Lightspeed's Connor Love on the DOD budget reality, defense investing blind spots, and what kills the ecosystem

they made their money in love they made their money in love there he is hi guys I mean I I wanted the chatter to go on I feel like on Sports Talk Radio you know long time listener first first time caller right yeah well good to have you here oh it's great to have you you had a thoughtful comment I just said come on the show you were like I'm game let's do it so here we are uh well let's start with that thoughtful comment I mean first introduce yourself break down who you are but then yeah no happy to um I I help lead our national security and defense Investments here at light speed been here for five years you know used to sit on that side of the table actually served in the military for a better part of the decade so uh so yeah excited to chat I think there's there's a there's a lot of spice I mean love Delan to death but uh let's let's get into it uh and and set the table for us on like size scale of light speed and then is defense Tech like its own fund or are you just making investment yeah obviously so so you know history of Silicon Valley firm been around for 25 years I mean we talk about oursel like a platform so we'll write you know a million dollar check early or we'll deploy a billion dollars late so so have the full you know kind of Stack platform uh obviously based here in in Silicon Valley but have offices and reach you know globally um I sit on the Frontier Tech Team so myself Ravi and Ravi Raj um and and tager really invest in you know we call Frontier Tech um what I lead a lot of is all our national security all of our defense stuff um and it comes out of the same core fund so it's not a separate thing where we have to deploy $500 million a year in this um it's it's it's really kind of up to the team and and up to how we see the ecosystem cool that's very helpful uh let's go to the drama you you and Deli break it down no before before before the drama I'd love uh that you know we were actually talking with Delan how you know the last two years a lot of VC's you know went amended their LP agreements and said well actually I fancy myself a bit of a defense investor myself you know I think we all did that I did that as an angel right I've got my I've got my bets everybody realized it was cool to be a patriot uh do you think that do you think that it's are there real blind spots for investors that don't have military backgrounds we just had uh Steve Simon on the show from Allen Control Systems he was a nuclear engineer in the Navy like that clearly sort of informs how he thinks how much of an edge do you think you have because you actually have have you know lived uh on the custom side I mean like like most things in life uh if you haven't lived and breathed the problem it's really hard to roll up your sleeve and understand like what's real and what isn't um I think the thing that's quite obvious though is the fundamental pace of change of technology is happening so quick that even what I was talking about 10 years ago and you know I I sat out in the Pacific kind of before the Pacific was cool I wrote a million memos about hypersonics and space-based systems and I work directly for the kind of the fourstar command of the Pacific and like we were talking about basic [ __ ] back then like we just didn't have enough Mass on system so I do think there's this clear edge of understanding who the customer is more importantly like you know the crazy thing about defense Tech that I think not a lot of people realize is there's not the concept of product Le growth like you can't just dog food something with a customer and then all of a sudden the colonel or the general out in the Pacific is like great I'm going to buy a hundred million do this thing I mean it's not how it works I mean Congress has a say we have program offices we have this complexity of just utter chaos that makes this really hard so you know long story short it definitely gives me an edge I just think things are evolving so quickly um that you know again the edge isn't enough like you know you need to get lucky a hundred times I mean what does Trey say all the time like they got kicked in the face for what seven years straight at andral before coming today so it's not easy like to to be clear I'm not pounding the drum that like there's going to be 100 andrs like I hate to Brak it to you there's not there's going to be a lot of investors who are going to lose their shirts there's going to be a lot of entrepreneurs who are going to try and fail but as the cold buted American who's that who served and been on that side of the like this is all in that good for us more people building new technology to get in the hands of War Fighters the question is like as we as a DOD are we going to get out of our own way and buy the right stuff at the right timeline yeah I was I was always bullish on that with the hard tech even if it was a bubble it's like it's so much better than some of the other Tech booms where yeah like it falls out and then what were what are your durable skills just like Shilling meme coins and that's what you're going to do next it's like at least if you like you know graduated college went to work for some hard tech company it fails but you learned like system design like welding like you know DOD you learned so much of these like tangible skills like at the very least like okay yeah the VC dollars they didn't just go out to Facebook they went into buying manufacturing capacity maybe that manufacturing capacity didn't produce profit so it's got to get rolled into other stuff but at least we have more machines in America so I was always like the the the there could be like a piece dividend from a bubble even if there is a bubble and there's a wash out uh anyway do you have next question or you want to move on to the continuing resolution just yeah let's get into that so so yeah uh can can you start by like breaking down um just how you process the information and the News around the continuing resolution maybe restate what you feel like is going on and then your take on it well and I think this is you know I won't get too in the weeds but I think this is really important to fundamentally understand how Congress and how our Department of Defense spends money and I think like people just read the headlines the defense news and they're like uh