Peter Thiel (Facebook Board of Directors) – Ronald Reagan National Defense Forum (Dec 2019)
Chapters
00:00:00 Venture Capital's Impact on Defense Innovation
Harnessing American Innovation: The discussion focuses on how venture capital influences defense and the significance of public-private partnerships in driving innovation.
Public-Private Partnerships and Learning from Industry: Lisa Hirschman, Acting Chief Management Officer for the U.S. Department of Defense, emphasizes the importance of public-private partnerships to benchmark industry practices and apply innovative approaches within the Department of Defense.
Budgetary Considerations and High Returns: Hirschman highlights the need to be mindful of every dollar spent, ensuring high returns and efficient utilization of resources, as emphasized by Secretary Esper in his keynote speech.
00:02:36 Opportunities for Venture Capital Investment in National Security and Defense
Venture Capital’s Role in Supporting Defense Technology: Venture capital investment can leverage high-growth potential firms’ resources and expertise in commercial and dual-use technologies. Early-stage technology companies play a vital role in fulfilling the Department of Defense’s (DoD) technology needs. Collaboration between DoD and venture capitalists is essential for fostering innovation and accessing cutting-edge technologies.
Challenges in Funding Startups Focused on National Security: Limited availability of startups solely focused on national security with a billion-dollar valuation. Post-Cold War procurement practices favored major contractors, making it challenging for small and mid-sized startups to scale. Venture capitalists are cautious about investing in small consulting companies with limited growth potential.
Opportunities for Growth and Scale: The DoD’s focus on technological dominance and the need for brilliant engineers present opportunities for startups in the defense sector. Young entrepreneurs and engineers are inspired by science fiction and driven to develop cutting-edge technologies that meet the needs of war fighters. Concentrating bets on a smaller number of the best startups can provide them and the country with a significant advantage.
Addressing Misconceptions about Venture Capital Investment: Venture capitalists provide capital to high-growth potential firms in exchange for an equity stake. Venture capital investments involve high risk due to the uncertainty associated with new and unproven companies. Venture capitalists are willing to take calculated risks, as the success of a few startups can outweigh the failures of others.
00:09:48 Venture Capital Funding for High-Growth Startups
Venture Capital Model: Venture capitalists invest in businesses with the potential to become multi-billion dollar future businesses. The model does not work well for businesses that are worth less than a billion dollars. Venture capitalists invest in companies that can start small but have the potential to scale to a world-class level.
SpaceX and Palantir as Examples: SpaceX and Palantir have proven that it is possible to create successful companies in the defense industry. Both companies took a long time to get significant contracts from the U.S. military. They were not conventionally venture fundable and relied on personal funding from their founders.
Challenges for Startups: The long time horizons and lack of funding opportunities make it difficult for startups to succeed in the defense industry. Top engineers and talent are attracted to high-growth, early-stage companies with the potential for significant financial rewards.
Role of DIU: DIU can play a role in making it easier for companies to pursue defense as a vertical while also pursuing other markets.
00:13:14 Technology Partnerships and Reform for Global Competition
DOD-Industry Partnership: DOD is committed to fostering partnerships with companies, particularly in the AI and cyber domains, where commercial opportunities abound. Successful examples of commercial companies expanding into defense business through DOD collaboration exist. A focus on eliminating barriers to entry, simplifying requirements, and embracing agile concepts is crucial to engage more businesses and achieve better outcomes.
Market Risk and Venture Capital: Market risk is a key concern for venture capitalists investing in defense-focused companies due to stereotypes about the industry’s slow pace, bureaucracy, and political nature. Reducing market risk can help attract more funding for promising technologies and equip warfighters with the best available capabilities.
Acquisition Reform and Contract Management: The current acquisition and contracting processes within DOD may hinder the participation of companies with the best technologies. Ongoing reform efforts, led by key leaders within DOD, aim to streamline processes, reduce barriers to entry, and improve overall contract management.
U.S. Share of Global R&D Investment: The U.S. share of global R&D investment has declined from over 60% in 1967 to less than 30% in 2017. China’s share of global R&D spending has surged, becoming larger than the USSR’s during the Cold War.
China’s Impact on Innovation and Funding: The rise of China as a technological competitor has accelerated the need for innovation and new technologies within the DOD. China’s emergence has forced the U.S. to rethink its approach, emphasizing faster deployment of technologies and more efficient collaboration with industry.
