Katherine Boyle: Hegseth's defense acquisition reform is Christmas come early for defense tech startups

Do you should the Department of War get a soundboard during these speeches? Uh I heard uh I heard [laughter] Haggath was giving a big speech. Is it are they sticking mostly to uh to the the the the cheers and the clapping or are we doing firing off musketss? Are we firing off cannons? Is there pageantry?

pageantry alive in the Department of War. Bring the pageantry back to the Department of War. That is that is important. You guys You guys should definitely have your own sound for them. You guys are getting the the first look at a a major speech. Yes. Um so it is it is just ending right now.

I I just topped off the live stream. Um and I can tell you my my phone is blowing up with just how many people are enthusiastic, not only in the venture community, but just across Washington about what has been said in the speech.

dramatic repercussions for defense and for Silicon Valley and the broader defense innovation. So, it's an extraordinary speech. You'll be hearing a lot more about it, but you're getting the first look. Fantastic. Take us through it.

And uh and and and it is it is it is definitely um I'd say, you know, for the last say 10 years or so, we've been talking about defense reform, why it is so important uh for for increasing competition for startups.

Um, and what is amazing about this speech is that it's not just lip service to yes, of course, we need competition. Basically, what you've been hearing in Washington for the last 10 years. It goes line by line. Hex Seth actually made a very very funny comment.

He said, "If you're watching this on Fox News, your eyes are glazing over because this is the most boring thing you've ever heard.

" But for everyone in the room, from the the Andres, the Palunteers, the SpaceX's of the world, all the way down to the little guys to the Primes, it was like it was like Christmas come early, right?

because it's it it really is changing the way that acquisitions are going to happen inside the department uh in ways that are so meaningful not only for Silicon Valley companies but for private equity backed companies and and for the primes.

Uh he basically told the primes in the very beginning you have to be investing more in research and development. The companies that have been getting the large programs cannot just continue as as as business used to be done. He actually quoted um Donald Rumsfeld.

Didn't tell us he was quoting Donald Rumsfeld for the first five minutes and basically went line by line through a speech that he gave on September 10th, 2001. About how important it is to change the defense acquisition process.

And he said, you probably don't recognize this, but the speech I am giving now is actually Rumsfeld's wait September 10th. Yes. Yes. The day before just happened to be happened to be the day before where he said we have to process. That is a crazy coincidence.

it very very crazy coincidence, but it shows you just how long this has been going on. Sure. Sure. Sure. So, I'm I'm I'm happy I have my notes here because I was taking notes throughout throughout the speech. Yeah. Let's go line by line. Let startups know what what's going to be changing. Yes, please.

Um but the the first thing that I think is really important for for all of the startups in Silicon Valley is that he mentioned and called out the importance of commercial first technology.

So this is going to shock people who are not in the defense world that right now if you need to build a product specifically for the department of defense the vast majority of contracts that are given out are not given out with a purview of what exists already in the marketplace that we can buy. Yes.

uh people, you know, it's a requirements process, a very long 300 day and you know, requirements process actually that that he called out that requires the different program offices to say what they need to write it down and then to find people who will build explicitly for those requirements.

They are doing away with the old requirements process and saying this is not what we're going to do anymore. We are going to focus on commercial first technologies.

Even if there is a technology out there that is only 85% of what we need, we will we will buy it or that that is that is the goal and then we will turn it into what we need to for actually for the warfire. This is CS versus got for the DoD DO word nerds like commercial offtheshelf versus government offtheshelf.

Uh this is what Anderol and all the defense tech community has been beating the drum on for basically a decade now and it feels like it's finally getting echoed back from the administration. Is that correct? Yes. Yes.

And there was there was a lot the administration and the EO that was was out a couple months ago said that they wanted commercial first technology. Now you're hearing it straight from the secretary's mouth.

There's always dust ups about this on Capitol Hill with with you know various parties arguing over whether we need more studies or whether we should just do this. It looks like now th this is a real change that's about to happen and it's going to be transformative for for all of the startup community.

