Winning the AI Race & Reindustrialization | Christian Garrett, 137 Ventures

0:00You know, it turns out the big problem in the industry is that it's not access to capital, it's really pricing. As in the math, it's very difficult for this industry because you have volatile pricing because China floods the market with supply. Legacy industry, we're talking a lot about mining, energy, manufacturing. The industrial revolutions of our past were the technological revolutions. All the same debates we're having now about AI, they were all the same debates we were having about the beginnings of automation and early manufacturing. What a group of smart ones we have in front of me today.

0:32that's about as good as it comes up here, the brainpower. We take historic action to reassert the future which belongs to America, always has belonged to America. How do we showcase how AI is going to impact the country and create jobs? I've got to give credit to Michael Kratzios, David Sachs, and Jacob Helberg. I really helped push this with the admin. And I also give credit to David Freeberg. And Jacob Daly and I are really excited to co-host this from a Hill and Valley Forum perspective. visions and demos of the future from Shamsankar from Palantir, Chris Power from Hadrian, Jake from Gecko, Lisa from AMD.

1:07We'll have Secretary Berger and a bunch of other secretaries speaking as well, which will be really cool. And then the president will give some remarks and then sign the

1:26video. Christian Garrett, welcome back to Sorcery. Thanks for having me back. A lot has happened since I had you on. And by the way, that episode crushed. Thank you. I'll I need to see the numbers to verify that, but you're being very nice. The numbers are good, but the sentiment on the back end was probably like insane. I don't know if I've had as much engagement on a pod than I did on that. Great interviewer. Great questions. People want to know about secondary markets. You were delivering. Yes, yes, yeah. So since then, a lot has happened. You hosted Hill and Valley. We're at Reindustrialize right now.

2:07And next week, you're going to be hosting another thing. So before we get to next week, let's talk about now. What brings you to re-industrialize and how does this fit into the 137 portfolio? Yeah, so this is actually my first year. And it's incredible. My partners and colleagues have gone before. My friends are involved in organizing and setting it up. A lot of our portfolio is involved. And so if you look here, obviously Hadrian is heavily involved. Palantir is a major sponsor. Brex is a major sponsor. And Palmer's here. Andrel, obviously one of our largest investments. So it is very much a fun place to go see friends.

2:53And I think coming for the first time, I now get why folks have really enjoyed coming every single year. There's Mobile World Congress for that broader industry. There's these major gatherings for the industries, CES. there is not one for manufacturing right there is not one for the industrial base and there's a couple of trade shows there's things in vegas like there are things here or there we argue the paris air show but i think what's going on here could be very very special across industries so it's great to be here um doing a panel a bit later um with some friends lily mosey from palantir some other folks i'm looking forward to that and uh it's been a great time what's the uh the panel on?

3:30The panel is really focused on the re-industrialization trend that's going on globally and how the U.S. and our allies can work together. Something I'm very excited about, particularly being half European and half American. Louis and I also share a passion here and try to work together on some stuff and work with our portfolio companies on scaling out in the U.K. and Europe. So it'll be a fun subject. You've been in Europe for a while. I feel like this is the first time we've been back on USOA? No, no, no. I did do some time there earlier in the summer and it was really, really impactful. Just hearing from end customers, being the government, defense industry, hearing what's going on out there.

4:11I'm spending a lot of time with entrepreneurs and startups. So I think the focus of that trip was focusing on reindustrialization and the rearmament that's going on, but also did a broad range of other stuff. And there's a lot of great companies been looking out there across fintech and cyber security um so it was a very productive trip and um any excuse to get back to europe is also nice well that was one of your hot spicy takes at the end of our pod is like you're bullish on europe so i am what what have you seen and what do you know from spending time there uh i mean the biggest takeaway just like we've seen in the u.s is uh there's a market shift which will attract talent and capital because there's an end customer that's very, very serious about supporting new entran, supporting the existing industrial base and spending more money.

4:55The broader EU, the European governments, they are very serious about re-arming, scaling up their industrial base and modernizing their militaries. I think the primary focus is definitely on just an increase of spend. And I'm seeing signs of a focus on modernizing procurement in order to modernize their capabilities. A good example is the DIU is a very successful program here in the US. The UK adopted a DIU variant amongst their own with about 400 million pounds to start in a matter of months. The story apparently is that it was actually Secretary Hexeth who was pushing them that they should do this and Minister of Defense Healy got it done.

