Invest Like the Best with Patrick O'Shaughnessy - Josh Wolfe & Chris Power - Factories of the Future - [Invest Like the Best, EP.281]

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Starting point is 00:01:00 instant impact with high limit corporate cards, payments, venture debt, and spend management software all in one place. Ready to accelerate your business, learn more at brex.com slash best. That's bR-e-x.com slash best. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest like the Best is part of the Colossus family of podcasts. And you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaunacy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect

Starting point is 00:01:52 the opinion of O'Shaunicee asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunosate Asset Management may maintain positions and the securities discussed in this podcast. My guests today are Josh Wolf and Chris Power. Josh will be a familiar voice to many of you and is the co-founder and general partner of Lux Capital. Chris is the founder and CEO of Advanced Manufacturing Startup Hadrian. Most of our discussion centers on the need to modernize the factories that supply our

Starting point is 00:02:25 space and defense industries. But given the current market environment, we also talk about capital conditions and the responsibility to build products that really matter. please enjoy this conversation with Josh Wolfe and Chris Power. Chris and Josh, this is going to be a totally different conversation about an area that I don't think I've ever explored before, very keyed in on a certain kind of manufacturing. I'm sure we'll hit bigger themes of onshoreing of manufacturing and just the next generation of this part of the economy. We'll spend a lot of time around precision parts, what Hadrian's doing, why Locke is interested in this area, what Chris, you and your team are building. To set the stage, Chris, it would be great if you could, as you did for me on the phone recently, give an overview of the recent past and what has happened in this world.

Starting point is 00:03:09 It's become a topic that everyone's talking about a little bit, but probably doesn't really fully understand the recent intermediate past of manufacturing, where it happens, why it's happened that way. So a little bit of a history lesson would be a great place to start to frame our conversation. For advanced manufacturing in general, which I describe as space, defense, semiconductor, eVitol, energy, medical devices, basically everything in the Jetsons, flying car, future, all has to be domestically manufactured because of ITAR requirements. It's super high precision components. And basically, 80% of the manufacturing parts for those industries flows through a high precision network of machine shops.

Starting point is 00:03:45 There's 3,000 or 4,000 of them. Average size is 10 to 12 million in revenue. In aggregate, they do 40, 50 billion in revenue. but it's incredibly fragmented super low NPS. It's the most perfect Keith Rabeau fragmented low NPS vertically into great structure you could ever possibly think of. Historically, what happened is this was built off the defense primes needing a bunch of suppliers. All these machine shops got built in the first space race or the Cold War.

Starting point is 00:04:10 There were businesses that got started 30 years ago by 30-year-olds, and now they are 30-year-old businesses run by 60-year-olds. What's happened in the last five years is there's not a lot of slack in the system, and generally a machine shop might be making some semiconductor parts, some parts for Boeing and then some parts for like Raytheon, for example. In the last five years, because of the boom in commercial space, which has been largely driven by lowered launch costs, the success of companies like SpaceX and Anderrol,

Starting point is 00:04:35 and then investors like Josh have been putting money into satellite companies, rocket companies, the whole thing. If at top level, you've got a bunch of net new spend in high precision components from commercial space and companies like Anderil that are flooding the same supply chain. That's the big problem number one. And what you're seeing for those customers, is, hey, I'm trying to ship a satellite really quickly. I'm getting parts in six to 10 weeks.

Starting point is 00:04:57 That's insane because I've got an aerospace engineer sitting around for another part, wasting time when I'm trying to get a launch done. I'm trying to get my startup goals. So all these new entrants to the market are going way, way faster than your traditional primes. Now that's putting speed pressure on the supply chain. And basically, you've got this thing where customers want fast, supply chain, huge opportunity to build a business meeting that need with a bunch of net new spend in the supply chain. That's phase one, is Hadrian builds a better mouse trap for new space and new defense. The second phase, which is really scary for the country, though, is all of those six-year-olds

Starting point is 00:05:30 are going to retire in the next five to ten years at an increasing rate. And 90% of them, historically, when they do retire, don't transition to private equity or sell or transition to business to a son or a daughter. They sunset the business, lock the door, sell the machines, and throw away the keys. There's two bits that are really dangerous for the country about that. The first one is just purely capacity. In the decade where we're trying to butt heads with a CCP and wind space race two, the capacity that feeds rocket satellite drone companies is going to fall through the floor

Starting point is 00:05:59 because of this capacity issue. They're retiring. So you've got this huge supply and demand imbalance in the worst possible decade that that could be happening. And on top of that, it's not as simple as, say, a Raytheon going, hey, Patrick's machine shop, you're retiring. Let's take all the digital files that tell someone how to make those parts and give it to another machine shop. most of them have been made for 20 years. There's no CAD file. The drawing is in someone's desk draw. We've just seen this where we shipped something like a third of all our Stinger and Javelin missiles

Starting point is 00:06:30 to the Ukraine. This is on the defense side, but this happens across space, semiconductor everything. So we shipped all over to the Ukraine. The Biden administration went to Raytheon and said, hey, we need more stingers and javelins. And then Raytheon came back and said, well, apart from the fact the supply chain is super bottlenecked and we can't ramp up production, we just don't know how to make any other parts anymore. And it might take a couple of years to figure it out. So it's a complete disaster both on net news spends in secular growth and decline. But what people don't realize is it's not as simple as, hey, let's resure semiconductor. Let's throw 50 billion into an Intel plant in Arizona. Because in the 70s and 80s, when we outsourced advanced manufacturing,

Starting point is 00:07:08 what we lost was not just capacity or capability. It was the talent and the people. And what people don't understand about manufacturing, it's like software engineering to get AI research. researchers, you have to have a base of back-end software engineers. You've got a million software engineers and it breeds the best, it breeds the best. And all of a sudden, you've got some top-tier people in deep learning and all that other stuff. It's the same in manufacturing. You can't really skip these training levels. So what we lost was not the know-how to do a specific part, but the talent-based that can produce better and better people that can work on things like semiconductors or advanced manufacturing. The slack in the system is not simply a capital problem.

Starting point is 00:07:42 It's this talent-based problem. You can solve some of that by trying to grab some people from Taiwan, people who really know this and rebuild all these industries, but it's much, much slower than people think it is, because it's not as simple as turning a capital key, buying some machines and ramping up production capacity. It's incredibly difficult to do. It's a huge commercial opportunity, but it's incredibly important that we get this right for the country because space is basically a defense domain. Peace through strangers is a huge deal. We've created this period of peace with Pax Americana. And I think in the next couple of years, maybe in the next 18 months, we're going to really see that a lot of that is risk.

Starting point is 00:08:13 There's going to be a huge wake-up call when the average American consumer not just can't buy an iPhone for less than $4,000, possibly can't buy one at all because of all this global shifting of the advanced manufacturing supply chain. I want to go through all of the interesting aspects of the factories you're building, what precision manufacturing is relative to generic manufacturing and some of the technology innovation around how these factories will work and components of the factory. Before we do that, Josh, I would love to hear your investing view having the benefits. of having invested in a lot of related or complementary areas of technology as to why this is so important on the one hand, and then also in the same breath, why it's an interesting investing opportunity, because it clearly sounds incredibly important. It also sounds very hard to do with your investor hat on. I'd love to hear both perspectives. Something I've shared with you in the past is this idea of 100,00, that I have 100% certainty will be investing the most cutting edge stuff,

Starting point is 00:09:09 zero percent certainty what those things will be, which is really this false humility, and then 100 percent certainty of where we'll find them, which is the edge of our cutting-edge companies. It started in space, which went from Bill Gates-funded, Caymetta with us, which was doing antennas, and then we had these guys at Dog Patch area of San Fran that launched this company called Cosmogia, that then becomes Planet Labs. One thing sort of leads to the next. Now, it was inside a planet where they had taken this idea from software and applied it to

Starting point is 00:09:32 hardware of agile aerospace. The idea that they were going to do very rapid iterative launches, in some cases, they were going to do it by design and they're choosing. In some cases, they were going to do it because the rockets that they were launching on would blow up and they need to launch again. But the idea that they needed to manufacture much more rapidly, high volumes with small form factors, was something that was interesting. And they were doing this by hand in-house. People physically manufacturing and stuff now, as the company started to grow and demand gets higher and they're going from 31 doves that they're launching to several hundred, and then they acquire another company and they're