elon's cutting budget ah continuing resolution and yet all these companies are being funded like what's going on like there's this clear misalignment I I think the reality sits actually a bit more nuanced than that and when you look at how the Department of Defense spends money and and Congress allocates money we we pass this thing called the National Defense authorization act and this is literally the president Congress both sides of Congress sit down and they say what are needs what are requirements and then what they do is they they pass a law very clearly that says here are the budget tables here are the things that we're going to be spending money on and it's this like you know I I I the Andro guys a ton of credit here like you know it's it's it's rocket science and literally what you're building but it's not rocket science to figure out what the federal government actually wants like we publish these things called jbooks every year we pass laws and so historically if Congress and government works the way it's supposed to work every year we have this new National Defense you know authorization act that gives the Department of Defense a budget table to say hey Air Force here's $100 million go buy space lasers um and and when that happens you get this really predictable nature of what's going to be bought when it's going to be bought and the quantity the problem is when you have disruption like we have right now like politically in in in the government and you can't pass an NDA and let's be honest like this has happened a lot in the past you know you do this thing called A continuing resolution and a continuing resolution just as Delan said is this like blanket Band-Aid where you just set an arbitrary period of time in the future and you say hey just keep the thing going let's keep the thing afloat Let's Kick the Can down the road and this is like let's be clear like this is not bad like this is not good like not how a functioning government should should should run but I think the Nuance here and this is like what gets me so gidy and like to Dean's Point like yeah like the the the Matt stman of the world and you know those guys aren't like tweeting at him saying like you're wrong it's it's it's because like those guys who really understand what's happening and and how to sell the government they're actually texting their co-founders and they're sprinting that [ __ ] right now and that's what's happening so this continuing resolution the the Nuance here that happen is again like you know go read the section go read the bill yourself but effectively you the rule was changed where you're allowed for new starts and new starts is just what it sounds like it it means that you can start a new program and allocate you know money towards something new and again like there's also a ton of bad in there there's recisions there's like hey you can no longer have $100 million for space based lasers you can now just have 90 but but where the like and I made this like you know there are there are sharks and there are mennow in this you know in- your budget you know happening right now is the Sharks you know the guys like Brian haras you know who's done this at SpaceX and is at castian now like you know the the the the Stans and and and the list goes on and on um what they're doing right now is they're looking at each of these new rescinded budget lines each of these new minimum lines that that Congress has gone back and forth on the CR and they're going to those program offices and they're saying you know hey maybe you don't need 90 million maybe you need 80 and and the Nuance here why this is important is each one of these new budget lines are theoretically and the key word is theoretically allowed to be moved around now and so what I'm seeing in my signal chats in my my discussions with both people in government and those what I would Define as like tier one Founders and go-getters is like holy [ __ ] like there's there's 200 there's 300 million dollar that you know again it's a big F right now but there's a lot of money being moved around and so when I made that comment and when I look at you know kind of this Broach of prodly like there's so much disruption and there's so much variation of what could happen one way or the other is like I actually think you're going to see one of two things happen this year you're going to see a small amount of companies and and and timing like anything in Venture and and and starting a company is really important here if you're in the right spot of the kind of growth Journey with your product and again like this is the beautiful thing about hard tech if your product doesn't do what it says it can do like who cares like you know move on type thing and that's the the beauty where the chickens are all going to come out to roost for all of us at some point but again I just think there's so much in your money up for grabs that I think by the end of the year and hold me to this um you're going to see one two three companies that will get I mean High hundreds of millions of dollars of in-year Revenue grabbed for real production real OT contracts that has never happened before in a CR or nonc uh very cool I I got a bunch of follow-up questions uh it feels like the United States does our defense budgeting and planning we're like building in public and like we joke about this all the time like building in public for most people like sure share maybe some progress like get excited on the timeline a little bit but generally like you're just sort of inviting like you know C black budget should be 100% of tax revenue essentially yeah but no no I like that no but like how does China approach all this stuff like I have no idea and maybe you don't either but maybe have Insight like it it seems like they wouldn't be like yeah we're going to just like air our dirty laundry out here and like be like well we you know we're going tell you is that is you know break break it down yeah I mean at at a high level what what we have working against us is for a Better or For Worse the Chinese government is pumping an insane amount of state and federal dollars towards these critical Technologies like yeah there's a VC ecosystem that exists obviously but like it it is in you know comp like there nothing in compared to the amount of money that China as a state entity is putting Beyond everything from rocket watch systems to missiles uh to