Founders Fund's Trae Stephens on Why The Most Competitive Deals are the Worst

It’s a pleasure to be here.

Oh, man. Yeah. I I mean, I grew up in the country. Like, I lived in the woods in a log cabin that my dad literally built with his bare hands. And I was kind of always this misfit, I would say. I love where I came from. I love Ohio. It’s a wonderful place to be from. You know, there was always this, like, tension that was, like, pulling me to escape. And I have an older brother. He’s eighteen months older than me. And my mom used to say that she had one son that’s 18 going on 12, being my older brother, and I was, like, 16 going on 40.

I had this kind of old soul from the very beginning, and I was the British version of an American teenager. I was like a 60 year old in a in a 16 year old skin. I just loved hanging out with adults. I loved sitting around and reading books. I loved, like, thinking about philosophy. I I would not say that I was, like, a super cool teenager.

I had great grades, great test scores. Like, for all intents and purposes, it seemed like I was going to be able to kind of write my story for what I was going to do. But the problem was is I went to a rural public school in the middle of the country. We don’t really talk about this very much as a country. We’re focused on other social demographic problems. But it turns out that, like, you just it’s basically impossible to get into good schools if your guidance counselor doesn’t know all of the admissions officers at the Ivy League schools or whatever.

And so I sent out a bunch of applications. I think I applied to nine schools, and I got a lot of skinny envelopes back. I remember on the day that I got the skinny envelope back from five of the nine schools that I applied to, I went over to my high school girlfriend’s house, and I was like, well, you know, at least the school that I got I did get into is next to where you’re going to go to school. And she was like, yeah, about that.

And broke up with me the same day that I had gotten rejected to all these schools. So I, like, went home and just laid on the couch with my face down. And my mom came over and she’s like, what do you wanna do? Where do you actually really wanna go? And I said, I wanna go to the School of Foreign Service at Georgetown. And she said, well, then you’re gonna go to the School of Foreign Service at Georgetown. And she put me on a flight and sent me to Washington DC and said, go convince the admissions office in person that they should let you in.

And so I sat on the doorstep of the admissions office demanding to see the dean. And eventually, the dean came out and he’s like, who is this crazy person that’s loitering on my doorstep? And I had a backpack full of recommendation letters, admittedly from people that I know now. It’s like they’re probably not even reading these recommendation letters. It’s like my high school cross country coach and things like that. And

No. She did not write a recommendation letter for sure. But they basically just said, like, this is crazy that you flew out here with no plan other than to, like, demand to speak to me, and we’re gonna put you on the top of the waiting list. And as soon as we, like, get the final decisions back from everyone about whether they’re going to attend or not, you’ll be the first person off the list. And so to my surprise, a couple weeks later, I got a call from Georgetown, and they were like, alright.

You’re in. That was a crazy stunt that you pulled. The funniest part about this whole story though is that the in my first week at Georgetown, I got invited to the President’s Office to have a meeting. And I thought, like, wow. The president of the university is crazy. Like, he meets with every incoming freshman. And so I go and meet with him, and he’s like, no. I don’t meet with every incoming freshman. I just heard your story from the dean of admissions. And he was like, I needed to meet you.

Obviously, you came from, like, a middle class, lower middle class background. What’s the financial situation here given your story? And I said, I’m taking a ton of debt. He said, you know, I can’t help you with financial aid, but I can give you a job in the president’s office. And so I ended up working for the university president all four years that I was in college. It was kind of like a crazy it went from a bad situation, like getting rejected to a situation where I was really set up to have a completely transformational life experience in very, short order.

Oh, it certainly would have been. I I think, like, again, this is like something we don’t really talk about as a society, but lower middle class, rural, primarily Caucasian communities are have just been obliterated by globalization. You know, JD Vance talks about this in his book Hillbilly Elegy. You see these stats from the elite universities about how many valedictorians they reject. It’s like kind of a symbol of pride. It’s it’s just this community that they’re rejecting because they have no connections, they have no money, there’s no legacy admissions, they get no demographic boost from accepting these people.

So it’s just like I was a stat. I was like one of these people that’s like, look, we get nothing from admitting this kid with good grades and test scores. Doesn’t benefit us in any way. And so I was just that stat to all the places that I applied to college. This is a lot of what has led to populism. The rise of populism in America is all of these people saying, like, man, we are just, like, be being completely ignored. You know, you see these communities of blue collar industrial workers that have historically been Democrats that have shifted over to being populist Republicans, and it’s because they’re just ignored.

And I I feel like I kind of figured out a way through that genuinely because of my mom’s persistence. Yeah. I would have I would have ended up going to, you know, a state school and probably working at Deloitte or something. You know, it’s a a pretty big shift.

sure that it is. And I’m I’m willing to I’m willing to go out on a limb and say that spending your life working for a consultant firm is probably not the path to having them the most enlightened experience.

These things are cultural problems more than anything else. And my partner here at Founders Fund, Peter Thiel, who I also worked for when I was at Palantir, he’s been talking about this for decades, like probably longer than anyone else. He started a program called the Thiel Fellowship to convince kids to drop out of college based on this idea that the elite universities are distorting our culture and our values. I think that there’s some distortion that’s happened that requires correction. That correction is we’ve seen this on display actively over the last six months with some of these presidents being fired for kind of feeding into this hysteria in the in the cultural moment.

We need to get back to a point where we have some way to generate meritocratic outcomes that are good for everyone, not just for, like, subsets of the population. You mentioned Peter there.

