WSJ x a16z: The Next 25 Years of Defense Innovation

0:00I think the world has changed. I think people realize that we're in a new reality. our view is investing in sort of ahead of what is the next theater, what is the thing that we need to be investing in in the next 10 years, is that the next war is actually going to be fought in space. A couple years ago, if I had said I invested in a hypersonic weapon company in Silicon Valley, I think I would have been kicked out of the room. And in 2023, when we invested in Andreessen Horowitz, there was not a peep out of people thinking that this was terrible. Technology is the backbone of what makes America strong, what is the envy of the world.

0:29And if we don't apply that to our national security and our national interest, we lose a lot of that competitive nature. This is something that I think is going to define the next 25 years of innovation in Silicon Valley. In 1956, Lockheed Martin had six times as many employees in Silicon Valley as HP Defense Investment built the region. Then the pendulum swung to software, and by 2017, Google employees were walking out rather than work with the Department of Defense. Three weeks after A16Z announced its American dynamism practice in January 2022, Russia invaded Ukraine. That changed everything.

1:05SpaceX and Palantir alumni started founding companies focused on the national interest. Autonomous surface vessels, hypersonic weapons, attritable systems built cheaply and mass produced quickly. Now every venture firm in Silicon Valley is investing in defense. The question is whether this represents a lasting category of innovation or a one-time thesis. In this episode, we share a recording from WSJ Invest Live, where Barron's editor at large, Andy Serwer, speaks with Catherine Boyle, general partner at A16Z, about why this moment will define the next 25 years of Silicon Valley. So tell us about the American dynamism practice at Andreessen Horowitz, which is one of the world's most prominent VC firms.

1:49And what does it mean? Sure. So four years ago, I joined Andreessen Horowitz, and it was a very simple thesis. It was instead of building a practice around a new type of technology, say AI, or around a customer set, a go-to-market set, enterprise or consumer, what if we built a practice around a very simple mission, which is companies that support the national interest? And at the time when we announced it, we announced it actually in January of 2022. We had been investing a lot in these categories before. I had been investing, my partner, David Yulevich, who was already at the firm, had been investing in companies like Anderil and Shield AI and SpaceX.

2:22And when we announced that we were starting this practice and actually going to dedicate capital to it, Silicon Valley was really stunned. I mean, it was shocking. And the fact that we said America out loud was even more shocking. I think people were stunned because the view that technology is always global was sort of the dominant view inside of Silicon Valley at the time. And four years later, here we are, actually three weeks after we announced it, Russia invaded Ukraine. And I'd say that was the moment that sort of changed everything about investing in defense, investing in aerospace, sort of these categories where if you're in Washington, D.C.

2:53or if you're in other parts of the country, that's what you think of when you hear the word technology. But in Silicon Valley, that was not something that was really done at the time. And so we say four years later, here we are. I'd say every venture firm in Silicon Valley is investing in these categories. They're not afraid of aerospace anymore. We had some big SpaceX news yesterday, obviously, that I think people are now attuned to. But it really, you know, when you think of the last decade of technology, investing in hardware, investing in physical goods, investing in things that support the national interest that most Americans think of when they think about critical technologies was just not in vogue in Silicon Valley.

3:30And just before I get on the next question, a quick follow-up, maybe inside baseball a little bit with A16Z. Do you talk to Mark and Ben about this? How does that happen, actually? Yeah, so, I mean, it's interesting. The kind of way we came together was my partner, David Yulovich, and I were just tired of competing with each other on investments. You know, it was like there were very few people that were investing in aerospace defense, public safety. And after a while, you just get to know each other. And you're like, you know, maybe it's better to partner than to compete. But, yeah, Mark and Ben, you know, Mark always says, you know, he had been working with the U.S.

4:02government since the 90s, obviously, advising in different capacities, but also selling to the U.S. government. And so it was not new to him to be patriotic and to think of technology as a patriotic good. But it was, you know, the last 15 years, I'd say, probably after the dot-com burst all the way up until 2017, we always mark it as the moment when Google refused to work with the department, then Department of Defense, but Department of War, during Project Maven, when there was a walkout of employees saying we will not work with the U.S. government. But things changed, where I think patriotic engineers said, we do want to work with the Department of War.

