E352: JD Vance’s Co-Founder on Space Defense, Hard Tech, and the Biggest Opportunities Ahead

0:00So you started Narya with JD Vance in 2019. What was it like working with the vice president in a business context? Before we started Narya, we've been working together since 2014, really. And what always made JD a great investor was, you know, I think he was a very first principles type investor in that he was excellent at thinking about what the state of the world was today and seeing around corners as to what it might look like five to seven years from now. and then taking that lens and thinking about how to build investment theses around that. And so he also was very, I would say, very mission-driven and enthusiastic about themes around what could venture dollars do to help our country, our government specifically, help our citizens?

0:47How could we improve the quality of lives of most Americans with advances in science and technology? And how could we also serve founders in off-the-beaten-path geographies? And when you sort of put that all together, you sort of had this interesting investor was both first principles driven, but also mission driven. And when you combine that, it gets very interesting. And we were able to look at all sorts of companies across a myriad of sectors, including biotech, defense, advanced manufacturing. And it was really all about this idea of returning venture dollars to backing founders, addressing what we see as the need to solve problems in our country.

1:18Almost like this idea of to be progressive in the asset class, you need to be regressive and return the asset class to sort of its inception. What did venture really start out to do? And it was to help our government. It was to help our companies create real GDP growth at scale, and it was to help our citizens. Many people believe that there's a tradeoff between investing in really innovative companies and getting venture-like returns with limited risk. Do you believe that there are strategies where you could invest on a risk-adjusted basis in a superior way and make some real bets? I do. I think one of the traps, and you have to be really careful when you're thinking about some of these categories where, as an American, you really want these things to work.

2:01You really want us to control our own destiny and all the different themes in onshoring, whether that's tied to pharmaceutical, whether it's tied to defense, whether it's tied to job creation. And so you want these things to work. And as an investor, you need to be very careful that the mission actually matches with a potential return for your cost of capital. And as a venture investor, the way we think about our cost of capital is we want to invest in companies that if they scale and things go well along the way and probably some serendipity as well, they can on a net basis return our fund and ideally even multiples of that.

2:32And so as we delve into some of these categories that are bits and atoms businesses where there's real hardware, there's a lot of opportunity, but the business model innovation is the key. And so you need to find founders who not only sort of on this continuum, not only understand how to build tech and how to convert that into product, but then how to create a real business around it where you can get venture-style returns at scale. You can have real gross margins. And it's a subset of these businesses. And so whether you think about defense, whether you think about advanced manufacturing, whether you think about pharmaceutical, whether you think about energy, it's like one of these areas where I'm very bullish on the categories and the CAGR of these industries.

3:14but there's very few companies that actually get the tech right and translate that into business model innovation. And so that's sort of where we focus our energy. There's a lot of nuance to this. Can you make a lot of money in innovation? There's a couple of ways I think about it. The only truly innovative mainstream firm that I think of is Vinod Khosla. One of the things that he says, he tells this to LPs openly, and he's even written about it, is that he wants to have really good returns. He wants to have top-quarter returns, but he's not optimizing on returns. He's optimizing on impact. So there he's making this inherent trade-off.

3:44And it's interesting, it also self-selects a certain type of LP. Thankfully he's had great returns as well, but I think there's some rules to how to invest into very innovative companies. Unlike as a founder, so if you're Elon Musk and you say, I wanna build a Dyson Swarm around Sun, one of the advantages of doing it within the context of a company versus a fund is that now you could amalgamate talent. Now the world's best thinkers and doers will come to you. With a VC, you don't have that leverage. You can't hire these 100x investment analysts that will just out-analyze everybody else. So you're kind of fixed in your constraint from a team standpoint.

4:17But the main constraint that I see there is the answer to the question of can you invest in very innovative companies and make a lot of money is yes, but it must be in something that's not too bleeding edge. It needs to be frontier, but it can't be five to ten years away because then you won't have the following up. I think that's right. I think so we take a lot of pride in having been ahead of the curve on a lot of themes that are now in areas that I would call very busy. Defense is a good example. There are all these founders building defense companies right now, and there's a lot of very sector-focused VC funds.

