You don't have a defense industrial base without an industrial base. It's been a real wakeup call that we need to get building again.
AI will be a phenomenal tool that can be used in the physical world. The reality is AI cannot turn a wrench yet.
The top 10 most valuable companies in the world, like the majority of them are hardware companies. What's it like to visit one of these sites? You're building a physical thing. You're not sitting at a desk on your computer. You're out in the world. It sounds kind of sexy and romantic, but when you're actually doing it, it's rough. When you show up at Mariana, when you show up at Hadrien, we show up at Castillion, you literally get people who are so passionate about what they're doing, that produces really good results.
There's that very famous chart of like US power production versus China new energy production. What would it take to close that gap?
I don't think that that is a technology problem. I think that that's a Connor and Aaron, thank you so much for joining the podcast today. We're here to talk about 8050 and this year's list and let's just get straight into things. Um, I know a big theme of this year was the American industrial base. Can you talk about what we've learned this year and why that's such a big important theme right now?
We've been saying for a while, you don't have a defense industrial base without an industrial base. And I think this year really put that into perspective, um, you know, with conflicts going on in the world and and realizing that, um, you know, the hollowing out of our industrial base that's happened over the last several decades actually has real consequences on the battlefield for soldiers, um, both, you know, American soldiers and our allies. And I think it's been a real wakeup call in the United States, um, that, uh, we need to get building again.
Yeah. I mean I think it's also something that is not just one factor but it's multiple factors that are all kind of happening at the same time. And when you take a step back and you say, okay, world conflict, you have kind of a continued evolution of the capital markets, which I'm sure we'll talk about a bit later about capital flowing into this ecosystem. But I think one of the bigger things is you actually have an entrepreneurial base right now who is effectively raising their hand and saying, I'm going to build in this ecosystem that's incredibly important, not just for our nation, but also you can build really valuable companies in. So I think it's just this conglomeration of geopolitical factors, of capital markets, and then entrepreneurs that are kind of all just coming together and you know I think it's a really interesting time to be building. It's a good time for us to be investing.
When we looked at 8050 this year, we thought about, uh, you know, kind of where we're at in the history of American dynamism and we're still early but I think one theme that has evolved is like you really need to start looking at American dynamism companies as a totality from end to end, from the input that comes out of the ground to the factory that makes the thing to the end system. And so that's how we've set up 8050 this year to think through those three lenses. Each one of those pillars is uniquely important to, you know, the end product or the end system but in the end like I I I don't think people think that way and a lot of the companies that are addressing, you know, uh, uh, things in our portfolio have thought, you know, from an inputs perspective, from a factory's perspective, and now from a systems perspective.
So one theory that a person could develop after looking at the list is okay we built out this industrial base for, you know, defense like building missiles and drones. Um, but it's actually a tailwind now that's helping a lot of different industries in America. So there is energy, there's robotics, there's AI. Can you kind of talk about how all of these things fit together?
Yeah, I mean, uh, it's funny because if you look back in history, I mean even, you know, 70, 80, almost 100 years ago if you look at how we've developed technology in America a lot of times it's very much been from the government. If you look at how we, you know, went to space for the first time, if you look at how we developed the internet, um, how we developed nuclear energy, it was the government saying we're going to do this for the purpose of the government and then the long tail of that technology was super valuable for, you know, you name it, the internet being created, you know, energy being proliferated, you know, across the world. Um, what's different now to some extent is now private industry as well as private capital was saying, you know, we're actually going to be the impetus that that develop something. And so to your point, um, you know, many of these markets is to serve the federal government, to serve the Department of War in some way. But the beauty about these things is when you build, you know, an industrial base either, you know, down the supply chain or end systems itself, those inherently have many use cases.
