Callye Keen speaks with William Treseder, Chief Strategy Officer at the Marine Innovation Unit and SVP at BMNT, a pivotal organization in the defense innovation space. William shares insights from his diverse career, discussing everything from 3D printing with his kids to complex defense contracting and the changing landscape of defense technology innovation.
Key Topics Discussed:
Key Quotes:
About William Treseder:
Callye Keen speaks with William Treseder, Chief Strategy Officer at the Marine Innovation Unit and SVP at BMNT, a pivotal organization in the defense innovation space. William shares insights from his diverse career, discussing everything from 3D printing with his kids to complex defense contracting and the changing landscape of defense technology innovation.
Key Topics Discussed:
Key Quotes:
About William Treseder:
Welcome to the Startup Defense. My name is Kali Keene. Today I have a friend of mine. I have William Treseder. William, you, like many of our guests, have a varied background, pretty interesting background. You were the Chief Strategy Officer of Marine Innovation Unit, which that keeps cropping up on my radar over and over again.
Speaker 1:I think this is some odd defense tech sign about that. But right now you're one of the founders and you're the SVP at BMNT and we've had a number of your colleagues on the show because your organization is always doing something interesting and again just crops up when I go look at you know, hey, who is trying to change how this works, or who is in this investment space, or who is a great entrepreneurial voice or an advocate in this place, and your organization keeps popping up. So we've talked a number of times. It's really great to actually have you on the show, kind of share our back and forth. But before we cut into it, what are you passionate about right now?
Speaker 2:Well, first of all, callie, thanks for having me on the podcast. I think we talked about this before, but I went to a 2x playback speed workout on I don't know 10 episodes a couple months ago and I was loving just all the contents. I really love the style. I love the podcast ago and I was loving just all the contents. I really love the style. I love the podcast and I think the way that you facilitate conversations I think is really really helpful, because you dig into things and ask questions with a combination of a lot of insight in terms of having run a defense tech company for a long time and inherited through the family, but then also asking kind of beginner mind questions about things, particularly in the innovation space, that are just sort of new. We're all exploring with it and grappling it and stuff, so it's really interesting.
Speaker 1:So thanks for having me on.
Speaker 2:So there's a top of mind question that has nothing to do with the Marine Corps or VMNT or anything else, which we talked about a little bit, which is I just recently switched from an FDM printer to a resin printer and my kids and I are set up in the in my in the garage, dealing with ventilation problems, having to put on ppe, as we're doing, I think, actually tonight. I got back from dc last night and my son's already hounding me to print some beskar armor for a mandalorian outfit that he wants. So I'm actually really excited about about doing that, that tonight we'll try to get the form factor form factor right. So, um, I'm really enjoying being in the space of physically prototyping. I always do that. I've loved being a builder for a very, very long time. That zero to one phase, right where you're just sort of figuring things out, has always been something that's attracted me to projects. I'm not a my joke that once it hits the Gantt chart spreadsheet phase, I'm immediately looking to the exit.
Speaker 1:I'm like okay, well, you guys got this.
Speaker 2:Sounds like you got this all taken care of. I'm going to go find another thing to do, because now it can be, it's instantiated, it's alive, it's a thing, and now it's time for somebody else to manage it, who's much better at that kind of stuff than I am.
Speaker 1:That's super fun. I remember so vividly 3d printers starting to get commercialized and have access through makerspaces and in the past I've participated with a number of makerspaces pretty in depth and, coming from a hardcore manufacturing background, I'm looking at it like you know, like I could just make this faster on a mill, like I could do this, I could do that, but really one. They've gotten better and better and cheaper and cheaper and easier and easier to use. But let's say that the peak of the hype cycle around 3D printing where it wasn't really very good but people were talking about it like it was going to change the world it's like 2012, 2014. Yes, and everybody got a really bad FDM printer and printed a Yoda head and did nothing with it.
