20VC: Palantir CTO on The Broken Incentive Structure of How Governments Buy Defence, The Danger of Defence Spending at Historic Lows, How Elections and Wars Change Government Defence Buying & Why Budgets are Anti-Creative with Shyam Sankar

22:24Is that the core industrial problem? Well, I think that's a consequence. The core industrial problem is that we don't have a way to reward mavericks and innovators that we're breeding. We've historically bred a marketplace that's driven towards conformity. We all have the same business model. We all want to get paid by the hour. Hey, I don't want to take risk because I need to know you're going to buy this government. There's no way for VC to be applied here because I can't figure out how to get to a scale of return that's going to matter. Does that change in a time of leverage? And what I mean by that is in peace times, you're absolutely right.

22:56People can wait. They can say, I want to pay by the hour, pay by the hour. When there is sadly conflicts around the world and you need to buy and you need to innovate and improve, you and private companies have leverage to say, align to our business model or don't buy. Does time not change that? I'm forgetting Churchill's chief of the general staff. He had an observation, which is that when you go to war, the first thing you need to do is fire all your generals. Generals that succeed in peacetime, and this was a general himself, right? The generals that succeed in peacetime are not the right generals to succeed in war, and vice versa.

23:30When I'm saying there is something a little smaller, which is that when there is war, you do have a different sort of mobilization. You have a different sort of leadership. People are willing to make different decisions. It's almost like the only thing that works when it really matters is breaking the process and doing what's right. and the process never really works. It's kind of a digression from the main point around this, but I think you don't have leverage in the sense that, look, you're gonna buy whatever model works. It's the opposite, which is the leadership says, oh, I'm willing to break the model because I see what's right.

23:59You know, like there wasn't a problem big enough to solve before, so I wasn't gonna change how we did business. I have a problem to solve, and I as a leader, I'm gonna say, yes, this is the right path. If we go back into the days of Lockheed Martin, the founders innovating there, was there a political structure that was flexible enough then and to make the changes that we need to happen now. I think there was almost a lack of political structures. You know, there was a willingness to move fast and break things. Kelly John, and when I say founder, I really mean it in the broadest sense of the word.

24:28It's almost like renegade, maverick, innovator. Kelly Johnson is one of my favorite examples. This is the guy who founded Skunkworks at Locking Martin. This guy, and we would recognize him as a 100x engineer in the Valley today, right? 23 years old, joins Locking Martin, and looks at a 2D diagram of the mathematics of a plane and says this plane is fatally flawed. He goes to the senior engineer at Lockheed and I almost get rid of Kelly, he's like, oh, why don't you fix it? Of course he fixed it. So this guy built 26 airframes in his career. Today, if you're an aerospace engineer, you're lucky to work on a third of a plane over your entire career.

25:03So you're never even gonna ship a plane. And this guy shipped 26. And some of his planes like the U2, we still fly. He built the first U2 in nine months. We can do this again. There's a way in which we've build up so much process, so much risk aversion in order to constrain I think that the greatest travesty of all of this is like in order to constrain the variance and outcomes We have constrained ourselves to mediocrity, you know It's like we don't want projects to fail catastrophically But that also means you can't have projects succeed catastrophically and the amount of process we put in place just ensures mediocrity.

25:36Well, what is me also is the human process and the tenders are so challenging that for anyone other than, I'm not picking on them, but just the most well known, then like your Lockheed Bartons, you can't engage in even the tender process because also you don't have the insurance premiums to cover some of the guarantees that are required on the directs. Only they have that large and insurance premium. And so it just means that in the end, only one or two go for them. I'm sure Palantir are now in that league, but it really is a constraint on innovation having such a stringent tender process. I think it is.

26:07I've been thinking about this, you know, it's dangerous to say this because you take me to literally, it'll sound politically unpopular. But in an effort to have a perception of fair competition, we have created so much process that we neither have fair competition nor speed. You could just juxtapose the European procurement process, which I've seen the US process and maybe alternative. So I'd say the European process is even more slow because Because there's an even greater emphasis on how do I show fairness across all of the EU states. And so then you can say, okay, the American process is a little more streamlined, but it still takes years.

