look at the start of the year, just prior to that Lunatic war they kicked off in Iran, prior to that. So, Secretary of War, Pete Hegg said he had this, he's a showman, but it was called the Arsenal of Democracy Tour, he called it.
12:37
Eight out of the 10 companies he visited didn't exist 25 years ago. And if SpaceX is 23 years old, exclude those. Seven out of 10 didn't exist 10 years ago. So he's making a statement there. He doesn't like the old primes. He's really tired of being ripped off. And the US generally are. They understand their defense base was just fat, dumb, and happy, if you know what I mean. And spending. Yeah. But now they're actually spending with smaller companies, more agile companies, startups, let's call them.
13:03
Neo primes are sometimes called as well. And they're getting results, to be honest. They are changing how this all works. How has war changed?
13:15
It's been changed a lot of ways, I suppose.
13:22
Once again, I'll over-characterize it. It's the drone, but it's unmanned systems, unmanned platforms.
13:26
Really, really cheap and inexpensive.
13:29
I like really cheap and inexpensive things, not because I'm a tired ass, to be quite honest, but because if it's cheap, you can give it to a corporal to use. If it's expensive, you give it to a kernel to use. That corporal is more likely to pull his screwdriver out and fix it if it's broken or if it's not working right to modify it. So the innovation cycle as you get through commodity war goods will speed up development and innovation a lot.
13:52
And there's lots of new modern business techniques. So the biggest change in war is that the new modern internet marketing techniques have actually come into equipment procurement. So there's an amazing book, it's about 23 years old, called The Clue Train Manifesto. The Clue Train Manifesto. Yeah, The Clue Train's leaving the station and get on board. It was in the late 90s. It was essentially when organizations were resisting getting on the internet because their customers might say bad things about them. And the whole part of the thesis of the book is, well... They'll say bad things about you whether you're on the marketplace with them or not. So the internet's a marketplace of ideas.
14:23
If you're not there, they're still talking about you. You just have no ability to absorb that feedback. So get on the clue train, essentially. But then it goes into the whole modern mechanisms around gamification and rewards and that sort of stuff at the same time.
14:38
In one example, the Ukrainian Ministry of Defense, they have an innovation. They're obviously at war with Russia at the moment. The Ministry of Defense, their innovation is called Brave One, so Brave number one, essentially.
14:51
You can approach them and get your goods into their- You mean a civilian or anybody? Yeah, anyone can, yeah. Anyone in the allied world can, yeah. And then they created something called the Brave One Marketplace. So it's like T-Move for war goods. So literally you put your stuff on there and then a Ukrainian soldier in a trench with mud in his boots gets on his phone and goes, I need that sort of drone. He's been allocated currency from the Ukrainian center.
15:15
They can make this sort of redistributed the decision making. Yeah, yeah.
15:20
Yep. And he gets delivered to his trench. He gets to use it. He can give star feedback, so he can give one to five star feedback. This is the whole thing. No one wants one star feedback, right? If he launches this thing in a rush and it doesn't work, that's bad. He's probably angry if we're going to give one star feedback. What you do is you ring up the supplier and say, mate, this didn't work, right?
15:38
And he goes, well, wait a sec, tell us what.
15:40
Don't give me a bad review. I'll fix it and send you 10 more. Yeah. And so that, all of a sudden, that...
15:46
That cycle in the West takes years and that Ukraine takes weeks.
15:51
So it actually shortened these cycles out.
15:54
But they've added one other aspect in, which is quite macabre, but fascinating at the same time. So not only can you use centrally allocated currency from the bank, but you have in-game currency. So if you actually can submit proof that you've destroyed a certain piece of Russian equipment, for example, you get allocated in-game points. So a Russian tank's worth 40, an artillery piece is worth 60.
16:15
And there's a leaderboard, and so every week they publish the leaderboard results, and the units have competition to see how much Russian equipment they can destroy.
16:22
And then you can take those points, go back to the store. Instead of using money, you can use points to buy more drones, more radars, more antennas, whatever you actually need. They like their credits.
16:32
Their credits, yeah.
16:33
And they actually did an incentive test. So they actually changed the score for a Russian KIA, so actually killing a Russian soldier, from two to six. In one week, they doubled the KIA count. Wow. So incentive and outcome, right? So very macabre.
16:49
fascinating. The US are trying to, most Western militaries are implementing that. They've actually seen what that does, just shortening that innovation cycle down. So that's probably the biggest innovation in military logistics since the standardization of rifle.
17:03
Is that like in terms of changes in the way war's been waged, is that about making your players, your team, be more intense in terms of what they do day to day? Thinking intense, physically intense, intense in every aspect, instead of just sitting there being like a... Like an old school soldier.
17:23
I think the driver is the desire for the soldier to go home at the end of the day. Every day it's a very existential problem they face. Yeah, could get killed. So everything they do probably relates to that problem. Reduce the risk. Reduce the risk. If you look at the front line in Ukraine right now, it's not a front line. It's 40 kilometers. So you have the line of contact, which is technically the front line. Then 20 kilometers either side is no man's land. Where your job as a soldier is to look exceptionally unimportant because you're under constant surveillance. And the more important you look, you're probably going to get serviced as a target.
17:54
That's the military euphemism for blowing up the drone. It'd be quite blunt. So now you go from front lines where you might have had 1,000 men per kilometer to maybe 10 men per kilometer. Wow. Because I've just got these platforms, which is why I'm not worried about the constant sort of rhetoric around Vladimir using nuclear weapons on that. Yeah. You need to deploy 100 nuclear weapons to have an impact because nuclear weapons are going to kill soldiers. And for every kilometer you've got 10 soldiers, you need a lot of nukes. And you're not going to waste that much money. No. I mean, well, nukes are pretty cheap, to be honest.
18:25
But I mean, it's definitely a period of victory. But you can't use one to have the effect. You can typically use one or two, drive 1,000 tanks through, and you've won. And that's oversimplifying it. And now you just can't do that. The front is...
18:39
It's gone from when it started, this massive armoured thrust that came through Belarus, tried to capture Kyiv and all the rest of it. Very brave Ukrainians. That was amazing. When the true story comes out, it'll be incredible.
18:50
Then it went to trench warfare, if you remember that. We saw a lot of pictures of trench warfare. Then the drones started coming in. They're probably now on generation 58 of drones in that conflict. That's how fast innovation cycles are moving. They've had drones that spew boiling thermite gas under soldiers. They've now got the fiber optic control drones. They've got deep strike drones. It's terrifying. The other really cool thing they've done with respect to modern business techniques is The Ukrainians are clever.
19:21
They're going through some political eruptions at the moment with their defense staff. You're seeing some protests there. But they've got something called Trophy Lab. So all the captured Russian equipment they've got.
19:29
Oh, the what's right?
19:30
It's called Trophy Lab.
19:31
Yeah.
