Ep 102: "If You're Not Blowing Stuff Up, You're Not Innovating!" — Stanford Professor Steve Blank

0:00Watching SpaceX catch a Starship booster versus watching SLS trundle out to the launch pad But$20 billion a pop, if that doesn't make the point between the difference between high-speed innovation done by crazy people versus process-driven innovation that, listen, gets us there, but not when your adversary is operating at starship speed.

0:29Steve Blank is a serial entrepreneur who's been building in Silicon Valley since the late 1970s. He's a Stanford professor, one of the most famous authors in the innovation world. These days, he's spending more time in national defense. He studied the DOD and the Pentagon and been involved in national defense for decades. He has some crazy new bold ideas. Let's hear about him. I'm Joe Lonsdale. Welcome to the American Optimist. It's an honor to have Steve Blank with us here today. Steve, thanks for joining. Thanks for having me, Joe. So, Steve, you're a serial entrepreneur. You're an author of various things, including four steps to the epiphany that the lean startup movement was tied to.

1:02And these days, you're a professor at Stanford and founder of the, is it called the Gordian Knott Center for National Security Innovation? That's it. Amazing. Let's hear about your background a little bit first, Steve, for everyone. After serving in the Air Force, you landed your first job, I think it was 1978 in Silicon Valley. That's correct. And it was at the Electromagnetic Systems Lab. Was that Bill Perry's? That was Bill Perry. Bill Perry was my first boss in Silicon Valley. That's a cool first boss. Tell us about the Electronic Systems Lab and how Silicon Valley helped end the Cold War.

1:29What were you guys doing there? Well, you know, Bill Perry had managed a lab at what was called GTE, bought by Sylvania, basically working on electronic countermeasures for the U.S. government, and then got pissed off and did a startup in the late 1960s, basically to do, oh, back then, national means of technical verification, at least ultimately, overhead systems to intercept telemetry. but he was the first company ever to use computers for SIGINT. And by this time, Bill Perry had become CIA's consultant on signals and telemetry intercepts. Edward Land was CIA's consultant for imagery. So between Perry and Land, they had the technology covered.

2:18And Perry partnered with the first head of CIA science and technology division, Bud Whelan, and came up with a really set of interesting things. But I remember when I interviewed Bill, he had a really interesting take. He said, you know, when it became a choice of doing the right thing for the government or making money, we always defaulted to doing the right thing for the government. I love it. That kind of stuck with me for, you know, the rest of my career. The other thing he did was he modeled the company after Hewlett Packard's culture, which was the gold standard at the time. except he said at HP only the executives had stock and and he changed that everybody including the lowest level employees include which included me got equity in the company which was pretty amazing because they got bought by TRW.

3:06So that's an amazing way to do things though and I love that it was always something at Palantir and other companies I work on defense where where if you're being the good guys means you're doing the right thing for the government not the right thing to make to make money and you don't always see that especially in the legacy companies these days unfortunately. And so you spent the next few decades, Steve, as a serial entrepreneur and founder, what were some of the technologies that you helped to build and deploy? Well, I did two semiconductor companies. I would never say I knew anything about semiconductors.

3:31One was a startup called Zilog, a competitor to Intel in the early days of microprocessors. And then another with a junior professor from Stony Brook, who just started at Stanford, named John Hennessy. And that became MIPS Computers. And John was amazing then. And of Of course, his track record as president of Stanford is pretty well known. But it was pretty interesting going up against Intel, which basically created a monopoly in microprocessors, which obviously has come back to bite them in the country today. Tell our listeners what MIPS was. John Hennessey obviously is an amazing man. He did a lot of great things as president of Stanford.

4:12What did you guys build together? Tell us a little more about that. So MIPS was just a different way to build computer architectures on a microprocessor. It was called the Reduce Instruction Set Computers, which basically said you can have a minimal number of instructions, number one. But most importantly, almost all those instructions would execute in one cycle, which theoretically would make them faster than the existing kind of kludged architectures. And they were kludges back then because they were kind of developed in piece parts and layers and added features, et cetera. And so we went head to Intel and Andy Groves crushed us.

