Starting a Solid Rocket Motor Factory from Scratch | Ethan Thornton, Mach Industries

27:22One of the things that you talked about when we were just walking around the factory is you would much rather have a lot of OPEX versus a lot of CAPEX. And I think part of that is like, if you have a bunch of CAPEX, you kind of like lock yourself into some future. Whereas if you have a lot of OPEX, maybe you can like swap things out faster. How do you think about that? Yeah, it's a great, great question. So one, I think too many people think of manufacturing as a maximization. Like there are three manufacturing organizations that are probably all three just as excellent, but almost couldn't look more distinct.

27:52Like if you look at like Tesla, SpaceX, and Apple, wildly different approach to CapEx, wildly different approach to supply chain, completely different levels of vertical integration. It's not that one's better than the other. They're just like custom fit for the problem they need to solve. And so for us, it's actually, how do you pull the best lessons from each of those three? In defense, specifically at this period of defense, I think it is nice to have a CapEx light, OPEX heavy business. And the reason for that is for starters, you're constantly in this chicken and egg scenario where you can't win a program until you have the production class, which means you have to pre-invest in the CapEx before you have before you have the contract, which is a really, really difficult thing to create a capital stack for the business to do.

28:37And so the more yeah, the more you can actually take away from CapEx and put on OpEx, you can you can wait for OpEx until you win the contract. similar it rhymes similar is for the government if the government is buying a capability and let's say the capex is super super cheap but I have the same amount I can spend on capex if I'm flexing on opex the product might actually be a bit more expensive but I can go and afford to build many times the capex I would need to deliver on that contract and that gives me surge capacity. The hard dynamic in defense across the country right now is how much do you pre-position for conflict?

29:17And this is super, super, super hard. How do you afford as a country to have factories that if a war starts can make hundreds of thousands of things, but the war hopefully never starts? And so how do you minimize the amount you're paying for that along the way? And putting more on CapEx and OpEx here being cutting POs on the supply chain side or more more often, frankly, operator hours, provided you can simplify the operator hours. This principle doesn't work if your OPEX cost is like highly specific composite technicians. You need to like simplify what your operators are doing so that you can scale hiring quickly if you need to.

29:48But yeah, that is really the strategy. Now, I would not apply that to most other businesses. If I were building cars and I had like a ton of certainty on how many cars I wanted to produce, I would be inverting that. This is actually why for us, like a lot of our processes will actually be relatively low automation, which has other benefits because automation is like, is very, very, very hard to stand up to start. So I'm also a fan of get into production with human labor and then start automating the process. That human labor stays with the company. They just work on your next thing. I think there's like two major interesting ideas.

30:20One is if you're working on a whole bunch of different products and you assume by default that a product is going to have a semi-short lifespan because the adversary is going to basically figure out how to counter that specific system. in some amount of defined period of time. Might be six months, might be two years, so on. You basically want to build an organization that's very flexible and can go up and down and also is very good at building the next thing, even as the first thing is coming online. Yeah, 100%. So how do you do that? Well, so the first thing I'll say, the OPEX, CAPEX part is actually not part of that.

30:57So supply chains actually tend to move slower than things that are vertically integrated. And so all that to be said, the first optimization on the capex side is maximal flexibility of capex like the factory we're in today my my goal and generally what we're able to do is to retool the factory in like two or three weeks to produce a new type of aircraft and we've done that successfully for the last two years or so now but ideally that pace also comes down a lot and so you got to build flexibility in your factories now there are trade-offs to doing this and the trade-off is just cost like if you're trying to get your machines to do more there's no free lunch your products will be slightly more expensive.

31:33That's where your products have to be just excellent on the design for manufacturing side. But you want flexibility on CapEx. Next, you want a functions-based engineering org and not a verticalized engineering org. So generally, it is the same electrical engineers, same software engineers, same aero engineers who work across the product stack. Now, for some period of time, they will specialize on the product they're working on. I don't let them work on like three products at a time. You end up with consultants. So it's very important that you're working on one thing at a time, but you actually sit in the electrical order.

32:00And what that creates is the learning, and in many cases, the actual hardware, and certainly the tooling you use to do it generalizes to all of your products. So each product bet you take gets incrementally cheaper. So like all of our products fly generally, I guess minus Dart and eventually minus Atlas, with very similar, if not completely overlapping, avionics. They all use the same aerodesign software. It's in many cases the same aerodynamicists that design them. So the next thing is like, how do you design your engineering org? The other nice thing about doing that is really a matrix org, function org, whatever you want to call it, is I don't have to go and build a team for a product.

32:35I just have to reallocate resources. And that accomplishes two things. One, on the front end of a product, I can stand it up a lot faster. Two, if you want to, if you want to like truly change the way someone buys something, you have to be able to take risk by building something that they're not directly asking for today. And so you're going to have some batting average. Now, that batting average for us so far is quite high. Like we're going into rate on all of our products because we will have customers for them. But you have to also be willing to spend down bets. And if you're verticalizing your engineering org, it's the whole function you just built around just that product.

33:07So it's extremely painful to like take those employees and put them in different places in the company. Whereas if it's functional, it's like, hey, you worked on Pike for the last like three months, but your boss isn't changing and your tooling is not changing. And it's the same. Generally, go work on Viper for three months. Let's say that you're fast forwarding 12 to 24 months and you're trying to figure out what is the next platform or system that you guys need to build in order to be in a position where however the world looks, you basically have both a system that's able to do a strike or something, but also counter other strikes from adversaries.

33:41How do you figure out what to go pursue, how much money you're willing to invest in one of those programs before there's an obvious, here's the contract for that system? One, I'll say being good at that is probably the most important thing you can be as a defense company, given how unclear stuff is right now, where tech is headed, and how long it takes to engineer one of these products and stand up a pipeline. So you want to obsess over it. I think you want to start with geopolitics. So everyone's mind instantly goes to like hyper-specific conflicts at their certain period and the way you think about design programs.

34:16You have the Taiwan situation of how do you deter Taiwan. You have the Ukraine situation. How do you win the current war in Ukraine? you have the Iran situation. What you find is that the golden rule of aerospace is very, very specifically design your vehicle to do what it needs to do. So you have to start with like, at a geopolitical level, how am I looking to provide advantage to the West and what sort of mission sets will that require? And sometimes this is like top end kinetic. Like I need to go and shut down a near peer competitor's ability to fight a war if they choose to invade. Sometimes it's actually very, very low end, right?

34:47It's light force projection. So you start with geopolitics. Next, you really, really, really want to obsess about logistics. Like, even before you know what the product looks like, how is this thing going to be launched? How is it going to be fueled? How is it going to be manufactured? How is it going to be maintenance? At that point, then you get into actual product requirements. You still don't actually know that. You know nothing about what the aircraft looks like. But you go in war game. So you look at these are the capabilities the adversary has or can be expected to have for this specific mission set.

35:21In our case, here are the capabilities we have. One of the things I'm trying to do is kind of close the loop where you're actually wargaming against yourself. And that's how I think one of the key things will take to just rapidly accelerate. What do you mean close the loop on the wargaming? We literally designed Dart as a means to shoot down our own products by the time they're copied. And then I will design an asset to bypass Dart. and of course if you knew how to do this you just shoot to the end of that but you learn in the process the world changes and then ideally technology is getting a lot better along the way and so there is just some speed you can do these things but you're kind of closing that loop and so you're literally in software running engagements like dart we've built like a full six off model to like war game against our own products you look at the economics you look at the types of mission sets you do that against other people's assets as well viper and pike are very very very hard to shoot down right now compared to a shot head and the pricing ratio on them is better than the shot heads we chose that as the hard one um but then you anchor kind of the the requirements of the product and then you take a full pass on like okay what are the creative techniques i can do to squeeze out this performance when you think of like asymmetry um this idea of trying to house like 232 to 1 shipbuilding capacity to the united states but But if you're able to go build a new system that like takes out their shipbuilding capacity, suddenly it's even the playing field.