I’m not sure it was an opportunity as much as it was an order. It’s kind of unclear. So I was I was heading up what Palantir called the leverage team, which is essentially the sales organization, and have been doing that for a while. In that role, I interact with Peter pretty frequently because, you know, he would wanna know, like, what does our pipeline looks like? Where are we running into problems? Where can we leverage leadership to drive these opportunities to close? And so he and I became friends, really bonding around philosophy and theology primarily.

And in March 2013, which I had been at Palantir for about six years at that time, Peter just called me out of the blue and said, hey. We’re raising this first billion dollar fund at Founders Fund. I would love for you to come join us at at FF. You know, I kinda scratched my head. I’m like, Peter, I have no interest in finance. I don’t know anything about venture capital. Also, I’m like, I literally work for you at Palantir. Like, what exactly is going on? And he’s like, yeah.

You know, like, you should entertain it. Like, I want you to meet other people on the team. And so I got together with a bunch of folks that are still at Founders Fund today. Lauren Gross, who’s our COO, Brian Singerman, who you just had on your podcast a couple of weeks ago. They were like, okay. So why are we talking to you? I’m like, you know, Peter wanted me to talk to you. They’re like, why are you interested in venture capital? I’m like, I’m not actually interested in venture capital.

What, like, deals that we’ve done are you most excited about? I’m like, I don’t know what deals you’ve done, so I wouldn’t even know what to be excited about. And not surprisingly, coming out of these very, very bad interviews, the process dragged for nine months. And then eventually, I just get an email from Peter where he’s like, alright. Here’s your offer. There’s always this kind of like funny joke at Founders Fund that like a horrible, horrible interview experience with me, and then that obviously meant that I ended up working at Founders Fund.

It took it took time. You know, Brian Singerman gave me the best advice I got in my first month when he said, the only thing that you should be doing for the next year is meeting with every single company you can. Have no standards. Just like take meetings. And eventually, you’ll start perceiving what’s good, what’s not good, like where you can kind of do a founder check to make sure that this is someone that the team would be able to get really excited about. And you can only do that with volume.

There’s no way that you could say, I’m gonna be super discerning. I’m only going to take, like, top tier meetings. It’s like, just do as many as you can. So my first year, I think I did, like, just over 500 pitch meetings, which for anyone that has done VC, I think you know that that is an absurd amount of pitch meetings in a year. And by the end of the year, I I think I was, like, pretty well tuned to what it means to be a top tier founder, what it means to have, like, great alignment with a with a business, and it does take about that long.

It takes about 500 pitch meetings before you really know what you’re doing.

20,000,000 sounds low. I mean, if you only lose $20,000,000 figuring out how to do this, then that’s that’s pretty good.

Totally. Yeah. No. I I do think it takes a lot of that. And there’s all sorts of things that I think the human brain is super interesting. Like, we have the ability to convince ourselves of all of these things that are just not true. Like, we look at something and we say, this category is way too competitive. The founder isn’t, like, perfectly aligned. There’s, like, this weird economic incentive structure, but this, ah, this is the exception to all of the heuristics I’ve learned in my time.

And we do this stuff all the time. You know, it’s a constant battle to, like, remind yourself of all the reasons why these things don’t work. Part of that is just maturity and getting to the point where you feel accountable, truly accountable for not allowing yourself to be sucked into these cognitive biases.

Yeah. I I really want a big category defining opportunity in industries that haven’t been touched by modern technology in decades, and I want a founder that understands how to play inside baseball in that sector. Two great examples. You know, the first big check that I wrote at Founders Fund was Flexport, and no one was thinking about supply chain logistics in 2014. Ryan shows up, and he’s kind of this, like, kooky guy that lived in China and, like, made a bunch of money on, like, pricing arbitrage and bath fittings and four four wheelers, shipping them from China to The United States.

And he was kind of this crazy outlier that it was, like, he was either crazy or on drugs or going to be one of the greatest founders of all time. I think that, like, as an industry was super interesting to me. And then the second example of this is Anduril, where basically gonna be super hard. It’ll be really capital intensive. But if you can actually be a next generation rebooted version of Lockheed Martin or Northrop Grumman, that company could be worth hundreds of billions of dollars.

And so I think that’s the sort of stuff that I’m looking for.

This is absolutely true of Founders Fund. We we all run our own strategy. We don’t have Monday partner meetings. Everything is super difficult to get through the investment team, and this is on purpose. The rough thesis is that the more process you have, the easier that it is to game the process to get to some mediocre outcome. And I’ll give you an example. If, like, the most junior person on your team meets meets with the company, and they’re like, yeah, this company is pretty good. Like, I like the founder.

I kinda like the idea. I’m gonna have them talk to, you know, a principal or a partner. And then that meeting happens, and they’re like, it’s interesting. I don’t have, like, super high conviction, but, like, we’ll bring it up into the partner meeting on Monday. And then, you know, the GP or whatever is like, yeah, let’s do a meeting with them. By the time that it gets to that point, it’s like, okay, maybe we don’t have conviction to write a big lead check, but, like, maybe we put something in because, like, it it made it all the way through the process.

So, like, you know, this is probably worth a participation check. Our approach to this is like, it’s going to be really hard to get anything through because there’s no structure set up to get it through. It’s just like personal willpower to go and convince people and get them to take the meetings out outside of this process cycle. And in order to get anything through, you literally have to just be pounding the table. It is on you to have the level of conviction that’s required to get people on board.