4:49But it was a great learning experience. So I did two semiconductor companies. We did a supercomputer company. I still know what R1 half is and vector scalar startup time and was teaching salespeople supercomputer architecture. Let's see, what else did I do? I did an enterprise software company, which was my last one called Epiphany. I did a video game company, which reminded me, never do a company where your customers are 14-year-old boys. Video games is hard. What was the enterprise software company? What were you selling to enterprises? Basically, we were kind of the first, you know, back in the 90s, enterprise software was client server.

5:28And so we were one of the first companies to pick up on the Internet and realize that the browser would be a much more efficient interface and, more importantly, architecture. And so we built three components and a lot of tool, a data mining tool and a campaign manager. And it was essentially the beginning of CRM. Tom Siebel did a much better job in positioning and marketing. We called it enterprise marketing automation or something, EMA, and he came up with CRM. But it was the same thing. We were essentially the same type of company for a while. and that went public in September 16th, 99 and I retired on September 15th, 1999.

6:11Wise man. So you did okay there. I have a t-shirt that says luckiest man on earth, number 248. So I'm not confused. I have a few friends, Steve, who just keep trying to build things and they're smart and they push. And I think the way luck works is that if you're smart and you keep trying really hard, you're going to get lucky, you know? And show up a lot. I, you know, that old line about, you know, half, half the game is showing up and and at least throughout my career i did a lot of showing up so i also did consumer software consumer hardware we did a mac peripheral company let's see semiconductors consumer stuff workstations before they were pcs etc so i got a pretty broad view of tech deep tech and and interesting tech in different markets in silicon valley you're making me a little jealous i've started a couple dozen companies and six of them I got lucky are unicorns.

7:01But I think you've done more different variety of things than I have, which is pretty rare. So that's a pretty crazy background. But it's a question of who has the bigger house, Joe? Well, in Texas, the houses are big. Come on, what can I say? You give a popular lecture called The Secret History of Silicon Valley. Where did all this entrepreneurial culture come from? And why is it unique to that region? I think you could tell us better than anyone. You were in the middle of this for so long. Like, why that place? How'd that work? Well, listen, I'll describe that. But I'd probably first tell you why I decided to do that is, you mentioned earlier, my first career was in the Air Force, but it was in electronic warfare and electronic intelligence during Vietnam.

7:38And EW was a big deal then because we were flying lots of planes and losing them over a pretty tough, what we would now call A2AD system over North Vietnam. Russian provided surface air missiles and radar guided AAA. And I got pretty intimately familiar with that system. And then I joined ESL, Bill Perry, and now it's, you know, 30 years later, but it's kind of feels like a bookend. So that kind of stuck in my head, always asking, you know, even when I was the Air Force, how do we know what to jam and what frequencies and what's the radar order of battle actually look like, you know, early morning radar and then local radar and then surface air missiles.

8:17And I always kept asking these questions. And even when I was in ESL and those customers actually didn't like you asking questions, but I was always curious about how did we know what we were building and why. And so I started thinking about how we learned this stuff. And it turned out that the history of EW and electronic warfare started in World War Two and long history that I talk about in the secret history. But the real question for me always was, well, who started this and how did it get started? And it turned out there was a single professor at Stanford named Fred Terman, who was part of Vannevar's Bush Office of Science, Research and Development.

8:58And OSR &D, as some of your listeners and viewers know, basically was a brilliant move by the U.S., the only country who did this in World War II, that outsourced advanced technology to professors. That is, Vannevar Bush went to Roosevelt before the war started and said, World War II is coming. It's going to be a technology war and big idea. Our Army and Navy are ill-equipped to actually build advanced technology. They know nothing about physics. I mean, with all due respect to what was ONR back then, not really. I mean, there were pockets of innovation. And he said something crazy. He said, scientists should be building advanced weapons.

9:37And, of course, the heads of the Army and Navy laughed. And Roosevelt agreed. And so they stood up something called OSR &D, where all the advanced weapon systems, whether they were radar, electronic warfare, rockets, and a small physics program that started in Berkeley and others and ended up over Hiroshima and Nagasaki, all were run by civilians. It's amazing. And one of those programs was run by Fred Turman from Stanford. When Turman came back from World War II, he basically took all his lab managers and set up an advanced electronics and microwave group at SAM. And he's the one who introduced Bill and Dave of Hewlett-Packard as well, right?