36:42Or, you know, if you're able to take out ships when you kind of have some problem like that and you don't know exactly what, you know, no one's asking for a system that's able to take out those things. How do you figure out here is the actual product that you should build in order to achieve some mission that people don't even realize is the actual mission when there's like other missions that are more obvious but are not the right ones? I think so look there are things I'm quite bad at and I'm happy to get into those and discuss those I think I I have been obsessed with thinking about this for a while so I have I talk about this a lot I have two family members whose job this was largely in the Air Force and this is like dinner table conversation my entire life growing up I'm pretty obsessed about it and one like this is principally one of my things to own is like what does this future look like in the limit I think it's easier to extrapolate than people expect like I'll give you an example on balloons and I shouldn't touch too deeply on the specific reasons but like in high school at the farm with my uncle my uncle and I were talking and we're like we start thinking about balloons for some reason we're like wait balloons are actually very very likely going to be super super important for unmanned warfare this would have been circa like 2018 and we we go on this long long discussion I get to thinking about it I get like massively obsessed with balloons and I this is long before mock everyone's like dude why are you so obsessed with balloons like I'm in high school I was like I wasn't a nerdy person but I had like this very specific obsession that was strange.

38:03I went and patented like a balloon navigation design. Like I was obsessed, obsessed with it. Well, probably three years later, China flies a balloon above the US and we have to spend like a million dollars shooting it down. And then suddenly this is in the middle of a fundraising process where everyone was actually critiquing me for being too obsessed with balloons. Suddenly, even though that's way out of left field and you wouldn't have considered that physics is physics. Like if I put something up for like a couple thousand bucks at 80 ,000 feet and you have to go scramble a fighter jet to go shoot it down or launch a big surface air missile, the unit economics there just don't work.

38:38And I can go and put millions of balloons up. And so this is like an example of like a really, really weird out of left field asymmetry that I think myself and my uncle have been passionate about for a while. Ukrainians are waking up to balloons, which is quite exciting. I think they'll be able to deliver massive asymmetry through that. But now I've got to figure out a way to shoot balloons down, which I'm working quite hard on. And so the other nice thing is once you have these bets and these bets are generally proven true, two things start to happen. One, you're already thinking about the future and you're anchoring that in conversations with the Pentagon every day, with your engineers every day, with the Ukrainians quite often.

39:20And so you understand what the future looks like. And as these things are proven true, you start to war game against what you know to be true. So like, I've been building this for several years now, thinking balloons are important, it's being proven true. Well, I have an advantage of already sort of positioning to, okay, China will have balloons, Russia will have balloons, how do we go and treat these things down at scale? The second thing that happens is the government starts to trust you on these things. And when they see a hard problem, you get called into the room to talk to them about how to solve it.

39:51And frankly, as a patriot, there's like no cooler thing than to be asked like, hey, hey, this is the existential problem. Can you help us solve it? And when you develop that trust, you get to see a level deeper and think a level deeper about all these things. I think a lot of companies stay in this design phase and testing phase for way longer than maybe they should. And you are very focused on actually getting it in users' hands and at least showing them what the capabilities are. How do you decide when the right time is to go do that and then make sure that it works? Because that's the highest stakes.

40:23It's like you send the rocket up and if it blows up, you're just lighting a bunch of money on fire and also a bunch of trust. So it's two things. I think you test like crazy internally. I mean, we run many flight tests every single week. And then two, you're honest with your customers. I think so many people are like, the customers have seen development programs. And their development programs usually take like a decade plus. And so saying, you want to see this thing? It's like 40 % going to work, but you'll at least get to see that I'm running a testing campaign, testing every day. Would you like to come out to this?

40:54you just like set a trust level with the customer just be like fully transparently honest they know it's a hard thing they've seen people struggle with it for decades and see you also just like let the customer in and give them as much info as you can i know that like for the past probably couple years you're basically in this like rapid design phase and you're working on a bunch of different programs all at once how do you go from that sort of business to like scaling up maybe multiple factories in the next 12 months and like having that transition be successful so So I think there are three discrete stages to this process.

41:27And so you've kind of got your one to 10 stage. This is where you actually just kind of want to be off on an island somewhere. You want to know like generally what the mission set is, but like kind of leave me alone. Let me go and do this. I'm going to blow a lot of stuff up in the process safely, very, very safely. But like, as we described, I'm going to take a lot of risk and get something that works. And that's like one to 10. We're there pretty much on all the products you see behind. You then enter 10 to 90 mode. that's where you want to be as close with the customer as you possibly can like okay how literally do you want to fuel this thing do you want this type of connector do you want this type of connector right do you want this launch box you want this launch box and you want to be super deeply coupled there that's when generally you start doing revenue because they're buying air frames for testing and we're at that stage across a good number of our platforms now there's what's always been called the valley of death for companies between that like 90 to 100 face and And this is where it is so easy to lose your soul as a company.

42:21Because you want to be really good at 10 to 90. But if you stay in 10 to 90 for so long, for too long, you just get like requirements build up and engineering build up and bloat as a company. And so there's this gut call that most companies get to make themselves. Unfortunately, we don't. That is, okay, when do you want to enter production? Most companies get to make that decision. For us, it's the government that makes that decision. And if the government doesn't make that decision to go into production, you keep going after engineering contracts on the product that's at like 88. And to get those engineering contracts, you have to be adding specs to the thing.

42:52You have to be doing something, but you need revenue to survive. And you can do a ton of revenue. Like there are companies that do billions of dollars of revenue, mostly in this stage. It's really on the government. Now, my job is to convince the government, but the government has to step up and say, yes, I want$5 ,000 of that thing. Right? And that is one of the things that makes defense so hard is that it's out of your hands. Now, that will be happening here across hopefully a few product lines, but certainly one or two within the next six to nine months. So you don't want to end up – you don't want the government to pull you too fast.

43:23And that's where you have to be honest. They want production real bad right now. Give me some time because I don't want to screw this up for you. But it also needs to happen because products die when they stay in that stage too long. And companies die. Your overhead just builds and builds and builds. And you wake up and your unit economics just fundamentally don't make sense. and who cares on the company level but when your unit economics don't make sense you're certainly not delivering asymmetry to the warfighter and so yeah it's a bdfer is the the way to put it it's a trust building experiment with the government it's getting your unit economics or your your capex economics and capital stack right to pre-build production so the customer really really trusts you're ready to go this is where we kind of have an unfair advantage on components because i can go and scale for companies and then bring x pentagon official by a factory that is actually making thousands of things, which very few people in defense do.

44:13But yeah, I mean, that's the stage we're at today. We're like right in the meat of like 10 to 90 work right now across several of our product lines. We'll be wrapping that up by in a year. So that'll be likely Pike, Glide, Stratus, and then Dart. We're re-architecting Viper, I think, to add a lot more range. We initially architected Viper around off-the-shelf engines. I think the Viper architected off mockjet will be a lot better and so dark viper will be sort of mid next year is when we'll leave the 90 work and then as soon as the government customary contracts and ideally before because you can sell internationally and you can sell b2b so before on some not before on others we'll be entering rate and that's where we're setting up factories so big big big factory down in texas another big factory right next door here that one's more development texas is like full automotive style production like this factory is still it's meant for flexibility so it's more of a development facility, that will be full true rate.

45:06Victorville Energetics will be full true rate. Along the way though, I think this is where a lot of companies die. You can't forget how to do the one to 10 work when you're in 10 to 90. And in the act of doing the 90 to 100 work, so many companies sell their soul by adding so much overhead of like process onto the company. And so one of the things that's controversial that I am doing and will continue to do is to have products at every stage of that. Because excellent engineers like working on something important. And so the second, and there's overlap here, but generally you've got engineers that are good at like zero to 30.

45:42You've got engineers that are good at like 20 to 60. Another advantage of running a functional org is you can kind of pull those engineers throughout the process of the program at the right time. But dude, if you're not doing a one to 10 program, especially if you're not doing that for like a year, your one to 10 engineers are going to leave. And so there's so many reasons that you need to have a lot of products to build a great company in this space. I wanna be clear, I would not have this many products in any other industry. But in this space is one of the reasons that I think it's actually insanely, insanely important to do so.

46:11When you think of like spinning up an entire new product from scratch, you may not necessarily have all the talent that's required to go from the complete from scratch, like just on the whiteboard to a finished product. So how do you basically rapidly, you have some idea and then go rapidly, find all the right talent to fit that mold like the guy to spearhead it and everyone beneath them it's another good argument for a function-based org there was a really painful period of the company where we didn't have all of those talent sets i didn't have someone who could like characterize the rf dynamics of the vehicle who could go and do like loads and dynamics who could go and do like reliability engineering like i guess we somewhat still have that guy that's one that's being stood up right now.