autonomous systems to a ecosystem and and you know what what you don't have obviously in the United States is you don't have this massive kind of call it uh industrial complex where it's like yeah you know we have these thing called cbers these small business Innovation research grants that like are two three four million dolls that help people get off the ground um so there's this huge like parody of just R&D spend that is happening and when it's coming from the government it might not be efficient but it's so large in a way where you're just able to fail 500 times and like you know it's not like the VC fund goes out of business and you know it's like the government will keep existing and keep pumping dollars into it I think the edge we have here because I'm an optimistic coldblooded American as opposed to a Doomer and gloomer is I actually think the competitive ecosystem we have um and I've told this to everyone in government who listen to me and again this might be controversial but like we need to stop funding a single siber in in our in our DOD and in our federal government and and and the reason I I I think that is like in a historic world cbers have been this thing to get a company off the ground to like hey I need some money to develop something and it's like net good for like entrepreneurs and people but now you have this wonderful thing called you know Venture Capital ecosystem who's now said hey I'm actually really interested in the risk in this and I I I Believe in Your Vision I want to back you you actually get the right incentive alignment here where if we do our job right and I say collectively like me Delian you know gc's quite the whole list of folks then we're going to be funding the right things that that you know have true technology behind them have the right entrepreneurs and Founders who get what they're doing and so I would much rather take our system just to be totally blunt and honest than this Chinese like let's pump trillions of dollars and they're doing that um because I think this is more efficient and I think the cream is going to rise to the top of like you're going to see again not a 100 andrs I hate to say it but you're going to see some pretty large companies that are that are solving real problems for the Department of Defense there's you you mentioned space lasers randomly sorry is that this ties into kind of a question I had which is uh within defense Tech uh there's technical risk and then there's distribution risk and it's almost like the distribution risk kind of weighs over the technical risk because even if you're building like you know autonomous submarine products well then it's like yeah like you could build the amazing product maybe you you can't actually sell through but the on the tying off of the space lasers thing like because there's so much distribution risk are we taking enough technical risk are we funding enough sort of like weird science fiction or is that suited for Skunk Works in the government and or or we need to get weird I I I actually think it's the right question and and it you know I'm biased obviously and I see how we do things at light speed I I think about things in a spectrum of like on one end of the spectrum you have what I call like true Science and Technology risk like this is the like bits and Adams thing like if if a fusion reaction doesn't take place like you don't have anything like there's nothing there um on the other end of the spectrum you have the the kind of commercial products that we know exists like we can get a car to drive we can get a software system to kind of you know be a CRM or whatever you know it's like you know you have no you have arguably no Tech risk on that end but you have huge kind of product Market fit like customer going to Market risk I think the holy grail and again we take this Approach at light speed is like number one like you need to build a portfolio that's really thoughtful about the type of risk that you take so on one end of the spectrum I wouldn't take fully Science and Technology risk on the other end of spectrum you're not going to have big enough outcomes if you're just making another CRM to or a software tool to apply to to the government the The Sweet Spot in my opinion is what I Define as these like systems companies and again like you know Andro I'll use Andro as an example here because everybody knows them but it's like you know there there's a clear software kind of component to what they do they're going after end systems they're building really hard [ __ ] that's hard to do there's there's a there's some Physics kind of you know like barriers to kind of figure out um but the beauty is each new system you add as a systems company only makes that flywheel on go to market that you've secured you know before easier like again when you when you're a multi-product company and like you know cic's getting there now like other you know casilan will get there eventually you know K2 and space will get there too like once you've made one sale and made one customer really happy you show up with an x four five six different products and you you know you have credibility you have contract history you have the ability to actually deliver and do what you said you would do I mean the Dirty Little Secret that everyone knows about andril is like the the the the the acquisition machine that they are with like AP and grim and bobc and the team there is like they're taking things that are cool pieces of technology and they're 10 100x in them and it's like nobody else can do that that is such a unique kind of ability as one of these systems companies so I think if you're if you're a venture capitalist here number one like I come go back to my statement before you need to know what real problems are if you don't know what real problems are and if you don't know where government is spending money you're [ __ ] out of luck you're just going to be wandering and throwing money at the hot thing but if you know where the pots of money are if you know what the needs are and you do this really balanced approach of some Physics risk you know some you know kind of go to market risk and then you just have a bunch of these systems companies that can get really really big I mean again I think that's how you return Venture funds I mean that that's what I'm in the business that's what we're in the business of doing at light speed great uh great