26:43Kelly Johnson could build a plane in nine months. We can't even procure something in twice that long. That's crazy. It's not because we're not competent enough to do it. It's because we have created a structure where we do not want protests, we do not want to be blamed, we do not want to lose public trust in how these decisions are made. but I think we are retarding the growth of the human capital and government as a consequence of this. You can make mistakes, that's how you're gonna learn. No one wants to make mistakes, no one wants to be wrong, I wish we could all be right all the time, but I have screwed up so many things at this company over 18 years.

27:15If the standard of surviving here was something like you can never be wrong, or you must optically be seen to be making every decision in a way that, you know, it will never blow back on you. This company would not exist, I would be screwed. it's not a way to actually make the world better. Which country has the best process do you find? US is more streamlined than Europe. Does anyone stand out as being good? I think the most honest answer to that question is America actually does have the best process when we're serious. When there's the political will and alignment and the problem is clear and we're ready to go.

27:47That's when we throw all the rules and the doctrine out the window and we go and we get it done. And this is kind of the church -hillion thing, right? The Americans screw everything up until they've exhausted all the options and then they do the right thing. And so that's the other part of frustrating is we are so clearly capable of this. I've seen it demonstrated in our greatest moments of need, but in the steady state, we reject it. So when you put your mind to it, you can do it. You said that the DOD needs to pick a winner. How do you think about what that would look like in reality? Pick winners plural to be very clear.

28:18So I think this is one of the greatest disconnects, I'd say, between the hyper -growth technology, community and DOD. So we've had roughly a hundred billion dollars of venture investment enter defense tech recently. We'll ask a couple years. And the VC model is not that everyone needs to be a mediocre outcome, right? Like I'd say the median return and eventually fund might be zero, but the average return is maybe two, three X, right, for the portfolio. And so this is the dynamics that matter, which is like the peanut butter spreading as it's kind of cold. Like I have this much money and I'm going to spread it across all the companies that have come in here that just ensures that they're all zombies.

28:54They're neither alive nor dead. Those firms are not going to be able to raise their next round. There's not enough return. And a much better strategy is realizing, look, we need to pick a few winners. And we're going to go after it with scale. These companies are going to become large as a consequence which then allows those funds to go bring more money in innovation in our ecosystem. And there's a virtuous cycle here. And the talent is going to stay. So maybe there are one company that didn't work out. But they're going to have many shots at the app or we're gonna have this ravenous new tech industrial base focused on defense problems with the capital behind it and the economics that support it.

29:29This is the part that DOD is a little uncomfortable with, which is like, well, I'd rather it's a little bit more an aesthetic towards fair socialists or turns. Like, I just want to spread out the money across all of these participants so that no one's upset. But I think in reality, everyone will be upset. And if you talk to these venture capitalists, it's, oh, like, yes, I'd prefer that my companies win. But if that's not possible, someone has to win. because otherwise this market's not going to exist. And getting the defense department to realize, so one of the greatest lies they tell themselves is we don't pick winners.

29:56If you interact with acquisition folks, you'll get this sort of like, well, we don't pick winners. But literally, you're a monopsiness. Every contract you award, you're picking a winner. So we have to kind of re -groove how we do this to support the broader ecosystem. One thing I do worry about when we said about that, kind of spreading the diversification, is actually the nationalization of buying, which sounds incredibly intelligent. but it's actually quite simple really, which is just countries and kind of continents would rather buy their own suppliers products. So Europe would rather buy European companies, products America would rather buy an American.

30:32You know, you're not gonna buy Chinese defense tag. I think there's two dimensions to this. One is, you don't wanna be beholden to your adversaries. So that's like an obvious one, I think everyone can agree to. The second dimension to this is we often forget that one of the roles of government is its economic role. There's an aspect of government that is a jobs program that is welfare for the people. I think where it gets tricky with defense is where that's the case and it's unacknowledged. In the US, we have these cyber programs, these small business innovation grants research. To a VC, this is like the kiss of death.

