How to Build the Next SpaceX or Tesla

[00:00:00] You don't have a defense industrial base without an industrial base. It's been a real wake-up call that we need to get building again. >> AI will be a phenomenal tool that can be used in the physical world. The reality is AI cannot turn [music] a wrench yet. >> 10 most valuable companies in the world, like the majority of them are hardware companies. [music] >> What's it like to visit one of these sites? You're building a physical thing. You're not sitting at a desk on your computer. You're out [music] in the world. It sounds kind of sexy and romantic, but when you're actually doing it, it's rough. >> When you show up at Mariana, when you show up at Hadrian, when you show [music] up at Castellana, you literally get people who are so passionate about what they're doing. That produces really good results. >> There's that [music] very famous chart of like US power production versus China new energy production. What would it take to [music] close that gap? I don't think that that is a technology problem. I think that that's a Connor and Aaron, thank you so much for joining the podcast today. We're here to talk about AB 50 and this year's list. [00:01:00] And let's just get straight into things. Um, I know a big theme of this year was the American industrial base. Can you talk about what we've learned this year and why that's such a big important theme right now? >> We've been saying for a while you don't have a defense industrial base without an industrial base. And I think this year really put that into perspective. Um, you know, with conflicts going on in the world and and realizing that um, you know, the hollowing out of our industrial base that's happened over the last several decades actually has real consequences on the battlefield for soldiers, um, both, you know, American soldiers and our allies. And I think it's been a real wake-up call in the United States, um, that uh, we need to get building again. >> Yeah, I mean, I think it's also something that is not just one factor, but it's multiple factors that are all kind of happening at the same time. And when you take a step back and you say, okay, world conflict, you have kind of a continued evolution of the capital markets, which I'm sure we'll talk about a bit later about capital flowing into this ecosystem. But I think one of the [00:02:00] bigger things is you actually have an entrepreneurial base right now who is effectively raising their hand and saying, "I'm going to build in this ecosystem." That's incredibly important not just for our nation, but also you can build really valuable companies in. So, I think it's just this conglomeration of a of geopolitical factors, of capital markets, and then entrepreneurs that are kind of all just coming together. And you know, I I think it's a really interesting time to be building. It's a good time for us to be investing. When we looked at 80/50 this year, we thought about you know, kind of where we're at in the in history of American dynamism. And we're still early, but I think one theme that has evolved is like you really need to start looking at American dynamism companies as a totality from end to end, from the input that comes out of the ground to the factory that makes the thing to the end system. So, that's how we set up 80/50 this year to think through those three lenses. Each one of those pillars is uniquely important to, you know, the end product or the end system. But in the end, like I I I don't think people think that way. And a lot of the companies that are addressing, you know, [00:03:00] things in our portfolio have thought, you know, from a inputs perspective, from a factories perspective, and now from a systems perspective. >> So, one theory that a person could develop after looking at the list is, "Okay, we built out this industrial base for, you know, defense, like building missiles and drones, um but it's actually a tailwind now that's helping a lot of different industries in America." So, there's energy, there's robotics, there's AI. Can you kind of talk about how all of these things fit together? >> Yeah, I mean I I it's funny because if you look back in history, I mean even, you know, 70, 80, almost 100 years ago, if you look at how we've developed technology in America, a lot of times it's very much been from the government. If you look at how we, you know, went to space for the first time, if you look at how we developed the internet, um how we developed nuclear energy, it was the government saying, "We are going to do this for the purpose of the government." And then the long tail of that technology was super valuable for, you know, you name it, the internet being created, you know, energy being proliferated, you know, across the world. Um what's different now to some [00:04:01] extent is now private industry as well as private capital is saying, you know, we're actually going to be the impetus that that develops something. And so, to your point, um, you know, the many of these markets is to serve the federal government, to serve the Department of War in some way, but the beauty about these things is when you build, you know, an industrial base either, you know, down the supply chain or end systems itself, those inherently have many use cases. I mean, the the term dual use is talked about a lot in in investing and, you know, to some extent like, uh, I I think it's a little bit of a folly like focusing on too many things at once is not good for a startup, but it is 100% true of what's happening with any factory that's being built today, any neo-factory being built, uh, any any uh, energy production, anything we we we touch and kind of minerals and materials in the ground, it's not just going into a defense system. It's going to go into my uncle's car. It's going to go into like my kids' future, you know, toy that they have in some way, shape or form. So, I I I do think it is a, uh, you know, uh, maybe the tip of the spear is [00:05:01] focused on the government, but I think the long run to your point, like, what's happening is these systems will be used, you know, in the waymo that we took today or or anything else. >> I think a good a good example of this to to look at is actually DJI in China. >> Yeah. >> Um, which start which has gone through, you know, multiple arcs of of of its lifetime and its journey. You know, started out building consumer drones and recognized over the late 2010s that there was a large market for drones in um, both public safety and national defense. And so, built out, you know, a real high-scale drone production business for defense. And now the company behind the folks behind DJI are now the largest producers of robots in the world because what is very similar to a drone motor is a robot actuator, which is the hardest part of building a robot. So, you have this company that over the course of growing a large defense business that itself spun out of a consumer business is now, you know, the world's leading expert on how to build and produce [00:06:01] hardware for kind of the next wave of physical AI, both consumer and uh, industrial. And so I think, you know, this technology transfer and process knowledge transfer between military use cases and non-military