Speaker 1:But what actually happened was the kids that messed around with the 3D printers 10 years ago like I'm hiring them now because they got really interested in manufacturing and they're who are leading all of these hard tech startups. And I've heard this story too many times for it to just be me having this experience is many times. For it to just be me having this experience is hey, yeah, 10 years ago we got a Prusa or we got this hobby printer or this 3d printer kit and I did this and this and this and I learned electronics and then I went to XYZ school and now I've started X startup, which we contribute to the defense industrial base, or we create drones, and so now, yeah, those kids from 10 years ago are in their 20s and they're actually making cool stuff, like legit cool stuff.
Speaker 2:That's 100% right. I wish I had grown up at a time when things like the ham radio sets were still considered cool. Because when you go back and you look at the founders from the 80s, late 70s and 80s, a lot of them were part of those the homebrew clubs and all the kinds of things where it was just tinkerers coming together, purchasing things off the shelf, building and buying, I mean microcomputers or minicomputers right at the time and back then it was so much more accessible and I I actually look for ways to find how to get my. I mean, I think about my kids because I just I want them to be able to do the kind of stuff as we're talking about. So, like changing out we have. I have a tesla like I can't, like there's nothing to work on, really right, but then we have to change the air filters. I'm like like okay, great, like we're going to go pull out the paneling and change. So I got the kids in there doing it and actually using tools and pulling things apart, always trying to find ways to break the world around me and try to reassemble it right.
Speaker 2:And the stories I hear of people, particularly in the physical world atoms, not bits.
Speaker 2:There's just this curiosity that develops and a sense of patience that develops too, because you're manipulating the physical world, the built environment, and if you can hold on to that sense of curiosity, I think we're all better off and some of those things will manifest as businesses later on.
Speaker 2:But in some cases it's just kind of an antidote to the more convenient way that the highly designed iOS world and the whole ecosystem of products that you tend to experience and you engage with in internet connected devices. I think this is all too seamless and it keeps us from wanting to do hard things because friction starts to scare us. And that is something that, if you're starting a business or you're trying to scale a business that exists, or build a new product or whatever, as you well know or build a program, build something from scratch that needs to exist, even if it's an organization inside of the Defense Department and sort of a large bureaucracy 98%, 99% of the challenge is the friction that comes into it and how hard it is to do, and if that scares you, you're never going to build anything of consequence.
Speaker 1:Yeah, frustration has built many great things and curiosity, and I'll make an argument for ignorance as well. There's a great saying it's we aren't doing this because it's easy. We're doing this because we thought it was going to be easy.
Speaker 2:Yeah, if I had known when we first started, I never would have dot dot dot that you're doing at BM&T with college students with hacking for defense or hacking for diplomacy.
Speaker 1:What is that frustrating friction point on one side and where is that creative curiosity on the other side? And how can they come together? And that's just one example of cross-pollinated innovation that's happening in defense.
Speaker 2:Yeah, yeah, hacking for defense, beyond being the most recognizable thing that we've built, you know, bm&t in partnership with some government folks National Security Innovation Network and Defense Innovation Unit. I've always found it to be a very BM&T thing in the sense that it is focused on problems, which is how we started the business, and we've continued to focus on this idea that the most critical thing is to get the problem right, and our whole, our corporate culture, our practices, our norms, everything that we do is really oriented around problems and validating problems and gathering information about problems, not jumping to solutions. That's a piece of it. And then hacking for defense in particular, it represents people in the government who have problems that they're trying to make progress on and solve. It includes student teams at universities who are trying to learn and grapple with entrepreneurial techniques and lead startup and stuff like that. It has to deal with teaching teams people at universities who are professors, right, want to have real world practicality and sort of really interesting ways to show an impact and manifest what matters in what they're teaching. And then you also have folks in the defense industrial base who are interested in kind of sponsoring some of the progress that the student teams can make. I have folks like the Lockheed Martin Ventures team which has been funding student teams to actually fly around the country and meet with beneficiaries as they they're doing, learning about the problem sets or test building MVPs and testing. So there's four different like core kind of beneficiaries there and it's trying to solve problems for all of them.