31:04A study after study shows that you get these cyber grants and your company never actually achieve scale. They don't really want to invest in the companies that are pursuing this. It's not a strategy to actually become a big company. It's a strategy to stay as zombie. I think we'd be better off asking ourselves, okay, if we want the cyber program, if we believe in small business and the aesthetic of small business, this is a type of like wall white collar jobs program and that might be quite good. It's creating more STEM jobs. There's that's a policy question. I'll leave to our policymakers, but we should not think that from this program, we're gonna get massive defense innovation.

31:36We're gonna get new champions. We're gonna get competition. We're gonna get any of the transformation that we actually need to win these next fights. You know, I'm a venture investor for a living. The most beautiful thing in the world is when you see TAMs expanding, you know, Uber moving from show for driven cars to the car for everyone is a beautiful and very clear example of just an expansion of TAM. When conflict arises and budgets increase significantly as calluses it sounds, it's an expanding TAM. I'd flag two things there. One is we are spending at historic lows relative to the cohort. It has a percentage of GDP.

32:11So absolute dollars, yes, are bigger. But as a percentage of GDP, what do you think is the defense insurance premium? The country should pay every year to protect Pox Americana and the Western International rules -based order. What is it in the context of GDP? Two to three percent. What was it in the Cold War? At its peak, I think it's like when you look at Vietnam, you look at other periods of the Cold War, it's like closer to six, but it's like half as a percentage of GDP. I'm not sure that should double. That's not the point. But I think we somehow view this in a context of like, we could view it as like, what is the insurance premium were willing to pay on GDP to protect GDP.

32:44What do you think it should be? I think it's between where we are now and where it was during the Cold War. It was absolutely right to get a peak. Even though we suffered long -term consequences of the last supper, I don't think you could have political legitimacy without having a peace dividend after the Cold War. So I think what happened was correct, but now we should analyze what needs to happen in the context of great power competition. We do not live in that world anymore. It has changed radically and we have developed some sclerotic habits of 30 years of living at the end of history that we need to really shake off and organize against.

33:18And no place more so than Europe where in many ways they've kind of forgotten the distant past and have enjoyed a lot of what the West collectively has been able to create. Can I ask you, have you seen conversations change since Saudi Israel, but Russia, as the discussion changed with buyers in terms of that tone, their requirement, as the world changed significantly that way, as it continued in the same way. The buyers here are very serious people who wake up every day thinking, I might have to fight tonight. I'm in the position of providing capability to people who might have to fight tonight.

33:54I don't feel a shift in tone. What I do feel is a shift in the rate of learning. What is there to learn from? You look at the tactics, you look at what is working on the battlefield. Many of these things are surprising. They're different. They're innovating very quickly. They're changing the concepts of what you think you would even need to buy to have survivable capability to win the next conflict. And that is evolving incredibly rapidly. And I think it continues to speak to this concept of lower cost, a trittable capabilities. Instead of buying something that you think an aircraft carrier or some space -based capability that's going to be around for 30 or 50 years, and because it's going to be around that long.

34:31It's going to be so expensive. It's got to just be perfect. It's like, I'm buying something I might use for the next year. You know, you look at Ukraine. Many of these drones are single -use drones. So there is no sustainment. What are we talking about here? There is like your whole supply change is like the whole theory of how you're going to employ the weapon is very, very different. And as a consequence, the logistics you need around it become very different. And that can liberate you to have entirely new concepts, entirely new business models that enable you to deliver the innovation, recognizing that what you're going to fight with in two years is now what you're going to fight with in a year and it's not what you'd use today.

35:03If you would be in charge of the DOD state, what would you do from the procurement process, from the budgets, from deployment, what would you do if you're in charge? One wish, it would be to return to a structure that we actually used to use, which is to have multiple competing programs to go after the same capability. So when we were building submarine launch ballistic missiles, we didn't have one program to build it. I think we had four. And there's a human factors element to this, and there's a practical technology element to this. Well, we weren't sure if they should be solid -fueled, liquid -fueled.

35:37There was all sorts of technical questions. And so you can either have the loudest voice win or you can do a forever never -ending research project or you can compete the ideas. And that means you're going much faster, you're learning, you're iterating. It's an empirical discussion rather than a theoretical one. You're buying down technology risk, but I think what's even more compelling than that is the human factor. I often think about what would motivate, so many of these programs, like what would motivate the program manager to want to go faster, to want to insert new technologies more quickly.