use cases is really important and has always been how it works. And it's great to have the federal government be sort of a subsidizer for figuring out this process knowledge and figuring out the new technology. And then, you know, I think like our world's greatest gift in the United States is the discernment of the American consumer. Like, we are going to push things to be more capable and cheaper than the government ever will. So, that symbiotic relationship in the industrial base is actually really important. And we're certainly seeing that on the energy side. We're seeing that on the electronic side. We're seeing that, you know, across the entire sort of industrial stack. >> And and and to some extent, I I I I don't think this is a super complex, you know, topic, but it's important to kind of restate, which is when you build the first of a kind of anything, it's quite [00:07:01] expensive. Like, when you were building a bespoke, you know, what whether it's a military system or a consumer product. >> Zero to 100, it's going to cost a lot. >> It's going to cost a lot. And and to some extent, like, you you know, we'll get into this a bit a bit later, I bet. But, you know, we talk about vertical integrating or using the supply, you know, chain base that you have. The beautiful thing about what's happening right now is we have a federal government and an Department of War is saying, you know, number one, we're going to we're going to try to actively rebuild some of this this industrial base. And by doing that, they're actually changing that unit economic decision from the start for these companies. So, you know, again, it's instead of building 100 things, you can say, "Okay, maybe build 100, but we're willing to pay a cost that the consumer or the commercial market wouldn't pay." And all of a sudden, then, you know, that means more machines, you can put your factory, more CAPEX that you know, the government is helping you pay at the start. And then that leads to things that are physical, you know, both like financially viable, but also like, you know, at a scale that actually can touch the consumer. So, I just it's important to to to identify that, and that is definitely happening right now. >> like if you're building a new PCB fab in [00:08:02] the United States, like that's a pretty expensive operation. Those are pretty expensive machinery pieces of machinery. Um and if you have a defense buyer as the first buyer to help you kind of pay for or subsidize a lot of that CapEx investment, that's great because you know what else has PCB boards? Robots. You know what else has PCB boards? Hearing aids. Um and so the ability to to kind of pass on some of that CapEx to the defense industrial base, I think is uh will be really powerful as we as we rebuild kind of industrial capacity in the United States. >> So what specifically are you seeing startups do to drive down costs and move faster? >> Yeah. Um I mean I I think like many things we can look to Elon for a lot of answers here. I mean it's not a crazy statement to say really the few modern-day companies that have built anything at scale are probably SpaceX and Tesla. Um and if you look at how Elon and and his team have built those businesses, it's been one very vertically integrated. Uh and and look, like I take the the ideology that you shouldn't vertically integrate [00:09:02] everything. I mean again, if you're building a super exquisite system like a missile that is, you know, doing something very unique, you kind of have to because you have to, you know, control the exquisiteness. You have to control the cost. >> Well, well, I mean SpaceX and Tesla were doing first of their kind. Like there wasn't there didn't exist industrial base in the US to support them. And so they had to build it themselves. I think where there are high-quality suppliers, like you should use >> For sure. >> suppliers. >> Yeah. Yeah, I mean again, I I I I think the the the learning though is number one, if you don't have an industrial base that you can rely on, you know, quickly, reliably, you know, etc., then you have to do it and inherently that is a hard journey. Like that that's really hard to do. This concept of saying, "Okay, I'm going to focus on the end system. I'm going to focus on, you know, building the most, you know, cost-effective, you know, effective system that I can. And oh by the way, I got to go figure out the ball bearing. I got to go figure out the solenoid valve. I got like that that's a lot to do." And in the case of, you know, Tesla and SpaceX, I would argue the the auto industry was a little bit different because there was a but there wasn't there wasn't a battery supply chain. [00:10:03] They had to, you know, Elon had to recreate that. >> The whole the whole power electronics, the the whole drivetrain, you know, they had to really build completely from scratch. Uh based off papers that were published in the '70s that, you know, had been collecting dust for for 40 years. >> Um in terms of uh companies that we talk about in the AD portfolio, there's Mariana minerals which bought a copper mine and is kind of reinventing things. And And would they be a good example to to talk about here? >> I think that they they recognized that um the you know, there the existing players in the mining industry just were not going to pick pick up technology fast enough uh for it to really make a difference and really move the needle. That And they also recognized that they wanted to actually own the entire value chain to be able to really put their money where their mouth was um and capture the end value of the new technology they were bringing. So, yeah, they do everything from you know, acquiring the asset, developing the asset, mining the asset, operating the asset, and refining the material [00:11:04] themselves across multiple different uh multiple different minerals. And then they sell a final commodity product in the market um and have really leaned in. That's another trend I'd point to is how much founders and entrepreneurs building in these spaces are leaning into AI and software as a huge huge component um of their build. >> Yeah, I mean, I I think when you look at the physical world, applying software and AI will look different than what has happened in, say, legal or customer service or any other category where you see AI taking off in a in a crazy way today. But But to Aaron's point, like many times that you have to do is you have to own the asset in order really to change that asset. Not every time, but a lot of times, you know, kind of showing is believing in the physical world. Whereas, you know, when you when you're purely a digital AI product, you can kind of just see it and it's very easily transferable and kind of understanding. You know, what Mariana is doing with this copper mine is is really impressive in a lot of ways. It's not just saying, "Hey, we're going to be better at extracting copper." It's It's rethinking everything. >> The entire end-to-end process of how you [00:12:05] plan, operate, mine, and refine materials. And you know, what's cool is once you once you own that process end to end and are using software at every stage of that journey, you actually capture that data and then it feeds