46:56Thermals. The thing about building products in any space, but I think especially in this space, is you've got like 40 different disciplines. And if you miss out on one discipline, the program just fails. Like if we improperly design the thermals on Viper, I have to restart Viper. Now, fortunately, my blocks only take three months, but that's a three-month slip on like a six to 12-month program. And so the reason it's taken us so long to stand up an excellent engineering function is it just takes a long time to build all of those functions. We're at that point now. The nice thing is we're not verticalized.

47:29We're based on function. So I don't need a thermal engineer for every single one of my programs. I need a thermal engineer. And he or she will probably have one or two. They'll be the lead and we'll have one or two people that work for them. And thermal spikes at certain portions, just to highlight thermal. This happens across the board. But thermal spikes at certain portions of the development process. It's really, really big at the beginning. there's not that much new data and like the prototyping phase it's super hot if like testing you like fix those issues and then it's really really hard as you design an environmentals for rate and so each of these functions is like spiky along the process of development now the nice thing is they tend to spike in the same phases in each development and so what you want to do is you never want to have two products in the same phase of design it's like very very painful because then those spikes overlap but if you want to run one an economically efficient org much more importantly an org where folks are just doing excellent work all the time and you build an excellent culture, you need to basically impedance match having a vehicle in each phase of that development so that those spikes are levelized as much as possible.

48:31You can have the desire to ship fast and iterate quickly, but how do you actually design the organization so that the iteration speed and everything is just a cut above anyone else? So one, the most powerful thing is always like team size and the types of people you have doing it. There's not that much work to do in aerospace. Like shipping an iPhone is like many orders of magnitude more work than shipping a glide. The difference is aerospace is so, so, so coupled. Like you can't make a decision in a vacuum from any other thing. And so what this means is that most of your engineering time is actually decisions and communication.

49:12The best thing you can do to minimize that is to decrease team size. The amount of people that have to communicate with each other grows as the factorial of team size. And so way faster than exponential. And so the best thing you can do, especially in aerospace, to make a program move fast is keep a very small team. Now, and you see that throughout history. This is why the SR-71 was something like 15 designed engineers. And I truly believe that on these programs, like 10 or 15 of the best people on earth will outship 300 of the top 1 % people on earth um but you have to have really really good people to pull that off but that's the first thing you have to do now that that just means it is always kind of a painful process like small teams that have a lot of work to get done that's why it's a very intense place to work um that's the first thing second thing is deep analysis right like you want really really good hittle you want excellent aerodynamic actually it applies across literally every domain like analysis is the way you move quickly.

50:09Third thing is the ability to cut prototypes incredibly quickly. Like we're joking today watching the Pike test, this is like a$2 million test today. Now at rate, Pike will cost significantly less than that. And if I wanted to today, Pike could cost a lot less than that. The reason that's so expensive is because we had like really four weeks from design release to first flight on the thing. And that means you're just surging to get the prototype built as quickly as you can. And so this is partially vertically integrating prototyping capabilities and partially like excellent vendor relationships.

50:41And you're willing to pay these people a lot because the cost is not really the pike you're flying. The cost is how many weeks did you have a bunch of engineers sitting around working or more often like the overhead of the business, the opportunity cost of not winning the contract. And then the final thing is excellent test. You need to know what you're testing and you need your like test stops to be run cleanly. We have a very large test organization. And it pains me how many aircraft we crashed early in the process, not because of technical reasons. These tests are complex, and you're running like 10, 15, 20 tests a week of aircraft.

51:15And so you have to be no fail. Test is also where safety sits. So you want to just invest so deeply in test. And then everyone jumps to product testing. By the time you're in product testing, it is usually too late. And this is where we still struggle, is excellent, excellent, excellent component in subsist of testing. Like, how do I characterize every single portion of the aircraft before it goes in the aircraft and flies? If you're learning something in the air that you could have learned on the ground, you have failed. And the test today, right, good release, got into flight, vehicle departed, not a surprise, successful test.

51:50But what we learned, you can't go and test that on the ground. You can with a wind tunnel, but it would take us 18 months to get in, and I don't have$300 million to build a transonic wind tunnel of that size. So you test it in the air. Like that's a successful test because that's something I had to learn by flying. But if the issue had been like a software hangup, that's bad. Like that is something you can absolutely test on the ground. The other nice thing about test is it immediately allows you to win on manufacturing. Testing on the manufacturing line is one of the, if not the most painful things in the manufacturing process.

52:22And so all of the excellence you're generating on component testing along the way, that all goes directly on your manufacturing line to be able to debug problems immediately. Because the thing I said about engineering and the power law of engineering, it applies in the design phase. Unfortunately, it does not apply in the manufacturing phase. And this is not to say manufacturing engineers are less talented. Like our manufacturing engineering is one of the most talented functions of the company, and they do some of the hardest work. but manufacturing engineering is I'm bringing up this line and a thousand things just broke at the same time and I need to run down all thousand of those things immediately.

52:59The better you can be testing products along the line and the better you can be collapsing all of that data, those army of manufacturing engineers who truly need an army of them have orders of magnitude of an easier time actually getting the thing into right. For this vehicle, you don't want just one. When you start testing it, you want to test 10 and two weeks. And so how do you decide at any given point to basically scale some amount of manufacturing so that you can test as rapidly as possible and get that feedback? The cost is almost always cheaper on average to build more vehicles than you think you will need in test.

53:34Now you have to balance this with the fact that as soon as the engineers have a bunch of vehicles on hand, they want to fly them. And so you have to make sure that you're going into tests with everything understood so that you don't start discovering ground test things and flight tests but dude if i like if we build two pikes more than we need in testing that is not the cost the cost is if i build too few and suddenly it's four weeks to go and build the next batch of pikes so we usually over build there so that's that's the number you choose to build and then in prototype you want your prototypes to look distinctly different than scale i think early in the process of company building i used to try and brag about how similar my prototypes look to my mass manufactured units I tried to force that I think you want to do basically the exact opposite of that you need to make sure that you're not expecting to manufacture something that is not manufacturable so you have your manufacturing engineers there the whole way but if you have a part and it's like is this part going to be cast or is it going to be machined from a billet choose the latter every single time and proto that said in scale I think people and who knows I haven't stood like we manufacture some things we don't manufacture a ton yet so I'm sure I'll eat my words and change this principle over time.

54:43What it seems to me though, based on conversations with good manufacturers, and we made like a thousand aircraft probably in the last 12 months, what it seems is that the stack ranking of importance on how to get excellent at manufacturing is first DFM. Like DFM is the truly power law thing, like on glide, glide block three versus block four. Same aircraft, same exact specs, but literally one process change, one redesign is taking us from like 50 operator hours to zero operator hours on that specific airframe. And from probably several thousand dollars per airframe down to like$7 airframe. And so folks tend to obsess with the fourth step, which I'll get to, which is manufacturing operations, but you really, really want to focus on DFN.

55:27The next is supply chain. I think, and I was guilty of this. I think supply chain is not as sexy of a thing as it needs to be in company building. Like, I think when most people hear supply chain, they assume like the function that like goes and buy stuff. I'm fortunate to work with my CEO who led supply chain for Tesla, which I think is probably the most like exciting supply chain effort that's been built in the last. At least in the United States. Yeah. And probably last decade, two decades. He led that function. I very quickly realized, oh, crap, like I'm completely mischaracterizing supply chain.

56:01Supply chain is looking at every ounce of the bomb and making. Okay. Maybe there's something off the shelf. that is like slightly different than what I'm buying today. Let me buy that. Rare, at least in our industry. Much more often it is like, okay, there's not a company that builds this today. Do I want to go and invest in a company? Do I want to go and like license that company's IP and build the thing myself? Do I want to pay that company a$10 ,000 check to stand up a factory next to my factory? Maybe there's a good company that doesn't have the capital. I'm going to acquire that company. That's how Squadron came to be.

56:30Like they quoted us a lead time for SRMs. It was like 10 times faster than anyone else in industry. And we're like, okay. like we talked with them and they like it made sense and so we acquired them or the final step do i really really want to build this thing myself but all that to say supply chain the second thing supply chain is many many many times the thing that gates rate and it is probably after dfm the single most important thing for for bomb cost so then third thing um at least me again who knows is is capital stack and this ties into the asymmetry piece but like OPEX versus CapEx trades.