Speaker 2:That's really tough to build a business model that services across multiple stakeholders. It's really complicated. It's beyond like a normal enterprise sale or something where you have a you know users are different than customers. That's really complicated. It's beyond like in a normal enterprise sale or something where you have you know users are different than customers. That's one thing. But in this case we have so many different stakeholders to consider and make sure you're creating for value for all of them. It's really easy to kind of get off track and it's part of the reason why things like Hacking for Defense and a lot of those similar problem-centric programs at the university level are so valuable is precisely because they're hard to build. It's hard to get all the details right Sourcing problems and building relationships across the defense department, making sure that those problems are relevant, making sure we have lots of users that we can connect to the problem so the students can do discovery, making sure that student teams are forming in the right ways and they're able to get taught to use entrepreneurial techniques the correct way, and they get check-ins during the course and and then making sure we have post course options of students decide that they want to keep working on the problem, maybe start a company. There's just so many different cool things that can happen.
Speaker 2:And when we were back in 2015, when it first, when Hacking for Defense was first being prototyped at Stanford, the part of the challenge was being able to get non-traditional perspectives on really big problem sets that the DoD knew it had, but either internal to the DoD or the defense industrial base, they were getting the same answers to the same questions. They wanted different answers to the same questions and they wanted to start asking new questions and they just didn't have a mechanism for doing that. And now, fast forward almost 10 years, I think there's a lot of new and interesting ways that the government is trying to engage with non-traditional talent, and that's key because that's a huge friction point. We have folks who are channelized into the government, whether it's through military service or whatever, and if you don't get in through one of those kind of core mechanisms early on in your career, you know, and if you don't have anyone in your family who's associated with the government, then it's really hard to figure out how that person is ever going to accidentally decide that the government service is even something they should consider.
Speaker 2:And so this is a long-term play for talent as well. Raising up folks who, in 10 or 15 years, will be part of the next generation of leaders inside of the government, will be making really big, consequential decisions about things that are both important domestically and in terms of, you know, larger national security and international peace prosperity. So these are, I think, really really, really big issues. Obviously, we have to work on it, you know, one day at a time, but we can see this much bigger impact and how it changes the way that different parts of the community and American society can interact with each other, reducing friction, increasing opportunities for people to work together, and that's just. It's a joy to watch it operate increasingly at scale.
Speaker 1:Yeah, I look at it and although it is a fairly large program now and it's a large ecosystem with multiple stakeholders, I also look at it as a microcosm that is solved or attempting to be solved right now, Thousands and thousands of times over in lots of niche markets. Because, like you said, really is talent play and you could replace students with startups or startups with technologists right, and the names of the stakeholders may change. Instead of it being George Mason University, it might be a DoD national lab that needs to commercialize technology. But creating the lowered barriers and showing people that there is a model for collaboration, for porous borders, of organizations to work together to move more quickly like a commercial company would.
Speaker 1:That's really exciting to people because if you are a maker, right, you immediately in the past would be hit with a barrier of paperwork challenges right, you need to know the right people, not the right solution challenges. And so it may be open from a perspective of there's lots of things happening. There are places to go find contracts and get awards and interact, but for someone who is just a really smart person that knows a whole lot about software-defined radios, it's very difficult, and now I feel like those types of things are changing because there's people like yourself that are having lots of conversations you and I have talked multiple times and there's just a lot of interesting things that are happening in the industry and it is attracting more smart people because maybe there is a long legacy of programs like Hacking for Defense that have changed people's interests. I think there's also money pouring into defense which changes people's it doesn't hurt.
Speaker 1:It doesn't hurt right.
Speaker 2:Yeah.