back. >> And this is this is an important point. I mean, this is not just Mariana, but if you look at another business like Hadrian, I mean, this is a perfect example of how one you can utilize software, you know, but but more importantly, um it's not one silver bullet that all of a sudden makes a factory or a mine perfect. It's actually 15 or 20 different things. And when you look at what Chris has done at Hadrian, you know, yes, it's kind of upfront what it takes to like quote and even take an order of a part. It's you know, it is the actual physical, you know, making of the part. It's how you inspect it and transfer it and and you know, there's there's all these different interim steps that exist within a factory. And the beautiful thing when you kind of either start from a you know, a fresh slate like Chris has in building his factories or in Mariana's case when you kind of own the thing and take it over, [00:13:05] you can look at every single node from a first principles perspective and say "Hey, was this process that's been done the last 100 years the right process?" And that's what's happening across every layer of the physical world right now. It's not just mines, it's not just factories. I mean, again, it exists in many different permutations. And and you know, my personal belief and we see this in a lot of our portfolio companies is look, AI will be a phenomenal tool that can be used in the physical world. The reality is AI cannot turn a wrench yet. It will at some point, but we're we're we're far off that, you know, again, we can maybe have a discussion about the you know, robotic models and autonomy that that that we see in the physical world. We're getting we're getting closer. I just think the the nuance here and and the portfolio companies, many that are on this list or or many many non-portfolio companies on this list, that they understand that um look, the the physical world is not about just putting a silver bullet forward like I said, that some you know, shiny AI product. It's it's it's deep understanding of of what a process looks like, you know, physically how to like, [00:14:05] you know, manipulate the the process or how to you know, you know, change something that's happening in the world. It's just going to look different based off. >> Well, maybe like a a specific example or to talk through is like um like low mix high volume versus high mix low volume and how how AI can kind of change change the game there. So, you know, historically like if you're spending a lot and setting up a line with a lot of automation, you really need to produce be producing like a lot of one single thing. >> Mhm. >> Um and that's how you get the cost down and that's how you justify the cost of invest investing in, you know, a pretty bespoke manufacturing line. Um in the US we do a lot of low mix high volume manufacturing, which is very hard to automate cuz it's very expensive when you have to change the line all the time. Um but what we're seeing across our portfolio is that uh manufacturing technicians themselves are have this have the intuition and now have the software tools to be able to to to change the economics of what it looks like to produce low volume high mix on [00:15:06] the line. So, you can have, you know, a manufacturing technician. This is not someone with a college degree. This is not someone maybe they are but like not necessarily who's like studied software engineering is now able to use these tools to reprogram and reconfigure their manufacturing lines on the fly using the fact that they understand the manufacturing process and they know how to do what they're doing in the physical world. They now suddenly have all these tools so they can you know, you can retool a line instead of having to call a system system integrator, you know, and it takes 3 months and hundreds of thousands of dollars to kind of reconfigure a line for a new setup. You can have a manufacturing engineer use Claude and do that in, you know, 20 minutes. Um and so that's been a real game changer across lots of companies that we've seen seen in this space. >> And and why that's important is, you know, when you look back at at how we've articulated AD20 this year, uh you know, it's it's you know, kind of three categories. And a lot of times what we focus on, at least you know, I have and and many people in the in in the sector focused on is just the systems companies. And look, there's a lot of really interesting systems companies. I [00:16:06] mean, Anduril, Saronic, Castille, I mean, you know, the list goes on and on of who's building really good end systems. But the problem is is if you can't, you know, uh iterate on that on the design and iterate on that prototype, you don't not only not get them an end system that is like, you know, different, better, but you also just move at a slower pace. So, then what happens is by the time you finally fix a production level, you know, missile or plane or kind of whatever, then all of a sudden then you got to, you know, go back and rejigger and build up all these kind of, you know, subsystems in order to meet the scale. But, if you have, you know, a more transferable line, a more adjustable line, number one, you can also build the prototype faster, but then two, you can then, you know, set up each one of these different components in a way where it actually can get to rate production quicker. >> Yeah, you're you're you're designing for you're designing for manufacturer from the outset. >> Exactly. Exactly. And that that is again, I I keep going back to learnings from, you know, Tesla and SpaceX. And a lot of ways they they they had to make those choice cuz they didn't have any other opportunity, but in the end it's actually just that mantra of design for [00:17:06] manufacturing that now exists within all these systems companies. Um, and to some extent like we are now in the age of now seeing them produce. I mean, again, like go look at what Anduril's built in, you know, in in Ohio and and now on the East Coast in Baltimore. You know, go look at what, you know, Saronic has built with the shippable. I mean, these are massive, huge facilities that are at some point, you know, in a very soon soon timeline going to be producing thousands, tens of thousands, hopefully hundreds of thousands of systems. We haven't done that in America in a long time. >> Yeah, this is no longer an on paper theoretical exercise. Uh, this is happening in in in the real world and and real stuff is coming off the lines. >> Something that I think is like special about 80 founders is they make any problem an Elon sized problem. Um, and and I'd love to I'd love to hear sort of that applied to the different industries that we're talking about here. >> Yeah, I mean, I think when you look at defense specifically, this is actually [00:18:08] been one of the most historically hard, you know, sectors to just build the thing that you think the government needs because unfortunately, and again, you know, I I I experienced this in my past, you know, when I served in the army, you know, the buyer is not the user and the and the appropriator of the dollars for the buyer is completely removed. So, you have all these like disjointed decision makers or groups that matter. And