Starting point is 00:10:04 doing larger scale. Entities with Skybox, the manufacturing demands get much higher. That was really our first preview into the need to have the equivalent of a TSM domestically or whatever sort of analog you want of some sort of competitively advantaged manufacturing facility. I had this moment when I was introduced to Chris, which we love, which is the wait what, when you hear something and you're like, wait a second, what does everybody talk about? They talk about wanting to be a neurosurgeon or a rocket scientist. The people that are literally the rocket scientists are manufacturing things for

Starting point is 00:10:37 SpaceX and Blue Origin, the creme de la creme, the elite of American industry, through these 3,000 mom and pop shops that, as Chris alluded demographically, are basically at retiring age. We had that moment of like, wait what? Chris had that moment and was sort of originally looking at this. Do you do a private equity roll up? Do you aggregate a bunch of these things? And I think he came to the conclusion, and you can query him on this. It's going to be better to do this from first principles and just do it differently with modern technology. In the same way, going back to the same software analogy, that Planet was looking at this and saying, okay, how do you go to agile aerospace, just like you were doing agile software development? You had this other insight that Chris

Starting point is 00:11:12 identified of not only the industry structure, but the structure of how people were spending their time. So if you're an engineer in aerospace, half to two-thirds of your time was spent sitting and waiting for parts, this dependency, this bottleneck, which you had no control over. If you really wanted that to be very rapidly iterating and have the reliability and not be beholden to one bottleneck that was one supplier or two suppliers. You needed to be able to do something about that. In the software industry, you had all these people that basically identified that there were these bottlenecks and then developed them, whether they were in comms, they were in payments, they were in databases. So you would get Twilio, Stripe, MongoDB, that rose to meet that. I think it was just a super

Starting point is 00:11:48 novel insight that Chris had to say, I can build the factory that builds the machines. We got very inspired by that. He was seeing it firsthand, knowing that a ton of capital was going into this long a tale of aerospace and defense companies who were tinkering on the edge and then starting to get real money, raising hundreds of millions of dollars and doing many, many programs. Anderil started with one core product in perimeter defense with a century tower and then they went into aerial platforms. Now we have subsea platforms and growing on and on. The manufacturing demands, the capabilities, the speed, the reliability that they need all meant that there was a growing demand that, as Chris also belucidated, was coming up against a supply capability that is 60 years old.

Starting point is 00:12:28 I think Chris framed the industry really well. He approached it not as some starry-eyed engineer that was like, we're going to go to space and change the world. He was asking the question that we love, what sucks? And he was like, this sucks. The way that the industry works sucks, and there's got to be a better way to do it. That insight around overall industry structure, how engineers were spending their time, seeing the demand function from a whole line of our companies, and seeing that there had to be a better way.

Starting point is 00:12:53 And that better way was going to be a combination of cutting edge hardware and cutting edge software. I actually just did one of these with Brian from Anderil, and it was really interesting to dive into the nature of the pieces of what they're building and their goal for speed, simplicity, modularity, the philosophy of how these things are built, whether it's ghost or whatever the product is at Anderol, is just very different from a predator drone or something that Lockheed or Northrop would put out over the course of a decade. I'm curious, Chris, how much you think in the success case for Hadrian, where it's everything you dreamed of in more 10 years from now, how how its existence changes the nature of the things that get built. What will this new manufacturing capability, just like Stripe and Twilio, people build stuff that they couldn't have dreamed of before because they were able to go so fast with this new tooling. How do you think about that, Chris, in terms of what this might lead to, even though there's amazing things happening at SpaceX and everywhere else, it's on the back of these 3,000 mom and pops,

Starting point is 00:13:49 what will be different in the success case for Hadrian for the people at the top of the chain? I think if you think about software engineering 10 years ago, Maybe to start a SaaS company, it costs a million dollars, and you were spending more than 50% of your time on activity like running a server farm or building payments that every single software company had to deal with. When you see these platform infrastructure companies like AWS come out or Stripe come out or Twilio, you get two really interesting dynamics, one of which is the cost to start a company in the space goes through the floor. So now with all the tooling, you can start a software company for a couple hundred dollars. Secondly, the number of companies that get started because of that tooling goes through the roof. And then the third thing is the speed at which those companies can iterate, basically turn engineering time into a good product that the market wants goes through the roof

Starting point is 00:14:39 because their iteration cycle goes through the roof. If we get this right, we should be able to drive three things. One is that existing companies can iterate on products an order of magnitude faster, which means that at the product layer, you just get better products. You're not doing a year-long cycle for a satellite. you're doing a two-month cycle for a satellite. As you're getting feedback from the customer, your designs can change way, way faster.

Starting point is 00:15:00 Secondly, by having Hadrian as a platform, we should be able to dramatically lower the cost of starting advanced manufacturing companies, which will drive a Cambrian explosion in both this evolutionary, who's winning in the marketplace to build a satellite company or a drone company. The raw number of these companies that start will go through the roof, and that would be success for me.

Starting point is 00:15:19 One of the things just said, which I think is really interesting, there's this old thought experiment, which was actually manifest in a physical experiment where you took two different classrooms of people that were making some sort of pottery. They had a very specific end state of a pot that they had to make. And one was told spend two hours or an hour or whatever was making the pot as perfect as you can.

Starting point is 00:15:37 And the other was told make as many pots as you can. The latter, which was rapidly iterating and trial and error and trial and error, ended up making the more perfect pot. So that idea, which I think applies to industry, is if you make something and then you're waiting forever to test it in the real world versus being able to rapidly iterate the latter example is something that Hadrian's going to enable,

Starting point is 00:15:56 that in turn then lets many more startups flourish for less capital. We can do more experiments, fund more companies. They can fail fast or they can come up with a product that is superior and competitive and then build a platform from there. It's fascinating to think about and it demands the question on the demand side. You've talked about the supply side being this fragmented mom and pop 3,000 base. Today, just in its current state, Chris, what does the demand side look like? who are the biggest sources of revenue for those 3,000 shops?

Starting point is 00:16:25 And obviously I want to talk about where that's going in the future. But just in terms of today's state, what does that look like? For a highly vertically integrated commercial space company, so all the new space companies, so rockets and satellites, the demand is coming directly from them, from the supply chain tip. For legacy space or defense, usually what happens is Lockheed gives the engine to Pratt, and then Pratt has two companies underneath Pratt making engine components, and then underneath that there's a bunch of machine shops,

Starting point is 00:16:52 which actually is one of the reasons why, apart from now, it's been a hard problem to spot because most people don't tap Lockheed down past three layers of supply chain, but if you look at all the supply issues, eventually you end up at Bob's machine shop all the way down. The demand is coming from two main drivers, the net new spend from all these new companies starting stuff, but also on the defense side,

Starting point is 00:17:12 I'll give you an example of a large prime that took a tour of Hadrian's factory yesterday and now are engaging really heavily, is they've got 500 machine shops in their current supply chain, just for sustaining existing programs where they've promised the government as a customer, hey, we're going to help you make X number of F-35s, as an example. They're just looking at the rate of parts of the need to produce to hit those current goals, and the current machine shops can't produce the amount of parts to meet the current production rate,

Starting point is 00:17:39 much less if we go into a conflict scenario, we need to increase the number of F-35s are being made. So it's not even a net new spend problem. Hey, there's a bunch of innovation in defense. flooding it with new business. It's literally just a sustainment. Can we produce a number of parts? And what's scary was over the last three years, this was a bad problem three years ago. Because of the 737 max crash, a bunch of machine shops that were doing some space or defense work might have had 30% of their business coming from Boeing. So they got wiped out because Max paused. There's a bunch of revenue drop. And none of these companies have got a years worth of cash on hand.