00:18:57 Geopolitical Tensions and Innovation in AI and Defense Technologies
AI as a Dual-Use Technology: AI is a dual-use technology with both military and civilian applications. The debate about AI’s use in the military has been slow to develop, unlike the debate about nuclear weapons in the 1940s. Google’s decision to withdraw from Project Maven, an AI project with the U.S. military, sparked a debate about AI’s military applications.
Ethical Considerations: The ethical framing of the debate about AI in the military is problematic. It is always the ethical decision to work with the U.S. government when choosing between the U.S. and China. China’s unethical actions are often hidden and obscured.
Historical Context: Silicon Valley’s origins are rooted in electronic warfare and defense. The aversion to working on defense-related projects in Silicon Valley is a growing zeitgeist. Companies may pander to this aversion to avoid HR issues and controversies.
Narrative and Zeitgeist: The lack of a clear and present danger, like the Soviet Union in the 1980s, affects the narrative and zeitgeist of young people. China’s economic and political influence has made it difficult to portray Chinese villains in popular culture. The influx of immigrants who are not fully committed to the U.S. or who transfer intellectual property back to their countries of origin is a problem.
The U.S. Military’s Role: The U.S. military does a lot of good in the world, including keeping the world safe and providing humanitarian assistance. The Communist Party of China is a repressive regime, and its actions are gaining more visibility. The Project Maven experience is not representative of Silicon Valley’s attitude towards defense.
China’s Economic and Technological Strategy: China is using market incentives and its repressive political regime to build a successful global economy. Their goal is economic prosperity for China, not just military R&D. China is hollowing out U.S. industrial capacity through its economic strategy.
The DoD’s Perspective: The DoD recognizes the need to reach out and access technologies being developed commercially. China’s approach to AI and technology is a concern. The DoD is considering public-private partnerships and rules of the road for new technologies.
00:26:56 Accelerating Innovation and Streamlining Processes
Process Reform: The need for change in the rules of the road was emphasized, focusing on speed, agility, and scalability. Reviewing processes and policies to eliminate unnecessary ones and optimize the remaining ones was highlighted. Automating processes whenever possible was seen as crucial to streamlining and increasing efficiency.
Liquidity Events and Startup Timelines: Liquidity events, such as share purchases, acquisitions, IPOs, and direct listings, were discussed as ways to realize gains in an investment. The trend of startups staying private for longer periods, such as SpaceX and Palantir, was mentioned.
Palantir’s Potential IPO and Timeframe: The question of whether Palantir will go public and the potential timeframe for such an exit strategy was raised.
Evolution of Startup Timelines: The shift from the rapid public offerings of the 1990s to the current trend of elongated timelines for startups to go public was discussed. Factors such as increased regulation, availability of private capital, and the desire for significant scale and profitability before going public were cited as contributing to this change.
00:29:42 Challenges and Opportunities in Military-Silicon Valley Collaboration
Biggest Challenges: Budget constraints and funding limitations Rigid budgeting and procurement processes Slow speed of decision-making and implementation compared to the rapid pace of technological development in Silicon Valley Lack of understanding and appreciation for the unique cultures and perspectives of both worlds
Opportunities for Collaboration: Leveraging Silicon Valley’s expertise and innovation to enhance military capabilities Cross-pollination of ideas and best practices between the military and tech industry Streamlined procurement and budgeting processes to facilitate faster adoption of cutting-edge technologies Recruitment of talent from Silicon Valley to work on defense-related projects
Bridging the Cultural Divide: Encouraging visits and exchanges between military and tech personnel to foster understanding and mutual respect Establishing clear lines of communication and collaboration between the two sectors Creating incentives for Silicon Valley companies to invest in defense-related research and development Advocating for policy changes that support collaboration between the military and the private sector
Advantages of Collaboration: Enhanced technological capabilities for the military Increased speed and efficiency in developing and deploying new technologies Access to a wider pool of talent and expertise Potential for cost savings and improved resource allocation
Recommendations: Reform budgeting and procurement processes to facilitate faster decision-making and implementation Provide more flexibility for the military to scale successful prototypes and transition them to full-scale deployment Increase funding for defense-related research and development Create a dedicated office or agency to facilitate collaboration between the military and Silicon Valley
00:39:03 Defense Primes' Role in Military Technology Acquisition
Incentives for Military Technology Development: Entrepreneurs and engineers have a strong desire to develop and serve military needs, even exclusively. The government must provide incentives to attract and support these efforts, reducing friction and facilitating the process.
Challenges of Acquiring Startups by Defense Primes: Some entrepreneurs have ambitious goals and prefer to remain independent, aiming for long-term growth. Acquiring startups may stifle innovation due to internal politics and bureaucracies within large organizations.