insights uh do you think there's uh our our shows oriented around Venture but in order for some of these you know Venture back companies to actually do what they need to do they need to partner with a bunch of small businesses to actually produce you know everything from Individual parts and things like it uh do you think there's an opportunity for like basically smbs to pop up to service some of these Venture back companies that want to focus on the technical risk and selling but then they have to produce a bunch of components as well and they can't you know make 2,000 parts for a single you know missile right yeah I mean uh let's be clear and I'll actually be really blunt about this I think how this entire ecosystem both from an entrepreneu and a VC you know perspective like defense Tech how this goes wrong is we actually cannot deliver on the systems that we are selling the government I actually think the snowball of like accepting new tech while it's still small in the grand scheme of things of the budget I do fundamentally believe that snowball has started to move and so how we fail to be clear is that if we cannot produce at scale uh with efficiency in the in the Scopes that we say they were going to do it um and and you know for better for worse like we don't have an industrial base in the United States to solve that like we don't have I mean the mom and pop shops are dying I I visited them you know like you know from Southern California initially you go out into the kind of desert there and you know it's like one guy after one guy after one he's built like a $7 million business doing this one thing over and over again those guys are dying we do not have an industrial base to serve this so the question and this is like the real big like you know people push me all the time like how is this bubble going to pop where how's this going to fail it's if we C if if companies like those systems companies can't find a way to vertically integrate themselves or they can't figure out a longtail supply chain of how to produce not just a couple hundreds of these systems but a thousand then I think we're we're in real deep dooo and and you've been in this situation where you've oversold sold and underived um and you don't keep billion doll contracts if you do that so I think we have to like can smbs do it I don't know you know maybe it's Chris at Hadrian like maybe it's the the longtail defense Tex I mean I I don't know I mean we we'll find out very very soon yeah I was I I was going to ask about that um in terms of you know there's this meme of like you know maybe it's very risky to directly compete with Ander roll on a program that might they they might be launching like next month like they launch very quickly um but what what is interesting to you where do you see the opportunities in hardtech but non-competitive with Ander we talked to AJ at hermus I don't think Andel has plans to work on a mock five autonomous plane or passenger airliner uh hadrien and and even like a rain maker like you know it's it is like andral hardtech coded but it's so far fielded that it feels safe to work on what would your advice be for the next generation of uh hard techers yeah I mean I mean again like I'll start with the same through line I said before there's not going to be 100 Andals like andal has a clear unique Market positioning of how they build different products into their family of systems I think the way to think about it both as an entrepreneur and as an investor is I I actually think about like unique fences you can draw around not just around like a technical product you know a system but also a customer and I think this is like really important when you know if you don't understand how the dod works like the Navy has all their different program offices that like some for underwater some for surface some for missiles and and you know those program managers like they want their solution to to build the better thing to then you know deliver better tools to the Navy so if you can be unique enough and and part of this is like yes looking at what the large guys are doing like andril and SpaceX and Etc um you you need to be nuanced enough initially with your product that that you're you're showing up to the table with something new where it's like uh well you know like uh you know Anvil is kind of doing that or or you know road runners kind of that thing so I might as well just buy that because you know andril has been already there they're already in the room they already have the need but but I but I think the Nuance here is like if you can make a leap from a customer and a system to an adjacent enough thing where where you know andr might be in the ecosystem um there's still a really massive opportunity to be built I mean Sonic is a great example of that like sanica is like Off to the Races now and building a bunch of autonomous boats and like it's going to be amazing to see what Dino does but like you know andr is underwater like andr is building autonomous systems and I do think there's a world where both of these companies actually work really well together and you know in this wonderful world where we're doing teaming and orchestration a bunch of multiple autonomous systems you want as many people orchestrating on the same platform as possible I think the last thing I'll say is just like where this goes wrong um this goes wrong in a way where um both andril but also these companies start to build kind of uh stove pip ppes around what they're doing and and you know there's like there like really basic examples like you know we want to get to a world where we have Skynet where these systems are kind of talking to each other and playing out and if you don't allow your infrastructure your software infrastructure to work with other things then number one like you're creating a really adversarial environment with andreil and other big guys so in my opinion like working with andreil as opposed to working against andreil is is is the answer here M Jordy what you got uh this has all been great I I don't think have any um I think that covered the the one thing I was wondering how you're advising portfolio companies right now uh uh we're in a we're in a sort of Defense Tech bubble we've we've sort of aligned on that and it can be a good thing and so there's a there's definitely a push for companies to take advantage of that and say like you have a