36:07And the answer is nothing, because the distant threat of an enemy for a conflict that you might want to fight one day does not warrant blowing up your schedule, introducing risk, maybe having someone yell at you, because you're just judged by cost schedule performance. And that's all you're going to think about. I don't think that's healthy. So my counterfactual would be, what if there are two PMs who woke up every day? It's human competition. You know, it's like, the government is going to buy some percentage of my product, some percentage of their product. And I am going to wake up every day to win this.

36:36That's like a uniquely American thing. I think we're very good at that. And I think it is going to drive a lot of innovation. It solves a lot of the problems. Like, how do we get things to be cheaper? Well, I want the government to buy more of my products. I'm going to build a cheaper. How do I insert new technologies? How do I go fast? or like these problems are actually kind of a lack of internal competition. The government focuses on competition in the industrial base. I think there's not enough competition inside of government. Is winning this attributable? Like if you think about single -use journeys as an example, does someone in DEC have attribution on their procurement process working out at being a good buy, being effective?

37:12And it's deployed four months later in wherever it is. Thousands of miles away. Is there attribution? There's definitely going to be ex -post attribution. How do we get closer to something xanty? How are you making that decision? So today, there is a pretty big disconnect between the people who are responsible for fighting, really the combatant commanders, and the people who are responsible for providing the equipment. And really, these guys, the fighters, they don't only have a vote, and I think that's one of the things we need to change, where winning the competition should really be about, okay, well, how much does the Indo -Paycom commander or the sent -com commander want of this variant versus that competing variant?

37:47And it doesn't have to be winner take all. It can be something like I want 20 % of these and 80 % of those. And next year come back to me with better ideas. Let me let me taste the stakes and see which one I like and I might allocate resources to different next time. And I think getting that faster feedback iteration cycle would be super valuable. It also lets us be a little bit more critical of a quote unquote requirements. And the requirements are the things that must say we've done this analysis and we said these things must exist and we're going to build all of them. Well, clearly requirements change.

38:17The only thing you know for sure is requirements are wrong. And so how do we enable our program managers to take more risk and say, well, I think these requirements more important than those requirements. And I think the requirements they haven't even thought of that really matter because at the end of the day, you've got to taste the steak. You know, you've got to yield the product, use the product. That's the only way you're going to know if it's good or not. You know, can you imagine if the valley didn't have something like that with its buyers? That the way that every new product was going to be evaluated was through a historical list of requirements that someone else came up with and a paper PowerPoint exercise to see which products someone was going to buy.

38:50No, we innovate because we fight with our technology in the customer's office. Can I ask you, how do you leadership changes impact buying processes? I know that's a weird one, but as you look towards elections both in the UK and the US, like, the discussion's just kind of break down because everyone's wondering which government will be in power, how does it change processes? much less than people think there's obviously some effect and I think it varies by country in the UK system given how involved the cabinet is with approving contracts and the oversight and integration with Treasury it's actually more relevant in terms of what agenda people will be following in the US I think the bigger issue is really Congress and whether there's a budget or not we don't have a budget will enter a continuing resolution in a continuing resolution that means you can't have any new starts so all the things the department wants to do, they're gated and waiting until there is a new budget.

39:41This is a consequence of our system. I think it's a little fast to say, like, Congress should just pass a budget on time and yeah, that would be a nice world. But this is how we exercise political power and arrive at consensus. And I think there are things that we can do to make this better, but I think that's kind of the bigger issue in the US. Is there any, the Silicon Valley and VCs could do to bet us of the defense market? If you'd asked me 10 years ago, I would have had a long list of things that I think the capital class could be doing better to help in the national interest. I don't have those critiques.

40:10The capital class has showed up. The capital has showed up. The entrepreneurs have showed up. People are working on these problems. To the extent I had an ask from the VCs, it would be to engage with the policymakers so they understand the dynamics of your business. What is it going to take so that the $100 billion or more continues to show up? What does it take for these entrepreneurs to stay in this ecosystem? Why is a labor -based business model so bad? Because I think we can underestimate the size of the goal between these two worlds. And you could even say it is something as simple as in DC there's no conflict of interest.

