The Exchanges

Q So what was the motivator then for change in the construction of the landscape of defense contracting? Was it software that takes us from the old primes to the new primes? Is that really what kind of triggered this?

A Consolidation. So in 93, having won the cold war in 91, or I think more accurately, the Soviets lost the cold war, you know, by 93, we expected as a nation, a kind of peace dividend. We don't have an adversary. Now we should be able to spend less on defense. And, uh, the department had this famous dinner where they brought 15 of the 51 primes together and said, this is gonna happen. The budget's gonna get slashed. We're not going to save you guys. You have our permission to consolidate. Some of you are going to go out of business. Some of you should try to make a commercial business, which didn't really work. Uh, and that's what led down to five. It was actually, there was going to be, we were going to go from five to four and 99, the justice department put their foot down and said, we're not going to let Lockheed and Northrop consolidate.

AI assessment note: “Consolidation. So in 93, having won the cold war in 91”

Q people are saying that Silicon Valley is taking over Defense and Silicon Valley is the next story of the American war machine. This has become sort of a popular narrative. Can you just respond a little bit to kind of where we were coming out of World War II from a defense industry perspective, where we find ourselves, where Silicon Valley seems to be at the center of this today?

A You know, the industrial base that won World War II and the early Cold War was not a defense industrial base. It was an American industrial base. You know, Chrysler made the Minuteman ICBM. They were the prime contract on it, and they make minivans, so missiles and minivans. General Mills, the cereal company, had a mechanics division. Everything they learned doing R&D to process grains, they actually used to build torpedoes and inertial guidance systems. Ford built satellites until 1990. So the entire economy was invested not only in economic prosperity, But also underwriting the freedom that allowed us to have economic prosperity. It's really a consequence of the end of the Cold War. So when the Berlin Wall still stood in 1989, only six percent of spending on major weapon systems went to pure play defense specialists. 94% of it went to what I call as dual purpose companies. You know, yeah, a missile is single use. It's not a dual use product. You're not going to buy it at Walmart, but that actually these companies were invested in both parts of this. That figure today is 86%. Goes to defense specialists. So we have a very different structure of the U S economy as a result. And I think it leads to very perverse narratives of what would it be like to mobile? If things got really bad, we'll just flip a switch and our auto factories will magically turn into enabling us provide for…

AI assessment note: “the industrial base that won World War II and the early Cold War”

Q Why do you think it became taboo and became so negative, particularly in Silicon Valley, that building a defense company or a company building technology to service the defense sector was viewed with, with such disdain and was an untouchable sector for so long?

A I think it's a beautiful consequence, and I mean, I mean it unironically, of kind of the peaceful world that we lived in. The origin story of Silicon Valley is actually defense. You know, Lockheed was the largest employer in, in Silicon Valley in the 19 fifties. The Corona spy satellites were built there. So in a world that was, uh, gripped by the threat of the Soviet Union, you know, you had a very different posture in Silicon Valley. But in a world post the end of the Cold War, the end of history, Um, kind of a view of globalism, that it's all gonna be great, that we exist beyond the confines of our country. Um, these things were viewed much more cynically, and the threats didn't seem very real. And I think you could even back test this through the moment where Silicon Valley kind of really woke up and realized, hey, maybe these things are real, or when the Russian tanks rolled across the Ukraine border. You know, it's when they realized, and there are a lot of Ukrainian, Eastern Europeans, a lot of people who were affected by that in Silicon Valley, who started to realize that Um, maybe there's a more nuanced issue here than just simple, the simple Eisenhower quote of the military industrial complex.

AI assessment note: “a beautiful consequence... of kind of the peaceful world that we lived in”

Q What's the next market where you're worried that's gonna happen?

A I have a lot of markets. So, I mean, we're, we're talking a lot about, um, weapons of war here. I'm worried about things that go beyond weapons of war that affect our will to fight. Uh, pharmaceuticals is one that's close to my heart. My father was a pharmacist, and one of the things he always wanted me to work on was bringing pharmaceutical production back home. 80% of APIs for generic drugs are produced by China. What do you think the American people are gonna think when they have to choose between defending the free world, defending American sovereignty, And their five-year-old dying of an ear infection that we would have thought of as trivially curable. So I think there are these, these things where we've just imbibed the globalist vision that, hey, we'll do the innovation, they'll do the production without realizing that innovation is a consequence of productivity. Probably to put it in terms that the, that the tech community would really understand is like, what motivated Google to do the research in 2017 behind the paper attention is all you need? A desire for a three percent incremental improvement In Google Translate. You cannot think of something more banal leading to something more revolutionary. And we've seeded all of those opportunities to realize and harness that innovation. Now, if we stick with pharmaceuticals, there's a reason 50% of all clinical trials, new c…

AI assessment note: “pharmaceuticals is one that's close to my heart.”