Speaker 1:But over this long kind of arch, there is now this proportionally large growth of talent. The numbers that I put is right now. You could argue that the tech budget for defense is a little over 400 billion dollars. The vc funded startup portion of that is under four billion dollars. So there's a lot of a lot of growth there, uh, but to me as a mortal being, it seems like everybody's talking about it and there's just a lot of action, a lot of changes. How does that perspective from you? Because you're at Marine Innovation Unit, so you're trying to make innovation on the inside, make changes on the inside, and now you are a collaborator on the outside.
Speaker 2:Yes. So it's tough to know where to start with that one. So briefly, on the Marine Innovation Unit side, because I think this speaks to the point about people, a buddy of mine who was another Marine at Stanford that's when I knew him a guy named Garrett Smith. He reached out to me as MIU was getting started and he was doing. He had been pulled in like early the company, the unit hadn't formed yet and he said hey, you should take a look at this. I'd been reading the Marine talent management kind of a new guidance, so they're trying to think more flexibly about this phrase permeability, so coming in and out of active duty, different forms of reserve and as well as inactive service, which is where I was at the time. I was totally out of the military, had a foot of hair, you know all that kind of stuff. That led to a series of conversations with the CO, the chief of staff and the sergeant major of the unit and if I hadn't immediately vibed with each of them as legit people that I would want to serve, then I would have walked away immediately. Wouldn't have been worth the pain. It took over a year and cost me over a grand out of pocket to join the unit because medical tests, all this junk. So I immediately I made the decision based on people. It was like these are amazing people, I want to work with these people and I want to help make this unit a reality. And it was again one of those zero to one opportunities.
Speaker 2:So as I looked at what I thought MIU could become, I realized I had an opportunity to help the unit. As I said to the CEO at the time, like make new mistakes, don't make all the old mistakes that innovation efforts inside of the DOD make. I mean, there's a lot of predictable ways things can go off track and I'd known that because I'd been involved in the ecosystem for a very long time. So I said I have seen or done a lot of these things and I want to help you push on top of those mistakes and go make new ones. And that kind of resonated with him and that's why we agreed. It was worth the pain for me to go through the process and it's about two to 3% of people who try to come off of an active service back into the reserves actually make it. So it's a very unlikely thing to do. So I loved it and it's one of the best decisions I've made. My wife is okay with it, my kids are okay with it. Like I said, from a family perspective, it was a good decision For me personally and I've been able to help reconnect the rest of my family to the military, which is such a big part of my identity. So I think it's actually been a sort of a win-win in that sense, although it has obviously taken me away from the people that I love. But I believe it's a worthwhile mission, like it's a microcosm but of a larger play, as you're saying, just natural maturation.
Speaker 2:We have people who work in defense tech companies Shield and Andral and Saronic and you know all these kinds of talents here and stuff. We also have folks who work in the primes Lockheed L3, raytheon, whatever. We also have people who work in like the federally funded research and development centers, the labs. People who work, you know, are civilian employees in the government as well as marine reservists, and we have people who work in venture capital and we have people who work in like hardcore finance, like on Wall Street. So we just have a fascinating mix of people.
Speaker 2:It's only 330 Marines, but you just have so many different people with so many different experiences and you mix them together and try to yoke them to these difficult problems the Marine Corps is trying to work on and you'll see how these non-traditional experiences, these different talent sets, which you can combine in interesting ways in a reserve capacity, how they can create new kinds of value that the Marine Corps doesn't know how to create on its own. Not because the Marine Corps is doing anything wrong, just because the Marine Corps is doing Marine Corps things these people are all out of the Marine Corps, doesn't know how to create on its own. Not because the Marine Corps is doing anything wrong, just because the Marine Corps is doing Marine Corps things. These people are all out of the Marine Corps. You know, at least part-time doing other things. One of the guys is a you know engineering product manager at Google, right. Another guy runs operations at DoorDash, you know.