40:42This idea of when I manage all the conflicts of interest and if you have any conflict of interest very bad, an obviously comfortable interest can be bad. On the other hand, in the valley, it's like, well, if you haven't invested in something, how do you even have an opinion about it? You're not even willing to put your own money behind an idea, so what do you know about it? It's almost like no conflict, no interest. There's the middle ground between these things. But I think that's the first place to kind of get the relationship group so people understand it. So it really comes down to high -trust human interaction.

41:08We're not going to scale this through process. It's going to come down to these two worlds coming together and they've never been closer, but we still have a lot of work to do there. I do want to move a little bit of a layer of deep edges into the company that we're with Palantir. You said something that I thought was fascinating. You said, content not process is the eternal substance. What did you mean content not process is the eternal substance? If you just see jobs as this great loss interview about how companies get confused, when they're trying to replicate their success, they look at the process they went through to deliver their first success, and they follow the process, and it doesn't work, because actually, the first and most important thing is the content.

41:47It's the creativity, it's the substance, and that substance rarely, and as he points out, people who are good at content tend to be a pain in the ass to manage, you know, that their pain in the butt, I think was his quote. But you put up with them because the content is just so good. And so I think there's this way in which process, as a medicine, is okay. You know, it's like, can you have zero process? No. But if you hold process up as the deity, the process ends up being what is actually an opioid. It's very bad. It's like, look, we just need to follow the process and we'll get to the outcome.

42:15That's almost never correct. When the process becomes more important than the content you're gonna lose. And a lot of this comes up as like, well, I wish the interaction to be less frictionful. I wish there was more predictability. I wish there was all sorts of things which are just not true in the real world. Like yes, we all wish the world could be different. But when you honor what the world is, you kind of recognize how important it is to have the right rock band. Right? There's no, hey, follow this process in order to get there. Does that scale, though? Because the challenges you need process with scaling teams, with increasing team sizes, and the magicians who come up with great content, it's really hard to have structure around that.

42:50Absolutely. So, you know, I think you need some way of having both. but you can't ever lose the primacy of content. Put it this way, you can get really far with incredible content and bad process. You're gonna get nowhere with incredible process and bad content. And so the primacy of it, you need to keep in mind. And this is what I mean by process as medicine versus opioid. And so there's a rule for this year, but especially when you're... And I feel, you know, Paladir is a company that keeps reinventing itself. In those moments of reinvention, there's just content. There's just the crazy content in your commitment to it and making it better.

43:21And then you figure out how to get it scale. And sometimes maybe getting things to scale is itself not scalable, which I don't mean as a critique, it's more like first you've got to figure out the substance and then you work really hard every day to get it to scale. There's an old Silicon Valley saying there's the first 80 % and the second 80%. And so maybe there's a little bit of this in this where it's like yeah, the first part of the content is 80 % of the work and then getting it to scale through process is 80 % of the work. It's so hard to hire because you need to be able to just chat those magicians, but But then you also need to hire for process around them as well.

43:53And there is room for structure in both, as you said. When you reflect on hiring, you said talent spossing eats strategy for breakfast. How do you think about talent spossing and how has how your approach it changed over time? Yeah, I think this is so important. I think there's a way in which we've kind of constrained our cultures and our companies because we've leaned into the opioid of structure, essentially. Like, look, I'm in a structure, and my company is a factory. Here are all the roles and the levels I have, and here's the org chart, and it's all very clean and laid out. And if you play by these rules, you can figure out how to navigate it.

44:28I think one of the challenges is that, like, really talented people are highly asymmetric. You're much better off designing a role around who they are, rather than saying what role can I slot you into. None of those roles are going to fit them. It's going to put them in a position of relative weakness. They're going to blow something up. They're going to feel like they have to be good at something they're never going to be good at. And so it's a total evisceration of their potential. And if you said instead of being a factory, we're going to be an artist calling. I don't get Dali to paint better by yelling at him to paint more like Monet.

