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Term Sheet — Wednesday, June 6

5 Qs WITH A DEALMAKER

Founders Fund partner Trae Stephens found his way to venture capital from the public sector.

After graduating from Georgetown University’s School of Foreign Service, he began his career working in the office of then Congressman Rob Portman before taking a job in the U.S. intelligence community.

“I was a senior in high school when 9/11 happened and wanted to go into foreign service,” Stephens told Term Sheet. “While at my intelligence job, I saw a demo of Palantir, got really excited about it, and left to join the company in 2008.”

Palantir Technologies is billionaire Peter Thiel’s secretive data mining company. Intelligence and national security agencies use its tools to flag suspicious activities, including the movement of money, contraband, and shady operators. Stephens joined Palantir when it had fewer than 100 employees, and he was focused on growing the company’s presence in the intelligence and defense space.

“As with any startup, the roles changed significantly on a biannual basis,” he said. “For the most part, I was focused on the business development side. Titles were meaningless at Palantir. I was called a forward deployed engineer, but my job function was to manage the sales pipeline.”

During his time at Palantir, Stephens developed a relationship with Thiel, who asked him to meet with some of the investors at his investment firm, Founders Fund. Its portfolio includes Palantir, SpaceX, Airbnb, and Lyft.

“I had never been interested in finance or venture capital, but I really enjoyed my conversation with the Founders Fund group, so I decided to join in 2014,” Stephens said.

In a conversation with Term Sheet, Stephens discusses his time on Donald Trump’s transition team, what the Facebook – Cambridge Analytica scandal means for the future of privacy, and why blockchain won’t solve all of our problems. Below are 5 questions (and one follow-up). Read the full Q&A here.

TERM SHEET: What are the areas of opportunity in the govtech space at the moment that Term Sheet readers should know about?

STEPHENS: I’m really passionate about the defense space. Going back to the Cold War, we had this incredible infusion of the top engineering talent into working on these problems that were relevant to national security — it could be critical infrastructure, traditional defense, law enforcement.

When the Cold War ended, our ability to funnel those top engineers into the community kind of stopped. We’ve gotten to this place where we’re really good at building super complex integrated systems, but it’s very incremental rather than disruptive. For example, we’re building a next-generation fighter plane. Meanwhile, our adversaries, who are really starting to re-establish their position in this new global power dynamic, are focused heavily in emerging technologies like hypersonics and artificial intelligence. I think that in order to stay competitive and create the type of deterrents that we need, we really need to make sure we’re providing capital to people who are willing to work on some of these important problem areas.

You were on Donald Trump’s transition team & made recommendations on changes to the U.S. Defense Department ahead of his inauguration. What were the areas that you thought were most important to address?

STEPHENS: Obviously, that was a part-time role, and I was still full-time at Founders Fund, bouncing back and forth to help out. The whole motivation for me was making sure that the defense technology ecosystem was protected and that there were people who were representing both sides. There had to be defense insiders, but also technology insiders who were helping the new administration understand how best to facilitate a relationship beneficial to national security. It was a lot of time spent talking to people about the individual agencies, like the Defense Digital Service and the Defense Innovation Unit – Experimental. We also spoke a lot about procurement — how can we establish better relationships with companies in the most beneficial way?

Did you come out of that experience feeling optimistic?

STEPHENS: Um…It’s difficult to come out of conversations with a huge bureaucracy feeling super optimistic about how well we can execute on the mission that’s been laid out. I came out of the experience having more conviction around what some of the changes were that needed to be made. Hopefully, some of the contributions that I made were useful to the incoming [Defense Secretary] James Mattis around how we can better facilitate these relationships. But it would be hard to say that I felt super optimistic.

In 2016, you wrote that the government is terrible at building and buying technology and that tech failures represent trillions of dollars of waste. What are some steps the government can take to close this technology gap?

STEPHENS: So much of it is cultural and systemic rather than process-driven. There are no rules that say the government can’t work with innovative product companies. There are pathways to doing super interesting things. You see this play out with SpaceX and Palantir, which have done well working with the government. The problem ends up being in the way that the decision-makers in D.C. think about some of the critical aspects on what makes a company worth contracting with or valuable to our national security efforts.

The most obvious one is talent. A lot of times, people tend to have a limited understanding of talent. If you were to go to a mid-level bureaucrat in Washington D.C, and ask, “Do you have the best technical talent in the world working on this problem?” I would guess the majority would say, “Absolutely.” It’s not because they’re bad actors, but it is because they’ve never been exposed what real talent looks like.

