F-16 pilot and HarbourVest exec soar with debut defense-tech fund

Shield Capital has pulled off a rare feat for an emerging manager, raising $186 million from institutional investors.

The average first-time fund is about $44 million and doesn’t have any institutional backing, Shield co-founder and managing partner Philip Bilden told Venture Capital Journal.

In contrast, Shield’s first fund raised 55 percent more than its target of $120 million, with commitments from endowments, pensions funds, insurance companies, asset managers, funds of funds and corporates.

“We structured Shield with the right team, the right track record, the right strategy and the right resources in order to achieve those two market anomalies,” Bilden said.

It certainly helped that this wasn’t Bilden’s first rodeo in the fundraising arena. He is a co-founder of HarbourVest Partners and served as a managing director of the fund of funds manager from 1991 to 2016.

He had no plans for a second career after he retired from HarbourVest, but he couldn’t stop thinking about the opportunity he came across while doing some nonprofit work for the Department of the Navy.

“One of the areas I focused on was cybersecurity,” he said. “I realized it was a major national security threat, and we had these great service men and women fighting this threat and they needed technology.”

Bilden has deep ties with the US Armed Forces. He served as a military intelligence officer from 1986 to 1996 and was an adviser for the Chief of Naval Operations Executive Panel from 2017 to 2021.

Expert advice

Looking around the venture landscape, Bilden saw lots of generalist firms, but very few focused on cybersecurity. He sought counsel from veteran VCs Ted Schlein and Ray Rothrock who, he said, assured him that a cybersecurity-focused fund was “not crazy” and put him in touch with Raj Shah, an F-16 fighter jet pilot who had founded a cybersecurity start-up he sold to Palo Alto Networks.

The two hit it off and started making angel investments in cybersecurity start-ups. “I knew how difficult it would be to raise institutional capital and that we needed time to work together to build a partnership,” Bilden explained.

Altogether, the partners made about two dozen angel investments, expanding from cybersecurity to “other areas of national security relevance, like artificial intelligence, autonomous systems and commercial space.” Those four areas remain the focus of Shield today.

Bilden and Shah continued to talk about Shield over the years, but it wasn’t until the covid pandemic hit in 2020 that they decided to pull the trigger. They launched in stealth mode and accepted their first LP investment in September 2021, holding a first close on $60.5 million from 22 investors in October 2021, according to an SEC filing.

By January of this year, the firm reported that it had raised $151.8 million from 90 investors. It made an official announcement on October 16 that it had held a final close.

The LP pitch

Part of the appeal for LPs was that Bilden and Shah rolled over 20 of their angel investments into Fund I. Bilden said in an email that they made the move to “provide LPs proof of deal access and quality aligned with SCFI strategy, de-risk a first time fund with assets ‘in the money’ [and] improve fund performance metrics (net LP IRRs) with maturing assets that would harvest earlier than new investments.” He added that “the contributed investments are materially above cost, proving out the strategy.”

Another selling point was a strategic partnership that Shield inked with L3Harris (NYSE: LHX), one of the world’s largest defense contractors and an LP in Fund I.

“They bring incredible technical expertise, and they are also very good at helping early-stage companies generate revenue because they have an embedded customer base around the world,” Bilden said. “They help these start-up companies get past the valley of death.”

Sometimes L3Harris acts as a customer to Shield portfolio companies and other times it brings those companies into large defense projects since it is a prime contractor for the DoD, he said.

Besides the successful angel investments and partnership with L3Harris, LPs liked that Shield is focused on technologies that can be used in commercial as well as military applications. That should ease any worries from LPs who want to avoid investments in guns or other weapons, which can be political hot potatoes.

“Our investment strategy is what you’d call dual use,” Bilden explained. “It has to have a commercial application and national security application. So, that rules out bullets and hypersonic missiles.”

A good example of the strategy is Hawkeye 360, which Bilden and Shah invested in as angels and is now part of Shield’s portfolio. The company operates low Earth orbit satellites that monitor things that emit radio frequency signals, enabling it to track everything from commercial ships to military assets such as tanks.

Since its founding in 2015, Hawkeye has raised $372 million from 29 investors, according to Crunchbase. Most recently, BlackRock led a $68 million Series D-1 round in July that valued the company at $900 million, PitchBook reported.

So far, Shield has invested in more than 30 companies, including high-resolution satellite company Albedo, satellite bus scale maker Apex, autonomous aerial logistics provider Elroy Air and data infrastructure AI enabler Nexla.

Its portfolio is heavy on AI start-ups, which account for nearly half of its investments. Space makes up nearly 30 percent, with cybersecurity coming in at 15 percent and autonomy at nearly 10 percent.

The firm invests very early at either the seed or early-stage. “We are a very founder-focused firm – we provide our start-ups with significant support from recruiting executives to accessing government customers to developing strategy,” Shah said in a statement.