19:32
So all the captured Russian equipment they've got, they're actually putting it up on a website for people to access once you go through your credentials and everything else. So in order to bring their Western partners in to sort of say, hey, you want to partner with us? Not only, you know, can we use and test your kit, but we can also, if we get from the Russians, we can make available for you to exploit, to inspect, to exploit intelligence. Pull apart. Yeah. So they've not only got that marketplace, but they've also got, for gear, they've got a marketplace for intelligence and ideas. So very clever leverage. Yeah. So it's literally, it's modern business marketing techniques.
20:04
Yeah, yeah. Applied to combat. Yeah. Conflict, more precisely. Yeah.
20:08
Can we just talk about drones? You just mentioned drones. We were talking about drones. As I understand it, you wouldn't know better than me, but as I understand it, the original drones were coming in from Iran when Russia first started using the drones, the Iranian drones.
20:22
Why was Iran so far ahead of everybody else, at least ahead of Ukraine and Russia?
20:28
So much so that Russia then drew on the Iranian drones and started the drone warfare. Now there's a whole lot of stuff, responses to drone warfare, so there's drone defense, et cetera. We'll talk about that in a moment. But why was the Iranians so far ahead? They're understanding this change in warfare.
20:44
Um, so it wasn't just the Iranians. I mean, there's also several Caucasus, Azerbaijan and the other places.
20:50
They went hammer and tong on it a few years ago with the drones as well, to be honest. Did they? Yeah. So they're quite close. Yeah, Armenian and Azerbaijanis, I want to say. Yeah, a bit of a dust up. Yeah, they're having a fight because they've got borders. Yeah, and drones were used, the side that had the most drones essentially won that battle, if you know what I mean. So I think there might have been a tell there.
21:07
Iran has been embargoed for most things for many years. So, but you know, it's hard to embargo a lawnmower engine. and balsa wood, which is what those shahids are made of. Really? Oh, yeah. They're nothing. They're very cheap, very inexpensive. I mentioned balsa wood in a derogatory way because it's obviously very light, quite striking. Yeah, yeah. But you can't embargo a lawnmower engine. That's what it's got on it. It's not like it hasn't got a jet engine. So they built that out of necessity of what can we do? What effect can we create? Pretty innovative, though.
21:38
Oh, very innovative, to be honest. Yeah, and their construction, how they built them at the same time.
21:42
So, but they haven't moved much since though.
21:47
Iran hasn't.
21:49
On the innovation side. Once again, they've got limited facilities, they're at Bargad, there's not a great deal of high tech, probably unless it's a nuclear centrifuge, I imagine. There's not a great deal of high tech in Iran.
21:58
A lot of support through China at the same time though. So that's, if you look at the, I suggest anyone who wants to have a think about that conflict, get on Google Maps and just zoom out and understand where Iran sits. It's quite fascinating to be honest. It tells you a lot about who's playing in that region.
22:11
But on the ballistic missile front, I mean, ballistic missile, the first ballistic missile was built by the Germans in World War II. It was called the V2, right? They've been around for a long time. It's actually really old tech.
22:22
that I think, in essence, the world can be pretty proud. It's proliferated quite slowly, if you know what I mean. So, not now. Now everyone needs it, unfortunately.
22:32
So, yeah. You mentioned earlier on that we're up to sort of like iteration 58 of drones. Yeah.
22:39
where is that innovation coming from? Is that Russia, Ukraine? Is it here in Australia?
22:43
It's both. We don't do it here in Australia. We have some great companies here in Australia, but the innovation is existential. Young men trying to murder each other, kill each other, basically. And then, like I said, because the platform is that cheap, they can literally pull the scroll around and say, I think I can make this work better. And so they'll do that. Tinkering. Tinkering. Yeah, tinkering, yeah. And when it's cheap, you can do it. It was weird. And so it's gone through many phases. I remember talking to one of our advisors and he was saying that at one stage what they were doing is they were doing very much localized. So they'd work out some new drone or feature or something and they deployed in a certain part of the front.
23:16
to test it, right? And then it'd work, and then they'd actually mass manufacture it, get all the units. But within that sort of period of time, two weeks, the Russians had countered it. So they actually, because they'd seen it one place, the Russians aren't dumb. They're very much a learning army. They'd get exposed to this innovation, and they'd learn that lesson. They'd counter it, and they'd deploy that across the front. So by the time the Ukrainians went to deploy their thing, it was now null and void. So at that point in time, they sort of said, we can't test this on the Russians. We have to assume it's going to work. So they get some innovation and they wouldn't test it against them.
23:46
Just go for it. They create it, put it out there, see if it worked. So also the format, not just the goods, but the format and how you actually deploy that because it's war. The enemy gets a say as well, unfortunately, if you know what I mean. And the Russians are, whilst they're very much maligned, they are very much an adaptive learning army, that's for sure.
24:06
In terms of drone defence, does Australia play a role in it? Because we saw those companies like DroneShield and all those sort of companies that came up in Australia, but are we doing anything in terms of defence for this sort of stuff?
24:18
DroneShield is not to be discounted. It's a Sydney-based company, obviously.
24:22
They... It's called a soft kill solution. So they're all about jamming. So, you know, drones work on little radio signals, GPS. So you can spoof GPS so you can tell that... You can convince the drone it's in the wrong spot, if you know what I mean. It'll fly to another spot. You can take it over. You can jam it. So a lot of those... So in the innovation race, a lot of that's been counted. So now drones will actually spool... Will actually... They'll put a spool of fiber cable on it. So a single fiber strand... 30 kilometers of fiber weighs about three and a half kilos.
24:54
So I put that there so you can send this thing 30 kilometers and not be able to jam it. It's unjamable, essentially. So they've already counted the jamming. So the drone shield solution, the kinetic sense. I like drone shield as a company.
25:04
I think in the civil defense sense, that makes a lot of sense. What's civil defense mean?
25:08
Not military. So I suppose defending sports grounds and bridges and things like that. Whereas I'm in the military space, a soldier has to know that he can stop that threat. The only really way to stop a drone is to put a big smoky hole in it, Mark, to be honest. You've got to blow it up. You've got to blow it up, yeah.
25:22
And how do you blow it up then?
25:24
Yeah, one of our portfolio companies, I can probably talk about that. It's a US company. They've got a solution which is a set of sights, lasers and actuators that fits onto a soldier's rifle. Actuator being something that turns something on or off. Yeah, so the actuator is actually on the buttstock, so where the rifle fits in the soldier's butt, you'll actually acquire the target through the camera. And then there's actually a pneumatic actuator. So the computer lays the rifle onto the target and allows you to engage the target. And they're talking about sort of first, second round accuracy for small flying drones at 200 meters, which is game changing in that space, to be honest.
25:55
And they've just, they're doing very well.