Advantages of Startups: Startups can maintain a culture of innovation, which is crucial for ongoing technological advancement. Startups offer a fresh perspective and agility that may be lacking in large, established companies.
The Role of Government: The government should provide capital and a runway for startups to take off and grow. Collaboration between government, startups, and defense primes is essential for successful military technology development.
Key Takeaways: Entrepreneurs and engineers are eager to develop military technology, but incentives from the government are needed. Startups may resist acquisition by defense primes due to ambitious growth plans and the desire to maintain a culture of innovation. The government should provide support and funding for startups to foster innovation in military technology.
00:41:05 Chinese Investment in US Startups: Risks and Responses
Addressing the Political Frustration in Large Companies: Employees in large companies may face political frustration and desire a more exciting and less political work environment. This can lead to resumes from big companies indicating frustration and a desire for something fresh and exciting.
Lack of Tech Acquisitions in Defense and Aerospace Consolidation: Despite consolidation in defense and aerospace, tech companies have not been frequently acquired. Acquisition remains one exit path for tech companies, but pitfalls exist. New age companies like Anduril are emerging and getting funded, which is a positive trend.
Concerns about Tech Startups and National Security: Chinese investors have had significant involvement in early-stage investment in the US. This raises concerns about adversaries gaining access to innovation and technology.
Efforts to Protect National Security: Congress has taken steps to address these concerns through bipartisan support for legislation. The Foreign Investment Risk Review Modernization Act (FIRMA) and the Export Control Reform Act aim to enhance scrutiny of investments and technology transfers. However, the rules for these acts are still being developed, and effective changes are yet to be seen.
Balancing Protection and Investment: The focus should not solely be on protection but also on investing in the US economy. Federal-funded R&D, STEM education, and moonshot initiatives are crucial for fostering vibrant commercial companies.
Impact of Government Interests and Regulations on Venture Capital: Government regulations and IP rights can affect venture capital investment. However, procurement, budgeting, and the ability to ramp up and scale businesses are the main challenges. Making concentrated big bets and supporting successful startups with heft and push are essential, especially to discourage foreign capital from entering.
Abstract
Venture Capital’s Role in Shaping Defense Technology: Bridging Silicon Valley and Military Innovation
The interplay between venture capital and the defense sector marks a pivotal juncture in technological advancements and national security strategies. This comprehensive exploration delves into how venture capital (VC) drives public-private partnerships and innovation within the defense industry, particularly in areas like AI and cyber. It highlights the Department of Defense’s (DoD) efforts in fostering environments conducive to commercial and defense collaborations, the challenges faced by startups in aligning with military needs, and the strategic implications of this synergy against the backdrop of global power shifts, notably the rise of China.
Main Body:
Venture Capital’s Impact on Defense: Harnessing American Innovation
Venture capital significantly influences the defense sector, providing essential funding and expertise to startups developing cutting-edge technologies. This facilitates the DoD’s learning from industry practices, enhances budget efficiency, and fosters closer ties between the tech community and defense operations. Lisa Hirschman, Acting Chief Management Officer for the U.S. Department of Defense, emphasizes the importance of public-private partnerships to benchmark industry practices and apply innovative approaches within the Department of Defense. Secretary Esper, in his keynote speech, highlighted the need to be mindful of every dollar spent, ensuring high returns and efficient utilization of resources.
Venture Capital Model and Defense Industry
In the VC model, investors target startups with potential for exponential growth, but the unique dynamics of the defense industry, with its prolonged timelines and specific challenges, often conflict with the traditional VC model focused on rapid returns. Venture capitalists invest in businesses with the potential to become multi-billion-dollar future businesses. The model does not work well for businesses that are worth less than a billion dollars. Venture capitalists invest in companies that can start small but have the potential to scale to a world-class level. SpaceX and Palantir have proven that it is possible to create successful companies in the defense industry. Both companies took a long time to get significant contracts from the U.S. military. They were not conventionally venture fundable and relied on personal funding from their founders. The long time horizons and lack of funding opportunities make it difficult for startups to succeed in the defense industry. Top engineers and talent are attracted to high-growth, early-stage companies with the potential for significant financial rewards.
DIU’s Role and Key Points
The Defense Innovation Unit (DIU) plays a vital role in easing the entry of startups into the defense market. DIU can play a role in making it easier for companies to pursue defense as a vertical while also pursuing other markets. It emphasizes the need for the DoD to adopt agile industry concepts and to address market risks and stereotypes that deter VC investment in defense technologies.