57:07And then are you selling a product that like actually financially makes sense to like, is it a deeply, deeply exciting product? You very rarely see commoditized things today have successful manufacturing ramps in the US. You see stuff like SpaceX, stuff like Tesla, that is like wildly different than what's been seen before. So one, you want to be selling a product that you can just afford to kind of eat a bit because it's so good, but you need to manufacture in the US. And then you want to make the right OPEX CapEx trades and you want to finance the business correctly. So what's your debt equity stack?

57:36By four, you get into manufacturing operations. So I think that's what I mean is if you screw up the first three things, you're doomed by the time you get to that thing. Now, 99 % of the work happens in the fourth thing. And that is the most painful thing and the hardest to execute. But the pain of that thing scales radically with how well you did the first three things. And that is actually building the factory, running the factory, hiring the technicians. Again, this is 99 % of the pain. I'm not making an argument that this is an easy thing. It's actually the best thing you could do for these people, though, is to get the first 30 things right.

58:11I imagine most companies will probably set out with a thesis and they'll go after it for maybe a couple of years and then start working on the second product. Whereas you are working on multiple products in parallel. And I assume that the first thing that you set out to do, your process for designing, testing, iterating, all those things is completely different than the process that you have today. So how has that process evolved? It's a long answer. It's everything I've described. It's the principles of how do you test, how do you design, what are the design goals, how do you simulate, how do you prototype, how do you compare prototype to mass manufacturing.

58:48And again, I hope no one takes this, is what I'm saying, is anything they should apply. The key thing is that this process changes so much company to company. and like i would not i would not advocate even another defense company trying to trying to roll this process you have to like chisel it out into the business you want to build but yeah you're in this act of like one how do i think about these things because most of these are optimization functions where on the optimization function do i need to lie to actually building the teams three those machine those teams functioning as well-oiled like while well-oiled cohesive groups and then not like acceleration naturally happens if you keep your if you keep your foot on the gas pedal one thing i'll say though if you want to be a multi-product company it is i think very very very hard to start as a single product company there's not conventional wisdom and i i i'm actually likely wrong here but what i think based on having done it so far is that if i had only been a single product company and then tried to be a multi-product company which is usually the way people try and tell you to do it.

59:52The pain between being a single product company and a multi-product company would be about as large as between a zero product company and one product company. Because the choices you make really, really, really depend on how many products you want to build. Like I would not be vertically integrating all my prototyping stuff if I was building one product. I'd like cut POs to vendors. Like I would care a lot less about systematization of these things. And so for us, I want to be an excellent multi-product company. I think that is absolutely needed to be an excellent defensive company. And so it actually makes sense to get good at doing that early in the process.

1:00:26I think you talked a little bit about vertical integration at the beginning, but I think it's good to go deep on that a bit because the first time that you build your first product to actually get that out quickly, it just takes a very long time and you don't necessarily want to be inventing every single wheel from scratch. But on your 12th product, you probably have a lot of learnings and also a lot of supply chains already set up to make it way faster and you can do it in one roof. So when you think about vertical integration for your business, what is the process from going and how far do you want to take that?

1:00:57Like, do you want to be 90 % vertically integrated or, you know, 50 %? You and I talked earlier about how deeply successful companies of one generation will form these like rules or laws for the next generation that don't actually hold that true given how different the next company needs to be. spacex has been so successful that i think everyone is vertical integration obsessed right now i don't see vertical integration as a metric for success in manufacturing like if i were an investor looking at a company i would not mark that company up if they were vertically integrated vertical integration like anything is a is a tool and depending on your industry it makes varying levels of of sense like apple's superpower is their vertical integration philosophy which is where it's nuanced it's not a it's not a binary thing by the way vertical integration they form excellent excellent partnerships with suppliers that they help get to rate that they help define processes on and because of that as as technology changes they can change with it like when you track apple's capex investment compared to basically any other like scaled hardware manufacturing businesses capex investment it's so shockingly low which is just it's beautiful because it's so easy to end up upside down on vertical integration like if you go and build a factory and the process changes under you you're screwed and so that's how apple has been able to ride the wave of radically changing manufacturing both in terms of location and technology for decades now contrast that with spacex and so i guess all that to say apple like That makes sense for their business.

1:02:39For SpaceX, they're operating in an industry where like ULA's industrial base was screwed. There is nothing that you would want to touch out of that. And so there's nothing good. It's a super rotten industrial base. They had to vertically integrate. Is it similar for like Boeing where they have, at one point I watched this interview where the guy was excited about having 120 ,000 suppliers. I think there are good reasons to not vertically integrate and bad reasons to not vertically integrate. I think a lot of the primes, I'm not generally anti-crime, but I think that was a pride point to optimize quarterly accounting.

1:03:17It's probably mean of me, but I think generally true. And then you also see companies during really hard times start to vertically integrate less because it's hard. Or if you've innovated poorly and things are changing out from under you. So I think there are certainly times where it is very bad. It is a bad sign to not be vertically integrated. But vertical integration shouldn't be a maximization function. It should be a tool. I think for our specific industry, there are some things that look a lot more like the ULA supply chain. Solid rocket motors, microturbine engines, radars. Like these things cost, in many cases, hundreds or thousands of times more than they should.

1:03:51There are two reasons for that. One is cost plus contracted, right? And we talk a lot about it for the primes, right? This idea that my margins are fixed, and so if I spend more, I make more. It's bad for the primes, but the primes also have the government breathing down their neck all the time. It's more acute in the supplier level. Because if I'm Lockheed and I'm buying a radar from you, I'm incentivized for you to take longer and charge me more in many cases. The difference is I'm being audited all the time. You're being audited, but you're a level deeper. By the time you get to tier 2, tier 3, tier 4, the incentive structures that have existed in this industry for so long are so much worse than they are at the prime level.

1:04:33So that's the first reason. The second reason is a lot of this stuff has been qualified for manned flight. The actuator you put on like a 737 compared to the actuator you put on glide is not at all the same. Same with the jet engines, same with the solid rocket motors. And so these things are overbuilt for like two or three orders of magnitude too much reliability. Now you need safety and safety and reliability are different, right? Like safety for us is specifically surrounding the warhead and like the flight termination system. But for us, in most cases, like an aircraft crashing is not the end of the world if the aircraft is 100 times cheaper.

1:05:11And you end up paying like an order of magnitude more for that reliability. And so for those two reasons, across a lot of our business, specifically the more traditional aerospace stuff, vertical integration makes a ton of sense. And then you have stuff where vertical integration makes absolutely zero sense. Like when you look at making PCBs, it's like the clearest example, or like regular visual cameras. I'm not gonna be better than Apple at doing those two things. It's just not gonna happen. And so let me go and rely on Apple supply chain to the greatest degree I can. Now, the weird thing is a lot of this process, a lot of these things specifically in consumer electronic, less so in auto, but still largely the case, is done overseas.

1:05:53And so there is this act of, okay, how do I take this knowledge that exists with the companies? It's not me vertically integrating in the SpaceX sense, maybe vertically integrating in the Apple sense. How do I pull that into the US to create sovereignty? And then you got this middle region, which the camera conversation we're having earlier, like how vertically integrated do we want to be on cameras? Well, the answer is for visual cameras, not that much. It's called EO in industry, but I'm trying to avoid acronyms. But for IR cameras, for thermal cameras, that's a pure defense thing. But I can take the processes that are used to make visual cameras that right now are very different than the processes used to make thermal cameras and stand up something in the in-between area.

1:06:28So like likely my design, likely me doing some of the production, but working with someone who's already excellent at cameras. And you end up doing this across your entire supply chain. There's the cost optimization function here. That's important. There's the timeline optimization on revs. That's important. For this specific one, the key thing you care about is rate. Like the thing that is happening so much right now is companies are going to the Pentagon and saying, I can make 5 ,000 of this for you. I can make 5 ,000 of this. And different companies will go and say, I can make 5 ,000 of these things, but they're all touching on the same supply chain.

1:07:00And that supply chain can make 5 ,000 of that thing. Let's say it's Seekers or let's say it's Warheads. Yeah, they can make 5 ,000 of that thing, but that 5 ,000 is being split to Ukraine. It's being split to Europe. It's being split to rearming our existing legacy systems that just got shot in Iran. And it's being split between like four different companies. And that's during a pretty peaceful period for the U.S. compared to what I think, unfortunately, we need to prepare for in the coming years. And so the reason the biggest argument for vertical integration, if you're Mach, which is different than SpaceX or Tesla, is surge capacity.

