E423: Castelion CEO on Elon Musk, Hypersonic Missiles & the Future of Defense

0:00Congratulations on the billion dollar series C led by JP Morgan, Carlisle and Andreessen Horowitz. Why is developing hypersonic missiles necessary for the defense of the United States? There's a ton of work that goes into a successful fundraise, which this one's actually the first one that's been led by our CFO, Andrew Kreitz. He did a phenomenal job. The strength of this round in particular hinges on that question. Why hypersonics? We've been through a period of several decades where American dominance was so supreme that we didn't have to focus on the fundamentals. And what's happened in the past decade is that's becoming not true anymore.

0:43And unfortunately, just the inertia of large organizations wasn't necessarily addressed at the same time frame that other people were closing that gap. And so we're in a position now where there's certainly sufficient munitions to do near-term operations. And you can see the administration saying that they have what they need. But I think there's a recognition now that in the long run, especially as you go up against, you say, more capable manufacturing adversaries, let's take China as an example. They're going to have massive production capacity to produce weapons at scale. and you can't win a war if you run out of weapons.

1:27And in fact, it emboldens folks if they think that they can outproduce you. And so we have to get back as a country to being on top in terms of defense manufacturing, which is really what I see the purpose of Castellion doing is we can fix defense manufacturing. We can be a large part in helping to address the time to develop these systems, the cost of them and the scale, because like the only way that the government can afford thousands, tens of thousands, hundreds of thousands, whatever the number is necessary, is that the price of whatever it is has to be times that quantity has to be affordable.

2:04And the budgets have gone up, but they're not going to go 10x up like that's not feasible. This deterrence is such an underrated aspect of defense. There's a famous Sun Tzu quote, which is the military general of genius wins the war before it is started. So oftentimes, if you have this dominance and defense, you don't even have to fight the war. It actually leads to a more peaceful future than intuitively feels like as you're producing missiles. I personally 100 % subscribe to that theory. Your position in the world and your ability to deter is really determined by your military strength at the end of the day.

2:42America is a cultural and economic powerhouse. And that's based on a lot of factors, including like the rule of law, but it's also based on the fact that America has had sufficient military capability to hold world order to the way it is now. And if you don't take care of that in the long run, all of those other factors can fall by the wayside. And so a lot of the strength of our military has been this kind of uniquely American mix of what they call like the military-industrial complex. And it usually gets talked about in a negative light, but I would say that it's been quite successful, this mix of both government and private companies to develop these type of capabilities and then to manufacture them at scale.

3:29Now, I would argue in like the past couple of decades since the last supper, we've really let the manufacturing part of that attribute And that's what Castilian and a whole range of new entrants are trying to fix by producing new systems at scale, whether they're a totally new capability or whether they're a more modern replacement to something that currently exists. And you at Castilian have decided to vertically integrate a lesson you took from SpaceX. Tell me about what else you learned being three engineers that left SpaceX to start Castilian. I would actually say I don't want to vertically integrate anything.

4:08What I would like to do is find somebody that can be a reliable supplier at a reasonable price that just delivers, and I will give them all of the work. We really vertically integrate when we can't find that. And in aerospace, a lot of the core of the problem is really not that somebody can't build that whatever device or widget that you're buying. It's that they do it at a price point that's way too high, that's not affordable, and they do it in a time frame that's so rigorously slow, you can't iterate. And that just kills kind of like your development of a program because complex systems are complex and you need that iteration to get good at it.

4:56And so a lot of times what it looks like is finding supply chain outside of aerospace that you can leverage to be a little bit more innovative, but can keep up with the development timeline. And if you can't find it in commercial because it just doesn't exist, then you have to vertically integrate, usually through great pain. It takes a lot of money. It takes a lot of capital. It takes a lot of time because these are not necessarily easy things. And the experience at SpaceX really was eye-opening in terms of demonstrating that there's kind of like this unified way that almost every traditional aerospace company performs their systems engineering and system development.

5:44and it's very unintuitive coming out of like college like why in the world would i do it this way but okay i don't know i'm young i don't know what i'm doing so you're telling me this isn't how you do it but it feels like this is just wrong and i'd say like one of the greatest lessons that i had at spacex was if you just followed your gut and assumed like that's not the most efficient way to do something it turns out that indeed it's not and you're seeing the limits of complexity in aerospace because of the process that they're following so when you look at like these large programs like take sls or orion you almost can't put in any more money and get a better outcome like you're at the limit of the complexity that process can handle and And SpaceX demonstrated that there are other processes that you could follow and develop a more complex system and do it in a faster time frame and more affordably.