Starting point is 00:18:12 They're like 30 days payroll situation. So you've got a bunch of people that got wiped out there. And then during COVID, a bunch more people got wiped out because some of the workforce just decided to retire. So you've got these big supply side hits as demand is increasing and it's causing this weird kind of slack effect that is really, really dangerous. Josh, what do you think about how the nature of demand will shift? You know the legacy companies, you've been an investor in some of the modern companies like an Anderol. I'm interested not just in the nature of the company, meaning Andrews is different than Lockheed, but also space versus defense versus something else. As you think about the future of demand for this style of manufacturing based on what you've learned through your portfolio, what do you see and what do you think about?

Starting point is 00:18:51 Overall, there's more demand because there's more people trying more experiments. If you take space as one example with each new capability, somebody else is like, well, what if we did this? I made this analogy before about taking effectively the railroads from the 19th century and turning it vertically, and you can sort of look as an analogy that first you're going to have the rails and the locomotives and the steam engines and the cars. today, SpaceX, Rocket Lab, Relativity, others. Then you have people that are saying, okay, we're going to make all kinds of different satellites and things to put on a bus. Then you have people that are designing the bus itself.

Starting point is 00:19:21 Actually, we have a company which would have been absurd five years ago, which is Florida, the idea that you're going to actually manufacture something in space. They're designing their systems and engineering that. Then they've negotiated with Rocket Lab to actually make the bus. And then they're taking that bus and in a stroke of improbable diplomacy are actually putting it on a SpaceX rocket. Those are two competitors. SpaceX, if you're totally conspiratorial and paranoid,

Starting point is 00:19:44 is worried Rocket Lab is going to try to blow up their rocket with a payload. But that ecosystem would have been absurd. If you would have said, oh, yes, we're going to have two rocket companies, say, 10 years ago that are going to be competing. And one of them is going to make a boss that could actually hold somebody else's commercial space application, and then we're going to launch. This natural ecosystem white space filling, which you see anytime that there's resources,

Starting point is 00:20:06 and in this case of the resources are talent, ambition, and then capital. People are just experimenting and trying all kinds of stuff. We funded one of a former Lux family entrepreneurs with WOS and a company called Privateer, looking at space junk. They're going to not only take off-the-shelf data, but they're actually launching craft so that they can monitor some things. You have people that are doing refueling. You have people that are looking at the not actual physical disintegration, but the diplomatic disintegration of Russia-U.S. cooperation on the ISS. There's going to be lots of little private space stations. There's going to be storage. There's going to be depos. And then,

Starting point is 00:20:38 on the rockets themselves, what's quite interesting. And this is something that we have debated. I still think it's quite early, and so we haven't committed. But people are going from vertically integrated rockets where a single company is basically designing their engine, designing their holes and doing all their logistics internally. On the hardware side, we're seeing independent engine companies. And the bet that you would want to make on those companies is akin to aerospace or on automotive. You might have a single OEM that is assembling these things, but the engines are being made by somebody else. At the moment, we still think that there's probably a few years where people feel it's mission critical that they have to design their own engines. You had some geopolitical

Starting point is 00:21:11 thrust right now, pun intended, that has caused the RL10 to be unavailable. You had Aerojet Rocketine, basically blocked by the DOJ. They're really the only U.S. game in town. So there are going to be some people that are going to be machining parts for engines, and eventually that will go from vertically integrated to horizontal. I just can't handicap today, whether that happens in the next two years or 20, but it feels likely that it will. Then you have people on the software side that are filling ecosystem niches in this where they're starting to come out of SpaceX where they did logistics and flight planning and command and control, and now they're spinning it out and saying, hey, we could do this for other people. They couldn't have done that five years ago because the

Starting point is 00:21:44 ecosystem and the demand from other startups wasn't there. Now, this is a company called Absalom 3. They can go off and do that independently for others. That cocktail of talent, capital, and new companies and ambitions is creating white space. And Chris is like going to be the arms dealer here. The analogy I would use is, you know how with traffic management, you turn a four-lane highway into a five-lane highway, and then all of a sudden there's more cars, not less. Any move that the ecosystem makes, whether it's disintermediating engines into a company like Eursa Major, who's just on a huge engine deal with another company, or it's a vertically integrated company. It's like, okay, launch is now cheaper.

Starting point is 00:22:18 So more payloads get built. Therefore, because more payload companies get funded, more rocket companies and engine companies in that ecosystem get funded. So you get this double multiplier effect. And whatever part of the demand cycle is going up, whether it's more launch vehicles, more engines, more payloads, whatever, all three of those axes point downstream to Hadrian, at that macro level doesn't really matter where the demand cycle shifts, essentially where the ones making the roads or the bitumen or whatever, whether it's more cars

Starting point is 00:22:45 or EVs or five-lane highways or 10-lane highways, it all closed downstream to the same thing. Chris, can you help us understand going all the way to the beginning of the supply chain, the rare earth or base metal component of this process? Because I don't think people have probably thought too much about, is it aluminum, is it steel, is titanium, is it something else? What's the 101 on the actual raw materials that are important in this process? Because out of nowhere, after a decade of silence, the commodity world has come alive. There's issues shipping. There's issues sourcing.

Starting point is 00:23:16 There's issues in pricing. There's inflation. This becomes a really important thing really quickly. So give us a little tutorial on what are the important metals that go into all of these shops as raw material and anything that you think we should know about the nature of that today? Basically, there are four main all space defense, semiconductor satellite companies use. Aluminum, 661, 7070, steel variants.

Starting point is 00:23:39 So 306, 316, 30X, titanium, and then Incanal variants. There's a ton of aluminum on satellites. There's slightly less aluminum on rockets. And then on rockets, you start to get into steels and harder metals like titanium and incanel because the closer you get to the engine, the hotter it is. So you need material that can withstand heat. And then it's the same thing for the defense side. So if you look at the fighter jet, there's a bunch of structural aluminum.

Starting point is 00:24:01 There's a bunch of structural titanium because it's incredibly light. weight and then the engine is incredibly hard, heatwithstanding materials like Incanal. Those are like the input materials to the parts. So let's talk about that. And then let's talk about the parts that are on the machines that we run in our factory because that's a little bit scarier. In a sense, I think the aluminum price over the last year, it's come down a little bit now, but I think it doubled. That was a supply chain shock from the inputs, but then the mills themselves in America had a labor shortage. There was just like a supply, so the price went up. The parts that went on those satellites during that nine-month period, the machine shop can't

Starting point is 00:24:32 absorb them. So it gets passed on. So the satellites are now 30% more expensive. And if you look at where those materials get sourced from, we have a pretty good supply of aluminum in the United States. 90% of the titanium in the world comes from Russia and the Ukraine. A bunch of aluminum and steel comes from Europe as well. And actually, if you look back to the Cold War, our spy planes were made out of mostly titanium. Skunkworks had to sneak titanium out of Russia to be able to make flyplanes. This is why I think a lot of the hand-waving around sanctions is, ridiculous because if you're in an adversarial position and you say, hey, we're doing all these sanctions and then there's 50 exclusions because you're kidding yourself about the fact that this

Starting point is 00:25:10 guy's the only one with the titanium. It's just ridiculous. That is a real problem both on lack of production, but also availability of supply to American companies because a lot of that is offshore, which makes me crazy because the State Department years ago should have been going to Latin America and Africa and getting supply of all this stuff and partnering with these countries and raising them up, whereas China through Belt and Road has secured a lot of this global supply because they've got Russia locked up with the whole energy pipeline thing. They've got Africa locked up. So it's a real huge challenge. For rarer materials, which are more things that go batteries, chips, that sort of stuff, they're not on the parts that we're producing, but our

Starting point is 00:25:45 machines obviously have a ton of chips in them. And then every single satellite or rocket has a bunch of chips or circuit boards in them. So that's a huge problem. That's way more strategic because obviously 70% of the world's chips come from Taiwan, most of which is TSMC. And then the other thing is The rare earth minerals like lithium or cobalt are largely Latin American, but the Latin American mines are much, much less developed. That's a huge challenge as well. Do we need a Hadrian for that stage of things, too? It seems like that's the most limiting factor. We can't exactly innovate our way to more titanium or something in the ground in the United States or in a friendly place. What do you think happens there? It depends how response of the administration

Starting point is 00:26:23 wants to be. If it was me three years ago, I would have dumped several billion dollars into subsidizing Rio Tinto and putting them in Latin America and doing a big deal with Australia to produce a lot of that stuff and subsidizing shipping instead of relying off European supply chains. That was just incredibly dumb and incredibly obvious that we need that robustness. The chips thing is even scarier because the administration has put 50 billion into giving Intel grants to build a semiconductor facility in Arizona, but then you get the same talent problem. You can put as much capital into Arizona as you want, but are there 5,000 people that can build and operate that thing in the country?