Q Do you think that outside of what Andurl's building, there's actions that this administration should be taking or that the private market should be taking to solve this hardware manufacturing and capacity gap that we have right now?

A My view is they're actually taking a lot of actions. Not all of them have come to see the day of light here, but, you know, even something as simple as re-imagining munitions and drones as consumables, they're not things that you build and then stock on a shelf. They're things that you, at the time of ordering them, you already have an exercise test plan where you plan to expend them, which means that you're going to have to replenish them, which means there's a demand signal to industry to keep going. And in a buying cycle, that means that you can buy the next generation rather than having the old generation. Uh, and I think this department sees that in a very clear eyed way and is doing the yeoman's work of like stitching that through, through all the services, all the portfolio acquisition executives to the point of not believing in process. They've moved from a world where you have a very rigid, Hey, I'd said I was going to buy X of Y and I can't change my mind to a world where there's more autonomy and authority for the people who are buying things to say, I told you I was going to buy something that accomplished this goal. I can change my mind about how I'm going to accomplish this goal, which, you know, can you imagine trying to run any private sector business without that degree of autonomy and flexibility in your decision making?

AI assessment note: “My view is they're actually taking a lot of actions.”

Q Where does the culture come from? The anti-defense tech alignment culture. Is it because of the peace era that we had and folks took for granted national security?

A I think the first schism was really during Vietnam, where people felt like, um, they were lied to about the war. It, it drove a fundamental schism between academia and defense. And that we've never really healed from that schism. And so there's this, this, this kind of sense, this distrust that's, that's brewed there and kind of escalates your society. The second schism is like the number of people who are prior service or are connected to this community who actually see these people as humans and have a fully informed mental model of how diligent they are, how the work actually gets done. What do these words actually mean? What is the process like? Is, is, is evaporated. So then their own fears Fill how they think it happens, and it seems like maybe it's happening more in a cowboy way. Maybe it's happening in a way without oversight, that there is no such thing as doctrine. Like, there is kind of a cartoon version of what's actually happening that I think, you know, you're unable to reconcile.

AI assessment note: “I think the first schism was really during Vietnam”

Q And last question, if we don't do things right, what does 20 40 look like? And if we do do things right, what does 20 40 look like? Economic and defense.

A Well, the, the economic part is, I think, the critical one, because national security is not an end unto itself. It's a means to an end, and that, that add end is economic prosperity, the prosperity of the American people. Um, I, you know, I think no country has done more to develop the world. Like, how did integrated circuits and microelectronics get to Southeast Asia? We sent them there. Yeah, we benefited in terms of trade there, but, you know, like, which other Winner in a war spent their own capital to rebuild the conqueror conquered, you know, in Japan and Germany. And now you have the stability as a result of it. So when I think about what could go wrong is you actually have a Chinese century that we never recover from that literally everyone in the world is a vassal state to China and might makes right in their sort of world, you know, and we, we shouldn't forget. It's like, it's very clear, even in the present moment that for the CCP, it's not enough for China to prosper. America must fall. That's an explicit part of the strategy. Look, it is a business decision. If you want to buy American or Brazilian soybeans, I actually don't begrudge you one iota which decision you make there. It's an entirely different decision when you're smuggling agricultural funguses into the US so that we can't grow soybeans. That's the sort of zero sum frame that I think 2040 will look like…

AI assessment note: “That's the sort of zero sum frame that I think 2040 will look like”

Q OpenAI, maybe one or two others. Is the landscape going to emerge that we're going to just look like the same old way of operating where we have a handful of primes that all have these trusted relationships with the government agencies? Or how do we kind of Create that competitive environment to continue to drive innovation and make things affordable for the US government and the taxpayer going forward.

A Well, just like, uh, and I interviewed Trey in my new book on this, like, just like venture, there's gonna be a power law here. You know, so, so one of the grave mistakes we've made as we think about innovation, which has resulted in essentially innovation theater, is this idea that you're gonna just peanut butter spread around the capital you have for innovation that, you know, every company is gonna get roughly the same amount. It's not enough to hit scale. It doesn't reflect actually the relative performance differences, because there's an authentic power law curve, like any venture capitalist would, would realize that, you know, your, your biggest winners are going to return your whole fund. There's, there's something authentic here as well, which is like, yeah, you may have 10 bets, but at some point you're going to have to get smart about concentrating down on, on the things that are actually working.

AI assessment note: “just like venture, there's gonna be a power law here”

Q Getting back to defense, how does the hardware and software fit together in this, um, you know, kind of emerging war technology landscape? You guys are building software, you're building hardware, like help us understand a little bit about what the systems of war look like in the decades ahead.