Yeah. I mean, naturally, we’re gonna pull in the person that we feel like knows the most about the industry in the process to have those conversations. You know, I’m not gonna invest in, like, a rocket launch company without talking to Delian and Scott. We’re always going to pull in the other people that are necessary to get to the best decision possible. It’s just not done in a process oriented way. We really just wanna back people in their conviction. So when I wanted to make the Flexport investment, I had to kind of go through the gauntlet and answer a bunch of questions from the team and pound the table.

But at the end of the day, they were like, we made a bet on Trae. Trae has high conviction in this. And if he wants to put his, you know, his reputation and his career on the line to go and write a big check into this company, we need to support him to do that. That’s like kind of on you to figure out whether or not you have that level of conviction.

Honestly, the answer is yes. Of course, we’ll, like, work together as a partnership to win deals. Our platform is very strong, and so I wouldn’t say that we’re often in situations where people are not keen to take our term sheet over someone else’s, which is a great advantage, and it’s a great advantage of having a long standing brand and very opinionated partnership that is very publicly opinionated. Have you ever lost

Yeah. I mean, there there’s at least one that I can think of that I lost on a massive price disparity, not on a, like, fund decision making.

No. It didn’t, actually. I think, like, we were wise to hold the line on that on the price in that specific case. That might not always be the case. There might be examples where it would have been better to pay the price, but I don’t think that’s generally true. And this is going back to that earlier point I was making about heuristics is that you can’t constantly convince yourself that every exception is actually an exception. Usually, it’s just wrong. Usually, you should just follow your instincts around the heuristic.

There’s there’s something deeply troubling about prices getting out of control that have nothing to do with the price itself. So usually, what an inflated price means is that the deal is being is being competed, And so the founder believes that they have leverage. The worst deals are the most competitive deals because they’re the ones that are super consensus. Everyone agrees on the thesis. Everyone agrees on the founding team. There’s no edge on the investment. Everything is going to be expensive at every round, so your expected value is going to decrease.

And it usually indicates that there’s some memetic contagion that’s happening in in the marketplace. And this, for example, is why Founders Fund why Peter put us in San Francisco when everyone else was on Sand Hill. Because he wanted us to avoid getting caught up in this, like, are they going and meeting all the way down the street with all the other people? It’s because memetic contagion leads to bad investment decisions. When a founder says, I’m going to let this run, like, auction style, they’re actually saying, like, secretly inside their head, subconsciously or consciously, I’m like an athlete model.

All I care about is competition, and I’m just gonna let it run, and I’m gonna take the best price at the lowest dilution that I can accomplish. I don’t care if that if that impacts the long term responsible growth of my business.

I actually think that’s super responsible. I think communicating expectations and aligning people is really important. The thing that I actually like a lot less is the false sense of scarcity and urgency. And that was like what was happening in 2021 where the founder was saying, like, you have twenty four hours. I have a I have an exploding term sheet. I’m gonna pull the trigger on this. That is basically saying, I’m using the leverage that I have perceived or or real to push people to do things with limited information.

And those sorts of behaviors are like, they’re manipulative and they usually lead to bad outcomes. And so I think someone’s saying, I’m gonna give this a week. This is when I’m, like, hoping to move through the wickets. And if they really want Founders Fund involved, like, they’re going to be respectful to us kind of walking through those wickets alongside them.

You mean, like, the ZIRP phenomenon of 2020, 2021? Yes. I think that the primary lesson for me is that I really don’t have fun in that environment. It was super stressful and I think for some people it was like the deal velocity was super energizing. For me, it was awful and draining. I was on the verge of just leaving venture capital because this idea that, you know, a founder goes out and basically holds their capital source hostage by creating this, like, suit this hypercompetitive, overpriced environment was just gross.

Like, it just didn’t feel right. And I say that as a founder as well. Like, we ran a process at Anduril during that time, and we didn’t do that because we agreed this is really gross. We’re not just going to let the highest bidder come in and sweep us off our feet. We have to think about the future of our business. And I think now in 2024, looking back on what happened, it’s very easy in retrospect to say, wow, we really let that get out of hand.

And now that we have got we have to do a recap. We have to do a down round. We have to do all this crazy structure. But we’re doing the same stupid stuff all over again. And I don’t it’s like people don’t realize, like, guys, you have to calm down. Think about the future of your business. Don’t think about what makes you feel good when people are, you know, patting you on the back and giving you exploding term sheets and taking you out to steak dinners.

This is not good for your company. It might be good for your ego, but it’s not good for the company. And that’s what we should be maximizing is the long term value and sustainability of these businesses.

I don’t think we did. I think there are there are some people in the industry that I have a tremendous amount of respect for that have looked at this and said, we’re just not gonna play this game. Like, would guys, it was literally, like, two years ago. This isn’t like a ten year information gap. It was like two years ago. And then there are other people that are saying like, yolo, Like, I have to win. I have to get in. I’m gonna plow it in. You know, there was this this incredible scene in Silicon Valley that I’ve been sending some people this video.

The main character is sitting at the bar with another founder, and the guy is like you know, his company was taking away taken away from him. He’s no longer the CEO. And he says, you know, you could have just, like, taken less at a lower price. And he was like, no. No. No. Like, I was offered this price and this amount. He was like, yeah. But you didn’t have to take it. You could have taken less at a lower price. And he’s like, why didn’t anyone tell me I could have taken less at a lower price?

And I feel like sometimes founders are just they just get caught up in the moment. They get caught up in this idea that, like, the only thing that matters is up into the right minimizing dilution. And we’ll see what happens. We’ll see if if, like, that lesson persists.

