Riskgaming

The United States has never won a conflict with the hardware that it had going into it

Description

Today we're talking about the future of American defense with the leadership of Anduril Industries, whose mission is to reboot the arsenal of democracy and become the most innovative defense prime in the United States.

Founder Palmer Luckey, co-founder and CEO Brian Schimpf and co-founder and Executive Chairman Trae Stephens joined Josh Wolfe and host Danny Crichton as we discussed the genesis of Anduril, how Luckey’s hardware experience at Oculus influenced the company’s approach to building new products, the urgency for new technology at the Pentagon, and what messages should be taken from the recent success of Top Gun: Maverick starring Tom Cruise.

I want to start out by painting the least rosy picture I can of the American defense industry over the last year and 2021. In Afghanistan, we saw a massive pull out of the American forces there. After more than two decades of war, we saw Russia invade Ukraine, in which Turkish drones some of the cheapest on offer in the market today have become the unlikely hero instead of American defense technologies. Meanwhile, America is not producing anywhere near the hardware, or even the software required to supply Ukraine with javelins and other core defense needs. On Capitol Hill, the defense budget process seems to get more chaotic and confusing every year. And we also found in the last year that China appears to be probably ahead of the United States, on hypersonic missiles. And so when I look at the defense industry today, it seems to me it's just negative after negative after negative news. - Danny Crichton

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Transcript

This is a human-generated transcript, however, it has not been verified for accuracy.

Palmer Luckey:
The United States has never won a conflict with the hardware that we had going into it, right? We've always had this understanding that we needed to be able to ramp up our manufacturing quickly in response to a threat, and that we needed to be able to adapt and build new things very quickly. Like you look at what happened during all of the major wars that we've been involved in, we've seen multiple generations of aircraft, multiple generations of weapons even inside of a war. And right now, it's pretty clear that the United States doesn't have that manufacturing muscle anymore, doesn't have that innovation muscle anymore.

Look at what's happening with in Ukraine where we're deploying decades of stockpiles of various weapon systems. We've literally been stockpiling for decades and we've exhausted them almost immediately in what is a relatively small conflict, big picture wise in the world. And so you look at that and it's hard to imagine where we could possibly move fast enough to build the things that would be relevant for a new conflict.

Danny Crichton:
I think one of the quick, big questions, Palmer, when you were talking about that we don't have the technology going into a war that we started with, it reminds me of Paul Kennedy's work, Engineers of Victory, which he talks about, particularly in World War II, the number of technologies that the United States literally invented in the war in order to fight off the Nazis and the Japanese, and the Pacific Theater I think highlights five or six including such things as radar. I'm curious when you look at the conflicts here, and we have a couple of different threats. We have threats from classic great powers, China and Russia and Ron come to mind. We also have sort of emerging threats, cybersecurity, small groups and cells that are fighting on terrorism or on online. How do we sort of conduct ourselves and rebuild the industrial base given the threat environment we're seeing today?

Palmer Luckey:
Well, it's really tough. You look at companies like Apple. They're the largest company in the United States, and they have invested 275 billion in Chinese manufacturing explicitly contractually by agreement with the Chinese Communist Party. That doesn't even include the investment that they've made up to that point without a specific agreement like that. And I bring that up because you compare it to what a lot of people see rebuilding the United States in capacity. You've probably seen the Chips Act and it's being hailed as this once in a generation, incredible bill, 52 billion dollars to bring back semiconductor manufacturing through the United States. And it's being hailed this incredible thing, and the reality is it's one fifth of what one company is investing in our largest strategic adversary doing this same thing.

And so what does it take to rebuild America's manufacturing base? It's probably well beyond what can be done with these kind of one-off PR stunts, like we're going to funnel money to this particular project or this particular project. Fundamentally, the United States has to be a place where people want to manufacture things. This isn't just a money issue or facilities issue. A lot of people imagine that China won the manufacturing war because of cheap labor. That's the easy narrative.

The harder to deal with narrative is that they actually have better people in a lot of areas and that they've been generating more and more people because in the United States, people don't want to get into manufacturing anymore. It's not the cool thing. It's not like aerospace used to be. In China, the young kids who are really smart want to work in manufacturing. They want to work in battery technology, they want to work in semiconductor technology, sensor technology, drone technology. And so it's not just that we lack the capacity, we lack the talent too. So building this up, I don't want to say it's too big of a problem for me to give a roadmap, but it is.

Danny Crichton:
Trae, what is your perspective on this?