I mean the the term dual use is talked about a lot in in investing and, you know, to some extent like, uh, I think it's a little bit of a folly like focusing on too many things at once is not good for a startup but it is 100% true of what's happening with any factory that's being built today, any neoactory being built, any any, uh, energy production, anything we we we touching kind of minerals or materials in the ground. It's not just going into a defense system, it's going to go into my uncle's car, it's going to go into like my kid's future, you know, toy that they have in some way, shape or form. So I I I do think it is a, uh, you know, uh, maybe the tip of the spear is focus on the government but I think in the long run to your point like what's happening is these systems will be used, you know, in the Whimo that we took today or or anything else.
I think a good a good example of this to to look at is actually DJI in China. Yeah. Um, which start which has gone through, you know, multiple arcs of of of its lifetime and its journey. You know, started out building consumer drones and recognized over the late 2010s that there was a large market for drones in, um, both public safety and national defense and so built out, you know, a real highcale drone production business for defense. And now the company behind DJ or the the folks behind DJI are now the largest producers of robots in the world because what is very similar to a drone motor is a robot actuator which is the hardest part of building a robot. So you have this company that over the course of growing a large defense business that itself spun out of a consumer business is now, you know, the world's leading expert on how to build and produce hardware for kind of the next wave of physical AI both consumer and, uh, industrial.
Um, and so I think, you know, this technology transfer and process knowledge transfer between military use cases and non-military use cases is really important and has always been how it works. Um, and it's great to have the federal government be sort of a a subsidizer for figuring out this process knowledge and figuring out the new technology. And then, you know, I think I like our world's greatest gift in the United States is the discernment of the American consumer. Like we are going to push things to be more capable and cheaper than the government ever will. So that symbiotic relationship, um, in the industrial base is actually really important and we're certainly seeing that on the energy side.
We're seeing that on the electronic side. Uh, we're seeing that, you know, ac across the entire sort of industrial stack.
And and and to some extent I I I I don't think this is a super complex, you know, topic but it's important to kind of restate which is when you build the first of a kind of anything it's quite expensive. Like when you are building a bespoke, you know, whether it's a military system or a consumer product, zero to 100 it's going to cost a lot. It's going to cost a lot and and to some extent like you you know we'll get into this a bit a bit later I bet but you know we talked about vertically integrating or using the supply, you know, chain base that you have. Um, the beautiful thing about what's happening right now is we have a federal government and a Department of War is saying, you know, number one, we're going to we're going to try to actively rebuild some of this this industrial base. And by doing that, they're actually changing that unit economic decision from the start for these companies.
So, you know, again, it's instead of building a 100 things, you can say, okay, maybe build a hundred, but we're willing to pay a cost that the consumer or the commercial market wouldn't pay. And all of a sudden then, you know, that means more machines you can put in your factory, more capex that, you know, the government is helping you pay at the start, and then that leads to things that are physic, you know, both like financially viable but also like, you know, at a scale that actually can touch the consumer. So I just it's important to to to identify that and that is definitely happening right now.
Yeah. Like like if you're building a new PCB fab in the United States like that's a pretty expensive operation. Those are pretty expensive machinery pieces of machinery. Um, and if you have a defense buyer as the first buyer to help you kind of pay for or subsidize a lot of that capex investment, that's great because you know what else has PCB boards? Robots. You know what else has PCB boards? Hearing aids. Um, and so the ability to to kind of pass on some of that capex to the defense industrial base, I think is, uh, will be really powerful as we as we, uh, rebuild kind of industrial capacity in the United States.
So what specifically are you seeing startups do to drive down costs and move faster?
Yeah. Um, I mean I I think, uh, like many things we can look to, uh, Elon for a lot of answers here. I mean it's not a crazy statement to say really the few modern-day companies that have built anything at scale are probably SpaceX and Tesla. Um, and if you look at how Elon and and his team have built those businesses, it's been one very vertically integrated. Uh, and and look like I I take the the ideology that you shouldn't vertically integrate everything. I mean again if you're building a super exquisite system like a missile that is, you know, doing something very unique you kind of have to because you have to, you know, control the exquisitness, you have to control the cost.
Well well I mean SpaceX and Tesla were doing first of their kind like there was there didn't exist an industrial base in the US to support them and so they had to build it themselves. I think where there are high quality suppliers like you should use for sure suppliers.