What it really says is that the best products will win. Yeah. Who are who are the losers here? Well, I think I mean the major loser from this speech is the primes. I mean he did he said I don't want to pick on anyone. I'm not going to call out companies but you have to be investing in research and technology.

like you have to be the the fact that these that the primes only spend 2% uh on on research and development uh and are are focused on you know constantly kind of maintaining the status quo that is not going to happen on his watch% I think it was a 2% on R&D yes um and and and haven't historically been been acquiring ventureback companies so this is also the problem where they're they're they're really just on a much uh slower timeline than is needed by by the department um and and I'd say that the the takeaway away from the speech and I think the sound bite you'll be hearing more and more about is that the new process is really going to be used to enable speed and volume and one of the things that I think you know a number of companies have been talking about for a long time is that by taking more risk in the acquisition process you take less risk on the battlefield and he actually echoed that he said we want to take more risk we want to have we want to reward the people inside of the department who are take making risky decisions or supposedly risky decisions because they're acquiring new technology ies or or from companies that are that are not Rathon and and and the the kind of big guys, right?

But what what they what they ultimately said is like they want those the the people who are going to be making those acquisition decisions to be taking on the risk because it takes less it will affect the risk of the war fighter, right? It will make things safer for the war fighter.

So, it's it's basically linking this entire process, bringing it back to to what needs to be done um before wars start and before products get into the world.

this is like a a top-own directive and then who are the players that need to actually put this into like who are the kind of key players that need to put this into practice? Yeah.

So, I mean like the the the main thing that I this is definitely a message sent to Congress because there's there's currently, you know, two different bills going through on Congress that are actually pretty aligned and in in most of the things that they're saying.

There's a few call outs where I think you'll you'll see sort of um some some sort of back and forth between the House and the Senate, but but this is definitely a call to them. Like this is happening on on sec the secretary's watch. This is something that he cares deeply about.

This is something that the administration cares about. And so it definitely is a huge push, not just a not just a major signal, but they sort of outlined this is how we're going to change things inside the department.

One of the biggest things that they do is is they created this sort of portfolio-based approach of how they're going to be allocating capital to companies.

Now, and this is always shocking when I explain to people that this is this is revolutionary because you'd say in a in a normal company, you're given a budget and if the vendor you choose is, you know, fails, you'll go to another vendor and you'll use that capital in order to to buy whatever product you need.

That is not how the department works.

And so with this new portfolio-based approach, they're basically saying, "We're going to give the what what's known as the PAEEs, the the portfolio acquisition executives, the right to say, okay, if this if this one product that we acquired 60 days ago isn't working on the battlefield, we can use the rest of the money and reprogram it for a product that is working.

" And right now, that is that is not possible inside the Department of Defense. Right now, you have to write a whole another list of requirements and ways that you would build a new product in theory that can take years to actually build.

and by the time it's built, it it it isn't meeting the requirements or the needs of the war fighter.

So, the fact that they're even changing the budgeting process and that they have an explicit call out of how they're going to do that, that will show up in this year's NDAA once it's passed and it will be the way that things are done from now on. A couple extraordinary. Yeah.

So th this means that uh if a contract is allocated to a certain company and they're they start underperforming in real time, the the person who's in charge of of allocating that budget can basically say, "Hey, this other this other startup like we're we're going to like rotate this budget over here because yes, they're actually going to deliver on this.

" I've heard super Yeah, I've heard some horror stories uh and even opportunities where some of the bigger primes have just been have just held on to contracts forever. They're kind of like barely delivering.

They're kind of like trying to deliver and startups coming in and saying like, "Hey, we'll actually take this over. " And sometimes those deals can can happen, but uh this seems like it'll be a lot more effective. Are there any new categories that are opening up generally?

I mean in we we we we we you know we've heard this week about like data centers in space. So if you're tracking like data centers or space like that's a story.