1:07:32Like, I need to be able to step up and say, if you cut me an order for a million of this thing, you may have to give me 18 months to surge. But I own this like I can surge and I can deliver as many as you need. And so we end up being very vertically integrated as a company, but there's a lot of nuance that has to be captured in that. One of the things that we talked about earlier was this idea of acquisitions. And ideally, you could just build everything in-house, and you don't have to go out and acquire a team or acquire a company. But in the event that you do have to do that, you want to make sure that the culture on the other side is cohesive, and you don't have two separate organizations that run completely differently.

1:08:09So how do you successfully do that? Absolutely. So there's the strategy and the tactics of acquisitions. So on the strategy piece, specifically for our industry, for defense, I am more bearish than I am bullish. I think it is very, very hard to organically grow this business, but there is so much to be said for creating that unified process that I think you want to acquire as little as possible. and then also we are in a period right now where companies like mock are able to raise at an unfair advantage like we have to be honest with ourselves that a lot of these aerospace companies are trading at two to three x revenue for a reason and that's because there's boom and bust cycles in the industry and so you have to be very very careful about not replicating these companies unit economics calling them your own marking it up you're gonna you're gonna really struggle if there's a down period as a business, which from a financial perspective is one thing, but it's actually so, so, so important for the warfighter.

1:09:10It's so important for the US that you can earn your right to have a high market cap with high margins as a company. And we can go back to why I think it's actually like, it's very important for defense suppliers to have high margins. It's like a controversial take. And then you get in, I guess, staying on strategy, what type of acquisitions make sense for us as a company? I'm also not trying to point fingers here. Like different companies do have different growth models. This is ours. And I just don't think it makes sense. The specific acquisitions that do make sense are ones that you literally cannot grow organically, like very specific IP in some cases, but very rarely teams, usually it's IP or licensing, right?

1:09:47So for solid rocket motors, it was both like they had built up over two decades, an index of the most cutting edge programs and had executed on those and built a really really deep bench of ip across air breathing like ramjets across solid rocket motors across liquid rocket motors again across in space propulsion that was important the thing that was equally important was the fact that they had the infrastructure built like it's hard to go from nothing to like testing hypergolic motors and takes years of red tape and so that acquisition made sense for us on the tactics side it's a game of including the two orgs and taking the best parts of both words and the process.

1:10:28So I think, again, conventional wisdom is you want to impose your culture on this company the second you acquire them. And I think in many cases, that's the right answer. But ideally, you're actually acquiring companies that are successful for a reason and they're elements of their culture and process that you can pull. It's super important, though, that those become the same. You don't want several different cultures. You don't want several different CAD tools, PLMs. These things just break you as you try to scale. but you also don't want to have hubris and say like, yes, Mock Industries has the best perfect culture.

1:10:58We know exactly how to do these things. Well, you're acquiring this business for a reason. And so be very intentional about the portions you actually really like that you want to take. And if it's a good acquisition, and it ends up being a lot, integrate that into your org. And then likewise, you're successful for a reason. So integrate that back into their org. But you do have to end up with a homogenous culture at the end of the day. Again, at least in hardware and at least in defense. I think if you're building a SaaS company, this process looks very different. One of the things that we talked about was this idea of like parallel pathing and sequencing.

1:11:29And I think it's one thing to think that you're basically going to do 10 different programs at once, starting them all at the same time. But there's also this other idea where in order to successfully have some program in your three years from now, that may look like you started today, you're just starting the design and development process, but you're not actually like starting the testing process or otherwise until like a year or two from now, whereas you're starting some other program and testing six months from now. So how do you kind of get this like both parallel pathing and sequencing equation right?

1:12:00So I think first, it's very, very important that these things tie together on some timeline. So you don't want to have several vectors as a company, like in the limit, and let's call the limit five years, even though we're really trying to build on five decade, five century timelines. But like, let's say in the limit across five years, these things need to tie back together that said things fundamentally have different lead times like i can write a software for a specific thing visual navigation vehicle control i can write that if i have good engineers in in in months in many cases weeks whereas you have some things that just take forever right like building a jet engine taping out a chip like those are probably the two most acute but you can go down the list of things like that and so one you want to build a big company, not because you want to build a big company.

1:12:50You want to do important things for the world. In the process, you have to build a big company, but you have big ambitions on a five-year timeline, and you're making bets now that will pay dividends based on lead time, some in two years, some in three years, some in five years, some in 10 years. And in the near term, those vectors do look quite different. And you have to get under the... It looks crazy, but you have to get under the hood and hear the explanation for like, okay, this ties in here, this ties in here, this ties in here and then you end up being able to do something nice like one of the golden rules of aerospace is don't design the aircraft in the engine at the same time right you want to you want to be able to anchor certain portions of your design in different times and one of the classic doom loops for like aircraft development is i'm designing the engine and i'm designing the aircraft at the same time and both are changing and they're sort of orbiting each other like their requirements are basically shifting constantly yeah through the development process and to ship a good product they better be like this.

1:13:43And so ideally, ideally you design one than the other. In Viper's case, we're buying an engine and the engine supplier, I don't want to rag on them either. Like they're shipping a majority of the engines right now that are going to Ukraine and other things. They're a great supplier, but we're buying an engine from them. We started development process here about a year ago. We're firing the engines now. We'll be in-housing that engine on some timeline. um but i anchored the first viper design to to that engine and i built against that and then now my engine's coming through and as it happens it kind of meandered now it meandered for the better i'm ending up with a pretty high thrust pretty high efficiency engine so now i'll redesign viper but i can ship the current viper with this engine and it it works but you want to stagger these things as much as you can and the same applies for for company building to some degree Like there are certain things that if you have taken, if you've eaten your vegetables early in the process, by the time it is now like game time to do the thing, if I already have this thing in hand, I'm going to be a lot more successful.

1:14:46It seems like distraction, but if you get under the hood, you actually need these things to align. Otherwise, you end up just growing really slow. You end up not getting done what needs to get done for the warfighter in the right amount of time. defense companies naturally scale slow and you have to scale faster than like the prime chip programs in some way and so this is the way we've chosen to do it is to take a lot of these bets and take them in parallel but on a serialized path um and i i think the results are starting to pay dividends i think they'll they'll certainly continue to because we're placing new bets along the way and then the other nice thing that happens and this is so your first optimization is like get the lead times right on these different bets you're taking.

1:15:27And the things that usually constrain lead times are engineering time, standing up manufacturing, or in our industry a lot, it is how long it takes to sell to the government. This is one of the key reasons to have a lot of programs is I could be engineering three times slower. The government buying my thing in time is probably still going to be the rate limiting factor. So I might as well stack that lead time as much as I can. That's the first optimization. The second optimization, if you do this well, is you can get compounding returns across different things. And so I talked a bit about this platforms and components from an excellence perspective.

1:15:57There's also the de-risk perspective here, right? Like risk on the upside end. Like if we end up in a period of maximum peace on earth and we don't need to make many defense platforms, and I hope that world happens, or similar end result, the different reason, political headwinds emerge, and suddenly no No one is buying these systems. Well, I build a lot of solid rocket motors. I build a lot of jet engines. Half my revenue actually comes from supplying these companies, most of them primed. And that in and of itself is a massively growing business. I can survive that winter quite well. Now, on the downside end, if we do have to go to war, because I've done this, I have controlled my destiny on these things and I can surge them.

1:16:41And so it's basically the reason to do it is lead times and then sort of compounding returns. One of the things that you mentioned earlier was this idea of sunk cost fallacy. And a lot of people will basically invest heavily in one thing. And then they have a whole lot of biases and tendencies to keep on investing in that thing, even if it doesn't work. With you working on like multiple programs at the same time, how do you kind of think about if something isn't working, you just cut ties? Like, at what point do you make that decision? I think the decision is usually objectively very obvious. I think the single thing that stops you from doing it is fear, right?

1:17:21And fear internally and cognitively to the degree that you don't even realize it. Fear to turn your team. And then in many, many cases, fear to scare your investors. Your job as a CEO is to make those decisions sooner than anyone else realizes it's time to make them. And this can be bets where the market didn't make sense. This can be bets where the tech didn't make sense. This can be bets that made sense at one point, but technology is changing. This is innovators dilemma. I think many companies would be better if they got better at killing programs, but you've got to be pretty ruthless on cutting things.