10:16He was a kindly professor whose grad students were Hewlett and Packard. I was sad when we took down the Termin Engineering building at Stanford. I don't think there's any more homage to them, is there? Because I think there really should be. So here's the punchline. So I'm thinking about all these connections, but I hadn't written a story. And I get my first office at Stanford in the Termin Engineering building. Amazing. And I thought there was a finger of God pointing to me to tell them that to tell me that it was someone needed to tell the story about the connection of the DOD and intelligence community and where innovation entrepreneurship came at Stanford.

10:55because all research universities in the United States during the Cold War worked on military weapons systems. But it was only Stanford where, by then, Terman was the provost who pointed the university outwards. All other universities were focused inwards. Your best career path could be a professor. Terman said your best career, if you were working in microwaves or electronics at the time, was to take your technology and leave the campus and actually start something that could be sold to contractors or primes or eventually. I think Stanford as a newer university trying to compete was always a little more tied to the real world maybe than some of its East Coast competitors.

11:34And today I label Stanford as an incubator with dorms, which most of the professors don't like to hear. But as you know, it's probably the most accurate description of the school. There's a lot of entrepreneurship going on there. It's interesting because we talk about, you know, the government working with Stanford then, and it was really impressive to me how they work together and how they push things forward. And during the space race, Stephen, the Cold War, it seems like the government and the universities were oftentimes even a decade or two ahead of the private sector. And today, oftentimes, in some areas, it's the opposite, especially the government, it's the opposite.

12:05What's your take? I think you're right. It's hard to remember. But the largest purchaser of electronics in the 50s and 60s was the US government. There really was no commercial market at scale. In fact, the first large customers for integrated circuits from Fairchild, the semiconductor, which was one of the early chip companies, were not only for the Apollo guidance systems, but for the Minuteman 2 guidance system, which actually kept them in business because they could charge an exorbitant amount of money. But that shifted when we went to consumer products and PCs in the US. The amount of dollars being spent by PC companies and others just far exceeded what the military...

12:44So the market just became much more important on the free market side versus the government. And that's a big part of it, you think? And the rate of innovation, because the rate of competition in the consumer space was much faster than the need of innovation in the military side. Because the Soviet Union and the United States in the Cold War both had their same bureaucratic kind of processes, which kind of equaled out, even though each country was trying to do an offset strategy to the other. So the consumer space basically dominated. And by the way, that didn't matter until the last 10 years or so, because inside of FFRDCs, federally funded research labs and our prime contractors and service weapons labs, we still had the most advanced technology to deter or win a war, whether they were drones or hypersonics or overhead service, you know, whatever.

13:39those you know things in space were battlestar galacticas that required billions of dollars etc um but that changed about a decade or two ago as you know and and a good number of your listeners now all of a sudden all those things that were owned primarily by the dod and ic are now commercial products and half of them being made in china and here's the here's the rub and and you live this with palantir unfortunately our acquisition system is still stuck in the a system where all that technology was owned by the primes or internally to the DOD system. And we still haven't kept up with the fact that there's a huge impedance mismatch between how the government acquires and what's outside.

14:23You know, the way I describe it is China operates, and also the speed. On a good day, China operates like Silicon Valley. And if we're really lucky on that same day, the DOD is operating like General Motors. um that's just not a fair fair process no this is something that obviously bothers me a lot we when we started palantir it was pretty obvious at that point to those paying attention that the silicon valley software tech culture had gotten way ahead of the government in a way that it just it was probably already getting ahead in the 80s and 90s but i feel like it does silicon valley with with obviously that the wave of the internet wave just pushed it so far ahead that it was almost comical how far behind the government was so it was to me it was not like palantir was the genius of a thing to start it was just very hard it's just but it was but but it was obvious and then but the hardware side has become more shocking to me in the last 10 years obviously when we back to the under all the beginning and started building on the hardware side was partially because it does seem like the government also got behind in that area which i don't it hadn't been as you know before right and and and here's the rub is that none of this would matter if we didn't have an adversary that um doesn't have the and didn't have the legacy that we had and didn't have the coin-operated Congress as we had.

15:34And so you end up where we're competing with someone who's operating with a different organizational design and different clock speed and figured out how to fuse civil and the military together in a way that does a whole-a-nation approach to national security. We've just not gotten out of our own way. I think we're coming to the conclusion through your help and others that we can't keep going on like this. You know, the observation, and then I'll let you move on, is that we have world-class people and world-class organizations in the DOD and IC. Unfortunately, they're for a world that no longer exists.