Shifting Dynamics and Ethical Considerations
The rise of China as a technological and geopolitical rival intensifies the global tech race, especially in AI and space exploration. Ethical considerations, exemplified by Google’s controversial decision regarding Project Maven, emphasize the need for careful navigation of military applications of AI.
Cultural Differences and Historical Context
Silicon Valley’s detachment from its military roots contrasts with the more defense-oriented perspective of Seattle-based companies, affecting their willingness to collaborate on defense projects.
The U.S. Military’s Role in Global Security
The U.S. military’s contributions to global stability and humanitarian efforts are often underappreciated, highlighting the need for public-private collaborations to maintain technological superiority.
China’s Strategic Approach:
China’s strategy of blending market incentives with political control aims to undermine U.S. industrial capacity and dominate key technological sectors, presenting a significant challenge to U.S. defense strategies.
Navigating the New Technology Landscape:
The DoD is focusing on establishing clear rules for the use of emerging technologies, emphasizing the importance of public-private partnerships for accessing innovation.
Speed and Agility:
The military’s need for speed and agility in operations requires a nimble approach, balancing rapid adaptation with scalable solutions.
Process Reform:
Streamlining processes and policies is crucial for optimizing efficiency and effectiveness within the defense sector, including automating tasks wherever possible.
Liquidity Events in VC Investments:
Liquidity events are pivotal for realizing investment gains, but startups in the national security sector often face delays in these events due to the industry’s unique challenges.
Challenges of Integrating Silicon Valley and the Military:
The distinct cultures of the military and Silicon Valley, along with procurement and budgetary constraints, pose significant challenges to their integration. Long-term funding mismatches further complicate collaboration.
Strategies for Collaboration:
The DIU and programs like Look-See foster collaboration by bridging the gap between military needs and Silicon Valley innovations. Recruiting talent from the tech sector is also a key strategy.
Benefits of Collaboration:
Collaboration offers access to cutting-edge technologies, increased speed and agility in military operations, and potential cost savings.
Government Incentives and Startup Dynamics:
Government incentives are crucial to encourage innovation and reduce friction in defense collaborations. The dynamics between startups and traditional defense primes, and the challenges of maintaining an innovative culture post-acquisition, are critical considerations.
Politics and Talent:
The political environment and talent preferences play significant roles in the technology acquisition landscape, affecting decisions and strategies in the defense sector.
Tech Acquisition and Startups:
The consolidation in defense and aerospace has seen limited tech acquisitions, partly due to the emergence of new companies like Anduril and the complexities involved.
Chinese Investment and National Security:
Chinese investment in U.S. venture capital has raised national security concerns, leading to regulatory reforms. However, effective implementation of these reforms remains a work in progress.
The intersection of venture capital and defense technology is a complex but crucial area for national security and technological advancement. Effective collaboration between Silicon Valley and the military is key to navigating this landscape, requiring attention to cultural differences, procurement reform, and long-term funding solutions. By harmonizing these elements, the military can leverage Silicon Valley’s innovations for enhanced capabilities and strategic advantages.
DOD-Industry Partnership:
The DoD is committed to fostering partnerships with companies, particularly in the AI and cyber domains, where commercial opportunities abound. Successful examples of commercial companies expanding into defense business through DOD collaboration exist. A focus on eliminating barriers to entry, simplifying requirements, and embracing agile concepts is crucial to engage more businesses and achieve better outcomes.
Market Risk and Venture Capital:
Market risk is a key concern for venture capitalists investing in defense-focused companies due to stereotypes about the industry’s slow pace, bureaucracy, and political nature. Reducing market risk can help attract more funding for promising technologies and equip warfighters with the best available capabilities.
Acquisition Reform and Contract Management:
The current acquisition and contracting processes within DOD may hinder the participation of companies with the best technologies. Ongoing reform efforts, led by key leaders within DOD, aim to streamline processes, reduce barriers to entry, and improve overall contract management.
U.S. Share of Global R&D Investment:
The U.S. share of global R&D investment has declined from over 60% in 1967 to less than 30% in 2017. China’s share of global R&D spending has surged, becoming larger than the USSR’s during the Cold War.
China’s Impact on Innovation and Funding:
The rise of China as a technological competitor has accelerated the need for innovation and new technologies within the DOD. China’s emergence has forced the U.S. to rethink its approach, emphasizing faster deployment of technologies and more efficient collaboration with industry.