5:41So stuff like that is just really strong signal. It's very positive. and I think what you're seeing abroad is good for the US, whether there's a huge focus on onshoring as it should be, but friend shoring will play a big role, having supply chains among the Western allies, which can be protected and scaled up is important. And I think also it just reminds you that what's happening here is being exported. What's happening here is incredible. Someone asked me earlier, why am I so excited about what's happening in re-industrialized? And I think the thing that is underappreciated is that right now we're seeing sort of the early stages of the culmination of technology and software eating the world.

6:25Legacy industry, we're talking a lot about mining, energy, manufacturing. These legacy industries were once the technology industries. The industrial revolutions of our past were the technological revolutions. All the same debates we're having now about AI, they were all the same debates we were having about the beginnings of automation and early manufacturing. And so I find that really, really interesting in sort of this techno-industrial framework, this combining of these two industries. It's now when everyone thinks about the future in AI, they're also thinking about manufacturing and energy.

7:03They're actually also thinking about mining and refining. that is going to be very powerful and it's a key part of the re-industrialization trend. Sorcery is brought to you by Brex, the financial stack trusted by more than 30 ,000 companies, including one in three venture-backed startups in the U.S. Nearly 40 % of startups fail because they run out of cash. Brex is literally built to help founders avoid that. Unlike traditional banks that let your money sit idle, chipping away at it with fees, Brex is designed to help you spend smarter and move faster. Their all-in-one solution combines checking, treasury, and FDIC protection into one powerful account.

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8:23Turing builds customizable AI systems designed to solve your mission-critical challenges no matter your industry. From expert guidance to tailored projects, Turing helps top companies realize AI that's more capable, more adaptable, and more effective. With Turing, discover how AI can accelerate your business growth. To learn more, visit turing.com slash sorcery, spelt S-O-U-R-C-E-R-Y. That's Turing.com slash sorcery. As we think about reindustrialization in America, there's many different buckets and industries that it spans across. What is an industry or vertical that you're very excited about right now because of all these technological advances unlocking?

9:08Yeah, you know, I think obviously I'm still going to be extremely bullish for just the opportunity within aerospace and defense for, you know, some of our largest positions like SpaceX and Andruil. There is a long runway to go, and they are just scratching the servers on the opportunities across those industries. I think that when you can find industries that maybe have been more difficult to crack, that is obviously an investor, right? Where are other people not looking as much or where are other people not appreciating something as much? And I think two industries right now that, one, we are actually investing in, And then another one that we're actively spending a lot of time and thinking about are the automotive industry and then the mining industry.

9:55On the automotive side, we are new investors in Applied Intuition. Huge round. Huge round. Caster and Peter are fantastic. The whole team there is fantastic. It's actually incredible engineering work and culture there that a lot of people just aren't fully aware of. They've sort of been under the radar. Now they're coming out a lot more. and it's just been really great to see the reception and people actually hear about the success of this company. They've cracked the code in selling to the top 20 auto OEMs. I think it's 18 out of 20 are customers. These are notoriously difficult customers. There's a litany of graveyards of companies that have tried to sell software here, even tried to just be suppliers or vendors here.

10:37Very, very tough customer, very tough industry. But also people don't really think every day about how the automotive industry is a critical industry to our economy right from a direct job standpoint an indirect job standpoint uh this is why during gfc they were one of the industries that got bailed out right it wasn't just the airline industry it wasn't just the banking industry it was the automotive industry um they're just critical and i think their success is a not just important from an economic perspective but it's actually important from a national security perspective and uh applied tuition is selling software um and building tools and products for that industry to compete and to remain dominant in the West, predominantly U.S.

11:17and Europe. And then a sector that we haven't yet invested in, unlike Applied, is the mining industry. And definitely looking there, I think there's some structural shifts that are happening where the government plays a big role from a policy or regulatory perspective or even from a fiscal perspective. And so I think it's something we're paying attention to. And we're definitely seeing a lot more really talented entrepreneurs that are thinking about how to build businesses in a category that was a shrinking, dying industry. The Pentagon MP Materials deal being recently announced was a very strong signal for some of the discussions and some of the ideas that are beginning to become reality and be implemented in that industry to help shift the market.

12:07Can you cover that deal a little bit further? I mean, that's a massive deal and opportunity. Yeah, yeah. So it's actually on my to-do list to go a little bit deeper into the terms of the deal. But in short, and this is something people have been pushing for for a while, actually MP Materials themselves have been pushing for a while. The CEO, James Latinsky, spoke at the last Hill and Valley. He's a friend of mine and has become a friend of the firm. And he's really, really insightful in the industry. And, you know, it turns out the big problem in the industry is that it's not access to capital.