1:17:54If you want to have the right to stand up many things, you have to be more aggressive than basically anyone else on killing them. And then you have to hedge them correctly, right? You have to take the bets in the right way that are as little damage to the company and the company's reputation as possible. I'm fortunate or unfortunate to have had to do this early in the business. I say a lot, hydrogen was a bad bet. I think I should add nuance to that. I actually think the company wouldn't exist without hydrogen. You and I were talking earlier, hydrogen is always a bad bet, I think, so far. Do you want to explain why?

1:18:25So far. So I'll explain why I did hydrogen. I'll explain why it was a bad bet, and then I'll explain why I killed it. So I didn't actually start with hydrogen. I started with balloons, fixed-wing drones, and hydrogen. And I cared about kind of all three of them equally. On the specific hydrogen piece, I cared about two things, a lot. So I cared a lot about high-velocity guns. I thought artillery would be super, super, super important. And keep in mind, this wasn't a period where we're divesting artillery. Now we're massively surging artillery. So I was somewhat right in the bet. There's the ability to go and fire projectiles hundreds of miles with hydrogen.

1:18:59And so I built a small cannon, 20-millimeter cannon, fired it, And we also acquired the IP of a company that had successfully back in the 90s during the hydrogen versus railgun bet. Both were wrong in this case. They had fired hydrogen projectiles 217 miles cheaply. That was one. The second and kind of equally important was austere fuel generation. So with aluminum fuel in a more energy dense way than diesel, you can make hydrogen in the field as a soldier. Then you can use that hydrogen to power artillery. you can use that hydrogen to run fuel cells or you can use that hydrogen to run fuel cells on drones and so the the other big piece of the bet on hydrogen was logistics are going to be super super hard in the future like your oil tankers are going to get shot at like likely won't be able to get into conflict and even back in the u.s or in your staging areas your depots are going to be taken out and this bet was also right we're seeing this like crazy in ukraine this was like five years ago.

1:19:58So I was right in the general-ish sentiment. Now, the reason it got so much attention is because I had no capital. Like you have to keep in mind, when I showed up to MIT, I had like$7 ,000 of savings from running my like small manufacturing like side hustle in high school. It is so difficult as like an 18-year-old freshman with no capital to get someone to take you seriously on engineering or manufacturing. Science was the only thing that like captured people's imagination. And so I got pulled super hard by Lincoln Labs. And then that momentum, when I dropped from the idea of working with Lincoln Labs, pushed super hard on the investor side.

1:20:35And also for investors, like with$5 million check, you're not going to go and outscale Lockheed on cruise missiles. And so it got so much attention. For that reason, hydrogen also always gets attention. And I wish it got less attention. And then it was successful because we're winning contracts on it. So we built a two kilogram an hour hydrogen generator, like two orders of magnitude better power density than the existing hydrogen production systems that Lincoln Labs team joined. Eric Lempacher, who I have a ton of respect for, who's actually going to be the guy hiring me at Lincoln Labs. Now, the reason it ended up being a bad bet, one is the engineering reasons.

1:21:11These actually weren't the deep reasons, but there were certainly portions of the reasons. So we had the accident with hydrogen. I think most people assume that happened late in the process of company building. That happened before we were mock industries. so that actually happened with my college buddy and i on the seven thousand dollar budget trying to build a hydrogen cannon which was foolish we never should have done that so that's not to justify any of this but hydrogen is hard to not get to explode and it wants to leak all the time and you get embrittlement it's just it is deceptively hard to get through on the engineering side that wasn't the real reason though i think we could have gotten through that the the second was the unit economics ended up just not making that much sense like the aluminum fuel was just more expensive than we thought it would be.

1:21:52So we're prototyping with a specific process to make the aluminum fuel, ball milling a metal with several aluminum with a few other types of metals. I ended up licensing the IP to Eric, so I won't disclose it. We're trying to get to salt ball milling, which would radically decrease cost. There are good papers on salt. So we continue to work on this. And I think those papers were fake because we never got the cost down. So the The cost was such that actually for soldier level, it made a ton of sense, but it was never something you'd fully field. So that was part of the reason. The main reason, though, and I think the reason people don't fully capture is I got a check for$85 million and could stop doing science.

1:22:32And we had to provide deterrence on like a three year timeline. And so doing science was at that point in the journey, a deeply, deeply, deeply unattractive thing to do. And so at that point, I made the decision. It was actually a wildly unpopular decision at the time. Like I had many investors fight me on it, many internal employees fight me on it to spend down hydrogen. Hydrogen was 100 % of our revenue. We had like a few million dollars of government contracts to develop hydrogen, and it was most of our engineering effort at the time. And frankly, most of the talent at the company was just no longer the right thing.

1:23:05And that was a super, super, super hard decision to make. One, like my personal reputation had very much been in hydrogen. Two, our investors had bet on hydrogen. Three, it was most of what we spent time on and most of what our revenue was on. But I had to make the choice, right? These choices get really easy to make when they're mission-first choices. This is why mission-first companies end up making good financial decisions, I think, too. When the risk of making the wrong decision is not providing the right deterrence and a world war starts, or a world war doesn't start and you choose not to defend Taiwan and the U.S.

1:23:39loses the AI race. but you stuck to the you know stuck the plan that you had in the first round or something yeah but it doesn't make any sense yeah you're like when you're balancing these two things in your head like do i want to embarrass myself in front of everyone by making a decision that makes myself look like an idiot over the last year or do i want to do something that is like hopefully going to be very very very good for america and humanity it becomes very easy to make the latter decision and so i made that decision um people also misunderstand this I actually novated all of the IP to Eric and took the contracts we had at that time and novated them to Eric and helped him stand up his own company.

1:24:15I could have sold that company. We could have spun down those contracts, but I wanted to deliver for the customer. I wanted the employees working on that to be well taken care of. And so a lot of people think, anyway, this is like old, old stories. A lot of people think he quit. I actually like came to him with this decision. He very much disagreed with this decision. He asked to stay at the company and work on something that wasn't hydrogen. He'd been working on hydrogen for the last three decades of his career. The dude is literally the world expert in aluminum fuel hydrogen generation, which I want to see be successful at some point.

1:24:45Like, I really think if you extrapolate 10 years, there's a good chance that this is what's happening at the soldier level in, like, very austere specific locations. So the warfighter needs that technology, and so you de-risk the bet in the right way by pushing it off from a moral perspective. And then I also set up the company to have float capital, and we survived that. And it was very hard to survive as a business. but we we had to make those decisions as a company and i think because i've done i think one of the hardest spin downs you can ever imagine doing like five million in capital at the company you're on track to burn it in the next six months your entire narrative is tied to this one specific niche thing it's what you've spent the last year of your life working on like that was a very hard decision but i saw it's actually just not that painful to spin things down if you build your company the right way and if you're willing to to the glass to do it if you're willing to say you know I was wrong right and if if you're willing to like just start back where you start or go back to where you start and rebuild your thing that makes it very very easy to think about spinning down specific product lines or specific ventures we take as a business like at some point I fully plan to be manufacturing commercial aircraft like I think it is an embarrassment that Boeing is the company that does this for America I think it's an embarrassment that has actually gotten worse the commercial air travel experience over the last few decades.

1:26:04Like I plan to do that. And I'm starting to line up bets in that direction. But if I have to spend that down, that will be significantly less painful. And so you can only earn the right to do these things if you're okay spending them down at the right time and if you're the most aggressive about it. But folks usually overestimate the risk of doing stuff like this and underestimate the risk of not getting done the mission that needs to get done because you've been so cautious about like, this is my one thing for the next five years. I think in a lot of situations, the biggest danger to most companies is inaction and not taking actions that may be tough short-term, but are the right move with the mission in mind and with the long-term focus in mind.

1:26:44Have there been any other like major decisions where you had to decide this is not going to be pleasant, people are not going to like this, but I know it's right? I'd started the business in Austin. This is like three months after the hydrogen thing. So like already a very hard time, but I started the business in Austin. And this was back when Austin was like this new emerging hub post COVID. I'm from about an hour and a half from Austin. Again, why it's important to separate decisions. I did make that decision partially because of that. And I think that's part of what led me to make the wrong decision.