Um but I remember secretary of the army was talking about uh modularity of weaponry taking apart a drone fixing it are uh I feel like the whole idea of drones or autonomous submarines these are new categories that sort of opened up.

There have been a number of competitors, but at the thematic like within defense technology level, are there any categories that you think this new administration is maybe more excited about than ever before? Yeah. So, I mean, you you mentioned modularity and what the Secretary of the Army is talking about.

I mean, this is this was actually called out in in Secretary Hegv's speech where he said, "Part of the reason why we need these PA paees and were formerly called PEOS, but PAEEs, these portfolio- based approaches, is because right now, if you want to take something apart and put it back together, you have to build an entirely different system to acquire those parts.

" Uh, and you have to go through a requirements process. So, if you're building modular based approaches that update in real time and he actually said like, "We want it to be more like software. we want to do software in updates in real time and not have to go through a requirements-based approach.

You you need um to to be be thinking about things in terms of modularity.

So I think there's there's a lot of different even just changing the way the budgeting works, it opens up a lot of different techn technologies that were that were you know not able to to participate in the acquisition system because they didn't want to go through um the the requirements process or they knew they wouldn't meet the requirements that are being put out by the Department of War.

So it is it is going to radically change I think not only the types of products you're seeing in the hands of the war fighter but just how quickly they get there. Makes a lot of sense. Switching gears a little bit.

Uh Sam Alman suggested on Wednesday this idea of like my my interpretation of it was kind of like a go model for uh AI factories. Without commenting on on that specifically, can you give us the history of go when and how they work well and what kind of some of the challenges have been?

Well, what what I actually didn't see what can you give me a little more context on what what Yeah. So, I'll read exactly what he said. So, this was in response to uh clarifying the the sort of uh backs stop gate.

Um he said uh so anyways he he basically said obvious one we do not have or want government guarantees for open AI data centers and then like later in the post he said what we do think might make sense is governments building and owning their own AI infrastructure and then the upside of that should flow to the government as well.

We can imagine a world where governments decide to offtake a lot of computing power and get to decide how to use it and it may make sense to provide lower costs of capital to do so.

Building a strategic national reserve of computing power makes a lot of sense, but this should be for the government's benefit, not the benefit of private companies.

And sure, just in some of like some of the ideas around this just reminded me of of how Gokos have have worked in uh in defense tech where the government is basically saying like we we have we're willing to commit resources and land to like a certain initiative and then you can have the private market potentially pay a role.

I have no idea how uh how this would that how this would look like uh in the AI context, but I just want I I just thought it'd be helpful to understand like how these sort of like public private uh partnerships have worked in the past, specifically in defense. Yeah.

Well, no, I can I can talk to one that was actually discussed today.

So the secretary of the army was on squatbox this morning talking about specifically if we are giving the land and security for for massive data centers could the army have its own data centers and be one of the largest providers and actually offtake that compute. So I do think that there are are ongoing conversations.

Candidly I haven't seen, you know, massive conversations about how it's going to be enact enacted by the Department of War, but I thought it was very interesting that the Secretary of the Army was basically saying that you this is something that they would be very interested in that they know that they are going to need their own compute um and that if there is sort of a trade-off of we provide the land and the security uh there should be an understanding that that that compute then goes to to the army.

So, I don't know that they fully fleshed out the details of of those sorts of things, but I do think there's a lot of conversations about this.

Um, and you know, it's it's good to hear that that Sam is also talking about that in certain ways, but I do think for the Department of War, they know that it's top of mind, and I think they're being a lot more experimental, which again comes back to if you have um a system of of requirements um that that is far more sort of open, I'd say, to experimentation or working with new companies that can do that.

Um, it does give the the, you know, secretaries of the army or the navy a lot more authority to make those decisions on kind of the the actual things like compute or energy that they need. Yeah.

