Tales from the world of a cyber venture capitalist

Cybersecurity is growing at an accelerating rate in the D.C. region, and its growth rate is poised to explode even more as companies like Amazon make their way in. One of the things making this growth possible is venture capital investment from people like Hank Thomas, co-founder and CEO of Strategic Cyber Ventures.

ABERMAN: Well, I know this is something you and I really share: how do we build a better ecosystem to support entrepreneurs who want to start cyber companies? What’s your current take on where we are? What do you want to see us do better?

THOMAS: Well, we’re definitely in the very early stages of it here in the D.C. region. It’s a lot easier, and I think safer, for a young entrepreneur to leave a government agency, or a big defense contractor, and start a services firm, because you can quickly find revenue and get to profitability in that space. However, if you want to start a software company, which is what we’re primarily interested in, it could take a little bit more time to become profitable.

So, there needs to be a safety net for them, generally in the form of early stage investors. We’re one of about six, I would say, in the region, that are hyper focused on early stage cybersecurity software companies, and we just really want to continue to cultivate that ecosystem, and build that net, so that people know how to find it and can see a path forward.

ABERMAN: Yeah, I wholeheartedly agree with you. My Tandem Product Academy is an effort to help service companies retool into product. There’s a big difference between product and service. Without question, in my mind, we really need to have people understand the big differences between growing a product business and growing a service business.

You’re an entrepreneur, you’ve been in the government contract industry, you see this from various different directions. In your opinion, what are the big differences that a service entrepreneur, because I’m sure we have many listening to the show because of the program and where we air, what would you tell them the biggest differences between being a product and a service entrepreneur?

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THOMAS: R&D is totally different, a totally different process, and sort of figuring out what you need. You might have an idea of the product you want to develop, but figuring out that product market fit, and having an R&D capability to kind of pivot in that space. And for me, being more of a services guy, that’s now a product guy, that relied on products in the past. It’s really been around how you market and position those things, once you develop it, and how you sell it. For me, the sales part process, the business development process, is totally different. And we are really having to rely on West Coast talent to do a lot of that for us, because that’s the part that doesn’t really exist here for us yet.

ABERMAN: What I find, when I talk with service oriented entrepreneurs who are really good at it, they’re really good at it because they really focus on what the customer wants, which means that they build great technology just for that client. And what I’m often asked is: how do I make the choice about which features not to have in a product, if I’m going to not try to tailor it specifically for a client? That would seem to me to be the biggest difficulty for somebody who’s used to building for a client. How do you figure out what to eliminate to make a product that could be useful to a thousand people? Do you find that too?

THOMAS: Yeah. You don’t want to fall into the trap of having your first client, your first customer, dictate all of the features of your product. I’ve run into that. I ran into that when I was at Booz Allen, and we created the first managed service in the history of Booz Allen. We had a large Fortune 10 bank that basically dictated all of the features they wanted of our managed service. We actually tried to productize that managed service, which was, in a big company like Booz Allen, an interesting journey to go down.

And in the end, the product that we created was really hyper-focused for that one customer. I learned a lot from that, and now that we have early stage companies that have one or two customers, it’s telling people no, and saying we want to build a product that scales, you have to figure out where to draw that line, and say no.

ABERMAN: I think that one of the hardest parts of being an entrepreneur is saying no. And the second part that makes it really difficult is, often, when you say no, you don’t actually have any real knowledge of what’s going to get you victory by saying yes. But I think that, again, that’s one the reasons why being in a service related environment is so excellent, because if you have a customer in front of you who says, I know if you deliver this, I will pay you. It’s so much more predictable.

Do you find that, ultimately, this becomes a temperamental life choice? You know, if you want to be a product person, the victory could be so much sweeter, because the numbers are so much greater, because you can make the same thing and sell it again and again and again. It can be hugely profitable, but boy is it stressful.

THOMAS: It is extremely stressful. I wake up sweating every night, thinking about decisions we made the previous day. I mean, we’ve made a concerted effort, and I feel like we’ve done a good job of it as an accidental venture capitalist, to bolt ourselves onto our companies, and help them in every stage of their development. I mean, I’ve sat at a booth for our companies before, when they didn’t have enough people to sit in a booth. And so, I’m in on a lot of the decisions, and we’ve made some really bad decisions in the last three years, but we’ve made some really awesome decisions as well. And so, it’s just figuring out, learning from those things, and moving on.

ABERMAN: I’ve often felt, in my own entrepreneur career, even when life sucks, at least it’s my suck.

THOMAS: Right. Learning to own your suck.

ABERMAN: That’s going to be the headline for this podcast: learning to own your suck! Speaking of learning to own your suck, you said something that I really want to ask you about before we go. You said, an accidental venture capitalist. Accidental? I know you have to raise a fund, you have to get somebody to give you money. How does somebody become an accidental venture capitalist? Because if so, I want to have that accident.

THOMAS: Right! I’ve been in the cybersecurity and the intelligence business for 20 years. Long story short, I built a relationship with a large hedge fund in New York that was getting interested in security. But they knew, from being from a hedge fund standpoint, that wasn’t really the best entry point into cybersecurity. Over the course of about two years worth of conversations, I didn’t know much about venture capital. I just kind of vaguely knew what it was. I narrowed down that I really wanted to start to develop the products that didn’t exist in the world that I was consulting in at that time.

And through my research, I figured out that’s called venture capital. And this relationship that I kept up, I went back to them at some point, and they came to me at the same point, and they said, you know, we don’t want to just buy one company that’s in distress or something like that. We want to invest in lots of little companies that are doing really awesome things. Would you be interested in participating? And I said, absolutely. That’s exactly what I’m thinking about.

And that’s how we formed Strategic Cyber Ventures. They’re our largest investor. We have about a 100 million dollar fund, we’ve deployed 22 million of that so far, and that’s what I mean by accidental venture capitalist, in that I’m a common security guy that now does venture capital.

ABERMAN: Well I think, like with many entrepreneurs I know, accidents aren’t really accidents. They’re preparation, matched with opportunity. And we’re glad to have you here, Hank, I think that having another hundred million dollar fund operating in this region is very important for us getting the ecosystem we want. So, thanks for joining us today.

THOMAS: Thanks for having me.

ABERMAN: That was Hank Thomas for Strategic Cyber Ventures.

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