short period of time potentially before you know there's a cooling off period and maybe there's less inv investor interest and certain investors maintain long-term conviction but then certain others you know pull out or pull back um how are you advising portfolio companies on like you need to move super quickly because you know there there are these sort of behemoths that are going to be built in the next few years but at the same time you want to be conservatives because if a contract if it takes you an extra year and a half to get a contract and then you run out of money like it just doesn't matter so like how how do you advise you know yeah I'll actually take it one step further which is like if you believe you're going to win win a contract in the near future and you don't make that decision to raise more Capital now you actually can't deliver on the contract like back to my comment of like you got to produce real things and if you don't have Capital to build out the factory to build out all the testing infrastructure like you can't do it so I I again like like most things it's a bit nuanced I mean the the advice that I give portfolio companies is there becomes a a a terminal value or a value of your business that that you only have one One path to go um you know and again this number is maybe moving a little bit but it's like the second you start to raise above 500 million um both early in you know maybe in early investors will get a good outcome but but near-term investors and and you as a company like you're either going to be a public company or you going to be bought for a private Equity multiple and and and I think the level of conviction that Founders have internally on the ability to win real production contracts or the ability to deliver and get to a technology Milestone should be that like internal like test of of a founder of like do I have line of sight to that do I believe that will happen and if the answer is yes and again like you're going to need the money then I advise Founders is like what let's take the swing like we're in this to build massive companies I'm not in this to build a company that gets sold to locked for parts like you know whatever maybe good outcome for a Founder but I that's not what we all play for in this ecosystem we want to build generational companies and I want to back generational Founders so it's really just that internal sense of like all right like this is the product we believe we're going to win the product or we're we're going to win the the the contract um so let's do it um and so it's it's I don't know you put your pillow down at you head on your pillow at night when you're an a founder and if you know even all the risk and all the being punched in the stomach that there's true line of sight to to real production contract value um then raise the money I think I think the time is right can you give me a little bit of a crash course on kpis multiples like what stats are important defense Tech compies as gr obviously in SAS we know triple triple double double double we know AR and churn what are you looking at in a growth stage defense I mean the geometry of Defense Tech you know uh company growth looks unlike anything else like it it doesn't look like software it doesn't look like consumer um what it looks like n nine times out of 10 and there are some anomalies here and I actually think there are going to be some anomalies during this continued resolution but um nine times out of 10 you get this really small like cber Revenue like I don't have a system yet I got to develop the thing I got to go get someone to pay me for some small like two three four5 million R&D money and and as an investor in this ecosystem I actually discount all that Revenue to zero I I don't you know whatever it's not like we're applying multiples at the early stage but you know you see this like middling and then you see again this just stepwise change and Improvement where you know people call it people overuse the term you know program of record you know most times it's actually not a true program of record like you know it's it's actually either just a really large OT other than transactional Authority or something like that but then you see the stepwise change of like okay you got you know children dollars and then you got this massive kind of call it 200 300 $400 million contract and so the the kpi that I always think about is like there's a separate technical timeline of der risking your system and like it's it's our job as investors to roll up our sleeves and be like is the real progress can we see this is there more testing like like what's happening from an iteration perspective but then the Holy Grail is like and this is where you're either really smart as an investor or you're really dumb is you know you make the the you lead with the preemptive term sheet you make the investment actually right before that tick and right before that big production because the beauty is you win a 200 you win a $300 million production contract yeah maybe it's over a couple years but like that's the base Cash Line of your business and that's the like get out of jail free card of like hey now we're not using a ton of enture dollars to develop the next thing to build the next Factory so to me it's like you you you get that internal feeling of where we are like how close we are to those those programs and like you know um it's it's it's not a clean you know oh net dollar retention is this oh you know you're you're doubling year-over-year tripling year-over year um you just got to be nuanced and you got to know what the hell uh you know program offices care about and and how they move that makes a lot of sense I've loved having you on yeah this is great thank you so much this is really yeah guys any any you know when you're when you're you know next time you're putting $500 million into a cool company join with the founder we'd love to have you both on that'd be amazing yeah guys well I appreciate it I love what you guys are doing huge fan all right talk soon bye bye and we got Chris power coming on to the show next from hadrien he got a little mention in that NE in that earlier interview Connor mentioned it I'll be right back and Jordy is uh taking a break well we will be back in just a few minutes folks but in the meantime let me tell you about ad quii ad quick.

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