Investing at the Critical Edge of National Security with Squadra Ventures’ Guy Filippelli

Guy Filippelli is the founder and managing partner of Squadra Ventures, an early-stage venture capital firm focused on national security and cybersecurity investments.

Tell us about your background.

I grew up in Cleveland, Ohio. My dad worked for the railroad and I was a computer science and math kid from a very young age. When I was in high school, I had this opportunity to go to West Point and my dad was super excited about it. I was 17 years old and it was the only school I applied to. I thought at that point I was going to become an Army officer and walk away from a career in technology.

I ended up spending nine years as an Army officer. During that journey, Sept. 11 happened. My boss’s boss announced they were looking for young Army intel officers with technical backgrounds for a special project. I applied and got it, so I was back in the tech world, but as an Army officer running tech projects. I did that for the next five years in Europe and Afghanistan.

Then my new boss ended up becoming the director of the National Security Agency (NSA), and I got pulled back to Fort Meade, Maryland, to be the tech lead for this really amazing project called RTRG. It totally changed the way the NSA supported the warfighter. At an unclassified level, NSA was collecting massive amounts of data for many years, but in places like Iraq and Afghanistan, that data was never real-time. You had access to this amazing research library that could give you insights into people you were targeting, but it wasn’t actionable at the moment.

My boss’s vision was to take all this information and make it real-time. That required a complete architecture change, including building a massive data center in Baghdad, developing new tools, and deploying new people. It was a massive project and became a career-defining moment for me.

When I got out at 31, my West Point classmate Nick Hallam and I started a government contracting company doing high-end software development for NSA, the Army, and other agencies. That went extremely well and we sold that business. Then I had this idea for a cybersecurity startup focused on insider risk and threat detection called Red Owl. I ran that for five years and sold it to Forcepoint in 2017.

If the Army taught me how to build and deliver technology that mattered, and if Barico taught me how to run a business, Red Owl taught me how to operate in the VC world where you’re trying to move fast but deliberately. After selling Red Owl, I felt there was an opportunity to build something new in venture capital.

What is Squadra Ventures’ investment thesis?

I thought there was an opportunity to build a different kind of venture firm. If you break the venture capital world into three buckets, there are firms that give you money but won’t do much for you and that’s okay since some of these guys are amazing at picking winners. Then there’s another category of firms that give you money and are really helpful. Outside of Silicon Valley, those were pretty few and far between. The third category are firms that just aren’t that great.

I felt there were very few firms in category two that were willing to look outside Silicon Valley and do a lot of work in the defense and cyber national security environments. Most of the people that did exist fell more into category one or three. So I felt there was a window to build a firm that would be super value-added and play in this national security space.

The thesis was simple: let’s go build that firm. Over the last almost six years, we’ve come a pretty long way. What I think is compelling for founders is that I know what it’s like to be on every side of this equation, and people appreciate that. We’re building this for all the right reasons.

How have the national security and cybersecurity sectors evolved over your career?

It’s an interesting combination because the two worlds I’ve played in overlap a lot at a human level. Many of my friends and colleagues have gone back and forth between these industries, which has been super valuable.

These two markets have evolved very differently. Cyber as a market has gotten really hard to invest in and operate companies in. While the problem sets continue to get harder and budgets continue to grow, there’s definitely a flood of companies in this space. I don’t think it’s ever been as hard as it is now to sell enterprise cybersecurity software and find budget. It’s a very noisy market, and you have to be extremely picky about when you make investments and how you can validate a growth path.

The defense market has seen a wild evolution. Six years ago, institutional capital wouldn’t touch it. Now everybody wants it. Six years ago nobody wanted to do hardware. Now everybody wants to do hardware. But it’s still a space in flux. You have companies like Anduril trading in the private markets at 30-40 times revenue, Palantir sometimes trading at 100 times revenue, while Lockheed Martin trades at 2 times. What’s the implication of that? Who’s going to buy these big companies?

The biggest question in the defense space without a doubt is where do these companies go? What’s the acquisition or public market ecosystem going to be for them? If you look at the U.S. defense budget, it was $842 billion last year and is going up to $1 trillion this year. All that delta is new commercially focused stuff. If you back out the non-discretionary part of that budget, you’re looking at a doubling of the U.S. discretionary tech side of the defense budget, which is huge. You’re looking at Europe going from 2% to 5% of GDP. That’s massive. You’re looking at continued chaos in Ukraine and the Middle East. People recognize that no one has ever felt less safe than they do today.

What’s Squadra Ventures’ investment approach in these dual sectors?

We definitely like cyber where we can help companies maneuver around the federal government, Department of Defense (DoD), and intelligence community ecosystem. Our first investment was Shift5, a cybersecurity company for weapons systems and commercial trains, planes, and buses. It’s doing some niche but super important things and has been massively successful.

Another portfolio company, Netrise, is doing fantastically with enterprise customers and over the last couple years has built up a very strong government presence with Department of Homeland Security (DHS), Cybersecurity and Infrastructure Security Agency (CISA), and DOD as current or prospective customers. We definitely like when there’s overlap because we can help maneuver in both worlds.

At the same time, we’re not afraid to do pure commercial cyber when we think the sales motions are there. We invested in a cybersecurity awareness training company called Phin that’s doing work for medium and small businesses through managed service provider (MSP) channels. It’s not government-focused at all and they’re doing great.

We also have companies that are dual-use at their core, but then we have companies like Primordial Labs that’s building natural language capabilities for soldiers to interact with drones and robots on the battlefield. They’re going to be 99.9% military focused for the foreseeable future. That’s okay since they’re building a phenomenal business.

What makes a founder successful in the national security space?

One thing that makes the national security space hard is that the buyer, the user, the funder, the influencer, and the policymaker are all different people who often have nothing to do with each other, especially at scale. It’s its own reality that probably needs to be rethought.

To achieve scale in the DoD, a founder needs to be able to line up 15 champions and prevent every one of those people from being a cynic or critic, because any one of them could raise their hand and shut it down. The bigger the money gets, that’s when those knife fights start. Maneuvering can feel very frustrating. Interestingly enough, once you’ve maneuvered it, nobody complains about the process and then they have the moat.

So what kind of founder does it take to sell into that? They better have intuition about the industry. They better have experience and a network. They better be capable of maneuvering there, or they need technology that is such an order of magnitude better that it’s undeniable. A lot of things have to come together for a founder to be super successful in this world.

How does Squadra Ventures approach diligence?

We take about 15 pitches a week. We end up making one to two investments a quarter. At the core of it, we talk to a lot of people. The challenge is to build conviction that an investment is going to be successful.

First and foremost, assuming this isn’t a total pre-product company, we look for consistent obsession with the product. I want users to be ecstatic about it, and I want that ecstasy to feel consistent. That’s gate number one. You’ve got to get to the end user and understand why it’s special.

Second, you’ve got to validate the pipeline. We’re betting on the future, not the past. If there are 10 potential deals in the pipeline, we better talk to at least five of these people to understand what’s real.

Third, everyone the founder introduces you to brings some bias to the table. You’ve got to bring in people who sit outside that bias to get an external perspective.

One of the things we like to say at Squadra is: Can we see the value of this business tripling in the next 18 months? It becomes a very easy north star for us. We tell founders that for us to get to conviction, we need to fundamentally understand your product, your customer base, your pipeline, and your market. You tell us who we should talk to, and then we’ll find people to validate that externally. That’s the core of how we operate.

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