25:58
We think they've got some good news there soon, which I probably don't know when this is going to air, so I don't know if I can actually say anything about it. Well, don't say anything about it at the stage where if we find out something, we might put it up. But just on that, like, are you saying to me that, like, there's a, a drone coming at me and this new tech allows me to basically blow a hole in it by virtue of this technology that you got on the rifle.
26:23
So there's laying of the weapon. So that's a soldier system. There's also what they call crew serves. They're bigger machine guns that go on trucks and stuff, I suppose. They've also got... The software and hardware, the optics can go on that. So an individual soldier's version, they have a cruise version. And then there's also the ammunition that's involved at the same time. So big now is the early counter to drones with shotguns, which are quite effective, but they only work when it gets within 10 metres.
26:47
Yeah, because the shot just goes everywhere. That's a bit scary closer. Yeah, yeah, yeah.
26:49
So now they have...
26:52
and the ammunition that breaks in like sort of six or seven fragments. So I think over 50 meters gives you about a one and a half meter dispersion.
26:58
So you have being able to get the round near the target, then being able to actually engage it with that. But there's many, many facets. So there's a great Australian company here down in South Australia that have a passive radar solution. So passive radar is, these guys will be the camera of Australian defense. Right. They are or will be. I'm hoping there will be. I actually think it's war-winning technology, personally. Passive radar is great. Let's say you've got a triple J antenna transmitting triple J.
27:29
It's that way, but for some reason, as it transmits out, a little bit bounces off the wall there and comes back. That's called signal. That's called noise. Now, modern radios are really good at rejecting noise and accepting signal. These guys listen to the noise. So they'll sit there and listen to Triple J. And they know it's at that grid cordon over there doing this. So all the little errant bounces they get, they build a map of the world based on that.
27:50
So a radar is a really good way to find something. What a radar does is it sends out a ping and listens for the response. When you do that though, the other person can hear you. Because it bounds it back. Yeah, the other person can hear you and they have exactly where you are. And so they'll send you a present to turn your radar off in a military sense. They'll blow you up.
28:06
This doesn't make any mission. It just sits there and listens to. So you could use the enemy's jammer. You could use the enemy's jamming signal as a radar source. So then you can find the drone. So there's one thing about Once you can find them, they're reasonably easy to kill. They're quite flimsy. They're small. Most aircraft, they're built light. They're built for a mission. They're built light. So if you can actually get an XYZ coordinate, you know where this thing is in time and space.
28:31
It's reasonably easy to create an effect. In military terms, I talk about effects and effectors.
28:36
An effector is a weapon and an effector is the explosion. But you can create an effect that disables that drone. So it's not just the actual kinetics of it, but it's also how do you find that? Unless you know it's there, then you can't shoot it. So we have that in Australia. That's really good. We're coming from EOS, who are a listed company. They do a lot of lasers, remote weapons sites, turrets, other bits and pieces like that. They have a lot of space capability as well. We have EOS, we have the soft kill guys from DroneShield we spoke about, the counter drone space.
29:08
Our investments with the US company called ZeroMark. ZeroMark. ZeroMark, yeah, they've got a great solution.
29:16
But in drones in general, I think drones are an absolutely scary combat innovation and they're actually a scary investment. We don't invest in drones as a fund.
29:27
The commodity platform itself has been commoditized.
29:31
And as a result- As in the machine itself.
29:33
The machine itself, yeah. The platform's been commoditized.
29:35
Right.
29:35
And there's just no value left in it, to be honest. It's a race to the bottom. Right. They're all discounting each other. Yeah. Yeah. And there's very little differentiation. I mean, I get these pictures from these lovely guys who make drones, and it looks 99% identical to the last one I saw, but it's supposedly different. And you're good on them. They're pitching, right? Yeah. So what we did though, about two years ago, much to my team, so I agree, we had about 20 drone opportunities in that pipeline. I just kicked them all out. I said, no one's, who's going to pick the winner from that? That's crazy. So let's pull a drone apart and let's see what makes it tick.
30:07
It turns out that the best allied nations autopilot for small drones is made in Geelong, Victoria.
30:14
The video modem guys, they're the best in the allied world are made in- What do you call it, yellow world? Allied. Allied world. What is that? Well, the best are Chinese. Right. And they're not allies. Right, okay. Our allies, as in allies. Yeah, allies.
30:27
So the best... I'll just say the best in the world, assuming it means allies, is a video modem, which takes the camera signal from the drone back to the operator.
30:36
That's in Brisbane, for example. You have two of the world's best speed controllers. So the thing that actually makes the power... get routed to the motors properly. Very, very important. Probably the most important part of a drone. Best one of those is in Hobart. Probably second best is in Sydney. Yeah, second best is here in Sydney. Maybe second or third best is in Sydney. In the world?
30:53
Yeah, in the world, yeah.
30:53
Wow. So we had the world's only non-Chinese motor manufacturer was in Canberra. That young, beautiful young man had the best mentors, Andrew. He got bought out by a Californian company. I think he left a couple of Sydney mansions on the table. He could have waited and sold for more personally. But yeah, good on him. He's a lovely chap, so he's done well. So there is capability in Australia that goes across all the platforms.
31:17
And is our government involved in any of this stuff?
31:20
Army, Navy, military? It is. So look, a lot of these things are actually created through non-dilutive government grants. So before people like me came along and private capital funding, the way these things got funded was through non-dilutive government grants. So loosely, federal government have granting mechanisms through the Department of Defence that then allocate funds out. Yeah.
31:41
You know, hit and miss, to be honest. It's a government granting system. Do they own it? Does the government get a percentage? Typically not.
31:49
They just say, we'll grant you the money to go do the research and build it or prototype it, whatever the case would be. And then what happens then is someone like you comes along and says, look, I'll give you another... hit because the government grant's over, I'll give you another hit because I think that something's going to go somewhere.
32:04
Yeah, pretty well.
32:05
Pretty much.
32:06
Yeah, pretty well. It strides a bit differently. It usually gets to the end. And everyone complains that not everything the government funds from an innovation sense should get picked up or should work. There's got to be an element of throwing socks at the wall here, right? The ones that are sticky go for, right? Yeah. So, and it got a very bad rap in the past. The scheme was called the Defence Innovation Hub, DIH. It's been superseded now.
32:27
Get a very bad rap. They spent about 90 million bucks a year on various grants.
32:32
Created a lot of great stuff. So I'm not sure if you're familiar. There's a business I talk about a lot called the Cardboard Drone. The Cardboard Drone. Cardboard Drone. So it's a business family, run business out of Melbourne called SIPAC, the Vencino family. They're lovely people. Um, and they created this flat pack. So it's a drone. It's a, it's a, you get it. It's flat pack cardboard. You get it. A soldier's got a hot glue gun, a roller masking tape, full flap A to flap B to flap C. 45 minutes later, there's an aircraft shaped thing. It's an Ikea drone. Yeah, yeah. 45 minutes later, you get this thing that can take two kilos of humanitarian payload, 60 kilometers.