4:48It's only defense or it's only advanced manufacturing. And our view on that, again, back to the sort of the high CAGR in the category but being very bearish on most of the opportunities that we see, is that a lot of those companies needed to be built like five years ago before the problem had surfaced and before our government really needed to sort of change its procurement cycles and change how it thinks about working with tech companies to solve a lot of its issues and the ability to scale. So you have this behavior where there's this sort of mimetic behavior where people and firms tend to sort of all sort of flock to these same ideas after they've become a little bit more mainstream because they were historically contrarian.

5:26So they think of them as contrarian ideas, but they no longer are. And so we try to stay away from that. But I think your point is an interesting one, because we also think there's a lot of groups that say, no, no, no, we're not memetic. We are thinking about the future we are going to solve for the future the way we see it is going to evolve. It's almost impossible. And so when you have investors and you don't have an evergreen fund, I think that that's just a very hard investment to make. And the tech risk is, in our minds, is too high. Like we prefer going after these sort of hidden in plain sight problems.

5:53And so when everyone moves into defense, we move a little bit away from there and we go back into healthcare, which has been bottomed out. And a lot of investors have real scar tissue from touching healthcare. But now with advances in AI, there's a lot of stuff one can do that you couldn't do five years ago. So we try to be very nimble and curious. And I think there's this barometer where you can't go too far into the future, but you need to be prescient enough to be ahead of these market trends. And I think there's a couple of ways one can do that really effectively. To your point on Coastalets, you need to have aligned LPs that are really comfortable in your strategy.

6:24And part of our strategy is having a very, very concentrated portfolio. So 12 companies per fund, and then you sort of double and triple down into your best company. So it's really only like three to four big bets per fund. And so that gives us a lot of time to do research, to collaborate with folks in our network. We have a lot of strategic LPs that have very experienced engineers and scientists on their payroll who help us with answering some of these hard questions. And so you sort of have this mesh network of aligned folks that are optimistic about the future, but doing it in a way that is informed, research-driven, and cynical enough that you're not going to chase stuff when everyone else is going into it.

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8:47And he talked about this LP mistake that a lot of LPs make, which is double diversification. Sometimes you could argue triple diversification. They're diversified. They need every portfolio company to work. Then they need every fund to work. And then they need the whole category to work where some of the smartest LPs, they love these concentrated positions and specific funds because they know they're building a basket of funds. They're not investing only in 12 companies in the case of NARIA or 12 to 15. they're actually investing into the best ideas from each manager. Most of our LPs, the discussion has always been, okay, we're backing you for fund one, but we see this as a long-term bet.

9:19We understand you're trying to build a platform for the next, say, quarter century, if things continue to go well. And can't promise we'll be with you that whole time. Is that how they're underwriting it in that they're betting on, call it, 40 companies versus just on the fund? Is that how they're getting their mind around it in that we expect one super power law outcome in those 40 companies? It depends on the archetype of an investor. I think the larger institutions tend to think that way. But based on our performance, we have some pretty big winners in our first fund and expect to have in our second fund as well.

9:46And so hopefully that can be showcased every five years or so. But I think that's right, yes. Hopefully you don't have to wait three funds. No, exactly. And then there's sort of the long tail of investors, founders we've worked with, and other more individual LPs where it's a different calculus. Narya, your fund was famously backed by Peter Thiel, Mark Andresen, Eric Schmidt of Google. why would they back a VC fund? And maybe you could explain the rationale. With the Peter example, we had been working with him for a long time. So there was a good relationship there. Both thought about a lot of things in similar ways and a good record of investing together.

10:20I think the broader network of the reason we were able to raise a first fund, which is always really hard, but also do it with high quality investors that actually could be really helpful to us, was that I think we were very clear about what we were trying to do. JD and I had been living in the Bay, and we understood the behavior, but we were surprised that so many funds were going all in on enterprise software and consumer internet. We understood the sort of short-term financial rationale for it, but the way we looked at the opportunity, we had some cynicism about that, and we wanted, going back to this idea of being mission-driven and investing things that are real and actually can have real impact at scale, we just saw very few funds doing that.