I definitely think there’s truth to that that statement. I think, you know, the industry has certainly become significantly more competitive and commoditized. At the same time, the returns end up being pretty highly concentrated towards the winners. You don’t see like really high IRRs across every new fund that pops up. There’s definitely still a great potential for the asset class as an asset class. But certainly, like as Peter points out in his book Zero to One, competition is for losers and it will always be for losers.

I don’t care if it’s venture capital or startups or any it’s competition is for losers. And so we need to figure out ways to differentiate and stand out.

Deal flow is always the biggest thing for venture capital. It’s like you have to have access to the the deals that are going to move the needle. And for large funds, the economics only really work if you have a 10 plus billion dollar winner in every fund or more than one in most cases. You have to evaluate yourself on whether or not you got hits on those monopoly style winners. That’s just about maintaining access to the network and being super easy to work with. And I think Founders Fund has the ladder in spades.

Like, you know, we we were the first fund that was talking about being founder friendly. You know, we don’t generally wanna take board seats. We are incredibly hands off and operationally helpful when asked, but only reactively. And the former is the harder part, though. It’s like you have to make sure that you are seeing all of these companies. That has to be the focus for the entire investment team.

You can definitely get good advice from people throughout the industry, whether it’s other founders or VCs. And a great founder will seek wisdom from people they trust that have experience that’s relevant to what they’re doing. Do I think that doing that in the structure of, like, gather a bunch of investors on your board is the way to do it? No. I think that’s really stupid. Any company that’s successful is not successful because their VCs are really smart. That’s not how this industry works. The VC is not going to do the hard work that’s involved with building a company.

The best companies are going to be the best companies because the founder and the team that they’ve built around them is awesome and has a plan and a vision for the future. The best the VC can do is ride along and not be annoying and not create drag for the company. Maybe on occasion, they can provide some advice or introductions that are helpful, but that will not be the reason the company works.

I I think probably somewhere in the middle. We have a lot of money under management, but we also are very intentional about playing our core venture strategy. And so we’re not trying to be cute with weird structures and debt instruments and big category specific funds, nothing like that. Our core vision is we just want to invest in the best founders building the best companies that are going to be category defining. And I think you can do that through a very traditional venture model of can we get a check into the Series A?

And can we follow on to the ones that are working? And that’s what we do, and I think that’s what we’re always going to do.

Well, I do think it’s important to hold reserves to double down in places where you see fund returning potential. I don’t believe that doing that in a way that’s like guaranteeing your portfolio companies that you have like reserve checks that are going to back into them. I don’t think that model makes sense because and this is, by the way, the biggest risk of taking seed money from an institutional fund is that, like, doing your pro rata is super lazy. Doing more than your pro rata is actually a signal.

And if you’re not going to have real signal, if you don’t have high conviction, you probably shouldn’t be doing anything at all. Because the pro rata, again, is just super lazy. The strategy really should be make your bets, and then where the conviction is justified, you should be doubling, tripling, quadrupling down. And so you do need to have fund access to do that so that you’re not striping across a bunch of different funds. But I don’t think doing that in a really, like, structural procedural way is smart either.

All upside maximization. No. Down downside protection’s silly. Like, I I think if you go back and you look at our portfolio, like, whether or not we got our money back has never impacted fund performance. Like, the only thing that moves the needle for a venture fund of our size is 10 plus billion dollar category defining winners. That’s it. Everything else is just a rounding error to zero.

Well, I’ve only been in the industry for ten years. The reality is is that startups survive for longer than anyone thinks they will. There are certainly investments that I’ve made that are still, you know, puttering along, haven’t figured out a way to hit the inflection, but I wouldn’t call them a loss. The biggest thing the biggest lesson that I’ve learned from these is that there are times where I’ve gone in and I’ve said, this has 10 x potential from where it is right now. And therefore, it’s probably worth making a bet.

I look back on some of those investments that I’ve made and I’ve said, even if it 10 x from, you know, a small Series A, it’s not gonna return the fund. It’s not gonna really move the needle. Really, I should be focusing on finding massive upside because the opportunity cost of deploying these checks is is actually quite high.

I think the example that you just offered is exactly what differentiates Founders Fund. Pushing your team to do things like deal memos, for example, forces them to like put down a number that they’re later going to be judged by. So the investment team is gonna go back and they’re gonna look at that investment memo and they’re going to say, wow, you outperformed expectation on this deal. Isn’t that great? If you don’t hit it, you know, you’re gonna you’re gonna be held accountable for missing. And so, of course, everyone is going to underestimate because they wanna lower the bar that’s required for them getting credit for some big outcome.

At Founders Fund, we won’t do the investment if we don’t believe it can return the fund. And so we absolutely have to have crazy amounts of conviction to make these bets. And I think that is, like, core to our culture. If you look at any of the big outcomes across our portfolio, whether Spotify, Stripe, Airbnb, Palantir, SpaceX, Anduril, Stemcentrx, like, you look at all of these big outcomes for us, every single one of them, there was someone on the team banging the table saying, this is a $100,000,000,000 company.

No. Because I think the the best founders are going to pick really strong markets, and they will increase the probability of success even in like a a middling market. I I think the founder has to be the atomic element always. But obviously, like, there are going to be great founders that do kind of middling things. I wrote an essay called Choosing Good Quests that you can read online with Marcie Wagner, who’s actually one of our portfolio founders as well. And I think this is like endemic actually in Silicon Valley, where you have all these really talented people that have the potential to go and do something that’s like world changing.

