--:-- **Host:** You can't credibly deter war without superior technology, and this has happened over and over, not just in the United States and not even in modern history, but going all the way back into ancient history. Back in November, A16NZ held our American Dynamism Summit in Washington, D.C. And today, we're sharing the very first session from that summit, which even half a year later may be more relevant than ever. Now, you might recognize our speaker, Palmer Luckey, for co-founding Oculus, but he's also the founder of A16C portfolio company Andrel. And in this jam-packed talk, Palmer brings us back to the 50s, a golden age of defense innovation, an era that helped us turn futuristic dreams into household staples, from personal computing to GPS to commercial air travel. But what happened in the 1960s and beyond? Why is it the case that today you have better computer vision in your Snapchat app than the systems the DoD is fielding? Listen in to hear Palmer's take on what incentives have stifled the defense industry, what the battlefield of the future might look like, and ultimately what Andrel is doing to reboot the arsenal of democracy. And if you liked this session, you can find the full library of recordings from the summit by going to a16c.com slash ad dash summit. As a reminder, the content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. For more details, please see a16z.com slash disclosures.
--:-- You can't credibly deter war without superior technology. And this has happened over and over, not just in the United States and not even in modern history, but going all the way back into ancient history. Unfortunately, America's defense industrial base, which one produced technology that was far beyond even what we imagine in science fiction, has largely stopped innovating, especially when it comes to systems that actually get fielded, that actually get deployed, that get out of the lab and into major budgets. And despite spending more money than ever on defense, our military technology for the last few decades has largely stayed the same. There's more AI in a John Deere tractor than there is in any system that the U.S. DoD is fielding. There's better computer vision in your Snapchat app than in almost any system that the U.S. DoD even has in development, much less fielded. And until 2019, the United States' nuclear arsenal was still operating off of floppy disks. But at the same time, China and Russia and other smaller states have sought to seek asymmetric advantage by aggressively modernizing their armed forces, taking advantage of technologies that were developed for the consumer sector, that were developed for business applications, and applying it to their military technology. They've been spending their resources not just to outbuild us on things like ships or outbuilding us on the number of aircraft, but also on things that are going to have an asymmetrical advantage, things like jamming our communications link, degrading the way that our current systems work, and creating armies of cheap autonomous systems that are uniquely suited to going up against our very, very expensive, exquisite systems that cost an enormous amount of money per shot. And the result of this is that today, in almost every war game that the United States simulates against China or their proxies The United States if we lose certainly end up in a very, very bad situation.
--:-- And of course, it wasn't always like this. Silicon Valley itself was founded by patriots who were pushing science and engineering forward, specifically with a mind towards the national interest, not just profit, not just making money, but also making sure that their country actually remained as it was so that you could have future economic growth. War research and development was what turned futuristic dreams into household staples. Personal computing, GPS, the internet, commercial air travel, and so many more things were born of military investment that was later commercialized. In 1947, half of Stanford's engineering budget came from the Department of Defense. Just think about how incredible that is, that you'd have a university like Stanford would have so many of their brilliant minds focused on that to the point where it was the majority of the research and development that they were doing. World War II in the 50s were really a golden age of this type of investment. Defense innovation, government efficiency applied to these types of technologies. We built the Pentagon in 16 months. We completed the Manhattan Project in three years. And we put a man on the moon in under a decade. In the 50s alone, we built five generations of fighter jets, three generations of bombers, two entirely different classes of aircraft carriers, nuclear-powered attack submarines, and submarine-launched ballistic missiles, just to name a few. And that's why in 1960, the Department of Defense accounted for 36% of all research and development in the entire world. But starting in the 1960s and moving into the decades that followed, our defense industry became more focused on process than progress. Unlike many of our other industries that have continued to rapidly advance in recent decades, defense companies are rarely asked to innovate as a matter of survival. Instead, they build specifications that instruct them what they are going to build. And because defense firms are reimbursed by taxpayers for every hour they work, well before they built a working product, they're incentivized to come up with things that cause work to be done rather than making things that actually work. Because of that, we now have a defense industry that spends a measly 1% to 4% of revenue on internal research and development, IRAD. And you can compare that to modern technology companies that need to move quickly, that need to invest in their own products, that need to build the things that they know are going to lead into the future on their own dime, spending as much as 20, 30, even 40% of their revenue on internal research and development. Andrel's currently spending over 50% of our revenue on research and development. So we're pretty great. But the result of this disparity, this result of this difference between how our private sector technology companies and our more defense-focused companies work is that we have an aging and top-heavy industry that moves very slowly because that's the incentive structure that they've been given. It moves slowly because not that many people are actually chasing it. And when I say not many, I