16:13It's a big idea. I mean, if you would agree we're in a crisis, you would say, huh, in a crisis, why are we appointing the same people we would have appointed when we weren't in a crisis? Or why do we have the same organizations that we had when execution at a reasonable slow pace? And I think it came, you know, if civilians didn't understand this, watching SpaceX catch a Starship booster versus watching, you know, SLS trundle out to the launch pad, you know, at$20 billion a pop, If that doesn't make the point between the difference between high speed innovation done by crazy people versus process driven innovation that, listen, gets us there, but not when your adversary is operating at starship speed.

17:04Does that make sense? Yeah, no, it does. And the thing that really gets me, and I see this in so many areas of our country, is it's not just that things are like 50 % more expensive or twice more expensive. We're literally spending 10 to 100 times more for the same old results, which becomes a problem. And so I want to ask Steve, obviously, so you found the Gordian Knot Center for National Security Innovation. You've served on the Pentagon's Defense Business Board. So you're involved in this world. There's widespread agreement in D.C. on some of the challenges of China and the need to innovate more rapidly.

17:33I think it's obvious, right? So people see that. Like, where's the conventional wisdom wrong? Where would you push the department to be more bold? Like, what's something controversial that you'd say, here's what you have to do? Well, but by the way, we're talking about Congress. You know, it's your fault that some of it's broken when you hired Mike Gallagher. So Mike was the most cogent and leading advocate. Mike's house got swatted by people on the far right, I believe. I mean, he's had a really tough time the last couple of years. So I think I think the problem in our society is it's very tough to be a politician right now.

18:05I think there's some really nasty forces there that encourage people to get out, which is sad. But he had the most cogent understanding of both the problem and potentially how to solve it. But I'll tell you a couple of ideas. You know, I also sat on the Navy Science and Technology Board and world class people, you know, dedicated folks in the Navy. And these boards historically come up with world class incremental solutions. Let's give autonomy another hundred million dollars. Yeah. Well, guys, you know, how much is a how much is let alone a fourth class carrier? Fourteen billion. But wait a minute.

18:43How much is a strike group? Great. Yeah. And we're going to give one hundred million dollars to more autonomy. Have we thought about like what the operating concepts should be when we have a hybrid fleet? Then where are those dollars coming from? Those dollars are coming from me with Cerronic. Exactly. That's the problem right now. But if you think about it, no, they're not. Because the DoD budget right now, here's the other problem. Number one, the DoD budget is thought of as a zero-sum game. That is, if I want to put a couple billion dollars into an autonomous fleet, well, where's that going to come from?

19:17My shipbuilding budget is only X. So problem one is the DoD budget is thought of as a zero-sum game. That's a massive mistake. We've not engaged the whole of nation in figuring out who should build things. I mean, you understand, and I know some of your listeners do, that the largest satellite manufacturer is not Northrop Grumman or Lockheed or Boeing. It's SpaceX, right? They have a factory that makes this at scale, at a scale unimaginable that would have made people giggle or, you know, go like, no, please stop smoking dope inside the Pentagon. There's no way you could make 2 ,000 satellites.

19:57Put up 6 ,000. What are we up to, 6 ,500? I mean, that's insane. But wait a minute. How much did that cost the government? It's not that Elon didn't get any money, but no, I mean, that's the that's the paperwork budget that Northrop Grumman or that's a lobbying budget. Yeah. So my point is, is how come as a strategy we haven't engaged and and put incentives to private equity, not just venture capital, but private equity at scale to be investing tens or hundreds of billions of dollars in the new things that we need? and is it tax breaks or whatever and and the reason why by the way is do you know the only economists we have in the dod are the ones working at the cape you know the with green eye shades and whatever it took two random guys jason rathke and eric volmer to come up with a billion dollar loan authority at the office of strategic capital how come we don't have 25 economists thinking about crazy things and so so that's one big idea is how do we engage the whole of nation And by the way, we should have understood that when Russia appointed an economist as the head of their defense department, not a general.

21:09You know, the light bulb went on for them. China's been operating civil military fusion for 15 years. We should have figured this out as well. Ash Carter understood this is why he stood up DIU, that the integration of all pieces of society. The second part is, you know, DIU has been a defense innovation unit has been a great science experiment. Now reporting to the SEC dev has a billion dollar budget. Hopefully that doesn't go away. Number one is, you know, we should at minimum probably 10x or 20x it. But it's essentially a shadow R &E that it is Heidi Hsu's department, but quicker. But there is no equivalent for acquisition.