33:04
So you have to talk about things in euphemisms. You can't say two kilos of explosives. Yeah, yeah.
33:09
Um, To the point where, so that was created through those DIH granting mechanisms. And this comes on like a pallet of 30. It comes on a pallet and there's like 30 drone things on a flat pack. The soldiers put them together and then they send them off on their missions and they'd program up the- Australian soldiers? Any soldier. So yeah, I believe there are some quantities in Australia. The biggest user, it's got a lot of coverage a couple of years ago where the Ukrainians used them to destroy Russian aircraft in an airbase in Kursk.
33:38
It was a long way behind the line, so we're thinking they actually got smuggled through the checkpoints. Cardboard's great in that respect because it doesn't show up on X-ray machines. Yeah. So we think they did a covert insertion through X-ray machines. I'm only guessing. I actually don't know Mark, to be truthful. But it feels like a pretty good story, right? Yeah, I like it. So stick with that one. So that's the cardboard drone. And the cardboard drone, it's great because it's literally, they're meant to be, some have done like 60, 70 missions, or they can be a one-way job, but they can do a variety of things. And people have talked quite openly about they've actually used, they've taken like, Ukrainians put aircraft radios in them.
34:13
And they use them as decoys to try and get Russian missile systems to start up their radars to understand where they are. So they can sort of goad them into lighting up their radars. They can discover where they are and bomb them, essentially. So they've got all sorts of different things. They're using it for surveillance. Yeah, surveillance, everything. So that's a really good drone. And there's a bit of a recent listing on the Australian Stock Exchange at a company called Boresight. We almost invested in these guys before they're listed, actually. Our fund can't do listed if we're prohibited from doing listed. Is it the HEO you deal with? No, it's Department of Innovation and Science, I want to say.
34:41
Right, okay.
34:42
I mean, they feed information back to the HEO.
34:44
That's Arthur Sinodinos' old portfolio. Might have been, actually, too. Yeah.
34:48
He's very involved in defense now, Arthur. He's chairman of a business called Hypersonic Launch Systems. It's a Queensland-based business. They won a... This is a great story. I don't know how much you let me... No, go for it. Just pull me off target if you want. No, no, go for it. So we didn't invest in these guys. It's probably one we missed, unfortunately. But they've made a hypersonic aircraft called the Dart Flyer.
35:08
And they won a US contract from something called the Defense Innovation Unit in the US. So if there was a five-star rating system for defense funders, innovation funders in the US, these guys would have 4.99 stars. DIU is brilliant. So they got a $15 million award there, three aircraft at $5 million apiece, plus the US Department of Defense bought the $18 million rocket they had to strap it to times by three. So it was a massive sort of win. Wow. They launched their... So they got three because typically in rocketry, the first one blows up, the second one flies for 10 seconds and blows up and the third one works.
35:41
And they all tend to celebrate their success or their failure very much in the open. This is why it blew up and everyone's sort of high-fiving the fact they just blew a rocket up. They've launched this thing in February out of Wallops Island and the thing took off.
35:54
And, you know, the commentary, you know, the aircraft separated and the US government cut the feed and said, what launch?
36:01
That's good. That's good, Rob.
36:02
I don't know. I'm only guessing it's good. So, that's going to be an amazing Australian... So, a hypersonic story in the world is written by an Australian company out of Brisbane. Michael Smart's the founder of the technology there. So...
36:15
But what is a, just explain to you what a hypersonic aircraft is. So a hypersonic flight profile is usually above Mark 5. Right, going faster than 5,000 kilometers an hour, whatever, I don't know, whatever, there's more than that. Yeah, it's a 1,200 kilometers an hour speed of sound. Yeah, speed of sound, yeah. That's Mach 1. Mach 1, yeah, this is Mach 5+. It's a Mach 5. Yeah, Mach 5+. This is going like two more Machs faster than the Concorde used to get. And air breathing as well, because you can go very fast in space, but there's no resistance in space. So it's a hypersonic and steerable.
36:44
So a lot of these things haven't been steerable in the past. And this aircraft, what would be the objective? Why would they want to have something go so fast? Like a puffer can be able to get somewhere quickly. Yeah, get somewhere very quickly. Carries a small payload very quickly.
36:58
It's not to put anyone in.
37:01
Well, the Dartfly, the initial one's quite small. There's nothing stopping him from actually scaling it up. Right. So, we've done DD in this business, and I can tell you a lot about it, but I won't do that on camera.
37:11
Yeah, no, okay, fair enough. Okay, I understand that. Of course, I was going to ask you about, there's been a lot of discussion about robots in warfare.
37:21
What's the deal there? Is that for real? Look, they're being used in warfare now. Really?
37:25
Well, not the walking ones, not the bikers. Yeah, I'm talking about the walking ones. Yeah, the walking ones, yeah. They look like people. Did you see that thing, was it Chinese New Year, when those robots were dancing with the kids and stuff? I thought to myself, oh my God, because a robot, it's an industrial machine. If it goes crazy, it's heavy. Imagine if we went out of control and slapped a kid. The kid would have a broken jaw, right?
37:43
Well, I actually did see that happen, not broken jaw, but I saw one of those robots actually throw an adult. Oh, it's a great YouTube channel of robots going crazy. Yeah, yeah.
37:52
It's hilarious.
37:53
You watch some of the videos, to be honest.
37:54
Do you think we'll have wars with robots? Oh, very much so. I hope so. I mean, a drone's a robot, eventually.
37:58
Yeah, let's get the humans out of the picture. I think it'd be awesome, to be honest. Yeah, yeah. But do you know, is there anybody sort of doing this sort of stuff now? Not with bipeds.
38:06
No, very much with wheeled, with air vehicles, underwater vehicles, surface vehicles. Yeah, they're everywhere.
38:14
So not bipeds. I have not seen bipeds yet. I have seen the dogs. You've seen the dogs. That's nightmare if you're right too. They strap machine guns at the top of these dogs. 100%. Or bombs.
38:25
Yeah, so the object now is to get them down in price so you can actually deploy them at scale. That's the real object there.
38:32
But is this stuff happening in Australia? Do we have robotics innovation here?
38:37
We do. I've seen people doing things in the periphery of robots, so there's a great business here. I can't remember the name of it now. We almost invested in it at 1013. We lost out of that deal.
38:47
Robots are a series of machines and a lot of those machines are small computers that make up the robot software and they generate a lot of data. These guys have a business that processes the log file data to help the people understand and train how that robot works. It's like the pick and shovel example for robots. Why build robots when you build a pick and shovel robot shop type thing? It's that old analogy. So I don't have anyone doing the actual robots themselves, but I know people are working on the peripheral parts of the robotics problem, to be honest.
39:19
I've always wanted to know this, Steve, but why is there a resistance to investing in defense?
39:26
Yeah. What are we worried about? Yeah.
39:29
I'll put it down to three things. From my analysis, it is that as an investor, there's a perception as a single customer. We mentioned that earlier. The perception is the ADF is the only customer.