It would be like only going to high school basketball games and saying that this one high school player is the best player in the world. If all you’ve seen is a high school gymnasium, then there’s no reason why you wouldn’t believe that. But the reality is that engineering talent building innovative products is a lot like professional basketball. There is a team like the Golden State Warriors that is going to build much better technology than a team of league-winning high school athletes. It’s just fundamentally different.

What are your thoughts on the Facebook – Cambridge Analytica privacy fiasco? [Note: This Q&A was conducted before the Facebook – Huawei story.]

STEPHENS: I believe that the way we live our digital lives, we have a pretty irrational expectation of how the data should be handled. There are massive trade-offs that people aren’t fully considering when they talk through these things.

The idea that you don’t want un-personalized ads because they’re super annoying but you also don’t want to share any of your data with the advertisers — it’s unclear how you resolve that type of debate. Of course, I think Facebook is in a very challenging position where they’re sitting on a treasure trove of data and that treasure trove is what makes them so valuable for advertisers because they can get to the right people. Is neutering Facebook the right thing to do? That seems less clear to me.

We should have a high expectation of responsibility. We should hope the tech companies are doing everything to comply with domestic and international regulation where those regimes exist, and we should expect that they are responsible with the data to a reasonable degree. But at the same time, we also have to be rational human beings and understand how our use of electronic information systems makes us vulnerable rather than impervious.

Some would argue that Bitcoin and cryptocurrencies are an attempt to create a decentralized world with heightened levels of privacy. Given your work at Palantir & the intelligence community, how do you think this technology will affect the world in the next 10 years?

STEPHENS: Blockchain, as a concept, is really interesting. As a fund, we have spent a lot of time exploring the space. Personally, I am less interested in areas of tech exploration that are incredibly trendy. I think this is very clearly one of those areas.

There seems to be a massive groundswell of companies that are popping up yet the practical applications for the technology are not yet super clear. I would be very interested in finding and investing in companies that have game-changing practical applications, but I am less interested in the theoretical aspect of it.

Read so much more here.

THE LATEST FROM FORTUNE…

• Elon Musk Admits Mistakes on Tesla’s Model 3 Production (by Jen Wieczner)

• Pfizer’s Opiod-Related Black Eye (by Sy Mukherjee)

• Walmart Selling Majority Stake of Brazil Business (by Phil Wahba)

• MyHeritage Says 92 Million User Accounts Compromised (by Kirsten Korosec)

…AND ELSEWHERE

Facebook gave data access to Chinese firm flagged by U.S. intelligence. SoftBank is in talks to lead a $150 million investment in clinical trial startup Science 37. GV to lead $250 million round in scooter startup Lime. The firm leading Wall Street into crypto. Autonomous driving is coming to all Cadillac models, other GM brands.

VENTURE DEALS

CMR Surgical Ltd, a UK-based developer of a surgical robot, raised $100 million in Series B funding. Investors include Zhejiang Silk Road Fund, Escala Capital Investments, LGT, Cambridge Innovation Capital, and Watrium.

Qumulo, a Seattle-based developer of enterprise data storage systems, raised $93 million in Series D funding. BlackRock Private Equity Partners led the round, and was joined by investors including Goldman Sachs and Western Digital.

Ritual, a Canada-based ordering app, raised $70 million in Series C funding. Georgian Partners led the round, and was joined by investors including Greylock Partners, Insight Ventures, and Mistral Venture Partners.

Avi Networks, a Sunnyvale, Calif.-based intent-based application services company, raised $60 million in funding. Investors include Cisco Investments, DAG Ventures, Greylock Partners, Lightspeed Venture Partners, and Menlo Ventures.

BlueVine, a Palo Alto, Calif.-based fintech company focused on small businesses, raised $60 million in Series E funding. Menlo Ventures led the round, and was joined by investors including SVB Capital.

Sunlight Financial, a New York-based finance company providing point-of-sale financing solutions, raised $50 million in funding. Investors include FTV Capital.

Marqeta, an Oakland, Calif.-based open API platform, raised $45 million in funding. ICONIQ Capital led the round and was joined by Goldman Sachs.

Coya, a Berlin-based insurance firm, raised $30 million in funding led the round by Peter Thiel’s Valar Ventures. Read more.

Caroobi, a Berlin-based auto repairs platform, raised $20 million. NGP led the round, and was joined by BMW i Ventures, DN Capital, and Cherry Ventures. Read more.