44:56Each one of these individuals is an individual. And I'm going to go on a journey to craft a role around who they are and I'm going to make it okay for them to like flex their role to meet their capabilities. Even more importantly, artists work don't monotonically get better. This idea that you're going to climb levels in this sort of strictly increasing way I think is deeply inauthentic. Some of your works are going to be hits and then you're going to go through a wall And you know your work might not be great the community might not appreciate it And then your next piece is going to be a masterpiece and so how do you get into a place where you can be Committed to your talent over a long Guration you know there's going to be ups and downs But they're so fundamentally talented that you're going to stick with them and you're not going to be judging them work to work It's not like a daily marked market.

45:41It's like look. This is you are special. This is a home for you and we value you over this long arc of what we're building together. That means that when they're not performing, you don't suddenly have this responsibility to sideline them and put them in a hole or fire them. Let's just break that one down. In terms of creating the environment where they are able to fail, create most of pieces as well. How do you think about doing that as I hate saying here, but as their manager, it was the person responsible for their work? Well, we could keep leaning into the Hollywood metaphor here of the talent agent and the talent.

46:14How do you manage talent is a very open -ended question, but I think that's roughly how you would think about it Which is like look I'm really here to support I need to create the environment that allows your art to flourish I'm not the one managing your art So if you think about that. Okay, they need a huge amount of autonomy. They need the resources They need some protections from the daily distractions of certain aspects of the business if you're always inhaling the full Disceral scary reality of everything going on. I think that distracts you from doing the art So how do you have complete autonomy over an area that you're very very good at and the ability then to execute against it?

46:47And then I think a maximum I always think about is smart people cannot be taught anything They can learn and that's the environment you're trying to set up It's like how do I create this environment of maximum learning for these incredibly talented artists? What happens if you continuously do duds? What if the most of pieces don't show? Yeah, I mean I look I think the artists might even blow up at that point Artists want their art to be really good too. If they're really going through a rough batch for a long time That might be part of your I think that's gonna be a judgment call as the talent manager No, no, I really believe like I understand this is a long grise bell here I'm gonna keep you motivated.

47:21I'm keep you managing. I'm gonna figure it out But of course you could just be wrong maybe maybe the the moment has passed the art and the inspiration in the mute says and exists Do you think is it potentially a bit of an ideological perspective to take because suddenly I tell you that your budgets have been cut We're doing 15 % layoff. Sorry, artists. You haven't hit it out the part for quite some time. Charm. There are sometimes there's just external realities. You may have to do that because that's reality. This is one of those things you have to think about how you shield or web. You choose to shield the artist from like budgets.

47:51Budgets are anti -creative. Constraints are important. Don't get me wrong. Budgets are just anti -creative. So you have to think about what's the right mix of like, hey, at this moment we really need budgets. It matters before these reasons. And here's why. And so And I think you tend to find that you kind of oscillate between two ends of a continuum, right? There's no budgets. It's free for all. It's max creative. It's like, oh, this is completely ungoverned. And we need this thing. And you're just trying to maintain the stable, unstable equilibrium rather. VCs love to say something. Constraints enforces creativity.

48:21Do you agree with that with the idea that budgets are anti -creative? Because budgets are constraints. I definitely agree that constraints drive creativity. Now, I think you can be overly constrained. So I already have a time constraint, I have a customer constraint, I have a problem constraint, and maybe the budget constraint blows it up. I mean, that's the job of the talent manager. It's the manager to the budget without exposing the brutal reality of the budget to the talent. How can I get the talent to feel a few less constraints while actually being constrained? You mentioned mistakes over 18 years.

48:51I've made many mistakes at hiring. When you reflect on yours, well, I've been some of your biggest hiring mistakes, and how did that change how you actually approach hiring? My biggest hiring mistakes were hiring for a factory. Hiring what I thought I would need. Hiring what the world told me, you know, the way to solve this problem is to hire this profile. And, you know, I didn't earn it from first principles. The most successful ones have always been when I took the talent and grew them into the roles that actually reflected their talent. And the worst mistakes were it's where I tried to import a solution to a problem.