39:41
Right. But that's a commercial resistance, isn't it?
39:44
Yeah, but that also then reflects on the opportunity and the opportunity of return, the potential for return for opportunity. The other one is...
39:55
defense is hardware for the most part. Defense is mostly heavy things made for robust men, if you know what I mean. Hopefully, we never have to use. That's got a different return profile. A software business might return you 25X, 50X, 100X. A hardware business returns you 5 to 10X. It's really good.
40:11
It's a different return.
40:13
I suppose it appeals to different sorts of investors, if you know what I mean. We're investors. We're lazy. We go for the best thing we get the return from, right? Then there's ESG. Sorry, I don't know if you lied to swear here, but it's a societal pox ESG where it's just environmental social governance. And for whatever reason, defense has been put in the naughty box with respect to that. And 83% of investment funds in Australia are linked to the superannuation industry and they default rule that investing. Oh, really? Oh, yeah. Very much so. So the big super funds, the big industry funds, et cetera, they- The tarnish is coming off.
40:47
We're starting to talk to a few of the operators in there, and they want to discover more, I suppose. Then you get the really cheap shot answers, a bit like, oh, we wouldn't fund the warship, but we'd fund the dock you could tie the warship to. Yeah, that's bizarre. Excuse me. So, look, in the US and Europe, it changed in a heartbeat. One thing happened. Vladimir drove his tanks into Ukraine and everyone got over ESG the next day, to be honest. So it's a bit more existential over there. The Yanks never really swallowed it that hard anyway, to be truthful. So ESG is the biggest thing, stopping it.
41:20
So let's call it ESG being sort of like, we call it ESG, but like really the ethics of war. Yeah, ethics of war. Yeah, and here in Australia, there's a resistance to investing. I didn't realize the super funds have a mandate across the board, none of that stuff.
41:36
But that, of course, opens opportunities for people like you.
41:38
Oh, yeah. It is an opportunity. And the reason that the equity is so low, we get a great buy-side equation is because we're the only investor at the table. Yeah. You're in property, right? Yeah. If only one person turns out to buy a house, is the price higher or lower?
41:50
Perfect. Yeah. And that's us. So our fund, to get a bit more direct, I suppose, we invest in defense-first technologies. Explain what that means.
42:02
We like companies that increase capability around lethality and survivability. At the end of the day, you don't stop the enemy with harsh language alone. A robust man carrying something heavy, right?
42:12
I never want to see these things used, right? So if that's going to happen, we need better politicians.
42:17
For more deterrence.
42:18
Yeah, we need better politicians and diplomats to deter war, right? So for us, it's about, I think, defense of the realm is a solid good. I have no problem with that. Our fund will only invest in things that the ADF will legally use. So I think we got quite a moral- What does that mean, legally use? Well, the ADF won't use landmines, for example. They won't use weapons of mass destruction. Right. Things like that, you know, gases and stuff. And gas is the apex of evil that men do to other men. I think it's a terrible thing, gas. So we'll only- I suppose we won't break the law in Australia, if you know what I mean.
42:49
That's in your mandate though. That's in our mandate, yeah. That's in cluster munitions on the bits and pieces. So will the ADF deploy this? That's a tick for us.
42:57
Yeah, yeah, yeah. So you can sit under their list of rules. Yeah, pretty well, yeah.
43:03
If they want to change the law, then democratic processes set laws, not businessmen, right?
43:09
I think that's probably a good way to go. Or army generals.
43:12
Yeah, so the other parts of our mandate are, we have our taxation mandate, the early stage, the ESV, ECLP stuff. It's always early stage? Yeah, always early stage, yeah.
43:24
We have that, then we have our own sovereignty mandate. What's that mean? So we won't invest in any businesses that, for whatever reason, might be precluded from doing business with the US. Right. So you can't have Chinese scientists, Russian shareholders, contracts with Med-East torture jurisdictions, for example, that's problematic.
43:42
What about Chinese microchips or microprocessors? Yeah, that's...
43:47
Or electronics, basically.
43:48
If you're in defense in Australia, there's a blue list. The US called the blue list. The blue list is non-Chinese. Yeah. Everyone uses the blue list. It's almost not a thing nowadays, to be honest.
43:57
But is there many electronic components that don't come from China these days?
44:02
There are more. I wouldn't say there's a lot. A lot of stuff comes out of Mexico and places like that, but the Chinese companies don't understand it.
44:08
Well, there's always China. No one regards Taiwan as part of China. Taiwan's in the blue, essentially. And a lot of that stuff comes out of there. But you can get them. It just puts the price of their goods up because the Chinese stuff is actually pretty good and it's really bloody cheap. Yeah, yeah, yeah. And so it becomes a cost equation.
44:24
I just know that a lot of NATO countries, including the US, they won't take something if it's got Chinese components in it. Yeah.
44:30
I mean, there's still some things they can't get away with, to be honest.
44:33
But getting pretty rare. There's a pretty good supply chain of blue stuff for most things now.
44:38
I remember many years ago, like a long, long time ago, I was involved in this business, technology business, and we won a NATO contract for the new NATO building in Belgium. And the general, I had a meeting with the general, and he said to me, you can't have any Chinese components in it. When you ship to us, it's all going to be unnecessary. It's unpacked in front of us, but it's also going to be disassembled. We want to look at all the componentry.
45:07
And then you reassemble it, and then you install it, but then we'll run it. But that was the process. Oh, yeah. It surprised me. People, look what the Israelis did.
45:16
Was it Hamas or the mob in Lebanon, what are they called? Yeah.
45:21
With the pages and stuff, if you know what I mean.
45:23
Hezbollah. Hezbollah. Yeah, with the pages.
45:26
They set that up over a long period of time, though.
45:28
Yeah. But the Russians, when the US built their embassy in Moscow, the place was littered with bugs. The contractors were putting bugs inside of bricks, for Christ's sakes, if you know what I mean. So there's a lot of crafty stuff that goes on. But with our mandate, the other thing we don't do, and I get asked this a lot, is, you know, is made in Australia our mandate? Well, it can't be. Like, if you sold it to the US and you get a major contract, at least, even way before Trump, this has been going for decades, they expect at least final assembly to occur in the US, at the very least. So, I mean, as we should do in Australia, we should have the same expectation of defence goods here.
46:02
We just don't.
46:03
So what that means is the components can be all coming from various places, but it all gets shipped to the U.S. and it sort of gets assembled in the U.S. That's sort of a minimum. And this is for defense. For defense, yeah, yeah.
46:15
But the reality is you're also in a competitive process against other U.S. businesses who have fully established U.S. businesses, right?
46:22
And they do what I would do if I was them. I would say, oh, look, they're Australian. They're not doing enough. And so your non-US status will get used against you in a competitive way, which you've got to expect. But Australia is still a good place to run prototypes. We've got really good people here.