And instead, they do something that’s easy that they know they’re gonna make money from. It’s like George Clooney sells tequila on the back of his brand. Good for George Clooney. It’s a commodity. There’s nothing special about his tequila. It’s the same thing with enterprise SaaS. If you’re like a multi time successful entrepreneur and you’re starting, like, a fairly simple trivial enterprise SaaS company, like, shame on you. Shame on you. You need to go big. Like, have some vision for how you can impact humanity.

are some great enterprise SaaS companies. I think there’s some great founding stories behind enterprise SaaS companies as well. I just think that as as a category, there are a lot of them that are pretty uninspired.

There are plenty of situations in which I’ve done exactly that or I’ve at least been tempted to do that. Again, the founder is the atomic element. A really great founder and team are going to be able to pivot their way into strong product market fit, whereas a great idea with a weaker founding team are going to get stuck and will likely spin out. So you have to start with that founder aspect first.

Yeah. Like, I would say the most common example is where you have a founder that doesn’t build, like, a diverse enough set of skills around them with the rest of their founding team or their executive team, and they assume that their, you know, specific superpower will be enough to make it work. Because there are a lot of brilliant people. Some of them are, like, scientists. Some of them are software engineers. Some of them are business people. You know, you could have, like, a sales founder that it could be revolutionary and could change an industry, but they need to have a complete team.

And so I think sometimes I’ve gotten really excited about a a single person, and then it turns out that there isn’t a completeness of team. Maybe that person does not have a particular strength in recruiting, and that becomes super problematic for the business. So I think, like, you wanna see the depth and bench with even the best founders.

Wow. That’s really fast. I don’t know if I would say the first month, but definitely in the first six months. I think you can get a sense for momentum. There’s almost nothing as important as momentum in startups. There’s this, I think, idea, especially in deep tech that, like, if you just hold out long enough, like, eventually, they’ll cross enough tech milestones that, like, things will seem like they’re, you know, starting to move. And even in deep tech, momentum turns out to be the most important thing.

And you can see that. You can feel it. It’s visceral. And I think that it’s definitely not five to ten years like people often talk about as as venture capital windows. And if you go back and you look at the best companies in any portfolio, they were kind of the best companies at every stage. Incredibly awesome at a. They were incredibly awesome at b. They were incredibly awesome at c. Very rarely do you see a company that, like, struggled for a long time and then, like, suddenly hit an unlock.

That doesn’t really happen that often.

I think those examples are less common than the ones where the momentum drove them all the way through. I don’t disagree with specific examples. I just think you’re cherry picking very specific examples that are the exception, not the rule.

I think that it’s not on me as a venture capitalist to evaluate markets and then pick companies to time some arbitrary thesis I have for any particular market. That’s like asking too much. VCs are not super talented specialists in any one space. Like, the best VCs are kind of generalists. And that means that they might have, like, a shallow understanding of a wide set of things, but they probably don’t have, like, some massive polymath death of understanding of every type of company they’re going to look at.

And so I think it’s really on the founders to communicate why the market timing thing is relevant to their business. And the best founders are able to do that in a way that’s super compelling. And so again, I think this comes down to like, do you have conviction?

Yeah. As a founder, I think, yeah. Anduril in my in some way was me predicting where I thought the defense market was going to go. And so as a founder, I I think that is what their job is. As a VC, I think, like, your investment thesis is only as good as the strength of the companies that come and pitch to you. And so did I have, like, some super crazy interest in supply chain logistics or a thesis in supply chain logistics before I invested in Flexport?

No. Of course not. Like, I needed Ryan to, like, convince me of the timing to the market. And so I think that, like, anytime you’re you’re looking at a thesis about the future, you are saying there is a category, and I have, like, some belief in that category. And that means you’re probably too late. Like, if you’re if you’re like, I have a thesis on SpaceX SpaceTech, but you’re not a SpaceX investor, you’re probably losing money. If you’re like, I have a thesis in crypto, but you’re not in Bitcoin and Coinbase, you’re probably losing money.

If you have a thesis in cyber, but you’re not in Palo Alto Networks or CrowdStrike, you’re probably losing money. It turns out that the core monopoly investment that won is the only one that mattered, and the rest of the category matters a lot less. So if you have some vision for what the future looks like and you’re looking for a company to invest in that’s doing it rather than starting it yourself, you’re probably already too late.

I mean, there will be other companies that might be worth taking a bet on, for sure. You know, if you were a social media investor, you missed Facebook, but you got conviction and invested in Snap, you actually did pretty well. There are exceptions. There are places where you should stay open to the idea that there’s a brilliant founder and a team that has the ability to go and to make something in market. But I think that this idea that investing broadly across an entire category where you’re doing relative rather than absolute assessments is just bad strategy.

It doesn’t make any sense. Like, there’s not gonna be a 100 SpaceXs. There’s probably not going to be two SpaceXs. But if there are, you should just be making that one investment in, like, a really high conviction thing that you would have done regardless of whether or not you were looking at that category. Yes. That might be a violation of the rule of, look at me. I’m so smart. I don’t think I’m so smart. I think, like, the founders are the ones that are really smart that are changing the world, and I’m just lucky to be on the ride with them.

I I mean, I had spent my entire career in national security. I worked in the intelligence community after college, and then I was at Palantir really early on supporting intelligence and defense programs. This was a space that I’ve always been really passionate about. I learned a ton of lessons from that ten year run prior to joining Founders Fund. And started going out and meeting with as many companies as I could find that were bidding on federal contracts and also raising venture dollars. And I was shocked at how little there was going on in leveraging cutting edge technologies, particularly in software, to impact critical national security requirements and gaps in our capabilities.