49:24Because that's the version, that's my version of the opioid. Wouldn't it be nice if I could just magically import this solution and it will solve all my problems in this area? I think I'm like zero for ten. It's never worked for me. So what do you do now? First principles. Who do I have? How can I get people more responsibility? How can I stretch them? How do I bet on just raw talent? And when I'm out there meeting people and I still spend a fair amount of time doing this, I'm not really even thinking about the role. I'm thinking about this human and it's like would I be excited to fight shoulder to shoulder with this person over the next decade?

49:54And can I imagine continuing to invest and grow in them to take on more problems? And if they're talented, I'll figure out the role. They'll figure out the role. We have so many needs. When you've been wrong, what did you get wrong about that decision? So like for me, I've been wrong actually often on my surprise, where I've hired very boring people. And my secret to hiring is hire boring people, because no one's quite as boring as they seem in a job interview. But they will always be humble if they're boring in the interview. And so I find hire the boring. The form of the mistake is thinking that outside knowledge will translate here without a massive retranslation function.

50:31And so the sort of personality that's like, look, I've solved this problem before I know the answer versus I'm betting on my talent to be able to solve the answer. That's the shape of the challenge. Can I ask one final one before we do a quick fight? But you've mentioned that Palantins had quite a few transformations or reincarnations. What do you think was the most challenging reincarnation that Palantin made and why that one? I honestly think all of them have been challenging and the reason they're challenging there's the work which is more obvious The less obvious part of this sort of reinvention is reinventing yourself It's the toll on the individual where you're like look But I got this thing and it's at this place and it's successful and where is my like earned a credibility from having done that and in the Reinvention what you're saying is no like we're all every single person we're starting from zero and it might be true that some person who joined this company two months ago is going to be more sophisticated at this new problem than you who joined five years ago.

51:26And that's, you know, there's like a commitment to pushing through that. And I think it's actually only survivable because the whole thing is set up as an artist calling. Is it not harder with more people? Because you have to re -engage, re -communicate that to 2 ,000, 1 ,000, whatever that number is. Whereas when there's 100, it's much easier. So actually the reincarnation gets harder over time. That's one aspect that gets harder. Let me give you one aspect that gets easier. The first few times we're doing it I felt this deep personal responsibility to like hand hold everyone through their own reinvention And that is exhausting and I felt their pain of it and it's not that I don't feel it now But I now recognize like that's the medicine like I was trying to minimize the pain of their reinvention But actually their greatness is gonna come from going through this this crucible and being proud of how they reinvented themselves So now I kind of view it as I view it proudly rather than with tragedies I want to move into a quick fire round.

52:19So I say a short statement, you give me your immediate thoughts. Does that sound okay? Sounds great. Okay, so where does value occur in AI? Startups are incumbent, Samoy. I think it biases towards the incumbents who own applications in the app layer. Why? I think the models are gonna be come out. Because the models are not going to really give you enough of the value. It turns out that you have the model then getting to a business outcome with that model happens in an application. And so if you own those pixels, you're going to be able to apply it more quickly. I also think that very few problems are 100 % AI.

52:51They're like a third AI, a third traditional, deterministic code, a third human thought. The only place you can drive that elegant integration is at the app layer. So you think we'll see the commoditization of other lams? I think so. I'm not saying someone would be better than others, but I'm saying most of them are going to be good enough. Well, no, I'm just interested because when you look at, say, cloud over the last 10 years, cloud has relatively been commoditized in terms of actual product offering, but the biggest players are huge and they're in the infrastructure layer and they are the same size as the 100 application layer companies.

53:26And so I'm just wondering, I get you on the commoditization side, but I still think the value will accrue to those incumbents in the infrastructure layer. I think they'll get a lot of the compute for sure. And I should say, I think the value is going to accrue in those two directions, infrastructure and app layer and that the models are going to be squeezed. If you are a model company that doesn't own full vertical supply of compute, are you not screwed? If I was a model company, I would be pushing into the app layer. I'd be trying to figure out how to own more of the value I'm creating with the model rather than just selling an endpoint.