so, what happens is, you know, companies, you know, back then we didn't really have neo primes or AD companies to serve, but what you had is you had primes who would just sit there and listen, like, "Tell me what you want. I'll develop the thing after you give me the money." And, you know, the the age-old problem is you get a system that's like actually not, you know, technology forward. You get a system that was developed for 10 years ago. And then, you know, the end soldier gets something that actually is not super valuable to them. What's different now, back to the like, you know, you can think through an Elon problem now, is you can say, "Okay, what does the military actually need?" And and the beautiful thing is, you know, venture capital and what we do at American Dynamism, but also, you know, the the rest of the capital markets are saying, [00:19:08] "We will actually fund that in advance and you can build in advance of the government saying, 'Here's the thing for you to build.'" And and and the outcome of that is the soldier gets a better product, gets something that actually fundamentally changes the battlefield and, you know, helps with deterrence or security or safety. Uh and then, more importantly, you get a time frame of a of a type of system that is actually built, you know, you know, aligned with the requirement of the market and what technology can do today. So, it's just it it's it's a fundamentally different way of like instead of sitting and waiting for the government to tell you what they want, you the government signals and you see it and you build in advance by using private capital. And that just has not happened in the history of defense. So, you can build, you know, like Castilleja is building a a hypersonic missile that does a, you know, not a super exquisite thing, but it's really hard to build a missile that goes that fast and is reliable. And, you know, the government, you know, now has given them contracts and kind of, you know, showed up and and and bought missiles. But, if you go look at the last 3 years of that business, I mean, it was private venture capital. It was, [00:20:09] you know, entrepreneurs like taking the risk and building the thing in advance. I think if you see that again and again in defense, you're just going to get better products and fundamentally like you know, you'll have the neo primes and the new companies start to take a lot of that market share. But, it's not just a defense thing. I mean, Aaron sees it in energy, as well. I mean, we're rewriting our entire energy grid right now. And we're again, like Aaron would know better than I would, but like we are in on the one yard line. We are just starting that process. >> I I think, you know, another part of it is >> [clears throat] >> is a little a little more intangible, but like these are really hard companies to build. These are really, really hard problems to solve. Um you know, when I talk to Turner, who's the CEO of Mariana Minerals, and you know, he's flying all he's flying to the middle of nowhere places all over the world to build his company. He's like out where there's no cell phone signal, where there's no electricity. >> Yeah. >> You know, touching dirt, you know, spending like weeks and months away from his family. [00:21:10] Um like it has to be worth it. You're building a physical thing. You're not sitting at a desk on your computer. You're out in the world. It sounds kind of sexy and romantic, but when you're actually doing it, like it's rough. The travel is really hard. The people you're engaging with, you know, you're not talking to you're calling up your suppliers. These are not like other startups who operate in the same kind of time scale and culture as you. These are like really tough people to negotiate with and work with who, you know, have a very different culture. And if you're going to be putting yourself through that, like it better be damn worth it. Um and so, I think people people really gravitate towards these problems that feel huge and enormous, because they're you know, these are real missionary founders that we see building in the space. Even as even as it's kind of heated up and there's more capital and it's gotten cool, um it's still brutal. >> I I think the biggest thing that has changed in American dynamism land in the [00:22:11] last few years is we always knew that the companies being built in this category were really important to the fabric of America. I mean, again, like when we talk about defense systems, when we talk about energy, I mean, when we talk about building, you you widgets that go into everything in the like that stuff's really important. Like it affects our safety, it affects how we live our life. But the biggest change is those companies weren't just the most important thing to us. Now they can be the most valuable companies. And that's like a big distinction that that has happened, which is, you know, it's not just like, you know, solving a problem for our safety or security, it's solving a problem for our safety and security. And oh, by the way, those can be some of the largest companies that exist in the world. And and that's what technology has changed in these industries. I mean, mining has always been a big big industry. Defense has always been energy. >> it hasn't been economically worth it for a young smart person, you know, who has a lot of ambition to go after these categories. But I think companies like Palantir, Anduril, SpaceX have proved that you can build a really big business [00:23:11] operating in in these categories. And if you I mean, if you look at the, you know, the top 10 most valuable companies in the world like that right now, like the majority of them are hardware companies. They're building a physical product. Um you know, we we've kind of come full circle in the so you get the most ambitious founders of our generation who you know, who want to run towards that hard problem and know it's going to be worth it. >> And and and the beautiful thing about many of these industries like mining or you know, Rio Tinto has been around for a long time. I mean, Boeing's been around for like you know, good companies that are building good products. But I think when you take this, you know, first of all, like a first principles technology approach about like what the audacious thing that needs to be built is. And then two, you get entrepreneurs like these these folks that that are on this this 80 50 list. >> yeah, I'm going to rebuild the American energy grid. That sounds That sounds fun. >> And you just that that I that didn't exist 50 years ago. That didn't exist five years ago. I mean, it is something that is fundamentally, you know, our America's, you know, best and brightest are building towards this category for the first time. And and then importantly, like Aaron said, like the opportunity is there. You see these [00:24:11] examples of these companies that have redefined space launch, that have redefined, you know, kind of military systems, that redefined, you know, all all these these categories of American dynamism that we care about. Um and yeah, I I think it's exciting. I mean, uh you know, as as again, as someone who served in the military, you always think of, you know, like