And I I kind of looked at that space and said, this is not gonna be good if we shift out of counterinsurgency and counterterrorism into great power conflict. And if we’re going to compete in great power conflict, we need to, like, actually bring a software defined mentality to our national security apparatus.

Correct? No. It’s specifically, like, we’re no longer competing with, like, rogue agents and nonstate actors. Our competition are huge nation states with a lot of power resting behind them, places like China, Iran, Russia. We had for over a decade, really, like, a decade and a half, we have just been entirely focused on counterinsurgency. The problems that you’re dealing with with things like airspace superiority in Iraq or Afghanistan, totally different than determining airspace superiority in Ukraine or in, you know, a potential Taiwan conflict. And so we really needed to, like, shift to a mentality of how do we compete with great powers and how has that changed since the last time we did this during the Cold War?

And the answer is significantly. The capabilities, the huge expensive platforms that we built for competing with the Soviet Union are not particularly relevant in a future conflict with, you know, a China or an Iran.

Yeah. So, like, when we were preparing for a fight against the Soviet Union, we were building nuclear submarines, aircraft carriers, advanced fighter jets with the idea that we’re competing with MiG 20 nines in an airspace. So if you have to build, like, a counter air system and you’re shooting a $2,250,000 missile at a tens of millions of dollar MiG 29, fine. That’s a trade off you’re willing to make. But in modern conflict, we’re talking about swarms of drones, kamikaze drones, low cost remote controlled systems. You’re talking about autonomy.

And so can we afford to shoot a $2,000,000 Patriot missile at a $150,000 cruise missile or kamikaze drone? No. It doesn’t make sense anymore. Now the whole thing is just messed up. And so when you’re not fighting MiG 20 nines, you have to make decisions about how you’re going to do airspace superiority. And this translates to every domain. It’s like we have to make the same decisions with undersea, with surface vessels, with ground vehicles, with airspace, with space.

I think this is core to doing work in this particular sector, and it’s not the field of dreams. You know, like if I build a really cool product or capability, it’s not like the government is just gonna show up and be like, yeah, I’m a buyer of whatever it is that you’re building that you think is solving a problem. You have to have a a holistic view of government relations, lobbying, being really good at telling a narrative, communicating to agency heads, decision makers, and your potential users in the field.

This is, like, the type of company that’s really, really hard to build for a a handful of teenagers in a garage. It’s not like a a software company that has like the same type of breakout story as Facebook. And I don’t think it’s like random chance that Palantir, SpaceX, and Anduril were all founded by billionaires. It turns out that it’s that hard to do this. And so you have to approach it with that in mind.

There is a capital advantage to having a billionaire as a cofounder. At Palantir and SpaceX, certainly, it took a really, really long time to get momentum on the business side of things. And so you needed to be able to raise money through a drought while you were figuring that out. At Anduril, it’s it’s a little different now because we have the benefit of standing on the shoulders of giants. We have done this before. We saw the way it worked with them. There are hundreds of people who have executed this sales motion successfully.

It’s not quite as hard, but there’s still a huge capital advantage to going in and saying, this is capital intensive. It’s gonna be really hard. We wanna raise a war chest to finance getting through to program of record wins. And this isn’t something that’s gonna take six months. It’s something that’s probably gonna take closer to three years. It is important to have the ability to go out and raise that sort of capital.

Yeah. I mean, as I mentioned before with a different set of problems, I think this is primarily a culture problem. All of the authorities that need to exist to buy products from non traditional companies, they all exist. You can do it. If the government wanted to do it, it could do it. The problem is is that they don’t. They don’t feel as comfortable with it. They claim that it’s a much riskier path. I happen to disagree with that particular fact. But I think I think the reason why in the early stages people were willing to take a chance on us is that we were working very focused on problems that were clearly software problems.

And I think they had had, like, long running bad experiences with the traditional players in the space coming to them delivering capabilities that relied on the technology delivering against the problem set, depended on software execution. And so when we come in and we have a demo and we say, we can actually do the thing that we know you’re trying to do, and we can demonstrate that to you in real time, and we’ve taken the risk of funding the development of those capabilities. We’re not asking you to, like, believe us in, like, a response to an RFP.

We’re just gonna show you that we can do And that shifting that risk to us rather than putting it on the government was really important to those early wins.

Yeah. Like I said, I’m not I’m I’m gonna do the opposite of what Chris Dixon did, and I’m gonna say, I don’t have a crystal ball. I’m not predicting the future. I think all of us in the on the founding team of Vanderbilt, like, we perceived that we were going to care a lot more about these things post count post insert counterinsurgency counterterrorism. But, obviously, like, I would not have guessed that all these global conflicts would have necessarily happened. But I think the writing has been on the wall for a while that globalization didn’t really work and that traditional strategic deterrence with nuclear weapons was not going to be the the only thing that drove reduction in conflict globally.

And so I think there was a there were some smart decisions that were made, and I think we had a lot of conversations about those those elements. But I certainly wasn’t, standing at a whiteboard, you know, with lines and pieces of yarn and pieces of paper being like, and you see, China is going to invade. I I I don’t think I had that level of insight. We got Putin

Exactly. To be fair, shortly before Anduril was founded, Putin went to a university, a technical university in Moscow, and he said, he who controls artificial intelligence will control the world. And so we weren’t the only people that were thinking about this. He had clearly been telegraphing his intention with tech development in Russia since even before NROL started.