Speaker 2:Then just sort of you go all over the place and they can bring those skill sets and leverage them and what that has done at a really basic level is help the Marine Corps think differently about some of the challenges it's trying to work on and in some cases it's just having somebody who was an engagement manager at McKinsey and being able to bring that level of professionalism, to an engagement and to know how to manage client expectations and scope things well and exit the pattern when you're getting asked to do scope, creep stuff and things like that. They're able to do all that stuff and manage things really well, and so they. You know the marine corps can't afford mckinsey to do anything, but they can afford the reservist who's at mckinsey to go do some stuff right. So it's really awesome and it's a win-win for the corps and and for the marines, because they feel like they're able to serve the nation, serve the Corps and at the same time they're not being asked to give up their lives in the civilian sector and they're too much time away from family or a lucrative job or whatever it happens to be.
Speaker 2:So that's the way I think of MIU and the fact that it couldn't have existed 10 years ago. There just wasn't the talent that you could tap into and there wasn't the awareness on the government side that this talent was out there and that this talent, if it was out there, was valuable because it did something that we couldn't do for ourselves. It's taken time for this. You know these giant barges of the services and DOD level. You know OSD level folks to be able to see and learn more about what's going on in the commercial sector, totally outside of the defense industrial base, and say, wow, like we actually do need some of this maybe not as much as they think we need, but we need some of it because some of the status quo is not working, given the mission that we have to be responsive to these, these threats that are being driven as much by commercial technology as by anything else, and we clearly are in our own little wild garden and we need to get out enough to be able to defend the nation and deter war.
Speaker 1:What's been really interesting to me is, as DIU and subsequently MIU and then these innovation programs and innovation leaders, I won't say matured, but it is proliferated throughout the service. It really has brought more attention and facilitated this next round of startups. But it's like internally DOD and I guess tangentially, I see, are thinking about innovation which has caused the commercial world to get more focused on innovation for them and has then brought a new level of disruption to how they want to work. And so it's 10 years ago. If we looked at what is happening now in the DoD, this would be considered very porous and innovative and open. But it's caused such openness that the ripple that's coming back, like the wave that's coming back, is disruptive because as innovation happens, innovation inherently creates new business models, new ways of deploying technology, new ways of utilizing talent, new ecosystems, marketplaces, infrastructures, lots of different new ideas.
Speaker 1:And so we're seeing people complain about things, but it's hard to put my finger on. But it's the better it's gotten, the better it needs to get. Or the speed of innovation is faster than the speed of change to get, or the speed of innovation is faster than the speed of change. And so I do see that in the defense industrial base and, to put a finer point on it, the startups that are working, in my case, in hard tech and manufacturing and making atoms not bits. It's pushing a lot of friction still back to those innovation groups because of just new business models, new ways of working. What ways have you kind of seen that friction evolve?
Speaker 2:At its core, the defense industrial base is basically the same as it was World War II, right, basically the difference is we're spending a lot more money sustaining things, but effectively it's the same kind of overall concept, right, it's still very much of a pipeline where the government buys stuff and you know, then you have the whole R&D into acquisitions and sustainment process. I think what we saw over the World War II until recently was just the sort of natural maturation of that process. Natural maturation of that process, consolidation, fewer. If you look at the number of aircraft, for example, or ships that were available at the end of World War II, it's just a massive number. Particularly aircraft is a really interesting example just over a dozen different kinds of like fighter jets. And over time you just you can look at the sort of like consolidation of all of those things, not to mention the famous, you know, last Supper in 1993, where Bill Perry told all the folks the existing primes, we can't sustain all of you, so you're going to have to consolidate those peace dividends at the end of the Cold War.
Speaker 2:Where that has brought us now is a place where the current defense industrial base, they're investment grade companies. They print money, they do stock buybacks. They issue dividends. They're great businesses.
Speaker 2:If you look at Lockheed's share price over the last 10 years, it's very clear that innovation is not having much of an impact yet because the incumbents are still making tons of money and the stock prices are still going up right through a variety of manipulation and just an accurate assessment of how ironclad their business model is and their relationship with the DOD. So that's like a basic kind of framing. They make money sustaining the things that they've built, right, and there's some combination of vendor lock and then just the natural way that the government does business, whether or not it's actually vendor lock. And now you're not seeing defense tech startups go in to try to take over sustainment, because that's not really. It's such a heavy services business and there's so much embedded assumptions that need to be made. There's just a lot of reasons why it doesn't make sense and I only know a few of them, but there's many.