Yeah. Yeah. I mean again I I I I think the the the learning though is number one if you don't have an industrial base that you can rely on, you know, quickly, reliably, you know, etc, then you have to do it yourself and inherently that is a hard journey like that that's really hard to do. This concept of saying okay I'm going to focus on the end system, I'm going to focus on, you know, building the most, you know, cost effective, you know, effective system that I can and oh by the way I got to go figure out the ball bearing, I got to go figure out the solenoid valve, I got like that that's a lot to do. And in case of, you know, Tesla and SpaceX I would argue the the auto industry was a little bit different because there was a but there wasn't there wasn't a battery supply chain they had to, you know, Elon had to recreate that.
Well the whole the whole power electronics, the the whole drivetrain, you know, they had to really build completely from scratch.
Uh, based off papers that were published in the 70s that, you know, had been collecting dust for for 40 years. Um, in terms of, uh, companies that we talk about in the 80 portfolio, there's Mariana Minerals which bought a copper mine and is kind of reinventing things end to end. Would they be a good example to to talk about here?
I think that they they recognized that, um, the, you know, the the existing players in the mining industry just were not going to pick pick up technology fast enough, uh, for it to really make a difference and really move the needle that and they also recognized that they wanted to actually own the entire value chain to be able to really put their money where their mouth was, um, and capture the end value of the new technology they were bringing. So yeah, they do everything from, you know, acquiring the asset, developing the asset, mining the asset, operating the asset and refining the material themselves across multiple different, uh, multiple different minerals and then they sell a final commodity product in the market. Um, and have really leaned in. That's another trend I would point to is how much founders and entrepreneurs building in these spaces are leaning into AI and software as a huge huge component, um, of their build. Um.
Yeah, I mean I I I think when you look at the physical world applying software and AI will look different than what has happened in say legal or customer service or or any other category where you see AI taking off in a in a crazy way today. But but to Erin's point like many times what you have to do is you have to own the asset in order really to change that asset. Not every time, but a lot of times, you know, kind of showing is believing in the physical world. Whereas, you know, when you when you're purely a digital AI product, you can kind of just see it and it's very easily transferable and kind of understanding.
You know, what Marion is doing with this copper mine is is really impressive in a lot of ways. It's not just saying, "Hey, we're going to be better at extracting copper." It's it's rethinking everything. It's the entire process of how you plan, operate, mine, and refine materials. And you know what's cool is once you once you own that process end to end and are using software at every stage of that journey, you actually capture that data and then it feeds back. Um,
And this is this is an important point. I mean this is not just Mariana, but if you look at another business like Hrien, I mean this is a perfect example of how one you can utilize software, you know, but but more importantly, um, it's not one silver bullet that all of a sudden makes a factory or a mine perfect. It's actually 15 or 20 different things. And when you look at what Chris has done at Hrien, you know, yes, it's kind of upfront what it takes to like quote and even take an order of a part. It's, you know, it is the actual physical, you know, making of the part. It's how you, you know, inspect it and transfer it and and, you know, there's there's all these different intram steps that exist within a factory. And the beautiful thing when you kind of either start from a, you know, a fresh slate like Chris has in building his factories or in Mariana's case when you kind of own the thing and take it over you can look at every single node from a first principles perspective and say hey was this process that's been done the last 100 years the right process.
And that's what's happening across every layer of the physical world right now. It's not just mines, it's not just factories. I mean again it exists in many different permutations and and, you know, my personal belief and we see this in a lot of our portfolio companies is look AI will be a phenomenal tool that can be used in the physical world. The reality is AI cannot turn a wrench yet. It will at some point but we're we're far off that, you know, again we can maybe have a discussion about the, you know, robotic models and autonomy that that that we see in the physical world. We're getting we're getting closer. I just think the the nuance here and and the portfolio companies many that are on this list or or many many non-portfolio companies on this list that they understand that, um, look the the physical world is not about just putting a silver bullet forward like I said that some, you know, shiny AI product. It's it's it's deep understanding of what a process looks like, you know, physically how to like, you know, manipulate the the process or how to, you know, you know, change something that's happening in the world is just going to look different based off.