4:34And that's when Andrel was founded. That's when a number of companies started being founded that are specifically focused on working in the national interest. Yeah, I want to talk about the founding of Andrel a little bit because, as you mentioned, you were involved in that at another firm previously. But one thing I wanted to ask you about a little bit is, in a way, this is Silicon Valley going back to its roots, right? So, you know, people sometimes forget. I mean, industrial and defense are a part of Silicon Valley's history, its core, really, in fact, a core of the core. Yes. No, no. And even when you look back at the history of what was happening in the 50s and the 60s, everyone always thinks of HP as being sort of the iconic company that was founded, that starts sort of the technology wave.

5:16And it's like Lockheed Martin, I think, had something like six times as many employees in 1956 up and through the 60s as those companies did. And so we like to say, you know, Silicon Valley was built off of defense investment. The Department of War and the Department of Defense was buying so many of these technologies and working hand in hand with these early companies. And then something got lost. I actually think it was sort of the, you know, the kind of change in sort of the talent that was coming to Silicon Valley. You know, everyone always thinks of like the Bob Noyce generation. These are people that grew up on farms working with their hands and working in the physical world.

5:48And then when everything moved to software, I always say like the Facebook sort of turn, the Facebook generation. It's a different profile of engineer. It's a Harvard kid in their dorm working with software. And we're seeing the pendulum swing back to the Palmer Luckies of the world who was building in his garage, building Oculus, and sort of moving back to a different profile of engineer. And now you kind of have both. You have the synergy of software and hardware coming together in these iconic companies. Oh, interesting, because we talked a little bit about this, the two of us, Catherine, that there was this era, and I think even progressives were getting frustrated at the apps that were being created in Silicon Valley about things like dogs' feelings.

6:23Remember that era when it was Web 2.0 and it was just a pendulum that really swung a little bit too far. So what are some of the most promising areas that you guys are investing in specifically? Certainly. So I'd say that we like to break it up into eras. So the first sort of defense 1.0 era is companies like Andruil. It's companies that see themselves as selling directly to the U.S. government. Andruil, it's no secret when you hear Palmer Lucky talk, he talks about how they want to be the next great Lockheed Martin. They want to be the next grade prime contractor working with USG. But there's this whole other wave that's happened.

6:57And again, we started the practice almost like the perfect time in 2022. You know, I said, you know, Russia invaded Ukraine. There was this host of new founders that I think, you know, decided they wanted to build for their country. And a lot of them were coming out of companies like SpaceX, like Palantir. They had been trained in sort of already knowing how to work with U.S. government. But they started doing some different things where they're not necessarily priming, right? Like they're saying, we'll work with the existing contractors. We want to rebuild the defense industrial base. So they see Lockheed Martin, Raytheon, you know, the sort of iconic companies of yesterday as potential customers and partners.

7:30And so you are seeing sort of the shift from we have to sell directly to U.S. government to now companies saying, well, we can shift left. We can be the critical supplier. You know, we work with many companies that are supporting sort of, truly supporting the defense industrial base by building critical parts for all of the companies, whether they're new defense, new space, or sort of the existing legacy prime. So you are seeing sort of this growth of the market, whereas I think, you know, maybe a few years ago, people looked at it and said, well, how many SpaceXs are we going to need? Or how many, you know, Androids are we going to need?

8:03And now you see actually the market can support that because a lot of the existing players are desperate for innovation. They're desperate for artificial intelligence, you know, suppliers, but they're also desperate for critical parts. And so we are seeing sort of that movement as well. Or specifically, are we talking about drones here? I saw the story this week that the United States has introduced a new tank, the M1E3 Abrams. And then the headline was, is this America's last tank? So is this drones? Is it all drones? What are the products specifically? Well, I like that question because it depends on how you look at drones, right?