Starting point is 00:26:58 No, and you can't train people in two years. It takes five to 10 years to learn these skills. So, yeah, there's also a shock on that side of things. Josh, how do you see the bigger supply chain things at the root level as concerns or opportunities? From an investment standpoint, it really is large-scale private equity, in my view. It's very hard to think about commodity mining. We've seen so many technologies, and I just think it's very difficult for venture-like returns with such, by definition, commodity margins. From a geopolitical standpoint, something that I've been advocating for is the Western Hemisphere Alliance. We've probably for 20 or 30 years neglected Central South America. We fought a war on drugs. We've tried to build a wall, at least half the country has, particularly if you see a rising

Starting point is 00:27:38 China and you look at sheer population, access to commodities, just for strategic geopolitical reasons, South America, Central America, Southern part of North America should absolutely be an allied bloc. And I would make that priority, number one, if I was president for the day or secretaries, state right now. Chris, if we zoom all the way back to the unit here of the mom and pop machine shop, what are the key set of jobs being done by one of those given shops? You mentioned the nature of them. It's the 60-year-old soon-to-retire, making 10 or 12 million dollars of revenue per shop or something like this. What are the key components that are inside each of those shops that you want to lift out as core functions or jobs to be done and then start innovating on inside of a Hadrian factory?

Starting point is 00:28:20 There's three big chunks. One is the the digital side of manufacturing, which is taking a customer PDF print and doing a bunch of creative geometry work to get that into machine code that tells the machine how to cut the part. That's one big chunk, and that's very software automation heavy. The second chunk is running the machine itself, which, again, is less of a robotics problem. It's more of a software engineering problem. So what a master machine does on the control is a lot of manipulating code on the fly as they respond to slight differences in the cutting tools, slight differences in the raw material.

Starting point is 00:28:53 that's a big operation software problem. And the third layer is general logistics. So you've got unpredictable cycle times of each operation in the factory. You've got huge variances in how long something takes to inspect from one part to the other. And then you've got a lot of customer requirements that are incredibly variable for each purchase order that comes through. And as an example, this is a very simple example, but can create a lot of operational noise if you don't get it really right at the top end of the funnel is laser marking apart. So you're producing all these space components. and then at some point an engineer is going to want to test it.

Starting point is 00:29:25 Often there's a call-out on the print that says, hey, engraved this part with a serial number, the purchase order number, the print revision that the aerospace engineer said, this is my part number. You might think that's easy, but there are about 10 aerospace known specifications of the depth of the laser engraving, how big or small it has to be, and what the function of that is. In a regular machine shop, you might have a guy running a laser machine that's staring at a PDF print that might remember the specification. So a lot of it is that documentation of that engineering.

Starting point is 00:29:53 knowledge and then systemizing it so that the whole thing flows smoothly, yet haven't got a bunch of random art going on. Even load balancing that is an insane challenge because you might have all these machines set up for making the part, inspecting the part, cleaning the part. But if you get one of those throughput messages wrong where you've got, say, 10 jobs running through a facility at once, but they all happen to hit the quality inspection station at the exact same time, all of a sudden you've got a bottleneck and all the jobs are late before you tell the customer, hey, we can get this in two weeks, having that low balancing like a data center with four knowledge of where the capacity bottlenecks might be in three weeks so you can make good judgment calls on what you're promising

Starting point is 00:30:30 versus what you're delivering is a huge data science and operational excellence challenge. What does Hadrian factory number one look like? What is going on inside of this thing? And how does the unit of the factory evolve in your vision over time? Factory one is about 20,000 square foot and is definitely our R&D facility where we've got a lot of people standing around watching our automation run and then catching errors. We're effectively spotting bugs in both the process and the system of the operations. Factory 2, which we're moving into in the first week of July, construction's about to finish, which has been a massive fight.

Starting point is 00:31:04 As an example of supply change just to Segway, four weeks ago, you couldn't get concrete in America. So we had to solve that problem, which I didn't think I'd be doing running a technology company. But anyway, Factory 2 is the one where we'll have probably 30 to 40 machines in rows, and we're really darling in the gross margin efficiency where we're trimming everything to the point where you can throw a customer job through. It flows through with almost zero errors. And then we're really figuring out how to optimize costs

Starting point is 00:31:28 and then ramp capacity. Basically, what it looks like today is there's a startup office with a bunch of people on laptops writing machine code, operators standing in front of machines that are mostly automated. And then, hey, when something goes wrong, we're catching that error, documenting how we can prevent that from ever happening again, and then using a bit of human knowledge to kickstart the process.

Starting point is 00:31:45 It's that learning cycle of we're going through over the next three to four months that is going to smooth everything out. And we slapped down the accelerator and just feed the factory machine with a bunch of customer jobs and it will flow through pretty smoothly. But it's incredibly complicated. We have five different software products that integrate with each other. There's four different pieces of hardware and they all have to work together. So one thing breaks, everything breaks.

Starting point is 00:32:05 Dialing in that robustness before we really hit the scale is really, really important. Josh, how do you prosecute diligence for something like this as an investor? Hearing all that, I'm going to ask more follow-up questions in a minute on the unit. of the machine and the areas of innovation and the machinist, et cetera. But when you're facing something like this early on, and it is Factory One or Factory One still a glint in your eye, how do you do diligence on someone's ability or a team's ability to execute something like this? I'm probably going to get myself in trouble with this. First, you make an investment in another company that fails. Good start. And that's what we did. We and Founders Fund actually were co-investors

Starting point is 00:32:42 in a company that did not work. Part of that was narrow focus. Part of that was team and structure. There was something proverbially different with Chris that the light shone brighter, as you can hear him talk, not only understanding the macro, but if you have a customer like Brian Andrew or Palmer, they want to anodize titanium and aluminum and parts that not only have electrochromatic coatings that strengthen and provide performance, but look really cool. They're super high demand. So Chris's understanding the macro to the micro is something that was inspiring, but we were still making a bet without any existence proof of why we were basically going to make.

Starting point is 00:33:17 a very similar investment as we had before, but this time was different, those dangerous words. And it truly came down to his vision of understanding industry structure, his vision of seeing the technological pieces that could be put together. Notably, he told us why we lost money in our last investment, which was super valuable. So he deligensed, our failure to diligence properly, our prior investment. And part of that was you don't want to automate everything. He's like, you don't want 100% automation. You need humans in the loop in some of these aspects. Maybe you want 80, 20, or 70, 30, but you need people that are there able to very quickly, look at the geometry of a part or design, make a human decision, let the computer do it.

Starting point is 00:33:52 A lot of it really came down to Chris understanding the macro, the micro of individual parts, the flow, where bottlenecks were. And then I think this is really important. You really have two different cultures. You have a machining culture, which is very blue collar in many cases. It is people working with their hands and really deep, narrow specialists. And then you have this coding software culture, which is almost the antithesis of that. It would be good to actually hear from Chris, how do you think about those two people speaking very different languages, sometimes growing up and going to very different schools, actually being teammates and working with each other? Because that answer that we got from him, it was super confidence inspiring.