Trae Stephens:
During a time of war, existential threat becomes a tremendous motivator to national strategic economies. Since the end of the Cold War, we haven't had that sort of existential threat that's motivated people to go and work on these key strategic problems. Palmer gave a speech a few weeks ago where the title was The Current Year is Too Late for the Current Thing. Again, a culture where the current thing dominates all of the creative energy of an economy, it's pretty easy to lose track of the importance of some of the strategic initiatives that you can't wait for that crisis to happen. You have to be prepared in order to prevent the crisis from happening or to be able to respond appropriately to the crisis. So I think part of this is just kind of inducing into our culture the ability to think critically about important things that don't align with whatever drop in a bucket cultural narrative is dominating the headlines.

Danny Crichton:
So I want to go back to, Trae emphasizes this point that if you're looking at the current year and the current thing and everyone's focused on that, you're now sort of predicting the future and driving the innovation where it's going, and I want to go retrospectively because for Palmer, for yourself, it's almost exactly 10 years since you started your last company Oculus VR, launching the Oculus Rift. And what was interesting at the time, if we go back to mid 2012, you were emphasizing hardware at a time when I think almost no VCs were particularly interested in hardware VR, any of these sorts of categories. Everyone was focused on software, FinTech and services and SaaS. And I'm curious on twofold. One is why did you go into hardware when everyone else was going into software? And two, when we were talking about the Chinese manufacturing hubs, you must've run into the challenge of building these devices locally, domestically in the United States.

Palmer Luckey:
So I think you're looking at this from the lens of a VC, why would you work in hardware versus software? Why consumer versus enterprise? And the reality was I liked VR, it was my hobby, and so that's why it was in it. If it had been a software play, that's what I would've done, but the reality was where it was really lacking was the hardware.

Now, we did have a lot of software effort. People often look at the Rift as just a hardware win, but actually a huge win that we had was being the first company to build a software toolkit that made it easy for any game developer to make a virtual reality game. Up until that point, even if you had the hardware, which cost an enormous amount of money, every developer needed to be an expert systems integrator to integrate motion tracking hardware and rendering hardware and the display hardware. We made it so that anyone who had had ever taken a 30-minute unity course could make something in VR.

Danny Crichton:
So you had this passion for Oculus, you were focused on VR at a time when a lot of folks weren't focused on it, weren't worried about a return, but you did have to actually build the device, which meant you had to go into manufacturing into the supply chain. Did you look domestically on how to build the Oculus Rift, did you have to go overseas? And what was the learnings that you learned from that company as you applied to Anduril?

Palmer Luckey:
It's very easy to build things at prototype scale compared to mass manufacturing scale. So when you need to make millions of something, you have to have a totally different mindset, and we did actually look at domestic manufacturing. In fact, there were some very early Oculus development products which were manufactured in the United States, and also in Mexico, which I would count as infinitely preferable to building in China. And it wasn't one of those things where we didn't try, we actually had a whole little contingent of Jingo engineers who really wanted to build this stuff in the United States if possible. But when we did the analysis, it just wasn't feasible at all.

Here's an example. We were building a particular lens and it was a really cutting edge type of optic that had never really been done in the consumer product before. The only vendors in the United States that would even respond to our requests were people who built missile optics, basically lenses that would go in complex arrays that would go onto missiles and they would diamond turn us these custom optics. And they were quoting us at about $6,000 per lens in production quantity. And it was a very difficult lens manufacturer in that you had to use an injection mold that had active heating and active cooling, basically liquid channels in inside of the tool, and you had to vibrate the tool and heat it and cool it in a perfectly controlled way or the lenses in it would warp and they wouldn't be exactly the same from lens to lens. And you couldn't do your software distortion correctly.

So in China, we were getting quotes for somewhere between three and $10 per lens, and in the US the cheapest we could get was in the thousands. This is a problem from little startups like Oculus all the way up to multi hundred billion dollar corporations, even ones that desperately, for political and social reasons, want to build domestically.

Danny Crichton:
Unbelievable. And I think obviously it's success selling the company to Facebook for 2.3 billion dollars, you started looking around for new projects to work on. How did you three meet each other and how did you decide to go into the defense industry? Because, again, and I know I'm putting a little bit of the VC hat on, I don't know any VC back in 2017 who was sort of raising their hat. Well, maybe, Trae, yourself, but almost no one who was like, "Hey, you know where the future of startup innovation's going to come? The defense prize."

Palmer Luckey:
I mean it was Founders Fund. Trae probably has the better perspective, but we all met through Founders Fund. They were probably the only fund that was looking at it that way, Trae specifically.