46:37
We've had really good tax incentives, to be quite blunt. The RTDI is actually really good, the research development tax. What's that? You're $0.43 back for research. Ah, yeah, yeah, yeah. R&D. R&D, yeah. RDTI, I think it's called. Yeah, yeah. So that's really beneficial.
46:51
So they have a really good core.
46:54
Basically, if you use your tax... But whatever you spent the money on now, you get sort of a refund of some of the money from the government. But it means you can't deduct it down the track when you get your income. But that's okay. It helps your funding.
47:07
Yeah, well, yeah. And as a startup, you worry about cash flow. Let's worry about bottom line. Yeah, because we might not ever make a profit. No, we don't like profit. Let's get there. Profit gets confusing, Mark. Yeah, let's get there. Then you get rated by profit. So we like growth and traction.
47:20
So we have two really good schemes here from a tax point of view.
47:24
in Australia for startups.
47:26
Well, there are probably three, so you've probably heard of ESIC. So Malcolm Turnbull introduced the NISA National Innovation Science Agenda back in 2017. Yeah. And there's something called ESIC, so where angel investors get a 20% tax credit, capital gains tax credit. That's right. So yes, there's the ESIC, there's the junior scheme, the senior scheme, and then there's the R&D scheme as well.
47:46
So I think there's three pretty good schemes, to be honest. And that was when Malcolm Turnbull introduced the Innovation Nation concept of Australia being the innovation nation. And as I said earlier, Arthur is a genius who ended up becoming the ambassador to the USA. You just talked about him in relation to that hypersonic aircraft, prototype.
48:04
Arthur was running that for Malcolm, I think, as I said earlier, who was the Minister for Innovation and Science for a long time. He just called me out of the blue, actually, when I was Queensland chief entrepreneur for a year. He just called me out of the blue when we had a chat and stuff. Queensland Chief for the government?
48:18
Yeah, for the government. Wow. It's pretty cool. You don't get paid. It's a pretty cool business card you walk around with. Yeah. I was supposed to be the first one. Then we found out we're having twins. My wife said, no, you're not going to do that. So Mark Salby, I met Mark from Blue Sky Equities. Yeah, I know. I haven't met him, but I don't know who he is. Blue Sky Alternatives, sorry.
48:35
So your fund now, so your fund, which given that the super fund's have mandated this outside of their realm so they can't spend. You've formed this fund. Yep. And this fund is investing in all these sort of technologies. So we invest. So if I can get a little bit more complicated for you.
48:54
So under the ESV-CLP scheme, you have to invest at least 80% of your committed capital into Australian businesses and you can do 20% offshore. So we have some US businesses as well. For the most part, we invest in sovereign Australian businesses. Yep. who want to move, who have demand, whose home, eventual home is the US. Yeah, yeah. So we've got 50, we've got almost 60 shareholders, investors in that business. About $21.54 million, if there were spreadsheets correct this morning. We've invested in seven businesses.
49:25
Should have been eight, one just fell over, annoyingly, but you know, never underestimate entrepreneurs' ability to snatch defeat from the jaws of victory, as they say.
49:33
We'll probably get them back. So we've got businesses. We've got two space businesses.
49:38
We've got a counter-drone business I mentioned before. We have a business that makes a long-range artillery shell. So an artillery shell normally goes 30 kilometers. This thing goes 150. They put a ramjet motor in the front of it.
49:51
And sort of, yeah, shoot at an artillery piece and the range at motor starts up and it goes 150 k's and it lands with less effect. Since they're landing with 47 kilos of effect, it lands with 8 kilos of effect. But 8 kilos is like 16 hand grenades. It's still a pretty bad day for the person who gets it. So...
50:10
That's another US business and the team there, they've sold businesses to Google and Apple before. You look at the team, if they were making roofing nails, Mark, I'd invest in making roofing nails.
50:19
Yeah, just by virtue of their credentials.
50:21
This team is that good, yeah.
50:23
You mentioned that ultimately you want to take it to the US market and – sell something to the U.S. How do you know these people in the U.S.?
50:32
Well, we have a U.S. venture partner, Sean Singleton. He's a former U.S. Air Force chap, a defense innovation, you know, that really good innovation business I was talking about, government department I was talking about before. J.P. Morgan, he's a financial background.
50:45
He's the politest man alive too, Mark. Our goal is to get him to swear once before he dies. But he's an exceptionally polite southern gentleman. But how do you build these relationships up? The US are great. They love it. You've got an Australian accent. They naturally want to talk to you, right? Really? Yeah. Oh, very much so. That gets your foot in the door. I mean, after that, you've got to be a bit more mature. But literally, it's an amazing asset when you do business in the US. How do we get them? Yeah.
51:13
trade shows are helpful. And then you land and expand. You find one person, you start the cocktail party, then you have the meetings.
51:19
Yeah.
51:19
A lot of sort of networking, but not in the loose sense. Well, of those 275 organizations that can buy in a low dock method, we have web close connections in the 60 of those. Wow. We think probably 50 or 60 are probably just offices empty with a brass plaque on the outside, to be truthful. Probably the old Apollo office was in there. They're not sending men to the moon. They've started again, I suppose. Yeah.
51:40
So I suppose we know how to, we know the easy ways to get in. What we do for our businesses is if, and this might blow Australians away, but in the US there's 9,700 taxation jurisdictions.
51:53
Wow. Every state, city, and county can lodge their own tax. Wow. And often do. Yeah. Impose their own tax. Yep. Impose their own tax. Yep. So you have 50 states, you know, US, everyone knows it's 50 states.
52:05
So you have all these other counties. There's some states that you should never do business in. So places that don't have a local are at will employment. which means you can fire the person on that day. You have a very different approach to industrial relations. If you go to Texas or Florida, go to some place where you can basically tell the person to bugger off and don't come back again. They're really flexible states and people like setting up there. California would be slightly different. Yeah. California's bad. Oregon's bad. There's a whole bunch of ones you run scared from, basically. But then you also need to then... And democracy is very much done in the open over there.
52:38
And as an Australian, it feels a little bit dirty and grotty. So I've been on Capitol Hill and lobbied... As in Washington. In Washington, yeah. I've gone and lobbied elected representatives staffers over there dozens of times. You sign in. It's all open. There's a register. Yeah. You go to the guy who's the Florida or the Texas representative, and if you put a factor in his district, he will work to get your line item thing written in the US defense budget. It won't mention you by name, but it looks like you're the only person who can deliver that because it's written so tight that it actually fits your specifications.
53:10
So he will lobby to do that. And it's all done in the open. As an Australian, it feels bloody corrupt, right? Yeah. No, it's just how you do business in the US. Yeah. So you've got to break that. You've got to break that inertia. You've got to do that because your competitors are doing that. So by God, you've got to do that.
53:26
How much have you, having lived there for a while, did assist that? Or is that just more new?