6:50And I think that all of the aerospace industry is going to have to move in that direction. Otherwise, we're going to top out at like how complex of a system can we build as a country or humanity? A lot of people misunderstand Elon Musk's strategy, and there's this famous Elon algorithm. It starts by elimination, and it ends with automation. A lot of people assume it's flipped the other way around, which you want to automate, you want to scale. But a lot of it is, what aren't you doing? There's so many cases of this. There's a Tesla and they were having issues developing a car. And Elon Musk asked the operative question, which is, why do we even have this feature?

7:34What would happen if we just took this out? And the first guy reaction is like, we can't do that. This is like a car must have this feature. And then when they thought from first principles that I get, there's no reason for that. So they just eliminated it and they solved this huge bottleneck in the production line. Best part is no part. But Elon has a lot of great forward phrases that are quite true. And I actually think this is indicative of the problem. Elon would tell you that engineers will very easily hyper-optimize a process or a thing that just shouldn't exist. And they never stop to think, should I be doing this?

8:14Because it's just kind of like the mental nature of an engineer. and I can say that because I'm an engineer, you have to like back up and ask yourself, like, should I be doing this in the first place? And a lot of people don't think to ask that question. So he kind of forces that through every single meeting, which he meets with all of the technical teams. From my experience, weekly minimum, if there's some issue, it'll be much more frequent than that. And it's really helpful to keep that in mind because one of the things that is the secret to SpaceX's success is really what not to worry about.

8:51And by that, I mean the traditional aerospace process is you gather up all of the engineering disciplines and you put them in a design review. And basically anybody can come to that review and like raise their hand with like a possible issue without really any quantitative data to back up that it is an issue. and you spend a lot of time trying to engineer out possible boogeyman without actually knowing if it's a real boogeyman or not and the culture at spacex is very much if you want to say something's an issue that's great but you have to bring the data because it can't be your hunch that it's an issue and if not if you can't prove it and we're all unsure then let's just go build some hardware, do the test and see what happens.

9:45And if nothing bad happens, then we can move on and not worry about it. And you cut out so much work because you're just not worrying about the things that don't matter. And you're discovering something that nobody thought of that does matter. And you're getting after that earlier. And that's kind of a secret of success. so curious about this friction at spacex because there's basically two polar opposite perspectives you could take you could take this purely quantitative approach which also could be called product market fit to take into the extreme that it needs to be proven through customer feedback in order for it to be a valid strategy and then the other side of it is using your gut which is i know people are going to need this we're going to invest billions of dollars before we even know from the customer and you can take this intuitive versus quantitative approach to everything how did you marry that at spacex i'm a huge proponent of talking to customers in fact in my view you really shouldn't have like a product team and a sales team it's really the same team you need to leverage your sales organization to actually understand what it is that your company builds in terms of a product to then get to the core issues with customers to understand what their needs are and how what you can do as a company can fit what they want while also not just directly doing whatever it is the customer set and by that i mean like if you that example back when henry ford was like making the model t like if i asked folks what they wanted it would have been a faster horse.

11:28They need to have some level of creativity to be able to take the actual problem and visualize a solution to that the company can do that fits the expertise of what you have and what you can build at the company and then present it back to them in a way that makes them feel frankly like it's their idea. I worked on the Star Shield program and did that quite effectively at SpaceX to how could we take what was being developed for Starlink but apply it to national security and the outcome of that was fundamentally game-changing for the country's national security of like extremely proud of all that work and the team that did it and at Castellion we kind of started the same way of talk to customers what is your actual problem what are you trying to solve and then what should the solution look like and blackbeard which is our first weapon really came from discussions with the navy of how do we get the f-18 back in the pacific fight and they gave us some criteria like it was literally like three bullet points in an email and everything else stem from that without overprescribing the solution if you take that literally is there a place for sales people or are you just teaching your product people sales skills separating the two functions is a mistake i don't care if they identify as a salesperson or a product person but you want somebody that can do that translation they need to have excellent technical understanding of the product of what the company can do because they need to make game time decisions on yes we could do that and technically like it's challenging but it's doable versus like that's absolutely impossible and i need to push back on that concept immediately and i need to have people skills and for me when i was running the government satellite sales at spacex it was really caring less about somebody's specific background but what i wanted to see is that they had persistence they had technical understanding they had a good personality that they could get along with folks and make relationships and they had that persistence because you're going to be told no a lot and you can't teach the personality traits that you need so that's what you're selecting for I can teach you orbital mechanics.