Starting point is 00:34:29 The difficult thing going back to previous failures in this space was both in private equity and software engineering trying to automate manufacturing, the previous approaches have been very egotistical in the sense of we don't need any industry knowledge. Either, I'm a guy with the spreadsheet and I know how to do an IRA calculation. Operations doesn't generate profit. Finance does. So the attitude towards machinists or manufacturing people is very downwards looking. I saw the same arrogance in Silicon Valley, which was let's not try and work with the best in the industry to automate this in the right way. It's let's grab 30 PhDs and don't hire a machinist until employee number 28 and just trying to figure it out ourselves, which for me is just this very coastal elite

Starting point is 00:35:11 looks down and flyover state sort of dynamic. What I recognized was, in machining, all the problems have been solved by people. The knowledge is in a bunch of people's brains. It's not like we're inventing a new algorithm for machining. If we did nothing but just find all the right answers and get them into software and process, we would win immediately. To do that, you have to create a culture where people feel comfortable working with a software engineer, a machinist, and an operations person all in one conversation and setting the standard that, hey, just because you've got a math degree from Yale, and this guy didn't graduate high school, that's setting that culture so they work collaboratively and there's no finger pointing or whatever and

Starting point is 00:35:49 everyone's pulling in the same direction is really, really important. This was one of the most important things that I worked on and it's a combination of making sure even really simple things like no matter of whether you're a machinist or a software engineer, your equity that you get in pageering is the same based on your rank. The pay is the same. All this other stuff is super, super, super important. Really finding the people from industry that want to share their knowledge and want to train people is an incredibly rare thing. So we're incredibly lucky to have the 20 or 30 people in industry that actually want to share their knowledge and understand that we're all pulling in the same direction. And that is a really unique thing. To give you an example of how scary

Starting point is 00:36:24 this is, even at the most innovative space companies, to train someone on how to inspect a part is usually this thing of like, hey, we've got all these amazing people that weren't working manufacturing, but I'm on X number of dollars per hour. And I don't want to share my knowledge because my job is at risk. Even something as simple as training you entry to the workforce. is incredibly hard because of this protectionism. People ask me all the secret sources, and I think investors think we invented this new technology, and that's the core of the company.

Starting point is 00:36:50 The core of the company is 50 people, soon to be 80 and 100, pulling in the same direction, understanding that what we're building is a culture of, here's a problem that's solve it, and no matter where the solution is coming from, implemented and work together. That's the core of what we're building, which long term is going to be a huge, huge advantage

Starting point is 00:37:06 because if we get Hadrian right, there's no reason why we can't take the same team and go solve to Ben, or raw material or whatever happens to be. You described this the first time we talked as the PhD arrogance trap, which I really like as a phrase, thinking you can just solve every single problem immediately with technology. Interesting to hear about the interrelationship between the two teams or the two modalities.

Starting point is 00:37:27 When it comes to the individual machine and the machinist working together inside of a Hadrian factory, again, maybe starting to squint a little bit and look out two, three, four, five years. What do you think the innovation zones are on the machine side specifically? In what ways will a Hadrian machine be better five years from now than it is today? Because it sounds like there hasn't really been much innovation on the machines themselves in these mom and pop shops. Actually, I think that's slightly incorrect, but I would say that we're not really innovating on the machines themselves. And that's part of the trick here is we are buying everything mostly off the shelf and then doing really tight software integrations to override the core software that lives on these machines to make them run better. But we're not doing mechatronics and upgrading the machines themselves.

Starting point is 00:38:10 building your own machines while trying to scale a factory is like two impossible tasks. What we're really doing is going, hey, these machines have APIs that control everything about them. No one's ever used an API for this machine ever before. And that's really where the technology curve is, honestly. Even down to simple things like you're meant to be able to run a machine overnight without it stopping itself. There's actually like 20 or 30 reasons why a machine would stop itself running, but tool breaks. Something goes wrong in the controller. It's like a literal software bug. A lot of our automation is actually building the robustness into these vendor machines so that they self-correct overnight so we can get the throughput in the efficiency. One of the

Starting point is 00:38:47 reasons why you have a second shift at a machine shop, which is incredibly inefficient, is because someone's hanging around waiting for the machine to error out and they know how to clear the error and get it going again, which sounds insane, but that's honestly 70 to 80% of the problem. It's hilarious having people from industry where we come back in the morning and the machines run itself overnight and there's 10 good parts sitting there and people are like, wow, this is amazing. I'm like, what do you mean? These machines are designed to run over there. And they're like, no, well, you know, like it almost never happens in reality.

Starting point is 00:39:14 The reason is because over the last five to 10 years, the amount of software that's in these machines has grown exponentially. But no customer of the machines has ever been able to take advantage of it because what machinist knows how to write software, what machine shop can afford to pull a software engineer into the problem, or even if they had a software engineer, have them spent three months of R&D on figuring all this stuff out versus just firefighting operations because they're trying to deliver for a customer. So that's more what's going on than us innovating on the hardware side. And the innovation, the units of innovation themselves driven by software, is better,

Starting point is 00:39:48 cheaper, faster, the right way to think about what you hope to accomplish by starting to tune the dials using software? Definitely on the front end of the factory in the digital manufacturing, CAD and CAM programming space, 100%, because you just want to turn a 20-hour process into a two-hour process. It's possible it should be done. We're chipping away the marble and we'll get there. For the factory, I actually think that simplification and robustness are the two most important things, because in manufacturing complexity and lack of robustness of what drives costs, you're actually better off having a system that works every single time. That's simple. That gives you two things. One is, there's less errors, so there's not a bunch of people firefighting. And because it's simple,

Starting point is 00:40:29 you can train many, many more people into that system. Getting rid of a lot of the complexity and making everything truly error-proof is a lot of the innovation there, which seems counterintuitive. But in the real world, you want as little errors as humanly possible versus trying to dial up the efficiency on something so high that it breaks one of it every 10 times. And all of a sudden, you've got three or four people standing around figuring out how to solve the problem. That's really, really what's important there. Now, what you get from that is speed.

Starting point is 00:40:54 So speed is not necessarily like cut the part faster. It's at every handover point. Don't have to go back in the step, go back in the step, or have this station hanging around waiting for information because you've got errors. So the whole factory speed is optimized by having each of these individual pieces incredibly robust. The customer layer, they get speed. What's great about speed is everyone wants it, so we also get pricing power. As we've hit the robustness layer, we have margin efficiency growth because people are getting things every single time cleanly versus running around scrambling, like, where's this bit of paper, where's this tool.

Starting point is 00:41:26 And then the customer layer, because we are reliable and fast, we have enormous pricing power. It's this interesting dynamic about manufacturing where if you just focus on robustness and cleanness of the process, you kind of generate margin improvement automatically and therefore you get pricing power because you're fast and you're reliable. Josh, these factories and everything in them sound really expensive. And we're entering a new era, I think, for investing, especially in the private markets where capital is more expensive. It's harder to come by. Obviously, something like Hadrian requires capital up front to get to scale. maybe you could share your concept of bubble anti-bubble that you were walking me through, which I think is really interesting that I know you're writing about right now,

Starting point is 00:42:04 as you think about funding companies through this period of time, and I'm curious for your take on this period of time relative to others and the constraints that will be placed on capital from an entrepreneur's perspective, but how do you think about funding this type of company that isn't a software company that can be started for a couple hundred bucks through this period, through that framework? I generally like things that are more expensive because in theory you have a and that moat might be capital. The idea of this bubble, anti-bubble, and I'll talk about this in the context of the anti-bubble for Hadrian, but in this current moment where people are being shell-shocked,

Starting point is 00:42:36 I think we're entering an L-shaped May, June, July of 2000, probably persist for 18 months or two years. We're in this plateau. We'll go through denial anger, bargaining depression acceptance, and I think we're somewhere between denial and anger, and I personally speculate that that anger will be directed at the Fed, and you'll have an Occupy Fed movement, sort of like you had an Occupy Wall Street movement with crypto bros on one side and gold bugs on the other. I don't know. Anyway, I want to insulate cutting-edge tech companies that are producing science and technology, insulate them from the macro, the micro, domestic chaos, political election, Trump coming back on Twitter or being reelected. Just insulate them for three or four years with enough cash that they can really focus on developing the cutting-edge tech. And then when the chaos has subsided, if it subsides, they will emerge as the dominant tech provider for whatever they're doing. That is one strategy, which is basically help people. start companies at the earliest stage doing that and give them cash that they're protected, and that the only risks that they're really taking are the technological and science risk early on,