Trae Stephens:
So when I left Palantir at the end of 2013, I came over to Founder's Fund on Peter's request more or less. Not knowing anything about finance, I decided that the one thing that I did sort of understand was defense technology. Founder Stone was a large investor in both basics and Palantir, so I kind of started canvassing the market and trying to meet with every company I could that had either bid on a government contract or won a government contract and also raised venture dollars to understand what else was out there, didn't really make any investments, went back to the team and just kind of told them, "I've met with hundreds of companies at this point." Retrospectively looking back, we didn't miss anything. It's not like there were companies out there that we just didn't see.

I had been talking to Palmer. We were the first institutional investor in Oculus. I knew that he was interested in national security and also still had a strong network of my close friends like Brian, Matt Grimm, who was one of our other co-founders from the Palantir days, and pitched this idea to all of them that, man, it would be really cool to start next generation Defense Prime. And Palmer surprisingly, instead of saying like, "Wow, yeah, that's an interesting idea," he was like, "I've been thinking of the exact same thing. Here are pictures of jet engines I've been assembling in the drained pool in the back of my house in Woodside." And so that kind of accelerated the process pretty quickly. And when he exited Facebook, we just immediately picked up on where that conversation left off.

Danny Crichton:
Brian, I want to bring you in here. Will you talk to us a bit about how Anduril can compete in a space where the legacy players are so entrenched?

Brian Schimpf:
Yeah. So maybe I'll just talk a little bit about, somewhat optimistically about why we think we can win in this space. So I think that we've talked a lot about how broken the defense department is and where America is on this position, but I think the reality and the advantage you have working with the defense department is you have some of the most mission-aligned and driven people who actually want to solve these problems. People aren't sticking around working in the military because it's fun and easy. They're doing it because they are truly mission-driven. And often the bureaucracy and all the policies get in the way, but when you can present alternatives, you can actually give them a path forward to win and to succeed, it's not 100% of the time, but they often take it. They want ways to move forward. They want ways to actually solve these problems.

The parts I get really excited about with the business are, why am I here? Why am I doing this? One, it's an extremely important problem, but there are people who do want to move and people who do want to solve these problems. We've had amazing success working with special operations. We've had amazing success working with a lot of partner nations, working with a lot of different groups within the DOD. There are these pockets that really do want to move fast. We've moved from some of these concepts through to large scale programs. For SOCOM, for example, it's two and a half years from start when we started working on counter drone systems, when we awarded a billion dollar program. That is record time. That is actually quite fast for any organization to move that volume of commitment out.

And so I do think there are these bright spots where if you can build the right technology, you can get aligned with the right people and find these urgent mission problems, you can have a lot of success. So those are the areas we get really excited about, is finding these places where we can win, where we can move fast and where technology can actually make a huge difference. And I think that's been the difference that's made us so successful, is having that conviction and pushing really hard where we know this is a problem, we know there's something we can succeed on.

Palmer Luckey:
And if I could talk about how that kind of turns into a real decision making process, a lot of other defense companies, definitely most of the startups that Trae was looking at, they come out of academia, people figuring out some cool technology and then trying to figure out how can I sell this? How can I make this? They're like, "Oh, I came up with this cool laser tech or this cool radar tech or this cool imaging tech, how can I sell this into DOD?" And then they desperately try to find some niche in DOD. And what we've done is basically the opposite. It's where can we make the biggest difference? What are the biggest openings right now where someone could, if they had the right thing, could move quickly into production? And then that's where we invest our research and development resources.

Even with SOCOM, we went in saying, "Okay, how can we solve the counter drone problem? What are the things that a company trying to solve this problem would build?" And then we built the most important ones and started going down the list. Whereas a lot of other drone companies, they start with, "Ah, I have a novel beam-forming technique for this type of antenna and I believe I can build a counter drone company out of it." And the same thing with counter drone laser companies. They're like, "We were building lasers for other DOD projects that didn't make any sense, but now a new project that does not make any sense has emerged, the counter drone threat."

That is a big difference between what we've done and other companies done. I would encourage other companies to probably think about it that way. Figure out where an opening in DOD is rather than how you can use something you've already built to try to break in because it's pretty unlikely that by chance you happen to have built exactly the thing that is the best thing if you weren't even thinking about it being applied in that area from the beginning. Which is also why I'm skeptical of a lot of these dual use commercial applications. Yeah, it's unlikely your thing you built for commercial applications is the best thing also for the military.

Danny Crichton:
So clearly the current system is broken with misaligned incentives. You have outlined what could be a better structure. My question then becomes what is next? What is the ultimate goal? Brian, let's start with you.