Well maybe like a specific example or to talk through is like, um, like low mix high volume versus high mix low volume and how how AI can kind of change change the game there. So, you know, historically like if you're spending a lot and setting up a line with a lot of automation, you really need to produce be producing like a lot of one single thing. Mhm. Um, and that's how you get the cost down and that's how you justify the cost of invest investing in, you know, a pretty bespoke manufacturing line. Um, in the US we do a lot of lowmix high volume manufacturing which is very hard to automate because it's very expensive when you have to change the line all the time. U, but what we're seeing across our portfolio is that, uh, manufacturing technicians themselves are have this have the intuition and now have the software tools to be able to to to change the economics of what it looks like to produce low volume high mix on the line.
So you can have, you know, a manufacturing technician. This is not someone with a college degree. This is not someone maybe they are but like not necessarily who's like studied software engineering is now able to use these tools to reprogram and reconfigure their manufacturing lines on the fly using the fact that they understand the manufacturing process and they know how to do what they're doing in the physical world. They now suddenly have all these tools. So they can, you know, you can retool a line instead of having to call a system system integrator, you know, and it takes three months and hundreds of thousands of dollars to kind of reconfigure a line for a new setup. You can have a manufacturing engineer use claude and do that in, you know, 20 minutes. Um, and so that's been a real gamecher across lots of companies that we've seen seen in this space.
And and why that's important is, you know, when you look back at at how we've articulated AD50 this year, uh, you know, it's it's, you know, kind of three categories and a lot of times what we focus on at least, you know, I have and and many people in the in in the sector are focused on is just the systems companies and look there's a lot of really interesting systems companies. I mean Andrew Sran Castillian, I mean, you know, the list goes on and on of who's building really good end systems but the problem is is if you can't, you know, uh, iterate on that on the design and iterate on that prototype, you don't not only not get to an end system that is like, you know, different, better, but you also just move at a slower pace. So then what happens is by the time you finally fix a production level, you know, missile or plane or kind of whatever, then all of a sudden then you got to, you know, go back and rejigger and build up all these kind of, you know, subsystems in order to meet the scale.
But if you have, you know, a more transferable line, a more adjustable line, number one, you can also build the prototype faster, but then two, you can then, you know, set up each one of these different components in a way where it actually can get to rate production quicker.
Yeah. You're you're designing for you're designing for manufacturer from the outset.
Exactly. Exactly. And that that is again I I keep going back to learnings from, you know, Tesla and SpaceX. In a lot of ways, they they they had to make those choice because they didn't have any other opportunity. But in the end it's actually just that mantra of design for manufacturing that now exists within all these systems companies. Um, and to some extent like we are now in the age of now seeing them produce. I mean again like go look at what Andrew's built in, you know, in Ohio and, uh, and now on the east coast in in Baltimore, you know, go look at what, uh, you know, Seronica's built with the ship. I mean these are massive huge facilities that are at some point, you know, in a very soon soon timeline going to be producing thousands, tens of thousands, hopefully hundreds of thousands of systems. We haven't done that America in a long time.
Yeah this is no longer an on paper theoretical exercise. Uh, this is happening in in in the real world and and real stuff is coming off the lines.
Something that I think is, uh, like special about AD Founders is they make any problem an Elonsized problem. Um, and and I'd love to I'd love to hear sort of that applied to the different industries that we're talking about here.
Yeah, I mean I think when you look at defense specifically, uh, this has actually been one of the most historically hard, you know, uh, sectors to just build the thing that you think the government needs because unfortunately and again, you know, I I I experienced this in my past, you know, when I served in the army, you know, the buyer is not the user and the b and the appropriator of the dollars for the buyer is completely removed. So you have all these like disjointed decision makers or groups that matter. And so what happens is, you know, companies, you know, back then we didn't really have neopimes or ad companies to serve, but what you had is you had primes would just sit there and listen, like tell me what you want. I'll develop the thing after you give me the money. And you know, the the age-old problem is you get a system that's like actually not, you know, technology forward. You get a system that was developed for 10 years ago and then, you know, the end soldier gets something that actually is not super valuable to them.