11:00Of course, there were some exceptions. and combining that with this not requirement but comfort that there were world-class founders capable of building transformational businesses outside of the Bay, outside of California, outside of Boston, New York, all these hubs because we had seen it and invested in it historically. Putting those two things together combined with some strategic LP relationships that we had already surfaced to folks like Peter and Mark and Eric and some other well-known people, that really resonated with them. And we were very clear that we weren't going to be chasing trends.

11:34We weren't going to do crypto. We weren't going to do NFTs. We weren't going to do these things that we would almost always have FOMO around, but we would never invest when everyone started chasing something new that came up. General AI right now is another example of that. A lot of our companies I would consider AI companies, but they're not these sort of large language model platforms or things. And putting that all together, I think that really resonated with investors who have great pattern recognition. They said, okay, this is actually a unique approach. And we weren't shy about saying, look, we're not saying consumer tech is bad, and we might do a consumer tech business, and we have a great company in consumer in the religion space.

12:07But that's not the focus. It's being nimble and curious and taking a macro view to what problems are. You can't be all in on defense. You can't be all in advanced manufacturing, because there's only going to be one or two companies that are really special per cycle. And so if you miss Anderil or an equivalent, maybe defense isn't the right place to play. Maybe you should be thinking about terrestrial defense. Maybe it's space defense. And so we had a lot of really interesting ideas around that. And that was how these folks got in. And it also didn't compete with what they were doing. And typically these category definers, the Andurils, the SpaceX's, they're there before the category exists.

12:39They create the category. In other words, you can't be chasing momentum and capture these opportunities, at least not at their least. We get pitched a lot by founders who are trying to build the next Palantir, the next Anduril. And I think perhaps the next Anduril is Anduril, right? And that being said, there's always white space in these categories. And so we just invested in a company a couple months ago that has a very different theory of the case of where there's opportunity within defense, which really resonated with us. And so the thesis was you've got Anderals and these big companies going after the big ticket government programs that are with very complex technology, very capital-intensive business rate, and you raise billions and billions of dollars.

13:16And a lot of those companies already exist that are able to win those bids. That being said, all these arms of the U.S. government have all these shorter-term needs in what I would call almost micro-projects. They're not interesting enough to be sexy for some all-star founder to go after. They're not big enough outcomes on their own where you're going to get a$10 billion-plus outcome, and so venture investors tend to shy away from them. But this founder, Julie Bush, who's ex-Palantir, she said, well, if you do this as a whole co-model, again, back to turning tech to product to business model innovation, If you have business model innovation around this where you can sort of have this hub-and-spoke structure where you're sharing resources across these product companies and going after these much sort of more micro-problems at scale, that gets really interesting.

14:01And so that was a very unique idea in what I would say is a crowded category. And so we're not sort of off investing in defense. It's just got to be really special. Maybe let's double-click on one of your company's true anomaly. How did you go about picking that company? And explain how that fits your thesis. So at prior funds, I had been a somewhat prolific investor in space and defense. One of the things we were observing was that this concept of what was sort of theater for defense was changing quite a bit. And we had all these capabilities at a terrestrial level, and we were starting to see more companies do stuff at a maritime level.

14:38But we sort of felt that space had evolved from this perspective area that was just going to do stuff that was very futuristic, like go to Mars or mine aquifers on the moon or whatever, like we were talking about before. But then all of a sudden it got really boring with just like this basic infrastructure. But we saw like in between that what was really happening was that space was going to become this next contested domain for a fight for sort of what does it mean to be sovereign in space? How do we, our most critical assets for all our communication systems and our military systems are now in orbit.