12:40It's really pricing. As in the math is very difficult for this industry because you have volatile pricing because China floods the market with supply. And they've sort of hamstringed the mercantilism, the build out of capacity. And that's why you see, you know, like 90 percent of all refining is done in China. Right. And about 70 percent plus or minus of the mining of critical minerals and earth elements is done in China. just in the U.S. and Canada and Australia you have everything we need we have every element that we need so that is not the issue we have the technology to go do these things labor costs are more expensive here we definitely need to make permitting faster there's some environmental stuff that we could streamline not get rid of, but streamline it so it can happen faster and we can get to the right outcome faster from an environmental perspective but actually the real problem is pricing there's no incentive to go build out capacity make huge CapEx investments if the math doesn't work.

13:37And so that is where the government is stepping in, similar to this Pentagon deal, where the government can step in with these off-take agreements, with trying to subsidize pricing and support future volume if you're going to go build it out. And then what's really cool is, like you saw with Apple and these other things, is you will see the private markets follow that, right? If the government can support kind of a critical problem here and subsidize pricing and help create a market, right? Like there's no market that exists right now here because you don't have the ability to get to critical scale where there's critical mass of supply on the demand side and critical mass of supply on the supply side.

14:18And so I think that is a good framework that probably will be rolled out more. Each deal will look very differently. And like I said, I look forward to diving into some of the specifics on the MP deal. but basically you need to sort of subsidize and solve the pricing problem to create a market and the private markets will step in um and i think that needs a more of these deals need to happen and you need to support more champions there also needs to be more vertical integration in the industry um and there's really cool companies like vulcan and others that are looking at creating ways uh creating companies that can solve this problem in the market as well how do you go from actual refinement to magnets to actuators right and have all that be vertically integrated.

14:58And the Chinese companies are vertically integrated. That's actually why they've made the market work in their favor, because you can play different games when you have that kind of structure as a business. You follow policy and the regulatory environment really closely. Is there anything in the last month or weeks or something like that, that's caught your eye that you're excited about? Yeah, I mean, I think, not as close as others, of course, but so I'm by no means an expert, but I do think if you look at the history of the venture industry and a lot of companies that we've invested in our investment thesis at 137 is around these sustainable compounding advantages, right?

15:37These powers that we focus on, and many of them are unlocked actually by government. You look at the fintech industry, right? That entire industry, particularly the interchange business model is a derivative of Dodd-Frank, right, is a derivative of policy post-GFC, the Durbin Amendment. I mean, it's wild. You just go continually. The growth industry is very much also a combination of not just the growth of the private markets and among many other things, but it's also a shift in the regulatory environment, right? The JOBS Act made it easier for companies to stay private longer by increasing the shareholder count, right?

16:11And so I think I look at it from that perspective because I do think it shifts markets and creates structural opportunities, and sometimes people don't pay attention to those as much. From a recent, like what's recent, I mean, look, I think the people should really spend a lot of time looking at the big, beautiful bill, the BBV. It's just funny saying BBV because Built Back Better, I think, was the last BBV. So there probably will be another BBV in the next administration. But in the most recent reconciliation bill, there's a lot of minor things that are really, really interesting and they'll have second order impacts that I'm trying to think about.

16:48I don't have a view yet. One that's obvious that you can understand is it was great to see sort of a focus on section 174 and bringing back the R &D tax credit portfolio company of ours, Gusto, has a business that's focused there on helping small businesses through software be able to automate and capture their tax credits. And it's just huge impact for small businesses, huge impact for startups uh there was really interesting stuff around depreciation um which once again just creates accounting incentives for how businesses operate and what decisions they'll make from a capital allocation standpoint um one that i think is actually the most interesting is what brad gersner did yeah on the street you know it was a big part in getting invest america done um for me like meta point it's extremely exciting because you're going to help you know americans participate in the american system and build wealth and that's something that i just have a huge passion for.

17:41It stems from my grandfather's focus, particularly for the African-American community, and how we could do that for our community. But I do think that now you're going to have some interesting market opportunities as you basically have every American having their version of a 401k. And so that's something I'm trying to think about is what does that look like, you know, 40 years from now, 30 years from now, 20 years from now, right? As the sort of next generation of Americans are born in their 20s, 30s, 40s, have an investment portfolio. How does that impact their decision making, their behavior, or their products that are built around that investment portfolio?