14:12I can teach you about whatever product that we're building. I can show you the different engineering divisions of the company, and you can learn that. But I can't fix your kind of like core personality that you need to have to be successful. Everyone I talked to on the show is chasing the same thing, an edge. And more and more, the edge comes down to your information, not just having it, but being able to trust it when the stakes are highest. AI is doing more of the information gathering for you every day, and most tools are very good at sounding right. The summary reads clean, but can you trace it back to the filing, the transcript, the specific passage that drove the answer?

14:49Or are you just trusting the confidence of the output? For investors, that's not a minor concern. A missed filing, a missed weighted source, a context that got lost somewhere in the retrieval chain, those aren't edge cases. They're how decisions go wrong. AlphaSense is the AI market intelligence platform built specifically for this. They own the content, over 500 million curated documents from broker research and expert transcripts to filings and earning calls, and they own the retrieval layer on top of it. So every answer links back to an exact verifiable source because the answer is only as good as what's underneath it.

15:23And with AlphaSense, you know exactly what that is. The edge goes to whoever could trust their information and prove it. See it for yourself. Start your free trial at alpha-sense.com slash how I invest. That's alpha-sense.com how I invest. It's an interesting thought experiment. What would you create if you were creating the perfect salesperson from scratch? What would you put in that person? You would put technical know-how. The most underrated aspect to a salesperson, especially in a place like defense, is the ability to generate enough rapport to get true feedback from customers. I think all things being equal, all things are not equal.

16:04The people that actually find out what the customer truly needs in very complicated and sensitive sales, for example, from limit partners or from the department of war, those are the people that end up winning. And then they also need the technical expertise, which you could argue as part of that rapport of getting the right information. You're not going to get respect from other people if you don't understand the product. I don't know if there's anything else. I think that's like a good covering of what they need. And a good archetype is like an extroverted engineer. But again, you don't have to be an engineer, but you have to have that technical understanding of the product to gain both the respect to the customer and of the internal team.

16:48because like another huge part of the sales slash product role is selling the company on what the solution needs to solve so that everybody is like engaged to build the thing that will sell and a huge part of like what i did with spacex was like argue internally for the characteristics of the system that had to be true for it to be truly successful in the market Maybe one final piece I would say about traits of that person is just honesty. People sometimes underweight the fact that in an externally facing role, what you're selling is not just your company or the company's product. You're selling your personal reputation because people don't trust a company.

17:37They trust you. And so if you were telling them something, you damn well need to come through with it and then communicate clearly if something is about to be a surprise that's negative. You need to tell them and you need to tell them the truth. You need to not give them BS excuses because you'll lose that trust. and a lot of success of anyone in a sales role is being an advocate for the customer and someone that they trust because they're putting their faith in you to help solve their problem. Because frankly, if you hang them out to dry, it looks really bad for them that they put their trust in you and you let them down internally and other people are going to judge them for that.

18:20So you have to kind of have that perfect combination of traits to be truly successful. But if you, like as you point out if you do that well you can frankly move mountains and there's so few people that do that well especially like in government sales space that it's kind of a running joke it's just like how few people actually do most of the sales for these large companies i asked jonathan gray president blackstone this exact question which is what do you do in a downturn. And he said in a downturn, all of his peers were basically hiding behind their desk. And he did the thing, which was jumping on a plane and sitting down with every LP and telling them exactly their views on it.

19:05And so many times, the reason these skills of reputation are so hard to build and so rare is because they're so hard and painful to actually execute on when the time comes. That's 100 % true. And yeah, you need that reputation. and the trust for when things are bad, not for when things are good. That's easy. The best way to communicate reputation is to have reputation. Yeah. You can't build reputation when you're in a bad spot and you need it. You can only build it when there was really nothing to be gained other than that's who you are and they trust in what you're doing and what you believe.