21:48That is, there isn't, we don't have a rapid acquisition budget. Everything goes through the palm and the pbe that is the yeah the massively complex just imagine we threw 50 billion dollars in a diu for acquisition that'd be very entertaining for us one of the big things we're trying to convince people as well steve is that maybe not having a monopsony having multiple buyers so that you can have competition because i think then you'd have one buyer shame the other buyers you know well so so the other piece of this is why don't we have the combatant commands have the authority to kind of buy from that new acquisition thing for anything less than Fiverr.

22:25That is, if it's going to be a treatable, combatant command should be able to buy from that group. So you asked what kind of crazy ideas that we could come up with rather than let's add another couple hundred million dollars to make people happy. But Joe, I'm going to push back to you here for a second and not to put you on the spot. But you know, you guys have been at it for decades. There's now a whole set of VCs now operating in this space that followed you guys at HVC. But we don't speak with one voice. That is, every smart VC has a lobbyist and some of the bigger companies like Palantir and Andrew have their own lobbyists.

23:03But we all go to Washington and we talk with individual voices about our line items or maybe our space. but Silicon Valley defense hasn't spoken as a group. And I don't mean as a group saying, gee, we need more money, but as a group coming up with a set of ideas that just like I articulated, and my suggestion back to you is I can't think of anybody better to get a bunch of defense VCs and some creative folks from Andrew O 'Panter in a room for a day and say, if we could reorganize the DOD, what we what would we hand the hask and sask for language for the ndaa what would we want um you know i find myself doing this but then realize you know congress comes out visits we bitch about x or y and they go back and all they heard was bitch bitch bitch individual item does that make sense at all yeah no and we and i think there are some some groups that are that probably could be better organized i think it's a fair pushback i think there are some groups that are saying, what are the high level frameworks?

24:11And of course, there's ways we work together. So maybe this is inappropriate to say, but the primes have different incentives. Sometimes, sometimes they have similar incentives on some things, but sometimes they have different incentives than us on the innovation side. So for example, a lot of them wanted to defund some more of the innovation things because they didn't like the fact that it was disrupting them. And a bunch of us got together. It was a very big victory and we kept it funded. And we introduced people running DIU to the people in the Senate and various places that they hadn't known before.

24:35And we were able to keep the funding and even increase it because it was obvious it was working for the country. And so there are ways in which we'll kind of defend and push these things forward. I think you're right. There's some bolder things around, like you said, giving more acquisition money in parallel to come back and come back. I'd love to see competition. You know, in my view, if you only have one buyer, then the buyer could do something that's 50 times as expensive, but quote unquote safe and mediocre. And then they get away with it. If you had two buyers and they knew there's a good chance the other one was going to do the thing to shame them, then they might also take the risk to not look stupid.

25:07So I think there are things like that we should be putting together to push. And I know some of us have been pushing it a little bit together, but you're probably right. There's ways we can ally and really teach them. You should, Joe, to be honest, I want to push on you a bit. You are kind of a leading light in the space. Why don't you just call up a bunch of your friends for a weekend and literally have them out to the house and figure out if we could redraw the diagram to compete at speed, what would it look like? Rather than how do I get another$100 million or a couple billion dollars for X and Y?

25:42That should still go on. I'm not suggesting we stop lobbying for individual interests. But collectively, we now know what's broken. And we ought to use the imagination we use to build companies to rebuild the Department of Defense and National Security. I think we have enough imagination to do that. And here's the insight. The DOD is built around execution, execution of processes and PBE and whatever. Silicon Valley is built around innovators who create new things that never existed before. And here's the rub. The executors never come up with innovation processes. I mean, they'll do it around the edges, and it's not that we don't innovate incrementally.

26:21But innovators at the same time hate coming up with process. Process? I don't need no... I think Elon especially is like so not interested in process. But you're right, the government runs on process though. So we have to fix it. So the problem we're facing is both groups have a Venn diagram of zero intersection in thinking about what radical reform would look like. And I'm sorry to get us on this high horse, But I think it's incumbent to the innovators to actually come back and say, no, it should look like this if we want to compete with China, Russia, North Korea, Iran. Whoever thought we'd be like shooting at Houthis?