I mean, the level of historical depth was was really special. My concern was was less about, like, is Putin impressive? Is he unhinged? It was more so that, like, man, we have really just allowed our Western political system to just be destroyed by mediocrity. Our standards for our elected leaders are, like, bargain basement level. It’s really pathetic. I don’t know what it’s going to take to convince talented people to put themselves in a position where they’re running for political office, but I I think this is a great risk to human civilization at this point.

We need to do a better job. I’m not being rude. Why

I mean, I I am deeply committed to the idea that I will return to civil service at some point in my career. I don’t know what from a timing perspective that will look like, but I am deeply committed to that. As far as elected office goes, my wife, who I love very much, has told me that she will divert divorce me if I ever run for office. And so elected office is off the table.

Yeah. She really doesn’t like the idea of being married to a politician, which I get. I’m okay with that.

I think you kind of hinted at this around like having a a holistic view on skills, but I really wanna beat the drum and say, you have to be good at selling to the government to make companies in this sector work. You either have enough money to survive being bad at it for a long time or you know what you’re doing from the beginning. And I think there are way too many companies in this hype moment that are approaching this and saying, like, I’m just gonna build something really cool that war fighters love and expect that that’s gonna be sufficient, and it’s not.

And that’s what we knew from the beginning at Anduril, that’s probably the most prescient thing we did is to say, we’re gonna hire a lobbyist literally in the first week of the company’s existence, and we’re gonna build the relationships that we know are going to be important for authorization and appropriation of funds to the programs that we’re working on. And most startups just they don’t have the background to understand that. They don’t have the the the capital to do it even if they if they did understand.

That’s a big differentiator.

One of the most important things that I’ve learned about hard tech in the ten years I’ve been at Founders Fund is that you have to have someone on the founding team who’s as good at business as the technical founder is at the tech. There’s just no way around it. The most successful hard tech companies always are paired with brilliant business people. You can’t you can’t just evaluate one side. You have to evaluate both.

Well, we should keep in mind that the cofounder CEO is Brian Shimp, who is the most brilliant software engineer I’ve ever worked with. And he ran engineering at Palantir, actually, before he came over to be the CEO at Anduril. So Brian’s kind of like the the software tech genius of the company. Palmer is kind of the prodigy polymath hardware genius. They both work very closely together on product, like making sure that the thing we’re delivering to the customer solves the problem and solves it in a way that is efficient and reliable.

And then Matt Grimm, who’s the other cofounder, he is the COO. He, like, runs the day to day operation. He is like a machine, making sure that all the trains are running on time, which is hugely important. You mentioned

Yeah. This is this is probably like not to put a, you know, a target on your back, Harry, but this is the most naive question that nondefense people ask because the reality is that we don’t. We don’t decide. The US Government decides. There aren’t very many people that we can sell direct to, like The UK, Australia. Like, there’s just not that many people that are buying direct. You can’t sell direct to The UK? No. That that’s what I’m saying. There are very few that can buy direct because they have adequate budget and they have the existing relationship with The United States that allows for the source of arms transfers.

Definitely not. No. We’re selling we’re selling munitions. We’re selling government controlled ITAR restricted technology that the US government has to facilitate the the transfer of. And so it’s the US state Department that’s deciding who they’re going to send the the tech to, not like random governments making decisions on money that they’re spending.

We just randomly sell to governments that show up with bags of cash. That all is facilitated by the US DOD, the US Department of State. Obviously, like, we have to have conversations as an executive team about, like, which use cases we’re passionate about working on and stuff like that. But we are, like, massively controlled by the US government when it comes to, like, where we’re allowed to send our stuff.

Yeah. I mean, there’s obviously, like, questions that that you should ask. But at at the same time, like, if the US government comes to us let’s say that we were making Stinger missiles during the the early Afghan conflict with the mujahideen against the Soviet Union. If the US government comes to us as the producer of Stinger missiles and says, we are supporting the Mujahideen in their fight with the Soviet Union, we want to to transfer a thousand Stingers to them in the next six months, and we want you to produce it.

Is it on us to decide, no. We don’t wanna do that because we have some thesis about what’s going to happen in this conflict in twenty years? Or is it our responsibility in a democratically elected governmental system to say, we are supporting the Department of Defense’s decisions about what they’re doing with the equipment that they’re buying? And if we don’t like it, we can choose to vote against our representatives. We can advocate inside Congress for people to make different decisions. But, like, if they have stuff in inventory, they have the right to send it abroad anyway, whether or not they’re buying it for for us for that purpose or it’s just been sitting in a warehouse.

you spend

It’s it’s tough. Without a doubt. I set boundaries. I mean, I have, as I said, a love lovely wife and two awesome kids. They’re 10 and eight. I make sure that I make them breakfast, drive them to to school every morning, and I’m with them for dinner every night that I’m not traveling. It’s really important to me to, like, be present for my family as well. I have an awesome support team around me. I think that’s, like, the only way that this is possible. I have an EA who’s been with me the whole time I’ve been at Founders Fund that is truly world class.

My chief of staff, Ellie Untermeyer, is she’s been with me for the last nine months now, and she’s make sure that I know what I’m doing and staying on task and keeping my priorities in line. At Anduril, we have an incredibly talented executive team, and I manage a portion of the business, not the entire business, and we have a high trust relationship across the entire exec team.