19:44And I think letting your true motivations, like, why are you doing this, like people need to know that's for the right reasons too. Sure, it can be to make money for the company, but they want to know that you care. And if they don't feel that, you generally don't build trust with folks. Do you worry about that? We just talked in the beginning of the interview, just raised a billion dollars. You're now going to have a lot of mercenaries that are going to be coming to you looking for positions. Is that always a deal breaker for you to hire a mercenary are there sometimes people that are so good that you just pay them to do the job motivations can come from a number of factors in good times somebody's motivation can just be money but what happens in a bad time like they're just going to leave the company because you can't continue to last one on the boat is first one off yeah and in my opinion those are good consultants like we'll pay you more but the expectation is that you're not necessarily here for us in the worst moments but we do a significant amount of screening for like why does somebody want to join the company and they need to have a good answer not necessarily the same answer but a good answer and if it's kind of for me if it's just like hey i want to manage a large team or direct what's happening, that's not a good reason.

21:13Because you're not going to want to manage a large team doing something complex and hard when we're behind schedule and things are not great. Your heart won't be in that. So it's much more important that somebody has some kind of meaningful reason why they'd want to swim through the trenches with you in the worst of times. And I think it's important that you load the company up with those types of people because frankly, just the spirit of why you're there that you can share with others is like it builds on itself and it builds the company culture to be the correct thing. Company culture is so fragile.

21:51One or two bad hires could really permeate throughout their organizations. How do you suss that out? How do you suss out somebody's true motivation in the hiring process. We ask a bunch of questions that perhaps seem unrelated, but it's all to try to get at motivation and why are they joining and what is it that they truly want to do? Because you also get folks that'll try to get in the door in any job, but then move to some other job. And that's not necessarily a bad thing, but then you have to ask yourself, well, why do you feel like you just can't do that job now? But even if they do get through the interview, which does happen like an interview i really honest to god hate interviews because it's like i'm supposed to make some judgment of somebody's life's work in a few hours and maybe they're just nervous or maybe they're having a bad day or maybe they didn't sleep but even if they do get through you can't hide your true motivation for very long it'll come out and i think that you have to be quick to address those issues because of exactly what you said.

22:56It does not take many people rowing in a different direction to really screw up the kind of choreography of a good team. Speaking of a good team, SpaceX is famous for this responsible engineer culture. Tell me about that. Think of it as the CEO of whatever you're responsible for. It could be a complete system. It could just be a tiny box that's somewhere attached to that system, but you're the CEO of it. You own it. You own the requirements management of it. You own the engineering of it. You own the cost of it. You own the manufacturing of it. And you're given accountability to meet whatever goals were set out, but you're given the authority to do what it takes you're the ceo of this thing it could just be like a tiny box but you own it make it happen tell people what you need yell loudly if you're not getting what you need to be successful and let folks know that are dependent on your success for their success and so you end up with this kind of hierarchy a model where you have responsible engineers of like sub components that then feed up to a responsible engineer for a higher level system who maybe feeds up to like a responsible engineer for an entire vehicle whatever that may be but you find in that process that good re's it's not correlated to just like years of experience in aerospace like you can find folks that are fresh out of school one of the unique things about that model is that once you determine that, hey, somebody managed this extremely well, let's give them a more complicated system to go manage next.

24:47And you move them up based upon their performance of doing a good job owning that system. And in that kind of model, you end up promoting based on merit and giving more responsibility to somebody that does well. And without regard to, I've been here 20 years and I should own that system. Like, that's not a good model. And unfortunately, that's the model for a lot of companies, and that reduces your performance as a company to do it that way. And so the RE model is very powerful when implemented correctly. How much of your experience in SpaceX instructs your work at Castilian? I think that we have taken a large number of the practices that work and continue to use them.

25:36It's not like a one-to-one necessarily mapping. Like we have our own unique culture that it's not just a copy of SpaceX. But at the same time, a lot of the practices that even SpaceX follows are really what all of aerospace used to do in the Apollo era. The 60s. Yeah, the 60s, like the space program. We made it to the moon in a decade. I honestly don't know if we could do that as a country in 10 years starting now. Sometimes the good old days are not just nostalgia. Sometimes there was actually more confidence and more cohesion. The thing is that's really frustrating is we have just so many incredible new tools and capabilities and technology that would have made getting to the moon easier.

26:22The problem in aerospace, in my opinion, it's not the tech. It's really the process that folks follow. And aerospace over many decades moved to be extremely risk-averse. And you cannot make fast progress being extremely risk-averse and thinking through every step of the process for a year at a time just to move on to the next phase. Sometimes you just need to go build something and try it. And SpaceX, in my mind, really solidified that is the correct approach. approach now when i graduated college and i joined johns hopkins applied physics lab straight out of georgia tech i felt like that like it quite frankly like i had the same kind of ideas in my mind like why are we doing it this way this seems silly but you get beat up by somebody that's been there 30 years like that's not how this is done and you're like oh okay i guess I just don't know what I don't know.