How do you think about the the flow between like uh entrepreneurial ideas like problems that are identified in the private sector? Somebody starts a company like with Anderl is like the flipped model. This idea that R&D should maybe live outside of the taxpayer dime uh be funded by venture capitalists.

uh that company gets built. Eventually those ideas are percolating into DC and then the the world updates, America updates, we change the way we work. Uh things get better, but Anderole benefits and people are pointing the finger, you know, like, hey, you you you're the one that advocated for this.

And I feel like that's kind of where Sam's caught right now. Uh where OpenAI is advocating for things that I think are good for America, but also might benefit OpenAI. And so he has to do this delicate dance of like well I was independent on this one but this one does benefit me etc etc.

It's like such a communications challenge. Do you think it's like do you have any best practices for like how to not get over your skis on that?

Well I think it's I think as you said it's sort of a typical Washington story where in order for things to change you you do have to sort of you know kind of Washington's a meme town just as Silicon Valley is a meme town. you have to be able to tell your story why it's so important.

I would argue that that Ander was exceptional at at really telling the story of why you need attitudable systems, why you need modular systems. Basically, the the kind of, you know, the the kind of uh frameworks that we're using today inside the Department of War came from those memes being established.

But yes, if you're if you're successful inside of of Washington, you're going to tick off a lot of different people. Totally. um and you're going to to certainly upset sort of the the bureaucratic class.

And what was very interesting too about this this speech is that the secretary actually called out the bureaucratic class and said like this is not a problem with people that we have. This is not a problem with innovation or technology. It is the bureaucracy that is stopping us from making great decisions.

And I think like that that is something that is that is you know always been the problem with DC. Um, and I think, you know, the the the most important thing that companies can always do is just continue saying what they believe, going to Washington, building those relationships.

And I think if anything over the last 10 years, this defense defense acquisition reform, which everyone said was impossible, is now actually at our fingertips and going to happen because it makes sense. The argument has been made.

It's been made in dozens of different ways um across many administrations and everyone's in agreement on it now.

So for founders that that feel like, oh gosh, like look look at these great companies that are getting backlash because they they've, you know, kind of spread their own gospel and now they're being attacked for it, like that's actually, I think, a sign of progress.

Um, if you're being attacked for what you're what you're advocating in Washington, um, that's usually a good thing. Yeah. No, that makes a lot of sense. Uh, final question. What is your most up-to-date guidance for your portfolio companies around the shutdown? Yeah. Yeah. No.

So, I mean it it definitely is having an impact, right? Like the the companies that were expecting contracts to come in or reprogramming dollars like they're not going to necessarily see it on the timelines that they thought maybe, you know, maybe a quarter ago.

That said, um I I do think that a lot of these provisions that are happening right now um are are so transformative that in the long run, like the kind of if we look back on what happened in in the year 2025, it will have been a very very good year for startups.

Maybe maybe their their numbers will lag by a quarter just because okay like the funds can't be delivered depending on how long the shutdown goes down. I think it's having a greater impact actually on the citizen, right?

Like I mean what's happening with air traffic control, what's happening, you know, across um you know, civic benefits like that that is something that I think um we're now all feeling the pain of or or people who are dependent on those benefits are certainly feeling the pain of or people who are traveling um or planning to travel for upcoming Thanksgiving are certainly going to feel the pain of the shutdown.

But it's certainly having an impact um on companies and I think most companies are still working exceptionally hard um on the things that they can work hard on now. um even if the even if the contracts can't get signed or the press releases can't be put out or or the dollars aren't coming in yet.

Um but I think when we look back this year, the story of this year will actually be the defense acquisition reform and and what's happening for these companies in the long term versus sort of the short term. Yeah. Short-term pain, long-term uh gain. Yeah, absolutely. Awesome.

Well, thank you uh so much for taking notes and giving us the full breakdown. Thanks so much. Always great to catch. We'll talk to you soon. Have a good one. Uh let me tell you about linear. Linear is a purpose-built tool for planning and building products. Meet the system for modern software development.

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