It’s not that structured. It’s it’s much more reactive and flexible. In any given day, you know, like today, I had a pitch meeting and then this conversation, and then I have two Anduril meetings, and then I have another pitch meeting. So I’ll I’ll kind of, like, bounce back and forth between them. I think the important thing is, like, having that support team that’s identifying the priorities and making sure that I’m, like, staying on track of making decisions where I need to make decisions that are high priority at any given moment.

100%. The entropy on knowledge of operationally being engaged with a startup is so fast. All the things that I did at Palantir for six years, like, I feel like were relevant for, like, my first three years at Founders Fund. And then, like, the software that we were using to do things is different. Cutting edge on the technology side is different. You’re just constantly going through these shifts. And so I think being in a place where I’m operationally engaged at Anduril, I’m up to date. Like, I know what people are using.

I know what is impacting our business in a meaningful way. I know what stuff that we’re we started using that ended up kind of being not that useful that we turned off of. I’m keeping up on a day to day basis, and I think that that’s that’s a super valuable asset to my other job as a partner at Founders Fund.

I think it would be better and more interesting if it were, because I think that most of the advice that I’ve gotten the most out of is from existing founders or former founders or operators. They’re the ones that have lived in those shoes. They’re the ones that have wisdom that I can glean. And I think that if venture is about anything other than just access to capital, the people that have been operators are are going to be much more useful.

I think I would say this is going to be the hardest eighteen month stretch of your life, and it is worth it in every way. Just keep your head down and realize that there’s light at the end of the tunnel.

Most of the answers that I could give to that would definitely get me canceled, so I’m not gonna I’m not gonna say those things. But I think there are limits to human scalability. I went through a long period of my career where I was opportunistically saying yes to a lot of things that benefited me tremendously that I feel really good about, that I just don’t have the ability to say yes to anymore. And so I think learning how to scale and then using no’s strategically has been a big change for me in the last year.

He’s such a unique person. Most smart people have the ability to collate information. Like, we collect information from a lot of places, and then we organize it and ship it. He’s source material. He’s not collating information. He’s just generating. I could talk for days about all the things that I’ve learned from him. The most critical to this particular moment and what we went through in 2020, 2021 is that hype is not aligned with outcomes. In fact, it’s often negatively correlated with outcomes. And so when something feels super consensus, you should be running away, not running toward.

No one. Smart people are accessible whether or not you’re on their board, they’re on your board. You can take advice from people anytime. The last thing you need is unnecessary governance. No one.

No. Money can like simplify things that are complicated or tedious in life, but you’ll never find core meaning from the acquisition of wealth. Everyone that has gone through this process, I think comes out on the other end and says that there’s a deep emptiness that they fill, that it doesn’t matter how much stuff they pour into it, it’ll just never be filled. You have to, like, understand the anthropology of your humanity and come to terms with what for me is a a religious spiritual faith. But for other people, they might try to find that in all sorts of different things.

But money is certainly not one that gives you meaning.

Usually. I I think like a lot of people, and this goes primarily for like my upbringing even as well. There were a lot of people that they viewed their job as a way to pay their bills. Right? It’s like, I’m gonna go to work nine to five. I’m gonna make money. And then my life will be what I do when I’m not at work. Because the work is just like a mechanism to generate cash to survive. I think this is like a deeply untheological way of viewing the world.

We have a a responsibility to our vocation. And it doesn’t matter what you’re doing, whether you’re a barista at Starbucks or, you know, starting a defense company, that is your vocation. You are living in service to humanity. And so I think as an investor, as a person of faith, I look at the world and say, I don’t want the world to be a science fiction dystopia. Like, I don’t wanna live in, you know, all these Hollywood pictures. I want the world to be approaching the kingdom of God.

Like, I I think we have a role in in building that. And so as an investor, when I look at something and I’m like, yeah, this is a vice investment maybe. It’s probably gonna make a lot of money because it leads to addiction or loneliness or, you know, whatever. I don’t wanna be involved in that. I don’t wanna be involved in stuff that might be a good economic outcome, but is going to lead us closer to a science fiction dystopia.

8. Lockheed Martin does over $65,000,000,000 a year in revenue. They have, you know, a two, two and a half x multiple that’s applied to them on the public market. It’s worth, you know, a $130,000,000,000 or whatever. Anduril operates at higher margins, much faster growth rates. We could be worth over a $100,000,000,000 with a tiny fraction of Lockheed’s revenue. So I’m incredibly bullish on the path that we’re heading down and the speed at which we’re growing.

Oh, man. I’ll give you two, and I’ll do it quickly. The first is, like, if we build something and we ship it and it doesn’t work, we deserve to be crushed by the market. Unfortunately, I don’t think that actually happens. The the big defense companies are constantly delivering things that don’t work like they’re supposed to, and they’re never punished for it. You can see this with, like, the way that the seven thirty seven MAX has been going for Boeing for a long time. So that’s that’s one way that I think it could, in theory, go south.

The other way is that government cultural risk. We are coming to them with a very different business model. And the only way that we win at a scale that we’re working to towards winning is if we win major multi decade long programs, like core military platforms. There will have to be people with courage inside the government to make a decision to go with a new player to, you know, build a next generation fighter plane or a next generation counter air missile or whatever.

My goal is to stay super opportunistic and not allow my current desires to overdetermine my future. That said, I will come back to a point that I earlier said, I’m deeply committed to the idea of civil service. And I don’t know if it’s in five years or ten years or fifteen years, but at some point, I wanna be back as a public servant working for the good of our nation and our allies and partners. And there are a lot of ways that I could do that.

I’m very open to to going down that path.

It could happen sooner. It could happen in five years. I don’t know. We’ll see what happens.