15:11How do we protect those assets? How do we understand if others are trying to impede our progress there? And we, through our network, we had met Evan, who is the founder of True Anomaly. And he just had this really interesting theory of how space was going to be the next contested domain, how China was already advancing much faster than we were in developing capabilities, both for, I guess, offensive defense and offensive offense. And we just didn't have that. And they were ex-Space Force, ex-military, ex-prime sort of DNA, putting all these interesting founders together. And so they had sort of had this unfair advantage where they had built these, essentially built the playbook for how this was going to work and how the government was going to actually be able to solve these issues.

15:55But the government and the primes were too slow to actually be able to build for this next modality of potential warfare and all these tech, both hardware and software-enabled capabilities that we need to have. And so they said, well, we need to do this as a private company and work very closely with the government. So they built it in the public sphere, and then they went out in the private sphere to go. And that sort of pattern recognition for us is really important. And if you've looked where they are now, we were in at the pre-seed. They're very far along, and they just won Scope and Golden Dome, both for hardware and software.

16:26There's no other startup that got that. And so this idea of SDA space domain awareness is evolving into also space-based interceptors and all these other capabilities that we hopefully will never need to use, but we need to have at least from a deterrent standpoint. And I think space is sort of this next operating system for modern power. And Evan and this team was there ahead of that. The way I like to explain it is it's another form of air rights. If you think about recently in the war with Iran, U.S. and Israel now control the air rights, So they had domain, air domain over the country. They could go and bomb whatever targets in Iran.

17:00Same thing now. The new air rights is space where you could basically take lasers and reflect them in space and then basically hit any target in the world. So obviously that's the next frontier. It's the next frontier, and it's a very interesting, I guess, what was an academic discussion that's now going to become quite real about what we used to have this with our oceans and our skies as well. and now it's going up into an orbital level. What does it mean to be sovereign in space? How do we create systems around that that actually work with our allies? Who has rights to do what on the moon? There's going to be all these really complicated decisions one's going to need to make.

17:36And being able to have capabilities to protect our assets as we sort of delve into these complicated questions and hopefully lowercase b battles, I think is going to be really important. Perhaps this is a dumb question. I'm an investor in SpaceX and VARDA, but I've never really thought about, what was the catalyst for space tech as a space? Was it just SpaceX and psychologically taking away the boundary of creating space companies, or was there something technological? SpaceX is a big part of it, but there were, I mean, there were lots of other companies that we backed historically as early as 2012 that were, you know, the cost, tech allowed for costs to get down to sort of get a payload into space and some of these ride-sharing models.

18:15Obviously, SpaceX is a big player there, but there were other companies as well. the quality of imagery technology to allow you to do the Earth observation, then all of a sudden you sort of had this proliferation of these small-set constellations that were able to do well. And you sort of slowly got more and more infrastructure into space, and then you could start evolving from, okay, well, we can get rockets into space, satellites work, and now it's like, okay, well, what are some other things we can do? And obviously, with the rise of the Internet and our need for better communications and all the advances that are going on in the telecom space, it's required us to go up to be able to sort of cloak the planet in better comms.

18:56Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square, they just feel more put together.

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20:03That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square. The all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here.

20:35They use Square and everything just works. Check out is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square, they just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups and everything stays synced in real time. You could track sales, manage inventory, book appointments and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid.

21:07Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing. Your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square, The all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place.

21:43Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups and everything stays synced in real time.

22:18You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing. Your best customers keep coming back. and right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. That's S-Q-U-A-R-E dot com slash go slash how I invest. With Square, you get all the tools to run your business with none of the contracts or complexity.

22:51Run your business smarter with Square. Get started today. Said another way, you need the cost to get into space, the launch cost to be in order of magnitude lower to turn these theoretical projects into reality and until it got to a certain level, It was all just theory. It was theoretically possible, but not practical. It'd be a government project, and it'd be public sector dollars to go try to do this or that, and now you've got private companies that are going to... It's easy to get in space, and it's easy to re-entry issues are being solved, and so they can go test science, they can test power, they can test all these things in space, and then you get all these side businesses where now you have all this stuff in space, now you have to worry about collisions, and so you need technology for that.