don't mean by people, I mean by corporate entity. There's certainly an enormous number of people working in those top three firms. But the 10 largest defense companies in the United States account for over 80% of the industry's revenue. I don't think there's really any other industry where you would see anything like that unless you chop it into really, really small slices and how you define it. Nearly two-thirds of major weapons system contracts in the United States have just one bidder. One bidder means that nobody else is even trying to win the money. How can you have competition and how can you have innovation when you only have one company showing up to build something? Understandably, most engineers and a lot of founders in the United States don't want to work under these conditions. Engineers want to see their code deployed, their robots in motion, their products out in the world making an impact. And they don't want to wait years or even decades for that to happen. And this is why we founded Andrel. It would have been a much safer bet for me to found a second unicorn in any other industry like gaming, fast casual dining, or fintech. For people who don't know, prior to starting Andrel, I started a company called Oculus VR when I was 19 years old and living in a camper trailer. And I was able to grow that from just me into a multi-billion dollar business in a matter of years. And if you look at the last 30 years that preceded Andrel, there were only two unicorns doing business with the DoD, Palantir and SpaceX, that were able to become unicorns. Both of those were founded by billionaires. And I don't want to throw anyone under the bus, but billionaires can kind of do whatever they want in America. If you start with a billion dollars, it's pretty easy to make another billion. And those are the only two unicorns working with DoD in 30 years. And that's since the end of the Cold War. I didn't just arbitrarily pick a number. The United States used to be good at building small defense companies into large defense companies. But if you compare this with every other sector I mean in that same 30-year period there have been I think four mattress unicorns 12 fast casual dining unicorns over 50 gaming unicorns over 100 social media and mobile application unicorns, over 100 financial technology unicorns, over 100 biotech unicorns, a few dozen automotive unicorns. I could go on and on, but the point is that almost every other industry would have been a better bet for me financially. And that's a problem because there's not that many people who want to go to work in a sector where you historically haven't been able to succeed over the last few decades unless you're already a billionaire. But the reason I did is because I felt that it was the best thing that I could do. It was the most important thing that I could do. Start a company that builds technology for our military and convinces some of our most brilliant engineers to not spend their lives designing augmented reality mustache emojis, but instead to build things that actually matter for the men and women on the front lines who have missions that actually matter. Now, at the time in Silicon Valley, founding a defense company to contribute to national security was wildly unpopular. The technology industry prides itself on being the first to understand where things are heading, but on national security and the rise of our strategic adversaries, it was the last. I could tell all kinds of personal stories. I could throw all kinds of people under the bus, but suffice to say that there were people who had worked with me who were literally willing to quit their job because I was fired, who nonetheless thought that working on weapons, that working on defense was inherently wrong. And our technology industry broadly didn't just fail to predict the importance of defense. In fact, it took really the exact opposite position, certainly at the executive level, if not necessarily the rank and file level. I could give a whole talk on how the executives of Silicon Valley used a vocal minority of their rank and file as a smokescreen for their dependence on China, but that's a different talk for a different day. Big tech companies, you know, probably the highest profile, but not necessarily the best example, but certainly the biggest, highest profile, started pulling out of defense work if they had any in the first place. Google very publicly pulled out of Project Maven. Many early investors actually turned us down because while they believed that we had a good team, good people, good technology, good product market fit, they thought that it was inherently wrong to build tools capable of being used for violence. Even after we did raise money and get traction, a lot of the negativity continued. If you look at an article, one of my favorites in Bloomberg in 2019. Their headline called us tech's most controversial startup. Let's travel back to the distant year of 2019 and look at what was going on. TikTok had just started banning any users that talked about the Uyghur genocide, and it was also officially against their terms of service to post content promoting homosexuality in China and several other Asian markets. That was pretty controversial. This was a year where Adam Neumann paid himself millions of for the right to use the word we. And this was also a year in which Uber was in the middle of a federal investigation for a lot of their workplace practices. But no, it was none of these companies. It was Andrel that was tech's most controversial startup. Little old me. But of course, as a defense company that builds technology for the military, Andrel was the thing that really won the belt. But what was the other one? Ah, yes, the evil list. We were the 23rd most evil company in America. I'm really proud of that one. Unfortunately, we weren't on the evil list since then because they haven't published the list. I'm super stoked to get on. I hope I move up on it, I guess. So how do we reboot our arsenal of democracy? How do we bring cutting-edge technology back to our armed forces? Well, to truly compete and to keep pace with rivals like China and Russia, the Department of Defense is going to have to enable a large pool of technology companies to scale into production and succeed. Not just a few, but many. Some of them that already exist and others that do not yet exist. We need to build how weapons systems are built based on software, not hardware. Taking a software-first approach to how war is waged. We're going