Starting point is 00:43:34 and then ultimately the market risks some years later, but not the financing risk for the next few years, because I think cost of capital is going to be higher. Cost of capital being higher also leads to the anti-bubble, which is basically all the people that have raised, in some cases, crazy valuations, overconfident, undercapitalized, overestimated, and under-reserved by investors, are just going to be doing serious down rounds. You will see a phenomenon that goes from extensions of current rounds to unnatural investors, that are in SPVs. You'll see positive inducements from existing investors to get smaller investors in. And then you'll see negative pay-to-play punitive things where people are like, okay, wait a second,

Starting point is 00:44:05 we're not letting free riders participate if we're carrying all the risk on this company. So there's going to be a lot of structure. And then eventually there'll be corporate divestiture, spin-offs, recaps. A lot of people just have no experience doing that. What we've told our companies over the past year and a half is basically capitalize, raise as much money as you can. And now that you have as much money as you can, husband that cash. And don't invest in unprofitable or improbable growth instead invest in consolidating your sector. I think there's a really good chance that some of the companies, which Chris was alluding to before with that 737 example, where Boeing gets hit and suddenly a huge book of their businesses done, we have people that are

Starting point is 00:44:41 basically hanging it up, either because of post-COVID or retiring, that there's going to be customers that are going to be acquireable, accounts that will be acquireable, old machines that might be acquireable. I think that if you are well capitalized and have momentum and start to get the market share and you get the market share, also as Chris was alluding to, that because you can deliver faster on time, better price, that you'll have the tailwinds. Those companies will be competitively advantaged. We'll be putting a lot more money into those companies that we think can use that capital. And basically, it'd be a lower cost of capital to other companies that have a higher cost of capital and sort of weaponize it for them to go through a period of consolidation. In terms

Starting point is 00:45:14 of financing a company like Hadrian, it is more capital intensive. Chris has given us a lot of confidence very early on of two things. One is his ability to raise capital. And not by promising the world are hyping, but by being thoughtful about syndicate construction, getting investors in that he thought could be valuable in different aspects and domains, giving them enough that they were excited to participate, but not enough that they were sated. There's a lot of latent demand, including from us and other insiders. I think he feels like he's probably got a pretty good pipeline of existing insiders, let alone new people that are excited by what he's doing in the niche he's filling. The other important thing he did that really gave us a lot of confidence was a hiring rate. I don't know if it's like nine for 10 or

Starting point is 00:45:51 19 for 20. Every single person that he tried to hire very early on when we just did a seed round was like, yes, I'm leaving SpaceX. Yes, I'm leaving Blue Origin and I want to join you. And they had seen the problem firsthand, which for us was this huge vote of confidence. I would also say on the capital side, what people don't understand is Hadrian is expensive to fund until we get up to about 50 million in revenue. And then we don't need another dollar of capital. And I'll tell you why. is because even in our not perfect equipment financing terms right now, the term is shorter than we are obviously going to get, even in a depressed cycle, the interest rate is high.

Starting point is 00:46:30 Once we get 12 months down the track, we know for a fact that the term doubles, the interest rate might not double, but the term is actually more important. Right now, even on those slightly shitty terms, assuming a machine is at 60% capacity, which is not a hard leap of faith to make, we're a positive free cash flow per month by something like 10 rec.

Starting point is 00:46:48 which is not great, but you add in two or three very easy operational efficiency moves that are highly believable, not boondoggle, how we're going to invent this new thing and it might work. You get two out of three of those and you get $40, 50 million revenue line at the company level. All of a sudden, we just print free cash flow. It's going to be hard to fund and kind of painful for the next two or three years while we get to that level. But then after that, the numbers just make sense at a certain level and it's not based on, hey, we have to execute these 20 really hard things. Once we've got the base in, there's two or three levers to pull where it starts

Starting point is 00:47:21 to make a lot of sense. And then all of a sudden, we have this scalable system that we can roll out and the business starts looping in on each other. So the way I think about it is, current market aside, you have a corporate burn of something like 25 million a year of software engineers, yada, yada, yada. And you can basically leave that flat. And then the factory starts to become really efficient. After that, what is scaling is the equipment financing and the factories, which most

Starting point is 00:47:43 of that cost is capex of the machines, which can be pushed off to equipment financing. The factory itself is not that expensive. It's the equipment, but we're turning that from a cap-ex cost to an OPEC cost, just on a free cash flow basis, and it's secured against the machines. It's not an IP lien against the business. So it's going to be hard to fund and painful and all this other stuff until we're at that level. But then after that, we have a very clear line of sight of an absolute monster of a company. There's this interesting concept comparing technology companies that are platforms versus applications or infrastructure versus applications where if your infrastructure, you want it to be very general purpose.

Starting point is 00:48:17 You want anyone that comes to precision machine something with you to be able to do it, but you also have to go to market, like serve a first customer. And in the app world, of course, you're supposed to be really narrow when you're starting. How do you think about that breadth of ability versus focus and execution and actually selling parts to actual buyers early on? Part of that is, and Josh was alluding to this in terms of other companies in the space trying to do everything all at once. Firstly, manufacturing is hugely complicated.

Starting point is 00:48:42 and a bit of that East Coast, West Coast ego makes you want to do every material, every process initially. And we just focused with just doing aluminum. We're just doing aluminum milling. What that buys us is, firstly, don't get me wrong, that is incredibly painfully difficult to pull off in itself. But depending on the space or defense customer, it's 30 to 80 percent of their parts by volume that they're pushing into the supply chain. For satellite companies, it's a lot more. For rocket companies, it's about half half. For defense companies where it's mostly engines, it's almost not at all, but there's enough of that chunk in terms of billions and billions of dollars in revenue and demand that we get to build this factory market fit,

Starting point is 00:49:21 which meets that. What we're laser focused on right now is making that thing hum, so it's operational, it's scalable, it's repeatable, and we can ignore it at an R&D level so that we can move the R&D resources onto harder metals, different types of machining, all that other stuff. It's a front-running a trade. It's like, well, what are all the engineers making? what's the Venn diagram of alloy and envelope size and how are we right sizing to that so that we're making this bet across the next 12 months that the capital we deployed is going to be able to serve enough customers in that wedge that we're going to be able to get a revenue target without having to do a lot of manual stuff to just make a steel part to get over

Starting point is 00:49:55 the line or whatever. It is the more painful process, but it's the only way that you ever get a system that actually scales itself like a data center or a SaaS company versus continually doing all these onesie-to-sies off to the edges which continually cause this jank or whatever. But it's a really painful thing because we push back on customers. I spent a lot of my time coaching people saying, hey, we're doing this right now. Here's the roadmap for the next 12 months. Here's what 18 months looks like. Feed us all of this now.

Starting point is 00:50:20 We're going to say no to a lot of stuff. And that's a really painful dance because we're going to be hitting revenue targets while also staring at all these purchase orders that we have the team to make that stuff that's still going to be profitable. But laser focusing on the thing that we have to get super right and scalable first before moving on to this. it's a very hard dance to do psychologically, but that's a lot of the trick. Josh, what lessons have you learned generally?

Starting point is 00:50:44 Like, if entrepreneurs come to you and ask you this focus versus breadth question, what is the interesting nuance that you've come to appreciate watching a lot of companies go to market, especially in the world of harder technology or cutting edge technology? What advice would you give people out there is they think through this, I don't know what to call it, the boil the ocean or the focus problem, or it seems like everyone has the vision for five years, and it's the path or sequencing to get there that is the really hard part, what advice could you offer them? You know that I am biased towards what I call randomness and optionality. And the only reason that you ever truly need to focus

Starting point is 00:51:14 is because you are running out of time or you are running out of money. We do everything from biotech to space. If you were a biotech company, you had a ton of money in the past few years. You had 10 different programs in a platform because that's a nice, a prior admission that we don't know which one's going to work. Today, capital is scarce. It means time is running out. You've got to cut 10 of those programs or nine of those programs and you're left with one that you've made. a bet on. That bet may or may not pay off, and it might have been the right or wrong one. You have no idea. Maybe you do have some instinct. I just generally feel that the more capital and the more time you can have, the more options you have, and you can make reversible decisions. It is true in life.