Brian Schimpf:
The mission's quite clear. So for us it is the US of the great powers is the one founded on human rights. It's the one who wants to actually ensure freedom around the world. And you could have your disagreements with whether the US is right or wrong in this, but it's pretty hard to disagree that we're in a better spot than we would be with China or one of these other countries having this dominant position. I think the part that gets lost is what Trae was saying earlier around the goal is to prevent war. The goal is to make the outcome of any conflict so clear that you would not try it. The goal is to give nations the ability to defend themselves, not to perpetrate aggression, but to actually protect their sovereignty, protect their people.

And you look at what happened in Ukraine, and to me that was a failure not just of are we producing today, but we failed to give them the hard power necessary to make that conflict obvious. We failed to give them the abilities to make it so clear to the aggressor that this would not be successful. In reality, I think it turned out much harder than Russia was anticipating, that Putin was anticipating, but that wasn't obvious and that's actually a huge problem.

So for the folks here, what we get really excited about is being able to really move the needle on how do we change that posture? How do we make it so clear what the outcome of these conflicts will be and how do we keep the men and women protecting America and our allies as safe as possible in doing it. We work in a lot of areas of autonomy. We work in a lot of areas of unmanned systems. We try to think about how to do this as sort of low cost and intelligently as possible. And that's been kind of the motivating case through and through.

We're not working on R and D problems, we're not looking at kind of a science and technology question 10 years out. Always the question is, how are we getting this to field now and does this move the needle on the US's position? When we've aligned to that, we've been able to get an amazing amount of urgency from the government, and I think there's a lot of clarity. What we try to do is say, "Here's your mission problem. We can solve this now." And that has moved it much faster than waiting for the bureaucracy to turn around and say, "Yes, this kind of follows the process." We're like, "Nope, let's actually go out and say, 'Hey, here are the core issues that we need to solve right now,'" and really get a lot of motivation around them.

Danny Crichton:
Josh, I want to bring you in here. You had a good point about the challenges of acquiring and keeping people who want to work in the sector.

Josh Wolfe:
You, years ago, had employees at Google protesting their work on Project Maven. You had a variety of other people that just didn't want to work on these problems, and increasingly now in light of current events, I think people do. Where is, and you were the first or amongst the first to really capture that zeitgeist and say unapologetically we're not just making technologies and leaving it up to the customer to figure out what they do. We are building technologies that are going to be in the service of the women and men on the front lines. Where is the talent coming from? Where are you recruiting from? Is it old primes? Is it young tech companies? Is it straight out of school? Where is the talent that is rebuilding this arsenal democracy coming from?

Brian Schimpf:
We've been able to track people across the spectrum on this. So we're getting people who are either frustrated or looking for something different coming from traditional defense, or even people coming from big tech who are excited about the mission problems working on, or even getting people out of university where I think historically it's been hard for them to tell their friends they're working on defense. We've tried to be very frontal with what we're doing. And I think the reason it's worked is we are unapologetic about it. We're very clear about what we do. We're very clear about what we make and why and how we think about it. It's a very serious business, we take it very seriously, and we're very clear about what we were working on.

Palmer Luckey:
There's a lot of these guys who were previously interested in going to work for Lockheed or Raytheon, it's just they don't want to work in a place where they're going to get to move very, very slowly. What's the Northrop statistic where during the Cold War, Northrop, the average engineer at Northrop would get to work on seven different airframes during their time at Northrop, and the average now is 1.1. So that means that in your time at Northrop Grumman, you're likely to work on one aircraft, and to be clear, working on one. If you're working there, you're doing that, and then one out of 10 people will get the chance to work on a second aircraft and people just don't want to do that. We're a great place for those people to, if they have those values, come and work on things at a much faster pace.

Trae Stephens:
Yeah, the great former Lockheed CEO, Norman Augustine, had some quote that was pretty funny that he said in, I forget the year, but in 2035, the entire defense budget will buy one aircraft.

Palmer Luckey:
And he did list the specs. So he listed the specifications. He's like, "It'll be one aircraft. It'll carry 10,000 tons and fly at Mach 5, but it will be one airplane." And it was a critique of how planes have gotten so much more expensive in pursuit of exquisite capability, but making the point obviously you can't fight wars with such a machine.

Josh Wolfe:
I want to come back to the technological piece because it's an important one and the diversity of all the crazy stuff that you guys are building, but this is a natural jumping point to the different economic structure in philosophy of when you started Anduril. The F-35 joint strike fighters probably Exhibit A, although there are 20 different ones from large aircraft carriers to other programs where they're built in several hundred congressional districts, they're cost plus, they've massively overrun, they haven't delivered, and it has cost the taxpayers billions, if not tens of billions of dollars in access.