1:27:16And Austin was cheap. I had like$5 million to employ. So I was like, I need to be in Austin because I'm going to run out of money in California. And so we built in Austin. We got to like 40 employees in Austin. I stood up a shop. It felt like a huge shop at the time, small shop, 20 ,000 square feet, probably a couple million dollars of, no, probably a million dollars of CapEx. And we're hiring and hiring is so brutally painful. And it starts, a theme starts to emerge and it's like, okay, LA is where the talent is. And I go into our applicant tracking system and 98 % of our talent is in LA. So I'm like, crap, this is the wrong decision.

1:27:51So then I flew to LA every Sunday for like three months in a row. I this is hard hard time in life I was like I still do this I guess but six hours six days a week and then I'd fly Sunday morning to LA fly back Sunday night and I'd meet with like 10 or 15 candidates and it wasn't interviews it was literally like discussing hey here's my company how attractive is this company in Austin how attractive is this company in LA and overwhelmingly people are like I want to join this company but I have kids and I just cannot leave and pull my kids up um and so then i was like okay we need to be in la this is one of the weakest moments of leadership i've had in the company i said i want to be in la but i need everyone to want to be in la i'm gonna try and bring people along for this decision and folks have been watching me go to la they knew that this was the dynamic like 12 times at this point yeah over three months yes people knew this was the dynamic I think they probably knew it was better for the business but they also had kids here and liked the company and some of them wanted to move and couldn't move and I walk into the room and I'm like okay we're going to make a decision raise your hand if you want to stay in Austin and I was trying to like I expected everyone to say based on how abundantly obvious it was based on data that we should be in LA every hand went up to stay in Austin raise your hand if you think it is in any world the right decision to move to LA No hands went up.

1:29:23And in that moment, I was like very clear. I'd like executed super poorly as a leader. And you can't excuse these things. Like I should have done better back then. But also, this is like nine months into the company building process. I had no idea what I was doing. My only real job had been as an auto tech. And this is all unfolded really quickly. If I had to do that again, I would deeply, deeply bring people along for that journey and convince them along the way, hear their input along the way. would make it very clear that this is a decision I own. Like, this is not a committee decision. But I was trying to be a good leader and try to make it seem like a committee decision, expecting the decision to go my way.

1:30:01So then, like, I was crushed. I had to come back the next day and be like, all right, we're moving to LA. At that point, did you have to basically let everyone go? Or how did that work? No, and I would not do this again this way. Like, this is the biggest reason for action is to learn. You and I talked about that earlier. So, like, I learned how to do stuff like this. It's been several years since this happened. I wouldn't do that again. But in the process, basically, we had to be in LA. Like we're hiring like an engineer a month in Austin, which again, when you have to create deterrence in three years, that is not okay, which is important.

1:30:38Again, why it is important to make these decisions based on mission. Like if this were like a money-based decision, I'd be like, well, my odds of building, making X money here versus Y money here. It's a very muddled decision. It's like, I need to deliver capability on this timeline to prevent what might be either a world war or a loss of the AI race. The idea of having to have this hard conversation with like 40 people and say, you know what, I'm really, really sorry, but like for the sake of the world, we have to move to LA if we want engineers, does get easier. The decision and the explanation process.

1:31:09So I ended up getting most of them to move. So that kicked off this whole like two month process of like convincing people to move. This is also at a very hard time in the company. like today this would be very different this is when we had like five months of runway stuff was kind of a a shit show because we just spun down hydrogen i frankly was not doing a very good job executing of the company i think there were like two people on that team that we wanted to stay with the company that ended up not leaving austin and we picked up and we moved to la all together which was such an incredible moment for the company like that's the weird thing these things are objectively mistakes but you also look back and they're very important for how you got to where you are like the hydrogen thing if i had to do it over i wouldn't go to execute the hydrogen thing but also don't think we ever would have been able to raise capital or win contracts or attract talent without it same on the awesome thing getting to la it was this interesting moment is a company where we all showed up in this factory very very very few of us in this wide open factory a bunch of texans they didn't know anyone in california they knew nothing about California all we had was like the ability to like hang out with each other and like work together and it was a great positive filter the only people that picked up and moved across two time zones were the people who fundamentally wanted to be there for the mission because it also certainly wasn't for the money given the stage of the business so it ended up being people who are there for the mission right and you would burn the boats like I read and Cortez is not someone to emulate in anything it does, but like burning the boats is a good strategy on occasion.

1:32:44I would have liked to have executed it on purpose. And don't get me wrong, it's hard to predict. I think the company would certainly be in a much better spot if we're in LA. So I'm not saying I'd do it again, but it did have this benefit of all of us just being so obsessive for such a period of time and forming this very, very distinctive pocket of culture in California that has actually scaled a lot with the business. When you think of this transition from moving from an old business in Austin to a completely new business in LA, I'm kind of reminded of almost like a heroin addict, where if you take a heroin addict and you put them in rehab and then you put them directly after they get clean, you put them back in the environment that they were in.

1:33:25There's all this like history and they'll basically fall into old patterns. Whereas if you take the heroin addict, you put them into rehab, they get clean and you put them into a new environment, they can like rebuild these patterns. Do you think that that almost had a similar effect where you like culturally and spiritually leave this old idea behind in Austin in this different place and actually re-found yourself and the company in this new place? First of all, I respect you calling us all heroin addicts. It's a strange metaphor, but it works. It actually works. No, the ability to clean out your cognitive biases along the way is so important.

1:34:04Actually, these things can't be artificial, right? If you artificially put these things on your company, these periods of reinvention, it's super, super, super painful. But over time, institutions do bloat and become sclerotic. So you want the right kind of change, but you need change in an institution. like if a company is shipping the same type of product for several years at a time i don't care how much money that product is making and in many cases it's more acute the more money that product is making because you get more more complacent you just lose excellence and so no am i in the game of like scheming okay how do i put the period the company through one of these periods absolutely not i think these periods happen best when you add a new hard challenge could be winning a giant product or giant contract that like is an order of magnitude bigger than what you've delivered before could be doing a fundamentally new type of thing like pike for us it's funny because it feels not that exciting now like it's it's cruise missile it's a great long-range super cheap cruise missile but for us at the time just getting off viper pike was this crazy thing to go and do like an order of magnitude more complexity and so you want to feed new product challenges Yeah, you want to constantly be, you need, you need to constantly be reinventing the company.

1:35:22But that needs to happen the right way. Let's say you're at some, you know, tens of millions of revenue run rate on, you know, whatever contracts you have. And you're basically designing the company for a future where you're going to scale 10 to 15 times in the next year and then 10 to 15 times bigger or some over the period of the next few years. how do you figure out what structure to create inside the organization so that you can actually successfully make that transition to prototyping and showing to like design like actually at scale manufacturing some product i think you want unscalable systems that are constantly in the process of becoming more scalable but deeply scalable people so changing people throughout that process is crushing.

1:36:10That said, if at the front end of that process, you build the way you do business, you build your org chart, you build your ERP, you build your design releases for that two stages down the business, you're going to move so slow. And you're also going to build it wrong because you don't know yet. And so you want to accelerate as much as you can on people and find deeply scalable people that you're insanely confident this person will be the person leading this function in 10 years. Basically, execs can kill or make a business. And I think most people hire execs too soon. And I tried to and I failed many times.

1:36:44My fault and the fault of the execs I'd hired. But a year ago, we finally hit the sweet spot where it made sense for us to start hiring execs as a business. So I spent the last year building what I consider to be a phenomenal, phenomenal executive team. And then I've really spent the last six months building out their lieutenants. And I'm super proud to say 100 % on the exec side now, probably 80 % on the lieutenant side, that these are the people who will be running the company with me in a decade. And that 20 % is not lieutenants who are here who are doing a bad job. That is not a single person.

1:37:16It's we don't have these functions today. And I'm still standing up these functions. And you, I love top-down hiring. And you need to execute that as early in the process as you can. and you only want to do that once as a company. You want to do that process of top-down hiring and then you want to get excellent at developing talent. I think a metric of an excellent company in year five is what percent of your newly promoted leadership is hired outside versus interned at the company, worked as an IC at the company and worked their way up the company. And so you want to start with this top-down push.