8:37So we always look at it in terms of sort of what is the theater? Is it air? Is it sea? Is it space? And I think the commonality of the new technologies that are being built by Silicon Valley companies or by companies that are built in, I always say the school of Elon Musk, right? They're building attributable systems. They're mass producing and they're producing from one to 10 to 10 ,000 as quickly as possible is that these are small systems that can be built cheaply. So we're not investing in aircraft carriers. We're not investing in what's known as exquisite systems by the Department of War where the kind of 100-year-old companies, they know how to build those and it's gonna take 10 years to build an aircraft of some kind.

9:14We're investing in the products that are 10 times as cheap, They're built as quickly, and they're built in a way where they can be mass produced as quickly as possible for the Department of War. So things like when you said drone, you know, we have a company called Sironic that's building autonomous surface vessels. That is a type of drone, but it's on the water. It's also a boat. And if you build a boat and engineer it so that you can go from 1 to 10 to 10 ,000 as quickly as possible, they have moved faster than any company that we've ever seen in terms of how quickly they've been able to manufacture and produce and get things in warfighters' hand.

9:46They're a three-year-old company. They're already working very closely with the Department of War. But that's a type of drone. And it's manufactured to be a tritable. It's manufactured to potentially carry munitions, carry different types of payloads. And I think that's the thing that's so interesting about these companies is, again, they've gone to the school of Elon Musk. It's how quickly can we build, how cheaply can we build. And they're building a different component of what's next in warfighting that is not these expensive systems that are sort of, I'd say, the architectures of the past.

10:16It's the architecture of the future and that they're building cheaply and very much for the next domain and the next theater. I mean, the next generation of warfare, and we're seeing it in Ukraine and other places, actually in that part of the world, is terrifying. All war is. Because it seems futuristic, it's even more terrifying, at least to me. I mean, our drones attacking your drones. And is that what it's going to come down to? some of them in the air, some of them on the sea? Yeah, I mean, it's a good question. I was fortunate enough to go with some people inside of U.S. government about a year and a half ago to the border of Ukraine and kind of see how we were helping operations there.

10:53And I asked a bunch of people who were, you know, very much in the thick of it, what's the technology that's most critical? And I actually thought they were going to say, drones are the most important technology for this theater. And the answer that every single person gave me was actually Starlink, which I thought was fascinating, how that is sort of the architecture, sort of the most important thing that's driving the ability to communicate on a battlefield of the future. What's also interesting about that theater is that it's very unique to a Soviet war, right? Like this is a trench warfare.

11:22They're bordering each other. In some ways, if you look at the bottom without thinking about Starlink or thinking of the drones, it looks like 1914, which is very unfortunate. It's a very brutal war. But then when you look at the new technologies that are sort of in the air and in space, it's very applicable. to other theaters and very applicable to what could potentially happen in the Pacific or what could happen elsewhere. Our view is investing in sort of ahead of what is the next theater? What is the thing that we need to be investing in in the next 10 years is that the next war is actually going to be fought in space.

11:53And that means that we need to be thinking about attributable systems in space. We need to be thinking about offensive capabilities. We need to be thinking about how Golden Dome can potentially, you know, be a part of that. But I think a lot of the companies that we're working with on the space side are very much thinking that the infrastructure in space to fight the theaters on the ground is actually where we need to be spending the most time. I mean, it sounds like there's one most important person on the planet, at least from our standpoint, the United States, when it comes to this, which is Elon.

12:22Because you're talking about SpaceX and Starlink, never mind XAI. I mean, are there other people out there besides him? I mean, maybe Jeff Bezos? Well, no, and I actually love that question because when I say people went to the school of Elon Musk, I think that Elon's most important contribution to this country is training two generations of engineers, really over 20 years, on how to work with their hands again. We had lost that capability in the U.S. And again, the pendulum had moved so far to software that we didn't have someone who was thinking from first principles of how do you actually build as quickly as you possibly can and build in new ways and capabilities that didn't exist before.

12:57You don't learn it at university. And you certainly don't learn it at one of the existing primes where they're given a list of requirements by the Department of War and they're told, build it exactly as we say. Whereas Elon's way of thinking about things, and there's been many books now written about this, but we see it every day in the companies we support, is he always thinks about how do you engineer something for production? How do you build for manufacturing? You don't separate out those two capabilities. You're an engineer. You want the best part is no part is sort of his number one rule.