53:31
Yeah, I lived there for a year. I've learned this over the last three, four years, to be honest.
53:35
Are you going to be aggressive in that regard? When I mean aggressive, I don't mean...
53:40
Tough guy, aggressive. I mean, like, relentless. Oh, I've got people to describe me, Mark.
53:45
I'm not too sure, to be honest. I don't know. I think Australians aren't as assertive. We're a bit laid back. Yeah. Like Americans, I always say that Americans, you know, they're very confident, born with a pitch deck in their hand. They can pitch. They're very confident. They've got no problem faking it before they make it. Yeah. Whereas in Australia, we don't tend to do that. Yeah. That's a disadvantage. We have to break that. Yeah. So, and so,
54:08
Am I confident?
54:10
When I look at how Sean operates in the US, for example, and whilst he's being an exceptionally polite man, he has that American flair about him and he can do the stuff that I find a little cringy.
54:18
Maybe you could explain what that is when you say American flair. I'll give an example now.
54:27
To give a direct example, it's like you must have been the pitch of these guys. You go there and you're like, have you ever seen the press at the moment? You hear like Marco Rubio. Yeah.
54:35
Who's just the most amazing guy. Yeah. You know what I mean? And you look at our- On his feet.
54:38
Look at our bloody politicians, excuse me, in comparisons. That's the delta.
54:42
Yeah.
54:42
You go there and you come out. And actually, I was in Perth. I've just mentioned I flew in the red eye this morning. I was in Perth and I was manning a business over there we'd love to invest in. They had their US representative over.
54:53
in Perth were called up for a BA. And he's actually an Australian chap living in the US. And he came and he gave me that. You can tell he's lived and he's been steeped in that US ecosystem for probably five or six years. Because when he spoke, he commanded, he left you no certain doubt that he was going to get that thing done. He identified the people we needed to attack, to convince, to control in order to get these contracts through, if you know what I mean, in a very, very confident way. Um, so with, um, with Sean, we had one example there where we were dealing, it's a very boring story. We're dealing with an Air Force unit that, um, ran, um, that operates their bombing ranges.
55:26
And so it was his way into ingratiating his way in there. Um, he investigated who the guy went to school with and he worked out he had someone in his background who was common, if you know what I mean, absolutely exploited that, this absolute tenuous link. Sort of somewhat profile.
55:41
Yeah, but in a good way. They don't, but no one takes it badly. Everyone expects a bit of bravado.
55:46
There's a little bit of bullshit at the front. Yeah, yeah. So, whereas in Australia, we tend to, we call the bullshit out, whereas in the US, they tend to celebrate the bullshit.
55:55
Yeah, yeah. Yeah. Because that's where your value, part of your value add, I mean, apart from identifying for your investors what it's a good investment because it's an early stage, etc., and all the other government sort of, you know, those tax offsets and those tax benefits.
56:11
I guess what you're doing, though, is taking – helping the startup people – through your connections, turn it into something over there in terms of who might end up being an end customer. We're a US market entry organization. Our job is that. So when I started this, I thought it would be like a playbook.
56:31
It's like a 3D Tetrasport. The way you get in there, if you follow the path, you'll get there, but it's very bloody complicated.
56:38
But it's just – we invest in people we think are the best in their field in the world. Yeah, yeah.
56:44
But for me, the bottom 60% of business is identical. The top 40% is a secret sauce. That's what they do. But I know how to operate a business. We know for the most part how to get a better chance of success operating a business in the US. So you don't go to Oregon, for example. They have a concept where they're called hub zones, historically underserved business something or other. So it's a poor area. If you put 35% of your staff in a hub zone, for example, and if you were hit by a hurricane the last 10 years, you're automatically a hub zone, for example.
57:16
So you put 35% of your staff in a hub zone, then you get a 10% dispensation when bidding for federal contracts. So if you have that status and you bid on a federal contract at a million bucks for that, they have to consider you at $900. So as you do that, if you have a 51% female ownership of your business, if you have a service disabled veteran, you get another 10%. Yeah.
57:38
They're like tricks.
57:40
Tricks of the game. Yeah. And your competitors, it all feels weird and it's very confusing, but your competitors are doing it. So you can't not play it. No, you've got to do it. Yeah. So it's making sure. And then if you're selling to Special Operations Command in the US, this is the way that they should do business.
57:56
I mean, A, the SOCOM in the US, the innovation arm in SOCOM in the US, have a budget the size of the Royal Australian Air Force, which is just bloody incredible. It's a massive budget. But then what they do is they have very open. They put these solicitations out saying, hey, we need this. We need satellites or magic boots or magic guns or whatever it is. And so you go and pitch them, right? And it's all very open. It's very business-like. They publish numbers and stuff. SEAL Team 6 Perching Officer's got a number he publishes.
58:24
You go there and if you win that business, then what happens is if you get bought into that SOCOM, their aim is to get your gear used by the regular US Defense Force, which is a larger purchasing power. Because when they do that, it then goes off their budget and onto that budget. Wow.
58:40
That's why they want to get you off. They want to get you in to get off their budget.
58:43
Again, they're very, very fast to get in the way there. I mean, when you approach these guys, don't take them half by technology because they will test it in real conditions. And if it doesn't work, you're dead to them. So you take very, very good stuff. Get us through that system. And they like it. They're great. But we like it. We're going to keep using it. But if we can convince the other army to pay for it. And so they try and drag you through the sales process. Yeah. Which is bloody beautiful. Yeah. They'll even send testing crews over to Australia. Wow. So they have this scheme called FCT, fine comparative testing. So they'll send like a dozen or so people over who are experts in their field. And we'll spend a week with the technology.
59:16
will buy a part of it if they need to. They have an extraordinary ability to purchase stuff and they'll test it. They'll go back and understand whether they should buy it or not. You don't even have to jump on a plane to go there. I suggest you do. We look at businesses where a co-founder or a senior executive who's materially equity incentivized will reside in the US. If you're not in front of your customer five days a week, your competitor is. You're always going to lose. You've got to buy into that market to get the best. You've got to be there. Yeah, yeah. And there's no other way to do it really other than you being there.
59:49
And now with capital gains tax, you'll have more reasons to move to the US, to be honest, Mark. You go over there and find some place that taxes you at 15% instead of bloody 47%.
59:55
Well, once you get past that $250 million. That's for the investors, but for the start, for the actual founders. Oh, yeah. Yeah, yeah. Because the founders don't get that, do they? No. No, it's only for investors. No. That's an interesting point.
60:08
They're actually explicitly carved out of it too, actually, now I think about it. Are they? Yeah, because you can understand there can be a little bit of shenanigans if they let them do that, to be honest. Yeah, yeah, yeah. Start your own business with your own tax-free benefit.
60:18
Yeah, yeah, okay. So it's not available to founders. It's only available to investors. Yeah. And the idea is to attract capital. Yeah.
60:24
It's been a very successful scheme. I mean, it's a...