1:37:48Ideally, you do that once. I think I had to try probably two or three times, but you want to do that and you want to get it right. It was one of the most painful things I've ever done, but we got it right. And then you want to start developing. On the process side, it's completely different. If your processes don't always feel a bit broken, you're overbuilding your processes preemptively. Now, I think most companies underbuild process, but I think most excellent companies actually overbuild process. And so you want to always be building the processes, the specific reporting lines, the specific systems, the specific workflows that need to exists to the company in like three to six months.

1:38:25It's so hard as a company, especially a company in a market as lumpy as defense, to project out past six months. I think you end up being very, very good at predicting like three months, pretty good at predicting six months, atrocious at predicting two years, and hopefully excellent at predicting 20 years. But if you push your systems out past six months, you're going to build the wrong systems. And you need to focus on the thing you're doing today. Like there is an optimal system to be at this stage of company. That system looks so much different than the system that we needed two years ago. And I really, really hope looks so much different than the system we need in a year.

1:39:03So one of the things that you talked about earlier was basically like this leadership failing, which I kind of think is not necessarily leadership failing in the sense that any organization as it scales and any leader as they scale is just going to go through challenges. And it's just how you basically take those challenges and like work with them. What have been the biggest things outside of that that you think are basically the biggest blunders that you've made over the course of the company? I think most of it has been leadership. So I think there's a common theme of me just not having enough reps on leadership early in the process.

1:39:39I think it's rarely the company. is basically you've got the rate of company scale versus rate of year scale. And ideally, your scale is faster and higher. And when those things intersect, it gets very painful. And we went from like dorm room to like this factory, I guess like 15 months or something. And those intersected hard. And there was a lot of different things that happened there. I think that's one. I think, too, I don't see myself as inherently excellent. Actually, let me rephrase that. I see myself quite bad, trending to be less bad, but still quite bad at detailed technical program management.

1:40:20I think I'm good at architectural decisions. But when it's like the day-to-day decision making on a product, I'm actually quite a cute little bat. I think part of that is just naturally the way I am. I think another part of that is reps. That is where senior leaders and an engineering org come into play. Like I see it as the horsepower in most of the org comes actually from typically younger ICs. And then when people get more reps, they get good at sitting around those boulders. And usually those boulders, if you're developing right, are actually every couple of days. And I'm very bad at that.

1:40:55I'm better about the long-term boulders than I am the short-term boulders. But I think there have been a number of blunders there. like we had the first viper rev this is called rev a it was such a blunder that we literally had to move off of doing revs and switch to blocks because i didn't want to call anything rev b and what is a rev there are so many names for the same thing it's basically like restart the program okay keep going now that happens when an engineering org is functioning very healthy that also happens when it's functioning in a very unhealthy way dude we jacked up the development process on rev a Viper to like a heinous heinous heinous degree and it probably set us back like nine months on company engineer on like a what has been like a 30 36 month timeline and that came down to there's a specific art to providing voltage to your engineering teams and this is more of a leadership scale but that leadership scale translated poorly into development folks think about executing fast.

1:41:59And they think that comes down to setting aggressive timelines and then sticking to those timelines really, really, really hard. And then there's also, there's always this very, very healthy balance with you and a lot of your team. That is, you're generally responsible for advocating short timelines that are high risk and they're advocating long timelines that are low risk. In those discussions, there are two ways those discussions can happen. If you were an engineer on my team and you say this is going to take 12 months i say no i think that this should take nine months that is super super demoralizing and pushes people to make the wrong decisions and i did that hardcore and in rev a it was a crappy crappy product um like we barely reached wings level flight on the product after like months of trying like embarrassing level and This is like, this thing was like the sophistication of like an RC model airplane.

1:42:56It's like an easy challenge and we executed at Portland. What I've found on that specific thing is you do have a job of getting things done on short timelines, but there are two things that I still, I'm still not great at it. I'm still trying to get better, but two things you want to do. One is if you say, I think this should take nine months and push that down top down, that is very different language than for the sake of the mission, this actually just has to take nine months. It sounds like small nuance, but I think it's actually very, very important in the way your team feels. The first puts you at odds with your team and you're kind of calling them idiots or saying they don't work hard, even if you don't think they are.

1:43:34The second is like, guys, I'm on your side. Like, this is like objectively a crazy thing, but if we don't get it done, like the product won't ship in time and the Ukrainians won't win the war or China will invade Taiwan. on. And so that is a really, really important reframing. That then allows the second thing, which is instead of saying, I think this should take this long, ask, why is this taking this long? And that again, kind of inverts the way that conversation is leading. And suddenly in that, in that process, the first is just purely adversarial. And you're not a good engineer at this phase of your, you might have good engineering fundamentals.

1:44:10You might be super smart, but dude, I don't, I like, I'm quite acutely bad. I'm getting better in most of our engineering domains. Like I'd say, like, I'm probably strongest on like vehicle level slash mechanical stuff. Still not excellent. The second you get into RF, the second you get in a chip design, I'm actually just not in a place to say these things should take faster because I'm not the expert. But there's this, there's this art you have to, you have to get good at. You're hiring people from companies where timelines are long and they don't have to be long. And you do have to constrain them because they should be shorter.

1:44:41I tend to think most companies ship products way, way, way slower than they should. In the process of asking why something takes longer, it sounds so simple, but it's so easy to mess up. And I see people mess it up all the time. So I am going to explain it, even if people are like rolling their eyes, because it sounds super abundantly clear. You learn a lot about what the hard processes are, and you're on the side of your team. And you can actually way, way, way more successfully sort of push that timeline down. and then that fundamentally just builds a better engineering culture. One, the execs are on the side of engineering and you together are against the problem.

1:45:20Two, when you admit things that are, like when you admit bad things, you get a lot more credibility and when you admit you're not confident on things, you get a lot more credibility when you say things are good or you say I am confident on this thing. And there's this trap, I think especially for young leaders, of thinking you need to be the smartest in the room. Again, this is so cliche, but I fumbled hard on it. Your job is to be the dumbest in the room on any given thing happening. Your job, though, is to have the most developed world model on how those things work together. And also, and that's kind of the microscope part, and then the telescope part of where do we need to wrangle these things to be in a handful of years.

1:46:02And so in the process of admitting what you deeply, deeply don't know, and in many cases actually playing dumber than you are, you gain a lot of trust with your team. And then when you push back on things, you do say, I'm very, very confident on that. You get a lot of confidence. And then similarly, if you're always saying this will take this long, this will take this long, this will take this long, it's a completely different balance of how you're applying pressure to the team. I think one of the most important things for founders, as well as like organizations, is being able to kind of bounce back from failure.

1:46:36And I love this line that starting can start up as like chewing glass and staring into the abyss and then being a founder or being a good founder is someone that enjoys that how do you when something goes horribly wrong basically rapidly get away from the emotion of that you know experience and kind of rethink you know how do we move forward most effectively i think so much of so much of company building is discipline Like there's nothing actually inherently that hard about company building. You're in an office, you have meals, no one's shooting at you. You're not like getting attacked by wild animals.

1:47:17Like it's a lot of like sitting or walking and like talking to people. Like from like an objective biological standpoint, it's not that hard. now it is inherently terrifying emotionally painful and cognitively exhausting and there's something I I think you you want to get good at doing which is completely separating completely separating those two things and this is controversial and I may change my mind here but I actually think fear and stress are just the worst worst worst decision makers like I actually don't know situations in which having those two emotions at the table push you as a CEO to make better decisions.

1:48:00And so there's an art that starts by disciplining yourself on those two things. Like, yes, I'm terrified of this thing, but that will cloud my judgment. I will not listen to the fear or the stress. And then if you do that enough times, you stop feeling those things as much because you see the results of not making decisions those ways. And my CEO has good line here it it's all about emotional inertia is the other thing like and these these i guess are the same thread but like it's so spiky like you'll have weeks where just everything is humming and you'll have weeks where everything crashes and you can't get too high when everything's going well and and for a number of reasons you can't start believing that you're very good yeah um but then similarly things just inherently stack to be bad and during those periods you basically need to bank all the emotion that you should have felt at the good times and use it at the bad times.

1:48:55And if you're doing your job right, and it's a very, very hard thing to do, and I'm not great at it, and it starts with discipline and then it becomes habitual, it's just not that painful because biologically it's not that painful. And I think the first time people hear that, they think that you will care about risk less. They think that you will care about the stakes of what you're doing less, that you'll care about your team less. It's not that you don't care about them, it's just that you act objectively in reference to them without personal fear, and that ends up being the best thing you can possibly do across those three different things.