Starting point is 00:51:50 It's true whether you're in a biotech company or you're in a platform engineering company for semiconductors. You just want to have as many shots on goal as possible, just like in a portfolio. Now, when you strike gold, when you see that a customer is delighted, satisfied, and you have some competitive advantage. Then you want to go deep. It's the same sort of thing in investing. When you have high conviction, we want to put more money into our winners. You want to become more concentrated. But when you have high uncertainty and you don't know, you want to try as many experiments as possible. High optionality to begin with, in order to have high optionality, you need time. In order to get time, you need money. And then once you strike gold and that could be

Starting point is 00:52:26 through effortful analysis, it could be through luck. Then you want to get concentrated and double down. If we do a little transitive property, one of the interesting thing that's happening, I guess, is the cost of experimentation has just gone up along with the cost of capital. Is that bad? Can you pass a value judgment on that? I have a good thing that I coach deep tech founders on because deep tech is so often capital heavy and R&D heavy. In a SaaS company, you got a bunch of back-end front-end software engineers where it's large

Starting point is 00:52:52 of the same technical domain. So if you need to pivot segment, the market changes, the direction changes, but you've got a product skill set, you've got a SaaS skill set, which is pretty transferable. So as an organization, you can do this error. ease, lean startup thing and snake through to iterate your way to product market fit. With deep tech, in any company, what you're doing is hiring a very specific set of engineers that are good at one thing, but basically can't build another thing. And you're making all these heavy two-year bets, both on hiring, burn rate, and capex, and you're pushing in one direction. So the amount of moves

Starting point is 00:53:24 you can take, if you're wrong on that direction is you can go left or right by 20%. You can't snake through the maze. You have to go first principles from the start, set the ship off in a direction, hope to God you hit Hawaii on the other side because you don't have that. What I tell Deep Tech founders is basically all of the advice you've been given about lean startups is completely wrong because you're in a completely different thinking and bets type of domain. The only way to do it is basically spend a year going first principles on everything, check the edges of all your assumptions and then throw $20 million in that direction and hope to go to hit the island. Anything less than that basically doesn't work unless you're in a weird domain like satellites where maybe you're going to making satellites,

Starting point is 00:54:02 but instead of selling comm data, you're selling some other sort of telemetry sort of a thing, but that's a rare situation. The answer to a related question, which is if the cost of experimentation has gone up, which I believe it has just because the cost of capital has gone up, timeframes have come in. These far out 20-year projects became these 20-month frenzied ventures. That is going to change. But do you get more or less innovation when the cost of capital is high or low? And my answer is neither.

Starting point is 00:54:28 It doesn't matter. When the cost of capital is low, you get a million experiments being tried. And statistically, most of them are going to fail, whether it's Sturgeon's law or whatever you want to call it. Let's say 90% of them end up crap. 10% are going to survive, whether by deserve success or selection or total luck or charismatic CEO that pushed it through by force of nature. But of the 90% that failed, that becomes the detritus. That's the combinatorial fodder for the next wave. And it has happened in every cycle where the stuff that didn't work, somebody cleverly looks and says, wait a second, I can pick that stuff up from that their junkyard and combine it with this other thing.

Starting point is 00:55:01 and suddenly I've got something that's more valuable. When the cost of capital, conversely, is very high, then only super-discriminating things get funded. But I can tell you right now, going back to that sort of anti-bubble thing, there are a ton of things that were effectively science projects inside of large tech companies with brilliant teams who are given money and what normally would have been like, oh, your 20% time to tinker became these little projects, and they're going to get spun out by groups like us and others

Starting point is 00:55:24 that basically see that there's value there, will fund the losses. We think that they're really competitively advantaged. And it's the kind of thing that we never would have funded ourselves from the get-go because it would have taken too much time or too much money. But somebody else funded it, and they might just not get paid for the risk that they took. So I think there's going to be a lot of those opportunities. Cost of capital is high. Cost of capital is low. It doesn't matter.

Starting point is 00:55:44 In the former case, you're picking up the commentatorial fodder and spinning things out. In the latter case, a million experiments are getting tried. And statistically, a handful will survive. In a low cost of capital environment where there's too much capital, you're making a bunch of bets. but the execution on the ground floor is really sloppy. So the cost of making the bet with a low cost of capital is much higher because a bunch of people are hiring software engineers when they could have done with two and they do with five.

Starting point is 00:56:08 The other thing is, this is what I think we've seen over the last three or four years, which is why I keep going on rants about people trading cap pictures on the internet for millions of dollars while society is collapsing around them. If you get these capital stacks and people are simultaneously inventing the product, inventing the customer, inventing the user because of the capital flood, you might think you're making a bet and you're seeing traction and that bet is paying off. But the signal is so distorted from all these capital flows

Starting point is 00:56:32 that you can say that there's more bets in an abundant capital environment, but they're not good bets because the signal is so wonky. Chris, if you think back to that fat startup versus lean startup concept you were talking about, what was the most difficult part of that for you and Hadrian? So obviously, if you're coaching others on this process, you've been through yourself. When you were doing that year-long period or whatever, what was the hardest irreversible decision that you made? And how did you make it?

Starting point is 00:56:55 The irreversible one, I think, is location. because you're assigning yourself up to a center of gravity in a talent pool. And the bet that I made was we're going to be able to pull enough software engineers down to L.A. where the customers are, that that's a better bet than trying to build a factory in San Francisco. And that is truly, truly irreversible. In terms of difficulty, the way I think about starting businesses is that the market of the universe is actually very efficient and the economists were right that the supply and demand curve meets. but that the way we measure it just in finance is incomplete.

Starting point is 00:57:28 A good entrepreneur seeks arbitrage all over the place. And in an environment like Hadrian where people ask me all the time, how do you know what the margins are? How do you know all these machine shops? How do you know what the supply chain issues are, six layers deep in this defense environment where it's unclear to everyone else? The answer is, because I've been in sales before, and I have this weird thing where I can face up to a lot of psychological pain,

Starting point is 00:57:50 I can call to call 1,000 plant managers and discover all this information and no one else can. But that is part of the efficient market. No one else can do it. I just happen to have a gene that makes me slightly psychotic in these things. So that's hard for me, but I know how to do it. It's the same as bodybuilding. You can be genetically predispositioned to put on a lot of muscle, but unless you're that type of person that actually really enjoys lifting the same weight over and over again at slightly increasing increments, then you're going to fail. And this is the sort of market where you have to really love schlep work. That's not necessarily hard for me, but anyone doing

Starting point is 00:58:20 deep tech with these undiscovered bits of knowledge, you have to really enjoy. the grind of going bottoms up on stuff and discovering things that no one else wants to. And the information is not Googled. You have to go get. There's this great Paul Graham idea from one of his early essays that if someone overweight is chasing you, you should run upstairs, not down them. All of a sudden, the relative game matters a lot. That idea of schlep work I'm really interested in.

Starting point is 00:58:42 Josh, do you find that? Is it a good signal if a company has to endure in its future a lot more schlep work than less? I think it's predictive of probability of success, things that are hard that people are able to persevere through. I think we're going to see a lot of that in the coming years. Predictive of survivorship, which survival is a necessary precondition for growth. But there are some people that get lucky and don't really have to suffer pain and thrive just as much. I would love to close with a book and pair from each of you of questions about the future through this lens of what's being built at Hadrian and the related industries.