to need to build the mission from the beginning of when we build products. We need to understand what problems we're trying to solve and not necessarily hold companies to specific requirements. We often say in Andrel that you should always trust the customer when they tell you about their problems, but you should never trust them when they tell you what the solution is. And we need to move fast. China and Russia and our adversarial nations are not waiting and have, in many ways, been much more successful at adopting commercial technology into their military process. And ultimately, technology doesn't mean that we need to spend more to do more. It means that we can do more with less. We have a clear opportunity to do all this while still saving taxpayers, the government and taxpayers, money along the way. So the United States Department of Defense is without a doubt the most advanced builder of manned fighter jets, aircraft carriers, and battleships that the world has ever seen. But the battle of the future is going to team with artificially intelligent, autonomous systems that are built with much lower cost in mind. Whether it's swarms of autonomous drones, precision-guided missiles, or distributed air defense systems, software is the through line for the next generation of defense technologies. And we're already seeing this play out I think in Ukraine in particular we've seen that this warfare has really been defined not just by legacy systems but also by these new systems that are being used in radically new ways. So defense acquisitions have historically been dominated by an emphasis on exquisite platforms, very expensive platforms, whose capability requirements are laid out in excruciating details. But the defining feature of most history's most successful technology companies is to have product vision. Jeff Bezos, Steve Jobs, Elon Musk, and other great technology entrepreneurs all had distinct images of the future and how their products would shape it. They weren't building what someone else thought they needed to build for their business. They were building what they thought needed to be built to solve a real problem. And these visions were independent of the opinions that were around them that told them that it wasn't going to work. They worked on things that their customers in competition often did not believe were possible or did not yet understand. And had they been building new products off painstaking specifications that were laid out by their customers, the history of modern technology would look very, very different. I would say, personally speaking, that the war in Europe has totally shattered at least my idea of something I used to believe, which is that we lived at the end of history, that things were not going to change anymore, that borders were drawn, that things were not going to be subject to large-scale conflict because peace was just too profitable. I think since Russia invaded Ukraine in February, the United States and allied nations have moved swiftly to supply the Ukrainians with the tools and the weapons that they need to defend their freedom and independence. But if the Ukrainians had an arsenal of advanced technologically sophisticated weaponry from the start, if we'd been able to equip them and make them a prickly porcupine that nobody wanted to step on, then this conflict likely never would have even started. One of my favorite quotes ever, not just in defense, just in general, is this Putin quote. He was talking to a group of high schoolers about what the future of the Russian economy would look like. And he was speaking about artificial intelligence. And he said, whoever becomes the leader in this sphere will become the ruler of the world. First of all, let's appreciate just how Bond villain this statement is. It's incredible. You don't see this audacity from villains these days. Most villains or they're so subtle, but he just says they're going to rule the entire world. And he didn't say this because he thought it's how they're going to lose. He said this because he thinks this is how they're going to win. He thinks this is a path for them to achieve an asymmetrical advantage. It's not a larger blue water Navy. It's not a faster air force. It's going to be through autonomy and artificial intelligence. I'll end with this. I don't think that there is a secret silo of government technology. As I've become more and more aware of the things that are going on, I've seen some really cool stuff that is very impressive, but I don't think that it's even close to what we're going to need to achieve our goal of deterring large-scale future conflicts. The only way that we're going to end up with a silo of advanced technologies is if we build it. And not just Andrel. We need dozens of new innovative companies that are going to modernize our military. And I want to point out, these can't be companies that are founded by people who have already made billions of dollars running other companies. There's a very, very limited supply of people like that. And most of them want to cruise the Mediterranean, not start new defense companies. Tens of thousands of engineers across our entire country that are not working on defense currently are going to have to ask themselves if there are more important things in their careers than building photo filters or doing ad optimization. VCs and investors are going to need to take even more risk and fund broad, diverse defense companies solving problems across the entire defense base, not just in the really sexy and cool areas that everyone's paying attention to, but in areas where people are often not paying attention to, like logistics, like training, like security. And then, of course, to our officials in government, the ones who are the ones who determine the incentive structure in the first place, you guys are the only ones who can really lead this change. Finally, I want to close by saying I usually have to talk to people who are more adversarial and they don't even necessarily believe in the idea of American dynamism or American exceptionalism or any of the things that are necessarily related to that. So it's really nice to speak to a room, very refreshing to speak to a room of people who genuinely believe and have the power to make these changes to better the United States. And I want to thank Catherine Boyle and Dave and the whole A16Z team for standing up this American Dynamism event. I really appreciate it, and I really hope that we can build this together. Thank you very much.