Verity Studios AG, a Switzerland-based provider of indoor drone systems, raised $18 million in Series A funding. Fontinalis Partners led the round, and was joined by investors including Airbus Ventures, Sony Innovation Fund, and Kitty Hawk.

Hailo, an Israel-based company developing a proprietary chip for deep learning on edge devices, raised $12.5 million in Series A funding. Investors include Ourcrowd.com, Maniv Mobility, and Next Gear.

Xain, a London-based blockchain and AI startup, raised approximately 6 million euros ($7 million) in seed funding. Earlybird led the round.

Kittyhawk, a San Francisco-based drone innovation company, raised $5 million in funding. Bonfire Ventures led the round, and was joined by investors including  participation by Boeing HorizonX Ventures and Freestyle Capital.

Taft, a Provo, Utah-based men’s footwear brand, has secured $5 million in seed funding. Kickstart Seed Fund led the round, and was joined by investors including M3 Ventures, Fifth Wall Ventures, and Peterson Partners.

MoloFinance, a London-based mortgage fintech, raised 3.7 million pounds ($4.96 million) in seed funding. Ubon Partners led the round. Read more.

10% Happier, a Boston-based meditation app, raised $3.7 million in funding. Read more.

Multiply, a U.K.-based fully-automated independent financial advice service, raised £1.75 million ($2.3 million). Octopus Ventures led the round.

HEALTH AND LIFE SCIENCES DEALS

Cytrellis Biosystems, a Woburn, Mass.-based medical technology company developing aesthetic devices, raised $28.5 million in Series B funding. Investors include ARCH Venture Partners, the Merz Venture Initiative, Partner Fund Management, and BioMatics Capital.

PRIVATE EQUITY DEALS

Calero Software, a portfolio company of Riverside Partners, acquired Veropath, an Edinburgh, Scotland-based communications expense management platform. Financial terms weren’t disclosed.

Carousel Capital has recapitalized Huseby, a Charlotte, N.C.-based court reporting agency. Financial terms weren’t disclosed.

Paysafe Group, which is backed by Blackstone and CVC Capital Partners, acquired iPayment, a New York-based provider of payment and processing solutions for small and medium-sized businesses. Financial terms weren’t disclosed.

Parthenon Capital Partners and Waterfall Asset Management acquired Mid Atlantic Capital Group. Financial terms weren’t disclosed.

Frontier Capital made an funding of an undisclosed amount in MediaPro, a Bothell, Wash.-based provider of security, privacy and compliance awareness training solutions. Financial terms weren’t disclosed.

Linden Capital Partners invested in Solara Medical Supplies, a direct-to-patient distributor of advanced diabetes therapy products. Financial terms weren’t disclosed.

OTHER DEALS

• Seidler Equity Partners and Major League Baseball acquired Rawlings Sporting Goods Company, a sporting goods maker, from Newell Brands for about $395 million.

PetSmart Inc will spin off a 20% stake in Chewy.com as a dividend to backers BC Partners, The Wall Street Journal reports citing sources.

Invesco Ltd. acquired Intelliflo, a U.K-based provider of adviser-focused digital solutions. Financial terms weren’t disclosed.

IPOs

• Electrocore, a Basking Ridge, N.J.-based vagus nerve stimulation therapy maker, filed for an IPO of $65 million in an offering of 4.3 million shares priced between $14 to $16. The firm posted sales of $811,500 in 2017. Core Ventures and Merck back the firm. Piper Jaffray, Evercore ISI, and JMP Securities are underwriters in the deal. The firm plans to list on the Nasdaq as “ECOR.” Read more.

EXITS

Gryphon Investors acquired Shermco Industries, an Irving, Texas-based provider of electrical testing, maintenance and repair services, from Oaktree Capital. Financial terms weren’t disclosed.

FIRMS + FUNDS

JLL Spark, a division of real estate developer Jones Lang LaSalle, launched a $100 million venture fund to invest in tech firms.

NextGen Growth Partners, a Chicago-based private equity firm, closed its inaugural fund above its $50 million target.

PEOPLE

Katerina Crews joined SNH Capital Partners as a managing director.

Priti Youssef Choksi joined Norwest Venture Partners as a partner.

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Polina Marinova produces Term Sheet, and Lucinda Shen compiles the IPO news. Send deal announcements to Polina here and IPO news to Lucinda here.