60:26
I think one of the best games in the world, personally. So, yeah. Final question for you, and it has probably nothing to do with your fund. By the way, what's the name of your fund?
60:34
It's called Beaton Zone Venture Partners. Beaton, B-A-T-E-N-Z-O-N-E. Yep, Beaton Zone. Venture Partners. Venture Partners, yeah. So when I started the journey with the Army, I saw a few things. I...
60:46
One of the things I saw was that the businesses in the defense sector were shunned by polite society. So a lot of guys couldn't bank in their business name. Yeah. Can't get insurance. Bank someone to deal with it. Can't get credit cards, yeah. So I thought, look, Beaten Zone, it's a business.
61:01
My absolute laser-focused goal is to return multiples of investor capital back to my investors. I'm investing $6 million, that 20. So I've got skid in this game, right?
61:09
So it's not a charity, right? But I didn't want to stand behind these people. I'm investing. I want to stand beside them. So the beaten zone's a military term. It's a part of the battlefield where all the bullets land, essentially, right? So there's more lethal places you can stand, but not very many. So it's like, you know what's on the tip, right? We're not trying to hide what we do. I think... A lot of the issues Western society is having at the moment is because we use euphemisms instead of telling uncomfortable truths, if you know what I mean.
61:35
We don't want soldiers to go into battle, but if we do, we want to have the most well-armed, most well-trained, most violently controllable men we can get our hands on. But please, don't make us use them. Yeah.
61:45
Right, so I think… And I think the point you're trying to make is you're not a warmonger because you don't want war. I've got three kids. That's the last thing you want. Yeah, that's the last thing you want. But you want to know if someone from Australia or anywhere for that matter in the… One of the good guys goes to war. You want to make sure that they're going to have the best possible chance of survival. I think deterrence is probably the best way to do it too, right?
62:06
Because when it starts, it's just a horrible thing to kick off.
62:08
Totally. And so just on that, so you have me fairly vocal on this. What do you think of the Iran war?
62:16
I want a really safe Australia and prosperous Australia. And I think to do that, we need a really good US government, a really strong US government. And I think the Republicans are more, at least what the Republican government has done with respect to defense and that sort of stuff, that they can guarantee our future more. And I think the chance of a good outcome in Iran was two out of five. Yeah. And we're seeing the three out of five downside at this point in time, right?
62:40
Yeah.
62:41
I think there's such a poor chance of a good outcome.
62:44
So, look, if anyone needed blowing up, it was the Mullahs. No love lost for the Iranian regime. Don't get me wrong. But just...
62:52
I just hope that he was staring at a piece of intelligence and said they're days away from a nuclear weapon or something like that. Otherwise, I don't understand it. Otherwise, you've got a George Bush moment.
63:00
Yeah. Weapons of mass destruction.
63:03
Weapons of mass destruction. In the 90s. So, you know, they haven't militarily prevailed, but it's not. It's an economic issue now, right? Yeah. Within five years, this is not going to be an issue. They'll be pushing oil and gas out of the North Americas, out of the...
63:20
Guiana, the reserves in Guiana and Argentina coming online, they'll blow the Middle East away. Wow.
63:28
Obviously, they did the Venezuelan rain, but you've got the Vacaverta down in Argentina, which is a massive field. You've got the Guiana fields, which are bigger than Saudi Arabia. They are massive. Once they come online, and that's being accelerated now because of this issue,
63:42
Then, yeah, and there's like hundreds of years of world oil supply. Do you think at any stage – I mean, sometimes I get a bit – But do you think at any stage the actual outcome or objective of the war in Iran could be that you want Iran to close everything down and you want no more oil coming out of those places and just opens up the oil producers in other parts of the world?
64:05
Yeah, this is a subject of beers two nights ago in Perth. I was laughing actually. I'm trying to understand if that was actually the purpose of this. And I don't think it's conspiracy.
64:16
A positive downside. Yeah, a positive downside. Or an actual downside that they're going for. Yeah.
64:22
But I think that it's like, I mean, there's stories about supply and demand in the past. And a big one, there's a great newsletter. I'm not sure if you recall, Doomberg. Did I? I might have forwarded that. You did. Yeah, you sent it to me. So they did one on what happened with the rubber back in World War II. So the Japanese took control of the Malaysian rubber fields. And all of a sudden, no one had any rubber.
64:41
Yeah.
64:41
And within like nine months, they created synthetic rubber. And so they no longer needed the Malaysian rubber fields. So I think a part of this, so the competitive reaction out of this through the Stratahumus is A, going to be more pipelines not going through the Stratahumus, which I think will be good. And then utilizing oil resources elsewhere. So you've got the amazing sort of US oil story. You've got the central and the Argentinian stories as well. So we'll find oil from other places that are less problematic to be truthful.
65:12
And even the new Prime Minister of the UK is now talking about opening up North Sea again. And, you know, apparently the oil reserves in the North Sea are like monstrous. But they just haven't looked for anything for a long time.
65:25
We can do the same in Bass Strait here because Bass Strait still, that hasn't been tapped to any large degree. Good luck seeing it happen. Yeah, I know.
65:32
It's going to be a bit harder, isn't it? Well, Steve Baxter, this has been fantastic. I really enjoyed this conversation.
65:38
Probably...
65:40
I just want to throw to you last words.
65:44
For those people who, and I'm not here as a proponent or an advocate or someone who's against this, but I'm here to actually hear your story. For someone who's investing in defence capability, let's call it that, here in Australia, What would you say to others who are nervous about that? And I don't mean economically, just nervous about doing that from the point of view of the look or perhaps the ethics of it.
66:14
What would you say to those individuals?
66:15
Yeah, I understand why.
66:18
From an economic sense, it's a rising market. So the economic justifications are simple, but then there's social justifications, and I understand that.
66:27
Look, I think that it's unfortunate. It's a human condition. For as much as you might dislike war, it doesn't care about your feelings when it kicks your front door in. I think the best way out of this is deterrence, quite literally. I have three daughters. I'd love if they voluntarily wanted to serve.
66:46
If we had to conscript them, we've lost. If they were forced to serve because of a war, we've all lost. I want to prevent that. And I think the way to prevent that, what I'm actually trying to do, and I said- In a philosophical sense, yeah. And I want to say, my business is a business, it's not a charity. But if I get it right, I can demonstrate a better way that we can do defense funding. I'm going to back some young kid who's going to go on to be the next billionaire, for example, right? Then he's going to back two young kids to be the next billionaire. So we can create this defense investing flywheel and get more sovereign impact in Australia.
67:19
That's my fervent hope. And I think the most honest way to do that is for investors to invest and get returns on capital and want to keep going back and doing it again and doing it again. So if we can prove a non-government back way, a private capital free enterprise way forward, and it's repeatable, I'm a happy man, Mark. That's the best thing we can do. Steve Basin, thanks very much. Thanks, Mark.