what you do is something greater than yourself. I mean look like the capital markets exist to you know make money like it's we're not we're not a charity. This is a capitalist society but in the end a lot of the companies on this 80/50 list are doing something that is both going to be large and valuable but also going to be really inherently important to the fabric of America and that's that's pretty exciting. >> What's it what's it like to to visit one of these sites like a manufacturing site or a mining site or you know drone manufacturers those kinds of sites like >> I mean Connor and I have the best job of all time. I did have to I I did I do own steel toe boots now because the number of the number of site visits I've been to with portfolio companies where you where they're like yeah you got to show up in steel [laughter] toe boots. Um yeah. [00:25:11] >> I mean it's not all sexy to be honest. I mean again these are these are locations that are you know a lot of times hard to get to in the middle of nowhere and in the end like we're talking about real physical things that require you know earth moving. I got I used to have in my time in the military I used to have this this kind of senior officer who would always tell me like the physical world doesn't care about you so just be careful in the physical world. Like you know these are you know moving you know tons of dirt and you know massive you know these factories being built out you know Hadrian or or what Amica will do. I mean these things are huge and and it's impressive. You know my one of my favorite things is maybe you don't see this at the remote sites. Maybe you do but it's this kind of running competition between these companies who can have the bigger American flag at their site. I actually don't know who currently holds that today. I mean Hadrian's is pretty big last time I saw it. >> Valor's is pretty big. >> big too? Okay good. Yeah yeah yeah. And like again I mean [00:26:12] that's that's awesome. Like the fact that you have that type of like one passion for for something greater than just the the product or the economic opportunity that you're building. I mean again it it it drives purpose behind a lot of these teams. When you show up at you know Mariana when you show up at Hadrian when you show up at Castellian like you you literally get people who are so passionate about what they're doing. And and you know, that produces really good results. When you have to do something really hard in the physical world, if you have people that are willing to run through walls, sometimes literally, to solve that problem, you're just, you know, you get really audacious, great outcomes. >> Well, one of my favorite things to do, you know, is visit the same company sort of multiple times within a 12-month period, whether they're in the portfolio or not, because you learn a lot by how fast a factory buildout happens. And so, you know, that that that's one thing we do is like we you know, you don't just go once, you go once and then you go 3 months later, you go 3 months later, you go 3 months later. And like, I'm not I'm not a manufacturing expert. I spent enough time on the factory floor on a factory floor between my time at [00:27:12] Palantir and and now doing this job. Um you know, I like sort of know what some of the machines are and kind of like how a line roughly works, but like there's just something about seeing stuff accumulate in a factory and it goes from the process of watching something go from like empty warehouse with epoxy floors and the big American flag and maybe like a couple of pallets and the founder is really excited to show you their forklift that they built. >> [laughter] >> Um and they're kind of like, you know, they they have the basketball hoop set up or like the gym set up in the corner to like, you know, fast forward 6 months and it's just, you know, they're freaking out about how to expand. They're like, "Oh, we need to get, you know, the the city out to to give us more power because we have too many machines plugged in." It's like kind of chaos. There's technicians and operators everywhere, people building stuff. That's really satisfying and and and and really fun and and something I think we're we're lucky to get to see that journey and and and how quickly that can happen. >> Yeah. >> Has anyone ever done like a time lapse of uh >> Oh, there's a lot. It's a whole that's a whole like category of filmmaking. >> Nice. Nice. >> kind of compares theirs and it's like a, [00:28:12] you know, a bit of a the the the >> do like the gym thing. I remember when I when I first visited many years ago Isaiah and the gundo, uh he made me do a rep on his uh on his >> all they all have they all have like Oh, yeah. They all they all have their bench press set up. >> Which is cool. >> Is is there a like a contagion effect to things being made in America where it's like oh because that actuator is made here now we can make this and now we can make that and sort of when you're able to compress one timeline you can compress multiple timelines. >> I don't think it's just timeline I also think it's cost and quality. I mean it's interesting because when we look at defense autonomous systems in particular like what Saronic's making a lot of boats Covenent's making a lot of missiles Castilian's making a lot of missiles you know Anduril's making a lot of things like when you build many systems you also require many subsystems below that and you know again like there are really interesting military systems being built today that that the corollary though back to the comment we had earlier is [00:29:12] like you know by building towards defense you also build for a different industry. We actually don't have a lot of humanoids or robotics that exist in the world today. I mean there are thousands maybe I don't know the exact number but when you think about the the subsystems that go into some of our military systems it's the exact same subsystems that are going to go into the future robotic systems. It's the actuators like it's the motors it's the you know you know valves and switches and those type of things and I think when you can build those two quality and two cost then all of a sudden you make other markets that maybe weren't viable or real all of a sudden make sense and again I think that's going to happen in the robotics world which is you know you we're going to spend all this time on showing development of all those sub components we're going to build for a lot of these military systems which is good we need it for security and safety and deterrence but then all of a sudden you're going to have this you know kind of robotic wave that will come in America I said it you know AI can't turn a wrench yet they can they will eventually um and that will be enabled by all that you know actuators and switches and subsystems that we built [00:30:13] it's going to serve a different market and and it's going to make it you know financially viable and we're not going to have to rely on factories in China and and again I think that is that is net good because you know as you build an industrial base an industrial base can be used for many things and you know down to the component level you know I I just