53:58This is usually the opposite advice you're going to get from traditional venture where they're like build something simple that scales with an API. Every venture investor says, oh, it's a thin layer on top of an LLM. What's the difference between a thin and a thick layer, do you think? Well, I think a lot of their criticisms are right that essentially if you're just building a chatbot, it's a pretty thin layer. So what makes it a thick layer is, what's the use of deterministic code or algorithmic reasoning in addition to the LLM? What's the integration into workflow? Are we still chatting here?

54:27Are prompts for developers or for users? Why do LLMs need tools? Because otherwise, you're completely constrained to the parametric knowledge of the model. And I think that's a sycophant task. Your people keep trying to jam more and more knowledge into the model, but what they fail to recognize is that these models are actually very good at speaking regular grammars. Jason, code, it's a regular grammar. How do you use these models in their current state to manage and manipulate application state? Have the core ala lam winters been already created? Or we see more over the next few years? Some of the folks who have been created are definitely going to be core winners.

55:02I think there will be more winners to come. Who do you think the winners been so far? Unquestionably open AI has done quite well. I think we have some time to see where does Google really shake up and in all of this and I think Meta has I mean it's amazing to see how much they've reinvented themselves around this. Do you worry the development is so far ahead of adoption? But I think we all overly get excited and actually 50 % of European corporates don't know what slack is. The fear I really have here is how much are we modeling the appropriate use and how fixated are we on proof of value instead of proof of concept.

55:36We had a self -driving car demo in 2005. They drove 132 miles through the desert. That's really impressive. That's not a toy like demo. You could argue only in 2023, did we have a proof of a self -driving car that could drive around the city reliably as a commercial offering? Nobody wants to be in that business. No enterprise wants to adopt this thing where the demos are amazing in 20 years from now they might be able to put this in production. And I think as technologists, in order for us to not be in a bubble, we need to be really focused on proof, not proof of concepts, and the speed by which we can affect these enterprises.

56:09What if you changed your mind on in the last 12 months? Probably the biggest one is content and process. I mean, content is always mattered, but I always had this view that it's got a scale, and I'm now willing to fight incrementally, you know, almost like trench warfare to get things to scale. As long as the content is gorgeous. You can have dinner with one person that are alive. Who would it be and what would you ask them? I probably beg in former Prime Minister of Israel, one of the founding fathers. I'm so obsessed with the conditions around founding. You could also pick a US founding father.

56:40I think we don't study that the mindset of 1776, the unliklihood of this, the unliklihood of founding the modern Israel state, how difficult it was. I just want to relish those founder stories. What was your biggest lesson from working with Alex? Probably the most important one is this idea of the artist colony. that humans are unique individuals and that you maximize value by staying true to that and never letting yourself aggregate or think about them as a class. What are the next five years hold for you and for volunteers? 20, 28, we sit down again. Where are we then? I think the world is likely to change much more than next five years than most people are modeling.

57:16The geopolitics are highly unstable that maybe is a more obvious statement now to say after October 7th. And I think we're entering a very challenging time here And I think that has consequences for the commercial world as well as governments. But the other aspect of this is as we approach that sort of instability, what is the role for real transfer? We have this unique opportunity with AI to actually change things. Not just to build businesses, but to fix many of the problems that drive at the fundamental legitimacy of the institutions we have in the world. Why don't these institutions work? Well, I am not someone who thinks you're going to fix them by tearing them down.

57:51You're going to fix them by partnering with them and helping them, helping the humans who wake up every day trying to make their institutions work better. Listen, Sean, I love this. This has been so nice to do one where I'm not talking about pre and post money valuations. It's been a very different style, but you've been fantastic. So thank you so much for doing this with me. Thank you, Harry, for having me. It's been fun. I mean, what a fantastic discussion that was. If you want to see the full video, you can check it out on YouTube by searching for 20 VCE. I always love to see you there. But before we leave you today, There's no shortage of helpful AI tools out there, but using the mean switching back and forth between yet another digital tool, what was supposed to simplify your workflow just made it way more complicated, unless of course you're in Notion.

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1:00:30As always I so appreciate all your support and stay tuned for an incredible episode this coming Friday on 20 growth with the head of TikTok at Juelingo, who scaled their TikTok to over 7 million followers.