What's different now back to the like, you know, you can think through an Elon problem now is you can say okay what does the military actually need and and the beautiful thing is, you know, venture capital and what we do at American Dynamism but also, you know, the the rest of the capital markets is saying we will actually fund that in advance and you can build in advance of the government saying here's the thing for you to build and and and the outcome of that is the soldier gets a better product gets something that actually fundamentally changes the battlefield and, you know, helps with deterrence or security or safety. Uh, and then more importantly you get a time frame of a of a type of system that is actually built, you know, it, you know, aligned with the requirement of the market and what technology can do today. So it's just it's it's a fundamentally different way of like instead of sitting and waiting for the government to tell you what they want you you the government signals and you see it and you build an advance by using private capital and that just has not happened in the history of defense.
So you can build, you know, like Castellian building a a hypersonic missile that does a, you know, a not a super exquisite thing, but it's really hard to build a missile that goes that fast and is reliable. And, you know, the government, you know, now has given them contracts and kind of, you know, showed up and and and bought missiles. But if you go look at the last three years of that business, I mean, it was private venture capital. It was, you know, entrepreneurs like taking the risk and building the thing in advance. I think if you see that again and again in defense, you're just going to get better products and fundamentally like, you know, you'll have the neopimes and the new companies start to take a lot of that market share. But it's not just the defense thing. I mean, Aaron sees it on energy as well. I mean, we're rewriting our entire energy grid right now. And we're again like Aaron would know better than I would, but like we are in on the one yard line. We are just starting that process.
I I think, you know, another part of it is [clears throat] is a little a little more intangible but like these are really hard companies to build. These are really really hard problems to solve. Um, you know, when I talk to Turner who's the CEO of Mariana Minerals and, you know, he's flying all he's flying to the middle of nowhere places all over the world to build his company. He's like out where there's no cell phone signal, where there's no electricity, you know, touching dirt, you know, spending like weeks and months away from his family. Um, like it has to be worth it. You're building a physical thing. You're not sitting at a desk on your computer. You're out in the world. It sounds kind of sexy and romantic, but when you're actually doing it, like, it's rough. The travel is really hard. The people you're engaging with, you know, you're not talking to, you're calling up your suppliers. These are not like other startups who operate in the same kind of time scale and culture as you. These are like really tough people to negotiate with and work with who, you know, have a very different culture.
And if you're going to be putting yourself through that, like it better be damn worth it. Um, and so I think people people really gravitate towards these problems that feel huge and enormous because they're, you know, these are real missionary founders that we see building in this space even as even as it's kind of heated up and there's more capital and it's gotten cool. Um, it's still brutal.
I I I think the biggest thing that has changed in American dynamism land in the last few years is we always knew that the companies being built in this category were really important to the fabric of America. I mean again like when we talk about defense systems, when we talk about energy, I mean when we talk about building, you know, manufacturing widgets that go into everything in the like that stuff's really important. Like it affects our safety, it affects how we live our life. But the biggest change is those companies weren't just the most important thing to us. Now they can be the most valuable companies and that's like a big distinction that that has happened which is, you know, it's not just like, you know, solving a problem for safety or security it's solving a problem for safety and security and oh by the way those can be some of the largest companies that exist in the world and and that's what technology has changed in these industries.
I mean mining has always been a big big industry, defense has always been energy. It hasn't been economically worth it for a young smart person, you know, who has a lot of ambition to go after these categories but I think companies exactly like Palunteer, Anderl, SpaceX have proved that you can build a really big business operating in in these categories. And if you I mean if you look at the, you know, the top 10 most valuable companies in the world like that right now like the majority of them are hardware companies. They're building a physical product. Um, you know, we've kind of come full circle and so you get the most ambitious founders of our generation who, you know, who want to run towards that hard problem and know it's going to be worth it.