AI as a Dual-Use Technology:
AI is a dual-use technology with both military and civilian applications. The debate about AI’s use in the military has been slow to develop, unlike the debate about nuclear weapons in the 1940s. Google’s decision to withdraw from Project Maven, an AI project with the U.S. military, sparked a debate about AI’s military applications.
Ethical Considerations:
The ethical framing of the debate about AI in the military is problematic. It is always the ethical decision to work with the U.S. government when choosing between the U.S. and China. China’s unethical actions are often hidden and obscured.
Historical Context:
Silicon Valley’s origins are rooted in electronic warfare and defense. The aversion to working on defense-related projects in Silicon Valley is a growing zeitgeist. Companies may pander to this aversion to avoid HR issues and controversies.
Narrative and Zeitgeist:
The lack of a clear and present danger, like the Soviet Union in the 1980s, affects the narrative and zeitgeist of young people. China’s economic and political influence has made it difficult to portray Chinese villains in popular culture. The influx of immigrants who are not fully committed to the U.S. or who transfer intellectual property back to their countries of origin is a problem.
The U.S. Military’s Role:
The U.S. military does a lot of good in the world, including keeping the world safe and providing humanitarian assistance. The Communist Party of China is a repressive regime, and its actions are gaining more visibility. The Project Maven experience is not representative of Silicon Valley’s attitude towards defense.
China’s Economic and Technological Strategy:
China is using market incentives and its repressive political regime to build a successful global economy. Their goal is economic prosperity for China, not just military R&D. China is hollowing out U.S. industrial capacity through its economic strategy.
The DoD’s Perspective:
The DoD recognizes the need to reach out and access technologies being developed commercially. China’s approach to AI and technology is a concern. The DoD is considering public-private partnerships and rules of the road for new technologies.
Process Reform:
The need for change in the rules of the road was emphasized, focusing on speed, agility, and scalability. Reviewing processes and policies to eliminate unnecessary ones and optimize the remaining ones was highlighted. Automating processes whenever possible was seen as crucial to streamlining and increasing efficiency.
Liquidity Events and Startup Timelines:
Liquidity events, such as share purchases, acquisitions, IPOs, and direct listings, were discussed as ways to realize gains in an investment. The trend of startups staying private for longer periods, such as SpaceX and Palantir, was mentioned.
Palantir’s Potential IPO and Timeframe:
The question of whether Palantir will go public and the potential timeframe for such an exit strategy was raised.
Evolution of Startup Timelines:
The shift from the rapid public offerings of the 1990s to the current trend of elongated timelines for startups to go public was discussed. Factors such as increased regulation, availability of private capital, and the desire for significant scale and profitability before going public were cited as contributing to this change.
Amory Lovins proposes a transformative energy plan for a sustainable future, advocating for a shift to renewable sources, efficient energy use, and military leadership in sustainability. He emphasizes the need for energy efficiency in buildings and industry, microgrid implementation for resilience, and policy reforms to accelerate the energy transition....
CRISPR, a revolutionary gene-editing technology, has profound ethical, scientific, and regulatory implications, particularly in the context of human genome editing. The ease of access and accessibility of CRISPR raise concerns about potential misuse and the need for balancing scientific progress with responsible use....
Scale, a company founded by Alexandr Wang, focuses on democratizing AI access while collaborating with organizations like OpenAI and the Pentagon, raising ethical questions about AI's military use and geopolitical implications. China's aggressive AI strategy and Taiwan's role in chip manufacturing further complicate the global AI landscape....
Dr. Eric Schmidt emphasizes the urgent need for a comprehensive U.S. strategy on technological advancements, particularly in AI, 5G, and national security, to maintain global competitiveness primarily against China. He advocates for collaboration among government, industry, and academia, while also addressing ethical considerations and the broader societal and geopolitical implications...
Eric Schmidt, Alphabet's veteran leader, emphasizes the critical role of Artificial Intelligence (AI) in shaping competitive advantages in business and military sectors, while also highlighting the U.S.'s lack of a coherent national AI strategy in contrast to China's ambition to dominate AI by 2030. He identifies talent acquisition, data availability,...
SpaceX's innovative approaches and public-private partnerships are revitalizing the US launch industry, aiming to reclaim 50% market share and restore American leadership in space. SpaceX's commercial success and emphasis on innovation are driving increased competition, service quality, and cost-effectiveness in the space launch sector....
China's rise as a superpower and its growing economic and military might pose challenges to the United States, potentially leading to conflict, but historical data and interconnected economies offer grounds for optimism. Globalization and non-state actors add complexity to the US-China relationship, and a realist approach is needed to navigate...