think we don't have enough of it in America and it it's a decision like you talk to a robotics company today that wants to build you know, some robotic deployment, there's a 99% chance that majority of what they are buying is coming from China. And so much of their platform >> for many reasons, not just geopolitical, want to onshore that purchasing for quality, cost, speed of iteration, um you know, and geopolitical reasons. I think like I one thing it you know, it's really over the last 3 years, even just it's remarkable how much of a supplier ecosystem has developed. Like one of the companies in our portfolio, um it's 3 years ago would order two [00:31:13] times the number of PCB boards PCBs that they needed because they assumed that they would have to throw 50% of the them away for quality issues. They would get the batch from their supplier, they would do the testing, and 50% of them wouldn't pass a quality test. Um you know, then startups have emerged in this category and are like, "We're going to fix this problem. We're going to use, you know, software and modern technology to, you know, redo the way PCBs are manufactured in the US. We're going to do it faster. We're going to do it cheaper. And guess what? We're going to do it better." Uh and you know, that now that same company um buys, you know, PCBs from new suppliers, and you know, they're keeping 70, 80, 90% uh passing quality test. So, it's I think like we underestimate how much the, you know, close collocation and co-development of some of this technology with um the end customer and their suppliers really matters to to drive quality higher. >> So, something really interesting is happening, I I believe, in the industrial base. Uh like we talked about earlier, you get this top-down demand signal from these new systems companies. [00:32:14] Like we're building new military systems, but oh, by the way, like you know, Joby and Archer, we're building new planes, too. Like we're building new end systems. That is That is a fact. Like cars are are being built different, planes are being built, military systems are being built different. When you build these new systems, inherently the inputs of those systems need to change as well. And when you look at the industrial base in America today, like historically, if you go look at how Boeing makes the 737, you know, Boeing's a great company, important to the fabric of America, but they just pick up the phone and they call Honeywell and Honeywell helps them kind of build all the different subcomponents. And it's not Honeywell's fault, but what Honeywell does is they say, "I don't want to build a new landing gear again. We have this landing gear that meets the spec and does the thing. So, let's just keep going and doing that same thing again and again and again." It's rational. Like, you know, they're going to build more 737s. They're going to get paid the same way if it's a 450-year-old landing gear or if it's a new landing gear. The problem though is when you keep iterating on these new requirements for end systems, at some point the 50-year-old subsystem just doesn't work. And maybe it it it [00:33:15] physically works in in terms of meets the requirements, but it's been designed and it's been developed in a way that inherently, uh you know, we haven't innovated on it. And and and why does that matter? It's because, you know, we've developed new materials. Like, yes, physics hasn't changed, but but the inputs to the physics and the inputs to that design has changed. So, I think what's happening or what what the opportunity for a lot of these manufacturing companies is to do what I call co-engineering. And, you know, we talked about, you know, the long tail of these like sub-tier uh you know, suppliers that they they've been in receive mode for the last 40 years. Honeywell's picked up the phone and they've said, "Hey, I need another landing gear. Go make that landing gear." And they've executed on the specs with that IP in building it. When you want a new requirement, uh that middle layer cannot, you know, think on behalf of Honeywell and change the requirement because, again, they're not in the position to do it. But I think what's going to happen in the future is you're going to have this middle layer of supply companies that, you know, will [00:34:17] effectively be co-engineers with the end OEM of rethinking not just what the end system can do by way of speed or kind of, you know, weight or mass, but the individual subcomponents will be rethought, will be re-engineered, and will be rebuilt. And so, you know, the end system will change from a top level, the the the the individual parts and components will change. And and I think that just hasn't happened in the last 40 or 50 years. So, you're going to see a completely new wave of what I believe like will be called like the manufacturing middle that will be, you know, co-engineering and pushing design and development upward in the supply chain as opposed to just being in receive mode and saying, "Okay, I can build the same thing I built 40 years from now." And I just I think that's an opportunity. I mean, I defined it, you know, previously as like we're creating the American manufacturing asset class right now. I mean, you know, private equity has been playing in this ecosystem for a long time and looking at an asset and buying it and improving the [00:35:17] cost and, you know, selling it off again. That's not fundamentally changing the things that we build. Right now, companies will change the the different things that we'll build. >> A good example of this is kind of the on the on the grid. And when you think about sort of like the electronic stack, and we're about to go through a a huge step change in how we manage and transfer power on the grid. Moving from a system of sort of static and mechanical systems that were deployed in large scale across the US in like the '70s and '80s to now sort of modern power electronics, battery storage architectures, which are much more software native and flexible. And, you know, that is just when you have a such a complete step change in technology where the technology that's replacing the previous thing is just completely different, you have this opportunity to rethink the entire supply chain behind that and the way all of that design and engineering work happens. >> And in the energy world, it's the same thing that's happening in the defense or the the commercial systems world, which is you have this massive amount of [00:36:17] demand for, you know, data centers and, you know, new factories and new build. When you get this top-down level, you have the ability to innovate like Aaron's talking about and rethink the entire architecture. And look, like >> Because it's a completely new architecture. >> Exactly. >> So, you know, you can't rely on these components that worked in the previous world to just reconfigure it. Like you actually have the opportunity to rethink that from the ground up. >> And another important point here is like, you know, you could be pessimistic and you can say, "Okay, Connor, all these new military or end systems, like not all of them are going to be adopted. So, like that that top-down demand or or or air and like we're not actually going to