27:22Next thing you're 10 years in, you're beating the common sense out of some young engineer. So everybody starts with this beginner's mind. They learn from an engineering principles. You almost start from first principles. Then you get infected through the cynicism for long enough that you have all your first principles thinking being out of yourself. And now your ego doesn't want to be the only miserable person. Now you start beating this out of the next person. And it feeds. And the cycle continues. Yeah. Sometimes I get asked, like, is there anything that we are doing that fundamentally, like a Raytheon, a Lockheed, a Northrop, or Boeing couldn't copy and go do tomorrow?

28:05Absolutely not. They could go do it tomorrow. But the culture of the systems engineering process and just what is considered the right way is not something that I have any fear that they're going to just immediately change and then become competitive with the way that we're doing business because that culture is so ingrained and so hard to change. and once it takes root it's just almost impossible to kind of steer that ship and that's the differentiation between kind of us and a traditional prime and so I got asked at a recent conference like would you ever partner with a prime and I absolutely would if I thought they wouldn't impose on me a process that absolutely kills the advantage of our company.

29:00And typically, they're going to want to impose their process on us to make them feel comfortable. And we can't do that. And it's just like an impedance mismatch. So I think that's the biggest misconception about the innovator's dilemma. The innovator's dilemma was this concept by Clayton Crenshenson, which is that the previous generation of something disrupts the next one. Kodak was disrupted by the digital camera. Blockbuster was disrupted by Netflix. And everybody always thinks it's a technological issue, but it's not a technological issue. It's a cultural issue. It's a cultural issue. And so much so that you've actually now the top founders and CEOs on Silicon Valley have innovators dilemma on their bookshelf and they're aware of it.

29:40They're like self-aware of this bias. And now they continuously disrupt themselves. The latest example being Google deciding to embrace AI while disrupting their search business. and there was a period of time, at least for me personally, I don't know if Google could do it. And the founders had to step in. It's the reason why the founder has this role that can't be replaced by CEO. Even the smartest CEO in the world can't replace this alignment with both the equity and the long-term vision of the business. Yeah, growing up, I thought managing money meant paying bills and balancing a checkbook.

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31:09Managing your money takes more than just checking your bank account every once in a while. And great financial decisions come from having a complete picture and proactive management for your income, expenses, and investments. Take control of your finances with Monarch. It brings together all of your accounts, investments, saving goals, and spending into one place, making it much easier to understand where your money is going and whether you're actually on track to achieve your financial goals. What I like most about Monarch is that it doesn't just tell me what already happened. It helps me plan ahead.

31:34The AI assistant lets me ask questions about my finances in plain English, and the AI weekly recap highlights spending changes or upcoming expenses before they become surprises. It's like having a financial advisor in your pocket. Write your own money story with Monarch. Use code invest at monarch.com to get your first year of Monarch core half off at just$50. That's 50 % off your first year at monarch.com with code invest. Growing up, I thought managing money meant paying bills and balancing a checkbook. But as you know, that's only a small piece of the financial puzzle. Managing your money takes more than just checking your bank account every once in a while.

32:06And great financial decisions come from having a complete picture and proactive management for your income, expenses, and investments. Take control of your finances with Monarch. It brings together all of your accounts, investments, saving goals, and spending into one place, making it much easier to understand where your money is going and whether you're actually on track to achieve your financial goals. What I like most about Monarch is that it doesn't just tell me what already happened, it helps me plan ahead. The AI assistant lets me ask questions about my finances in plain English, and the AI weekly recap highlights spending changes or upcoming expenses before they become surprises.

32:37It's like having a financial advisor in your pocket. Write your own money story with Monarch. Use code invest at monarch.com to get your first year of Monarch core half off at just$50. That's 50 % off your first year at monarch.com with code invest. You have to come in full Felder mode and just be willing to rip things up in a way that would be too scary if you were wrong. If you were, I'd say kind of a - You have to bet. You have literally have to bet the farm. You have to bet the farm. No hedging. Correct. And I mean, Elon is tremendous at doing that. it feels like no matter how many times you're at the roulette table betting on black and it lands on black and you're like holy crap and he's like let's do it again and you're just like oh my god but at the same time it's so important that you continue to have the behaviors that made you successful and the tendency over time as you get to be a larger business and you put more risk management processes in place is that you actually kill the thing that made you successful.