13:26You want to make it as simply and cheaply and as quickly as possible so that you can mass produce something. That, of course, is the capability of Starlink. And so for every single one of our companies, we've watched the diaspora out of SpaceX. I'd say there's SpaceX talent in them that is really taking sort of that Elon knowledge and building for a new capability, whether we have a company called Castellion that's building hypersonic weapons. It's an all SpaceX team that had worked very, very closely on Starshield and worked with the US government. And now they're taking everything they've learned from that disciplined sort of methodical approach, and they're bringing it to a new capability that that SpaceX isn't working on.

14:00So that, I think, is what you're seeing when you see the diasporas out of these great companies like Palantir and SpaceX and Anderil. They all know something that they've learned from the previous generation of companies. Right, I guess Palmer Luckey's another person. I mean, the Palantir people. Is hypersonic weapons another name for that missile? Yeah, so yes, it can be. Hypersonic can mean many things, but in the case of Castellion, they're building hypersonic missiles that go Mach 5, so five times the speed of sound. And the reason this is so important, I actually think the better story about this is how a couple years ago, if I had said I invested in a hypersonic weapon company in Silicon Valley, I think I would have been kicked out of the room.

14:37Like, really, I would have been called horrible, horrible names. And in 2023, when we invested in Andreessen Horowitz, there was not a peep out of people thinking that this was terrible. And the company came in. Again, they had worked for Elon and they had worked for SpaceX many years. And they said, this is a deterrence company. If we cannot build hypersonic weapons, which is the thing that the Department of War is saying is the most critical on their list of things they need to build as quickly as possible, we have lost the next war. This is so incredibly important. And I think that the shift and the cultural shift that moved from saying it's horrible to be working with any of these departments to we have to build for deterrence happened so quickly in Silicon Valley.

15:16I'm not even sure that people realized sort of the sea change, the 180 sea change that happened. So I think that is what's really, really exciting about these technologies is you have people who are able to build them. They've gone to the school of Elon Musk, but now there's investors. Now there are people who are saying this is actually really important for the national interest, for America's security. And deterrence is really the important part about it. Yeah, I mean, it sounds like the old rules still apply, Catherine. Deterrence, mutually assured deterrence, right? I mean, escalation, is that an issue?

15:48Are the rules still the same? Well, I'd say that things have changed in that, you know, if we're focused on a space war, that's very different. But I do think that, you know, there was a long period of history in Silicon Valley. Palmer talks a lot about this where he says, you know, people thought it was the end of history. But we are not going to ever see another, you know, live war. We're not going to see a land war in Europe. That would never happen. And so you had people who said, okay, we should only be focused on software. We should only be focused on consumer technology. And it's actually wrong.

16:16Not only should we not be focused from an investment perspective, but it's wrong to be focused on supporting the national interest or supporting defense. And I think if what happened in Ukraine teaches us anything, it's that we have to defend our allies. We have to support not only the U.S. interests, but the things that are happening around the world and that the U.S. government says we have to. And we have to have a defense industrial base that is already built. I think one of the things that the current Secretary of War talks a lot about and previous ones have as well is that if you stop building for it, it becomes depleted.

16:47So if you have 15 years where everyone says, oh, we're not going to build this or the best engineers are not going to go into these companies, then it ultimately leads to a decay. It ultimately leads to you haven't done research and development. You're not fighting the next theater. You're not thinking about where things are headed. And so I think that has been the sea change is that now Silicon Valley is all in on this mission and sees how important it is. And not to sound like a peacenik, but, you know, I'm afraid you're right. I mean, every time you you hear about a war, it's like, and they were woefully unprepared because of a long period, you know, and then they have to ramp up again.

17:22So I guess that's the way human nature is. And the defense industrial base, I mean, this is something that, you know, in some ways, it is the reason why America, you know, is so strong and is so mighty, right? Like we won the, Ben always likes to say this, we won the defense industrial, or we won the industrial revolution, right? Like the technology is the backbone of what makes America strong, of what is the envy of the world. And if we don't apply that to our national security and our national interest, we lose a lot of that competitive nature. And so, you know, having a kind of defense-focused and sort of what I would say really a national interest-focused practice in Silicon Valley, where a lot of the bleeding-edge, you know, technology is being produced and where it's thriving, that is really important.