increase energy by four times. Like there's not going to be that much demand." I actually don't think it matters because I think once you start the snowball of the demand cycle moving in one way, even if you deliver half of that, you know, requirement. >> going back. >> going back and it doesn't make financial sense and it you know, again, it's it's like when you rethink something first principles and you make the like new design, new engineering decision and a lot of times that comes with better [00:37:17] cost, better efficiency, you're just going to buy that thing now going forward. >> serviceability, easier to manufacture. Yeah. Yeah, you're never going back. Yeah, I'm curious kind of what you're seeing in terms of founders being second generation Anduril or second generation Palantir or something like that and maybe they they see some of these learnings and they see the opportunity to be the middle layer supplier in some something that has never been touched since, you know, decades ago and and kind of like what what are you seeing in terms of, you know, those opportunities and those kinds of founders? Yeah, for sure. I mean, if you you a great way to light a fire under an entrepreneur is for them to be banging their head against the wall on a sort of engineering or supply chain problem where they are and then they're, you know, they're like, "Well, okay, I really care about this. This is a a pain in my ass. I know it's I know it's bothering other people. I know it's a problem that I don't just have here at Anduril or SpaceX or Tesla. It's a [00:38:17] problem more broadly. I'm going to go solve that more generally." Um and the kind of lineage of founders that have sort of lived and breathed this on the manufacturing floor. And not just founders, but even engineering teams who are like, "I saw this problem. I solved this, you know, within Anduril or Saronic or whatever and I'm going to actually like go out and build this as a company and then I'm going to, you know, I know that everyone in the ecosystem, so I'm I I I have, you know, automatic access to a customer base that's captive. Yeah. Um you know, we certainly see that trend happening and, you know, this is how ecosystems get built. Like people make fun of YC for all YC companies kind of selling to each other. But like that's how it works because you have you know, you it's it's your friends. They're tolerant. They're understanding. They're willing to like work with you and help you and and you know, put up with something breaking because they're working on their own really really hard problem and if you know, the thing you're doing is not the most existential thing to them. They're like very willing to outsource it to you. That's beautiful. That's how Silicon Valley was built. And what's really like what makes me really optimistic is the extent to which we're [00:39:17] starting to see that in these kind of physical world ecosystems and supply chains. >> Yeah. I I I think that the few companies you mentioned, you know, the SpaceX's, the Palantirs, um look, they weren't overnight successes. Like those companies took a long time to get to both the product scale and just the the size and and success of the company that they're at. >> Overnight successes that took 20 years. >> Exactly. And and I think that the learning point and you know, we invest in a lot of the entrepreneurs on this list I come come from those ecosystems is you just learn this like relentless focus to do the one thing as well as you can, you know, down a path until you've succeeded and like, you know, I've I've I've seen this with with the Constellation guys for example is like they focused for two and a half three years on the first hypersonic missile that was really hard to build and you know, other people showed up and they're like, "Oh, be multi-product. Go build this small drone here." And they're like, "No, we need to do this one thing really well." And I think, you know, that comes from the fabric of SpaceX. Like at SpaceX the concept of being a responsible engineer and like if this thing doesn't work, like it's my ass. [00:40:17] I'm going to make sure like >> [laughter] >> I'm going to obsess over this thing again and again. Like that's what it takes to build really hard things. And again, like, you know, there will be different, you know, derivations of of success. Not everyone will think just like the SpaceX mindset, but if you look at a lot of these businesses like that, you know, in the physical world you kind of need to do that to build something really hard. >> And but what what you do with doing that is you learn, you know, you learn that process knowledge. You learn how to do it. And so thing two, thing three, thing four >> Yeah. >> are a lot easier. You've developed a supply chain. You have your relationships. You've developed manufacturing for or design for manufacture processes, you know, you've learned how to build a factory to a high quality, high spec. You've learned how to build that trust with customers. And so, if you can do that one thing really well, that sets you up to do other things really well, but it doesn't work unless you deliver on that >> Yeah. >> on that one core thing. >> Uh so, we talk a lot about competition. China, what does the United States do uniquely when it comes to our capital markets that that really enables these startups? >> Well, I I I think this may arguably is [00:41:18] one of I mean, Brian Shimp was talking about it the the founder of Anduril you know, a couple days ago, which is this concept that, you know, we have literally trillions of dollars of private capital in our capital markets that inherently follow, you know, success. Follow both technology success and and, you know, to some extent like production success as well. And I think if you look at the United States, um number one, like we do not have a top-down directed, you know, industrial policy that says the state will put this amount of money in in this. I think to some extent that's a good thing because the money will follow the entrepreneur, the money will follow the success. I think that that the distinction now, we've kind of always had a good capital markets in the United States. I think the distinction is the capital markets all of a sudden have said, you know, what? The category of AD is really interesting. And and, you know, Aaron and I you know, have been living and breathing this for a long time, but if you go look, you know, not just up and down, you know, Silicon Valley and Sand Hill Road, but if you go to, you know, the major banks, I mean, JP Morgan has has committed, you know, trillions of dollars towards, you know, both investing in the physical world, [00:42:18] not just defense, but factories and and other things in the physical world. And you see that again and again and again across not just our our venture capital firms, but, you know, private equity now is is is is starting to play in this category in a big way. >> Big credit firms. >> Big credit firms. And and and that's so important because, you know, the the the reality is many of these companies in in the AD world, they require a lot of capital. When you build physical systems, when you build a Falcon 9 rocket or when you build a CCA, and