18:14Now you own an asset, right? So what will come from that? And I think a lot of people talk about the trend of the wealth transfer that's coming as you sort of have generational shifts. This is another interesting one from a wealth creation opportunity. So I think that's one I'm leaning into. That one's really exciting. And I also, I also love the fact that yeah, once you're involved in something, you learn about it more. So through transitive property, more people will learn about how to build wealth and what's actually going on in the economy by being a part of it. Yep. Yep. As we shift into next week, which this might.

18:56I'll see you there too. I'll see you there. But look, this might drop then. I don't know when we're going to drop this. So maybe this is in hindsight, but you're hosting an extension of Hill and Valley next week in partnership with Allin. Can you explain what you guys are doing? Yeah. So this is a, you know, it's funny. It's, it's, this is really like an AI expo, right? The focus here, and I got to give credit to, you know, Michael Kratios, David Sachs, and Jacob Helberg really helped push this with the admin and spearhead this. And I also give We credit David Freeberg, who has had a good vision for how to think about this.

19:36And, you know, Jacob Daly and I are really excited to co-host this from the Hill and Valley Forum perspective. But, you know, the concept is how do we have an expo? How do we showcase? How do we do demos? How do we showcase how AI is going to impact the country and create jobs? How is it going to build wealth? How is it going to save lives? Right now, a lot of what we talk about is how do we compete and win an AI? We show the technology. We speak about the future from a futurist meta standpoint. How do we make it tangible and real? How does the AI help rebuild the middle class in America? How does the AI help the middle class build wealth?

20:11How does the AI help the average person in jobs? And most importantly, how does it actually expand job opportunity and job creation? And so I think that's a big focus. There is an executive order being signed. So it's kind of around that and celebrating that, but really offering a vision for Americans. for what this can look like. And that, to me, I think is awesome because there's a lot of misconceptions. There's a lot of real fears and concerns and uncertainties. And, you know, those are real things that we should be discussing. And we're going to have to see as the industry evolves how we can sort of be quick and nimble and react to create card rails the same way that, you know, you could not create stop signs and highway systems when the automotive car was first invented, right?

20:54You had to sort of see how the technology evolved. And then you can figure out what regulations are needed. So that's definitely how this will play out. But at the same time, this is going to clearly create a huge unlock of opportunity for the everyday American. And so I think that's the focus of Tone and Vision. And you'll see another culmination, which is in the spirit of the Hill and Valley Forum, of tech and government coming together and spending the day together. And then I think you'll have the same spirit of the All In podcast, which is how do we hear from the smartest business leaders, the smartest government leaders, the smartest industrial leaders from around the world and share their perspective and then let the viewers subscribe to that or not.

21:34So it's going to be really incredible. I'm so excited. Are there any speakers you can reveal? Yeah, I mean, we're going to have visions and demos of the future from Sean Sankar from Palantir, Chris Power from Hadrian, Jake from Gecko, Lisa from AMD. We'll have Secretary Burgum speaking, um uh secretary rubio and a bunch of other secretaries speaking as well which will be really cool and then uh the president will give some remarks and then sign the eo um and then we have some fun stuff planned later um surprises some surprises as well um and i think most importantly it's it's going to be great just building relationships and meeting people and um look i mean this is like these things are incredible because they're just so bipartisan right like and I need bipartisan from both communities Silicon Valley and bipartisan from the sort of Capitol Hill perspective and so you know you you see shoots of this like the genius act right where Democrats and Republicans are both pushing for something that's gonna create regulations and guardrails and safety within the crypto industry and for stable coins and but also create opportunity from a fintech perspective and a technology perspective clearly you know you see continual trends of how technology is a uniting force and although there's definitely debates around it and there's uh no propensity for people to just be human and have disagreements and arguments and that's a reality of among friends um you're going to also you have to also be reminded of how national security uh maintaining our lead within technology and industry like these are uniting uh topics and there are things we should rally around uh at a time when it's hard to find uniting topics and rally around together.

23:19Well, Christian, you've accomplished a lot in your helping drive momentum in such a critical time and motion with technology, regulation, everything around it. And so are you at Sorcery. Thank you. Sorcery is at the forefront. But yeah, again, it's great to have you on. Excited to have you on again in the future. Thank you. Thank you. Love premium merch just as much as we do. That's why Sorcery uses 4th wall. Everyone from creators like Marcus Brownlee to podcasts like Acquired to Orgs like the Smithsonian Institute are using 4th wall. They let you create and sell premium products without having to stress the details.

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