Brian Schimpf:
For folks not familiar, cost plus is kind of the way the government does all these contracts, and the idea here is government pays you for everything it costs plus a fixed incentive fee, so you get a couple percent margin on top. Obviously this has incredibly broken incentives where all of a sudden now you're paid for things being more complex, more expensive, failing, taking longer. It really doesn't incentivize you to perform as sort of efficiently and cleanly as possible. And incentives matter. And our belief with this is not going to work if we're sitting there thinking about how are we maximizing our billable hours for every engineer working on this project. It's only going to work if we can focus on delivering technology that actually makes a difference.

So the way we've looked at this is, well, let's just fund the research and development ourselves. The iRead budget for most of these big primes is a paltry amount compared to any big tech company. I think you're looking at like one-ish percent and you compare it with Apple, which is wildly higher than this. It's just there's no comparison there. There's no sort of belief that by building technology, they can substantially increase their future. They want to be paid and have all the risks absorbed by the taxpayer. Our view was you're just going to get the best timeline, the best product and the best technology out quickest if you actually are motivated to get to market. But very simple, very simple idea.

So we fund our own research development. It's worked incredibly well and it's allowed us to move very, very fast where we can build these prototypes in a matter of months, get them out in front of customers and have them understand what's possible. And so this has been an extremely core part of how we believed in what we're doing. And even apart from the incentive structure, it forces us to have conviction in that technology, in that roadmap of what we're building. And that, again, is quite different where if you're in this other world, you're kind of waiting to say, "Well, tell me what you want. I have the best engineers. They can build anything." No, our view is we will have conviction and we need to have conviction, and what are those technologies, what are those products that will solve real urgent problems? And that is a very different mindset than if you're just working on getting reimbursed for what it costs.

Danny Crichton:
I know we're almost on exactly time, but I do have one final question because I think it's highly relevant to Anduril. I watched Top Gun: Maverick two weeks ago, a film that both is an amazing kind of statement on America and patriotism, particularly beautiful for 4th of July, but also it was a kind of great defense policy piece you don't see in film very often, which was the core of the story was this tension between a pilot maverick from the original Top Gun, which is played by Tom Cruise, who's up against the fact that automation is coming for the manned warfighters. So he's a pilot, he's out of date, he's old, his career is coming to a close, he's stuck at the captain level, and it's sort of this tension between the future of what defense needs to be versus the past of what defense is sort of nostalgically looking at for most people. How did you feel about the film? Because I assume you all watched it.

Palmer Luckey:
Yeah, and actually we took the whole company to see it the night that it came out, so we definitely need to go see it. So my feelings going into it were complex because one of the largest financiers of the film was Tencent, which has a lot of money from the CCP in their fund and from the state-owned entities. And so I was pretty concerned that we were going to see a lot of modifications to the story, and some of that brought out true. I don't know if you remember the controversy, but when the trailers came out, Tom Cruise was wearing his same flight jacket that he had worn in the original film, but it was missing the Taiwanese flag and the Japanese flag, which is especially bad actually. The Taiwan thing, I can kind of get it. You frame it as, oh, it's a civil war issue for us. But it's like, come on, you're going to pull the flag of Japan off of the jacket? Anything you can complain about is pretty long time ago. And they're one of the US's top allies. And so that really had me feeling conflicted.

One of the cool things is actually they ended up putting them back in the film, and this didn't leak until the day of release, but it turns out that Tencent got their money refunded that they had put in and they pulled out of distribution and marketing for the film right at the last second because they were afraid that being involved with a film that had still ended up so pro-American would reflect poorly on them domestically. You can see the influence that remains.

It's pretty ridiculous when you watch these highly technical fighter pilots and analysts and they talk deeply about the weapons systems and the mission profiles, and you're up and you're in this aircraft with this weapons load out and you're up against fifth generation fighters flown by the enemy, and it's just ridiculous that they won't say it. They can't say who the enemy is, they can't say what they're flying. You never see any of their faces or hear any of their voices, and I think that's probably some of the Tencent influence. But overall, amazing movie. Just broke a billion dollars at the box office. They need to make more movies like that.

Danny Crichton:
Fantastic. Well, this has been so great. Palmer, Brian, Trae, Josh, thank you so much for joining us.

Palmer Luckey:
It's always a pleasure, guys. Thank you so much.

Josh Wolfe:
Thank you.

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