A Well, I think the, the starting premise would be, where does it give us an advantage? And, uh, you know, we had the first offset, which was nuclear weapons. The second offset, precision guided munitions and stealth. Really the third offset is decision advantage. How can we outthink and out execute the adversary? That's where these things fit together. That's like the thesis of even having them to begin with. And I think the reality is that there's kind of a messy overlap of these things. Like all innovation is messy and chaotic and maybe The department suffers at times because it tries to have a framework based approach. Like we're going to have Mosa modular open standards architecture, something like that. You know, it's like, we're going to avoid all of the pain and messiness by having some sort of process. But in reality, the process always destroys all of the innovation. And so there, there's obviously a very tight thesis where these things need to coexist and build off one, one, one another. They need to be interoperable. But you have to earn that. You have to earn that opinion in the exercises, in the tests, in the evaluation, in combat would be my, my humble suggestion.

AI assessment note: “Really the third offset is decision advantage... That's where these things fit together.”

Q need to stand up to have production lines that can be turned on To support munitions capacity for conflict in, you know, pick your region, let's say more than one region around the world, and the US needs to sustain those conflicts to defend the United States. How far are we from being ready based on what's going on in the investments that are being made today? Across the sector.

A I think the way I think about it is if you thought about this as a spear, the tip of the spear is incredibly sharp. The shaft of the spear needs a lot of work here. Um, the, you know, the Department of Defense is such a big organization. It's, it's structurally supply and demand is not integrated. You know, the, the demand side is the real world events that happen in the combatant commands. The, the supply side are what the services and the industrial base built, the man train and equip and how you're actually producing that material. And the ability to drive consensus, which is really the beating heart of any private sector company of like how to supply and demand come together. What's our view of it is, is kind of managed with, with great difficulty in the Pentagon and your ability, your agility to respond to scenarios is, is Weak. That's, that's where we can have a lot more precision because if you can start changing your mind and saying, actually, I thought I needed X barracudas, but now I need Y barracudas and Z furies. How quickly does that take to percolate through the supply base? You know, instead we get locked into these like, Hey, we've made a decision. The decision really can't be revisited. Uh, and then you start over time. The entropy is like, Hey, I need to, I have it. I have an unexpected bill. Let's just take a little bit of money away from these programs and e…

AI assessment note: “the tip of the spear is incredibly sharp. The shaft of the spear needs a lot of work”

Q for hardware business are notably higher. If you didn't have the success you had building the manufacturing facility you're building, and I'm assuming all the R and D cycles are longer and require more capital to get to a point of product. Does it make sense for venture capital to be the funder of the next gen of hardware defense tech companies? How does the economics and the capital markets

A I'll have a take here and then, so I think, um, if you back up a little bit, if you look at Fairchild, if you look at integrated circuits in 1968, 96% of all integrated circuits sold were sold to the Apollo program. There was effectively a monopsy. There's one buyer for this thing. But Bob Noyce, who was at Fairchild at the time and co-inventor of the transistor, he was so maniacally committed to a future that semiconductors, integrated circuits would be in everything that he never let more than four percent of his R&D be paid for by the government. He was going to be like, why should I have some PM tell me what my R and D roadmap? I invented the thing. So he kept executing that. And that's he, so he chased Moore's law mercilessly. And that meant in the eighties when the government needed precision guided munitions for assault breaker to compete against the Soviets, we had the price performance we needed. Uh, so this idea that, you know, cause when you get stuck inside the government loop of what they want, you never hit the price performance.

AI assessment note: “he never let more than four percent of his R&D be paid for by the government”

Q Well, let's look at where we are today. So in terms of defense readiness relative to our adversaries, 10,000 to one drone production gap versus China, 223 X Shipbuilding capacity disadvantage. And I think you've said a 20, 27 Taiwan window of danger. High level. We spend more than any other nation on defense. How ready are we? And how long will it take us?

A Well, our, our joint force is the best in the world. And so I, you know, I, I think we have to couch the alarmism and commentary in that context here. But I think if you look at like the, the rate of change Our adversaries are moving very quickly. If you just look at the empirical loss of deterrence, you had the annexation of Crimea in 2014, the militarization of the Spratly Islands in 15, Iran with breakout capability to get the bomb in 17, you've had a pogrom in Israel, you have the Houthis holding trade hostage in the Red Sea, not to mention the present conflict. So when you look at that, you, how can you not feel that deterrence is eroding? To Trey's earlier point of having capabilities that are so scary that Picking a fight isn't worth it. And people are investing significantly on the low end of the mix. Our high end is still unquestionably amazing, but, you know, you can't keep shooting two million dollar interceptors at 20,000 dollar drones and have that math work very long. I think the second part, like, why does it matter that we lost the American industrial base and have a defense industrial bases? You lose volume. You lose the R and D stimulus to come up with creative ideas, like using the methodology of building a bathtub to build the next generation, low cost cruise missile. Right, and you get stuck in these platforms that are absolutely eye-wateringly amazing, but…

AI assessment note: “our joint force is the best in the world”