Investing in Defense Tech

Bloomberg

6 weeks ago

Transcript

00:00When you hear breaking news that once again perhaps the relationship between U.S. and China is unfolding,

00:05what does that mean for you in terms of the velocity at which you need to allocate money to the startups

00:09that are willing to strengthen national defense?

00:11Well, thank you both for having me here.

00:12There are a couple of different things that we think about when breaking news like that comes up.

00:17I think one of the critical timelines that we've seen the Department of War really highlight

00:22is this 2027 time horizon of how do we get ready to prepare to fight if we have to.

00:30And one of the ways that we think about it on the startup side is just how quickly can we get capital

00:35flowing to the right types of subsectors.

00:39And so that capital is starting to flow. The reforms are starting to happen.

00:42We're aligning both capital and reform in a really critical way.

00:48Is the Department of War doing enough from the reform perspective?

00:51I think so. I think I've never been more optimistic than I am right now

00:55because you have leadership talking about a variety of different programs.

01:01Secretary Driscoll over the last couple of weeks actually announced the Army's FUSE program,

01:06which is a $750 million sort of strategic venture capital firm for the Department of the Army,

01:13at least, to start to bridge the gap between early stage startup,

01:17which we invest in at Venrock, and true scale, which is necessary for the Department of War.

01:25Morgan, for the audience that's just joining us, we are live at Andaril in Costa Mesa, California.

01:30We were and are having a special show focused on defense tech.

01:35The president posted on True Social.

01:37In that post, he said he had been due to meet with President Xi of China in two weeks

01:41and now sees no reason to do so.

01:44He called China increasingly hostile, and he has threatened a massive increase in tariffs on China.

01:50In that moment, markets fell.

01:52You know, that's what has happened in the last 40 minutes.

01:57Is there a direct impact on private markets?

02:00In other words, when you are looking at a term sheet or there's a pitch deck on your desk,

02:06are you thinking this is now a more attractive investment opportunity

02:11because of something the president says on True Social?

02:15I think one of the key factors that comes into play with news of this kind is

02:21startups are not immune to supply chain risks.

02:24And so I think one of the things that we end up thinking about is

02:28how does the supply chain get impacted by something like tariffs?

02:32We've got a whole host of companies that are U.S.-based that are starting to fill the gap.

02:37We're here at Anderil.

02:38Anderil is one of them that are starting to fill the gap with the domestic supply chain.

02:43But it's still a challenge.

02:45And, Morgan, all of this breaking news, this True Social post was sparked

02:48by the fact that China was once again really resisting allowing rare earths

02:55to go from China into Western nations.

02:56That's their bargaining chip.

02:58That's their thing.

02:58Their leverage, and how much has that impacted the startups that you've backed thus far?

03:03So we've seen a variety of different startups start to play in the critical mineral space.

03:08It's one of those domains that would not typically have been

03:10venture capital backable businesses previously.

03:14But one of the things we're seeing is we're seeing the Department of War

03:17and the Department of Commerce really aligning budgets around these types of opportunities

03:23that create big potential return profiles for venture.

03:26Morgan, a year ago, Caroline and I were at Rocket Lab.

03:30And the conversations we had centered around how SpaceX had established this space industry

03:35in Southern California, had ripple effects, and built out commercial space in America.

03:40Is Anderil doing something similar in defense technology?

03:43Yeah, Anderil and Palantir, actually.

03:48Sean was a great representative for Palantir just a few moments ago.

03:52I think both Anderil and Palantir have led to an influx of talent

03:57that we would not have otherwise had building for this problem space.

04:01So we're seeing a ton of startups founded by former folks coming out of both Anderil and Palantir.

04:08But from a risk standpoint, I do believe there's a risk of potential over-consolidation.

04:14If we have the neoprimes of today, the Palantirs, the Anderils, as our monopolies of tomorrow,

04:21I think we've failed.

04:22And so, therefore, you keep on feeding the next generation of Anderils and Palantirs.

04:27I'm interested as to whether the valuations are healthy from your perspective.

04:31We've had so much desire to get into the early defense IPOs that happened,

04:35particularly space-orientated ones this year.

04:36We're in a government shutdown, but there is real want from the public markets

04:40to back these businesses, and it must affect valuations in the startups.

04:44The opportunity is massive.

04:46That being said, I'll borrow a Trey Stevens-ism.

04:49We've seen a bunch of kamikaze rounds, some of these rounds that are super healthy

04:54from a valuation perspective, and they're really early.

04:59We haven't quite seen the budgets catch up to where we're seeing these valuations.

05:03The Department of War is one of these places where we know how much capital is going to

05:08be spent in a particular domain, in hypersonics and in critical materials.

05:13But we haven't quite seen the promise come out yet.

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