you build a Black Grid missile, um it looks so expensive to build up those lines and build that physical system. So, I I think part of this is, you know, the capital markets, you know, speak with, you know, where the success happens. And the reality is is it's the capital markets are not top-down driven by our government, unlike China's. And And what that allows is that allows us to be far more flexible. Uh you know, again, to follow success, like I said. And then more importantly, um to fund things in advance of it being obvious. And And we talked about that earlier, the concept of building in advance of the requirement and the need. You know, [00:43:19] maybe we're a little bit late on the energy side. Maybe we're a little bit late on on some of the defense systems. But look, the capital markets have woken up and we're we're putting hundreds of billions of dollars, if not trillions of dollars, you know, you know, towards this category for the next, you know, 10 plus years. >> mean, if you look at just the first half of 2026, more uh more risk dollars went into the defense ecosystem than all of last year combined, which was many times what went into the defense ecosystem in all of the previous year combined. And I think historically there's, you know, in defense specifically, for example, there's been, you know, a narrative around the valley of death and like how do you get the government contract to like propel you through this period um of needing to build out CapEx. And And what's really exciting is that almost that that that's start that's starting to disappear with the support of of capital markets and and and of risk and of risk capital. And that's certainly extending even beyond the defense ecosystem to energy and robotics and critical minerals and some of these other sectors that are really important, [00:44:19] which is super super exciting to see. Um yeah. >> I had one question. I'm not sure if it's too much of a tangent, though. Just um there's that very famous chart of like US power production versus like China new new power new energy production. Like America's line is like basically flat and China's is, you know, up and to the right. Like Like I I guess some question uh around like like what would it take to close that gap or how how fast can we build new power? >> Yeah, I I don't think that is I don't think that that is a um technology problem. I think that that's a we need to do some soul-searching about our will as an American people. And do we want conforming projects to be built? Do we want to grow? Um and if we do, I think that the technology and the capital will follow. >> Yeah. And it's funny because, you know, this is not just an energy problem. It's, you know, it's it's an everything problem. And and [00:45:20] and look, I you know we're we're optimists inherently. I do think that snowball has started to roll. I think the question is, you know, back to our discussion on capital markets earlier, will will there be emergent winners in these categories that then fuels more capital to flow into the ecosystem? And you know, it's this kind of self-fulfilling prophecy that happens. Like, you know, yeah, if you build it, you know, that you know, they will come. But at some point there needs to be a pot at the end of the rainbow. And if there is for a few companies, I think, you know, one capital will flow like I mentioned. But but I think the last thing I'll say just real briefly is uh anything in the physical world takes time. Um you know, we you know, to set up a factory, you know, at a scale where it really you either affect our our power generation or you affect our military systems or you name it, you can't take a couple of engineers, you know, throw them in front of a couple servers and computer screens and come up with an answer. I mean, it's it's moving dirt. It is physically understanding a supply chain. Like, these things take years. And so, you know, there's a little bit of patience that we need to [00:46:20] have in the capital market side. But again, I think I'm optimistic. I think it's happening. And you know, to some extent, like, it's ours to lose. Like, it's ours as a government and a nation to to mess up and to get in the way of this. And that's a risk. Don't get me wrong. But >> I do think it's I do think it's another will be another long-term benefit of capital markets even if it's short-term painful. Just people need to feel I mean, you mentioned that these are physical things. They take time. They're also physical things in that they have a physical manifestation to the people and communities that live around them. And the most important thing is that, you know, American society at large feels like they're participating in the economic growth that's coming as a result of this development. Software, you know, was sort of could like had this ability to be sort of siloed cuz it really existed in just a few cities. It was kind of this virtual thing. You sort of experienced it in the way that your your interaction with digital services got better, a lot better over the last 20 years, but it you know, it it was a little bit more it [00:47:20] was a little bit more abstract. Physical world, like someone's building a data center, a power plant, a mine in your backyard. Um and you need a you know, you you have a say and you have a stake in that. You you physically see it. It affects your life. And if you don't feel like you have participation in that economic upside, it's hard. I do think that this is one thing that the capital markets long term will solve really well because companies will figure out how to bring communities along for the journey and make it financially and economically worth it. >> And I think there are some good examples of that, a few companies on the AD 50 list who like, you know, build real things in their communities and show up the right way. There are also bad examples that have existed in the last, you know, few years. I mean, if you look at what Amco does, like they show up to these these really small machine shops that exist. They partner with them, you know, they don't they don't you know, cut the management and fire people. They say, "How can we build new products and grow the kind of, you know, business that you have today?" And it's that type of you know, concept of working with communities as opposed to working against them that I think we still need [00:48:20] to, you know, wrestle with a little bit in in the tech world and understand that just cuz we sit in Silicon Valley, I mean, we we we don't understand everything that's happening in the world. And you know, fundamentally, I think a lot of these 80 companies will build stuff that that touches middle America. I mean, it will physically exist in middle America and you know, I I I think that's net good. I think that means more jobs, more prosperity. I think that means more energy and abundance world where you know, we have a safer America and >> less concentration of wealth in these pockets in these elite pockets on the coasts. It's a good thing. >> Yeah. >> But it will take time. >> Yeah. >> Well, Aaron Connor, thank you so much for joining. Uh and everyone can check out the AD 50 list today. >> Awesome, thanks. >> Awesome, thanks so much.