Starting point is 00:59:14 If we think about a really ugly and a really bright future, I'd love you to describe the things that you would think about in those two futures, the necessary conditions for the bright future, the things you might stay up at night worrying about for the not so bright future. Chris may be starting with you. How do you think about that spectrum and what defines its edges? A really bright future looks something like US wind space race to the CCP gets put back in their place. We solve all these supply chain issues that we can build the Jetsons future, or as Josh calls it, taking science fiction into science fact. Ultimately, where we were out as a country in my view, I think about what is the root cause of problems all the time. You can say that their supply chain, you can say that

Starting point is 00:59:50 they're technological. You can say that there's all these issues. But at its core, there are many, many people in all these fundamental industries that make society go that are no longer serious about doing their jobs in society. And what I mean by that is the reason why you can sit on a laptop creating crypto stuff is because there's this whole structure of society behind you where someone fixes your alarm. Someone comes and puts out the fire at your apartment. Someone built the door dash. There's farmers making food. There's all this infrastructure of society that enables us to work on all this cool stuff. And as a country, we've failed to generate the culture. Jewish society does this incredibly well. There are constant rituals and reminders of you have to

Starting point is 01:00:30 reinforce and remind people and the new generation that what built the successful country has to be maintained. It's not for free. The most crisp definition that I've found of this, which me and Catherine Boyle agree on, is that the American populace in general has turned from a bunch of serious people to a bunch of unsurious people where because we've had so much success, they don't realize that these things matter anymore and we're about to go through a rude awakening of that. And this is why I think the cost of an iPhone is going to be this real trigger in the American mind of like, oh shit, I can't just eat the bugs and click the laptop anymore. This stuff actually matters. So success for me looks like, and this is what we want to fulfill

Starting point is 01:01:06 through Hadrian, is can we be a beacon of financial success, fixing a really hard problem for customers in the country? But we have this culture of seriousness about the mission and the purpose, which I hope radiates out and reminds people that none of this is for free and working on hard problems is not just this funny VC thing. It's if we don't have a culture in America that people in manufacturing or people in operations or people working in deep technology are as respected as people in finance or working on esoteric software problems, then the culture and what we produce is upstream of solving all these problems. And the main one is that we've got a bunch of people in leadership seats all across where for some reason they're on serious people and

Starting point is 01:01:46 they haven't been maintaining the structures that made this country successful in the first place. We really have to realize that that is the most important possible thing that we could work on. What do you mean by Sirius in this context? What does that word mean? Serious means we're all running a town together. Josh is the security guard. You're the guy that cooks the food and I'm the guy that hunts the animals, right? Can I just object to that assignment of roles? What I mean by that is, in that very simple example, you all know at a tribal level that if we don't all perform, our roles, we're very quickly back to we're all hunting or we're all fighting over food. So in the winter solstice or we're all getting habit at the local tavern on a Friday,

Starting point is 01:02:24 all bets are off. We're friends like whatever. But when we are performing those societal roles, we are serious about them. Now, what I'm serious looks like is, I'll give you a really practical example. The fire hydrant goes out outside the factory the other day because some guy hits it with a car. So a head of operations calls the water company and they say, oh, it's the fire company's problem.

Starting point is 01:02:43 Call the fire company and they say, no, it's the water company's problem. There's all this finger pointing. It's not my problem with this guy's, this guys. Right now, I'm fighting with the California state government to get more power connected to the factory. And it's turning into this ridiculous 20-person caska game of you fill out a form and yada yada, and it's completely insane. It's all downstream of this attitude of, yeah, we're all living in this society, we can party together or whatever. But unless you are dead serious about performing the intent of your role in the scaffolding of this country that we've built, then everything falls apart. everything falls apart because ultimately there's a hundred layers of society that we've built downstream

Starting point is 01:03:18 from the military protecting us to people building up food, energy, electricity, all this other stuff. And if you have people in those seats that are performing processes but are not taking their dedication to the function that they perform in society seriously, collapses very, very, very quickly, if that makes sense. What an awesome answer. Josh, what is your same conception of this spectrum and what defines it such is? something like Chris said, which I haven't agreed with, and I'll put it in different terms, is the sort of shirt sleeves to shirt sleeves to generations, and the fact that prior success

Starting point is 01:03:49 has allowed complacency from a younger generation. I don't think there was a more controversial tweet I've put out in recent times than recounting a friend who was hiring somebody that showed up eight minutes late. They called the front desk and said, well, what time did they check in the front desk? And it was five minutes late. And there was no excuse. There was no apology given. Half the the people were like, 10 minutes early, you're on time. On time, you're late. Ten minutes late. You're fired. And the other half are like, oh my God, this particular candidate dodged a bullet. What kind of horrible boss? I just couldn't imagine the great generation, the kind of people that were actually making things ever showing up late and thinking that that was okay. So there's a sense of complacency,

Starting point is 01:04:22 entitlement. Some of that is a natural function of excess. You've had people today between 22 and 37 years old, looking back at the last downturn, 15 years, that have really never experienced the downturn, have never really experienced downrounds and companies, hardship, et cetera. watch wars, sort of war porn on YouTube and news, but haven't really experienced the need to serve and suffer in a very long time. So there's an element of that. There's also a natural, understandable trend towards complexity where you go back to 1958, the Leonard Reed essay of I Pencil manifest today with any of the objects around us. No one person can really articulate the simplest objects, let alone the most complex ones, and our objects have only gotten more

Starting point is 01:05:00 complex. But the complexity of those objects, in turn, lead to competitive advantage on the global stage. Much of a thrust of what we're focused on is making sure that we're funding the most cutting-edge crazy technology to put in the hands of war fighters to defend us so that we can go and live a life full of trivialities and comfort that you see today in the very giant to put it in the Ishiguru book about the rise again of a war long forgotten that we see with revanchus Russia invading Ukraine and suddenly saying, wait a second, there are good people and bad people, there are bad actors. Lives can be uprooted and put it at threat. So some of it is the race that Chris is helping to fuel

Starting point is 01:05:35 and that starts with a space race and starts with aerospace and defense. And I think it will trickle out into a whole bunch of other industries as people start to reshore certain manufacturing, imagine new capabilities, something you described earlier when Andrel is designing a part, thinking about the modularity of how that same part can be used in four different systems, that many people will say, oh, that's an interesting part, and artistically take that and put it into something else. And there's a moral dimension. Chris talks about it, I talk about it, about not being anti-Chinese at all, but being anti-CCP.

Starting point is 01:06:05 an authoritarian regime and what that means for society as influence grows. It's interesting when I started talking about Adrian to some of our friends, two people who I hold in super high regard both send me the same book within like two weeks of each other. It was this book. I'm holding it up here for you. Freedom's Forge. And it's the story of World War II how our industrial base was basically mobilized and in the course of four years helped to create the American War Machine. Incredible, yeah. I just think that that capability, which for the past generation, was effectively outsourced in an understandable sense of peace and a quest for ever-increasing profit margins, but eroded a domestic capability that was a historic competitive advantage. People like Chris and Hadrian are going to help us return to that so that we can be technologically advantaged and let a thousand flowers bloom and just rebuild this American base. Chris, would you hire someone that showed up 10 minutes late to an interview?

Starting point is 01:06:56 We have, but we're on a 50-minute commute and texted me 10 minutes saying, hey, the GPS has just blown out there's an accident. So in a situation like that, absolutely, if it's the frivolous type of situation that Josh described where it's just like, I'm six minutes late to an interview, absolutely not. And I actually think that's the perfect definition of you're running a serious company as this entrepreneur. Being late to things like that is a strong signal. This person is not serious about building something. The ownership and responsibility and maybe even duty that's underneath some of your. answer. It's just super interesting to me. And that also it's good for the person executing those things that ultimately you feel much better when you do have those senses of ownership and

Starting point is 01:07:34 responsibility. This is a dimension that I don't think I've ever talked about on the show. And I really, really like closing in this area. I just think it's so interesting and very appropriate for the environment that we've entered geopolitically from a capital market standpoint, battened down the hatches, focus, work hard. I think is a wonderful closing sentiment. Chris, I've already done this with Josh a number of times. So he's answered this question probably too many times for me, but I haven't done it with you. So I get to ask you my traditional closing question. What is the kindest thing that anyone's ever done for you? This is the beautiful thing about this country. I would say that there is three to four people

Starting point is 01:08:07 that in the first three weeks that I moved to America in San Francisco, through no other reason than kindness took me under their wing and helped me navigate what I wanted to do, that without them, I would not be here and none of this would be here. There was no financial motivation to it. there was no nothing. It was just a pure, hey, you seem like a nice guy. You're trying to do something. Let me help on all fronts. There's less than five people that were directionally so important to my life and where we are today. It feels as though we need to do one of these, the three of us every two, three years or something, but check in on the progress of what you're building. Really excited to watch it happen and unfold. Chris and Josh, thanks so much for your time.

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