18:04And the other thing that I think is really important to call out about Silicon Valley is, you know, we're very mimetic people. If one firm is doing something that another firm often follows on, if there's one, you know, founder who proves that you can build, you know, the next space company, other founders will follow suit. And so that leads to this just explosion of talent, explosion of capital, explosion of people focused on sort of something that was untouchable 10 years ago. And so it's our view that the ultimate success story will be when every firm has an American dynamism practice and when every institution looks at it as something that is, you know, It's not just a one-off thesis, but it's really something that can be a lasting, enduring category of innovation, which we think it is.

18:43When I read about drones, I'm always reading about them being made in Turkey, in Iran, in China. Can America make drones? Does America make drones? And these hypersonic weapons as well in the United States, not farmed out to somewhere else? Absolutely. I mean, part of why it's so necessary is because the U.S. government doesn't want to buy drone technology from other countries. or from other countries, they can't, I mean, in many cases. So you can build it here. I'd say that, you know, the actual problem with a lot of the drones that are being manufactured in the U.S., it's that some of the dumb parts, most of them come from China or most of them come from other countries.

19:19And that's something that we have to get better at is the component parts that go into these larger systems, even if they're small-scale drones. We have to figure out how to manufacture those and incentivize companies to do that. But certainly there are, you know, there's companies like Skydio, which is a portfolio company of ours that's been operating for 10, 11 years now. that works with the Department of War and is built in the U.S. But we do have to think more about what we call shifting left, these component parts. We can't be, you know, taking Chinese parts and saying that that's going to be the solution to how we build for, especially the Department of War, but also things like public safety, where drones are also being used every day.

19:54Like shifting? We say shifting left in terms of it's not, you know, not these primes, but it's the component parts that go into the supply chain. So it's always confusing because people are like, is that a partisan thing? No, it's not a partisan comment. More of just a supply chain. Yeah, the types of component parts that go into a product that you're buying. Well, shouldn't President Trump put tariffs on those components? Well, I think, I mean, in some cases, yeah, we've seen different pieces of legislation and policy. I mean, we've certainly seen new executive orders around public safety in particular, not working with Chinese drone companies, for example.

20:29For a long time, if you were seeing any sort of police force, local police force working with drones, oftentimes they were working with DJI or working with Chinese drones. And that is definitely a national security threat. So now you're seeing sort of a kind of a wake up call and a policy shift that we don't actually want that data returning to China. We don't necessarily want those drones operating in communities across the country. So you are seeing sort of this shift through various types of policy, whether it's executive orders, to make sure that these components and make sure that this technology is actually American-made.

21:01And we've certainly, you know, we've been investing in it. And I think there's going to become a huge opportunity for people to invest in these companies that are working across various sectors that are important for national security and the national interest. And never mind just delivering for Walmart. Yes. I mean, that's becoming a huge business right now. Yes, I would say that's the national interest, right? Yeah. Very, very, very quick delivery. I went to one of those facilities. It's really amazing. And you really, you know, at first you like laugh at it and then you see it actually working.

21:28It's really pretty remarkable. It's not for everywhere. You know, it's not going to happen in Manhattan necessarily anytime soon. But most of America is not Manhattan. Totally. And it's interesting, too, because, you know, for us, you know, we've been investing in this category for a long time. But the early drone companies, you know, they were not focused on defense as a mission. Again, it's like no one was thinking about that in 2015 in Silicon Valley. when we were talking about drones in 2015, we were talking about delivery. We were talking about sort of the consumer applications of this. And it goes back to, I think, how technology is built in this category.

21:59A lot of these companies are what's known as dual use. You know, they want to provide for the consumer. They want to provide for the enterprise, but they're also working with the Department of War. And so drones are actually a great example of that. A lot of the companies that are now working directly with the Department of War started off as sort of these toys, or they started off as something that was going to be focused on a consumer application that's now, they've pivoted to working with public safety and working with Department of War because that's such a willing customer. So I think we're seeing that too, that sort of movement of even companies that were built 10 years ago saying that this is a real opportunity.