And and and the beautiful thing about many of these industries like mining or, you know, Riotinto has been around for a long time. I mean Boeing's been around for like I mean, you know, good companies that are building good products but I think when you take this, you know, first of all like a first principles technology approach about like what the audacious thing that needs to be built is and then two you get entrepreneurs like these these folks that that are on this 8050 like yeah I'm going to rebuild the American energy grid that sounds that sounds fun.
And you just that that that didn't exist 50 years ago that didn't exist 5 years ago. I mean it is something that is fundamentally, you know, our America's, you know, best and brightest are building towards this category for the first time and then importantly like Erin said like the opportunity is there you see these examples of these companies that have redefined space launch that have redefined, you know, kind of military systems have redefined, you know, all all these these categories of American dynamism that we care out. Um, and yeah, I think it's exciting. I mean, uh, you know, as as again, as someone who served in the military, you always think of, you know, like what you do as something greater than yourself. I mean, look, like the capital markets exists to, you know, make money. Like it's we're we're not a charity. This is a capitalist society, but in the end, a lot of the companies on this 8050 list are doing something that is both going to be large and valuable, but also going to be
Really inherently important to the fabric of America, and that's pretty exciting. What's it like to visit one of these sites, like a manufacturing site or a mining site or, you know, drone manufacturers, those kinds of sites?
I mean, Connor and I have the best job of all time. I did own steel-toed boots now because of the number of site visits I've been to with portfolio companies where they're like, yeah, you got to show up in steel-toed boots. [laughter] Yeah, I mean, it's not all sexy, to be honest. These are locations that are, you know, a lot of times hard to get to, in the middle of nowhere. And in the end, like we're talking about physical things that require, you know, earth moving. Like I used to have, in my time in the military, this kind of senior officer who would always tell me, like, the physical world doesn't care about you. So just be careful in the physical world. Like, you know, these are, you know, moving tons of dirt and, you know, massive, you know, these factories being built out, you know, Hadrian or what AMA will do. I mean, these things are huge, and it's impressive. You know, one of my favorite things is maybe you don't see this at the remote sites, maybe you do, but it's this kind of running competition between these companies who can have the bigger American flag at their site. I actually don't know who currently holds that today. I mean, Hadrian's was pretty big last time I saw.
I think Valor is pretty big.
Valor's big too. Okay, good. Yeah, yeah. And like again, I mean, that's awesome. Like the fact that you have that type of passion for something greater than just the product or the economic opportunity that you're building. I mean, again, it drives purpose behind a lot of these teams. When you show up at, you know, Mariana, when you show up at Hadrian, when you show up at Castellion, like you literally get people who are so passionate about what they're doing, and you know, that produces really good results. When you have to do something really hard in the physical world, if you have people that are willing to run through walls, sometimes literally, to solve that problem, you're just, you know, you get really audacious, great outcomes. One of my favorite things to do, you know, is visit the same company sort of multiple times within a 12-month period, whether they're in the portfolio or not, because you learn a lot by how fast a factory buildout happens.
And so, you know, that's one thing we do is like, you don't just go once, you go once, and then you go three months later, you go three months later, you go three months later. And like, I'm not a manufacturing expert. I spent enough time on a factory floor between my time at Palantir and now doing this job. You know, I sort of know what some of the machines are and kind of like how a line roughly works, but like there's just something about seeing stuff accumulate in a factory. And it goes from the process of watching something go from like empty warehouse with epoxy floors and the big American flag and maybe like a couple of pallets and the founders just really excited to show you their forklift that they rented. [laughter] And they're kind of like, you know, they have the basketball hoop set up or like the gym set up in the corner. To like, you know, fast forward six months and it's just, you know, they're freaking out about how to expand. They're like, 'Oh, we need to get, you know, the city out to give us more power because we have too many machines plugged in.' It's like kind of chaos. There's technicians and operators everywhere, people building stuff. That's really satisfying and really fun and something I think we're lucky to get to see that journey and how quickly that can happen.