Speaker 1:Like Anduril doesn't want to take over the F-35, right, it doesn't make any sense F-35, right that doesn't make any sense Mature infrastructure, Even if you look at the long tail of services that are involved around sustainment. This is what primes do extraordinarily well.
Speaker 2:Exactly Compliance. Yeah, I think I know where you're going with this. Yeah.
Speaker 1:Yeah, nobody's eating their lunch. On sustainment right.
Speaker 2:Exactly exactly and paradoxically. This is really interesting because a while ago I was thinking that one of the things that we could do at BM&T is help generate more free discretionary dollars in the defense industrial base to build new platforms. My hypothesis was if the defense industrial base the big primes, the system integrators and folks were building these big, exquisite platforms had clear signal from the government that that they would be able to free up cash to go build new things. And the more I've worked with them and especially talk to folks who are in the financial markets that service the aerospace and defense sector, they can raise money if they want to. They just don't have. They're not highly convicted about any one particular thing and they know how hard it is to do business with the government, which is another way of saying how fickle a customer of the government is. So they could build Andral-like stuff, maybe not at the same level of technical sophistication, particularly on the software side, but they can build that kind of stuff. But they don't have any reason to. They know that their own capture teams are telling them right. There's probably not going to be money for this, at least the way that our our the financial pressures we're under as a business. So all of that, I think, means that the companies that are being started in the last, you know, say, 10, 15 years are they aren't trying to do the sustainment thing. They're trying to look at how you build new kinds of systems, new kinds of whether it's an entire platform play or it's just really good hardware-software combinations that are either endpoint solutions to things or somehow fit into the layer, some sort of part of the tech stack for the DoD, and then in some cases, like with Anduril and Lattice, they're trying to take over the whole. You know, seek, the command and control system and all that kind of stuff. At some point they want, but they want things to be interoperable and joint and all the buzzwords.
Speaker 2:What I think you're starting to see happen, like just with a recent Palantir award and that you know they just were awarded a prime contract recently for a couple hundred million You're starting to see more examples of how the government is feeling comfortable giving money to companies to do work that would have traditionally been the scope of the incumbents. Right, and the more that gets de-risked as a path, the more and more money will flow. It now becomes a fast follower strategy and you have more mechanisms to spend that kind of money, whether it's through consortia or through the DIU-CSO or something like that or just through a traditional program. All that stuff means that at the program level people are having to think differently about how you map out the cost of these different capabilities that you want, because Anduril isn't trying to. They obviously want to have a sustainment tail, but they don't think about it and they're not incentivized to think about it the same way as a Lockheed or whoever is. So the government customers. There's so many details here around how the government customer can now be more demanding on the upfront in terms of what the capabilities are that they want to see, and they have a much more responsive set of vendors who can, who can work with them on like, just really interesting product led stuff. And I think where that takes us is some of these will not be integrated into programs of record but will still become profitable programs, product lines and that has never happened in the DOD before for like any kind of like, say, a weapon system or anything like that.
Speaker 2:If you can have a platform that people can just the equivalent of buy off the shelf, right, and that company views it like maybe Skydio comes up with some sort of specific unmanned aerial system that people can just whip out a government charge card and buy it and if that is a profitable product line for them, that is an entirely new business model that no one else has had before. It's never worked. It feels very similar to moving. I think the closest analog is mid-90s Mark Benioff trying to move from on-prem to SaaS to software as a service business model, which is how he built Salesforce right. He came from an on-prem business where, like, everything was built in house and you had the big, massive upfront costs to install softwares and everything was on site.
Speaker 2:And he's selling something that you can just get online and was able to charge accordingly. I don't lock you in. Instead, you know you're paying on a monthly recurring subscription or an annual subscription, something like that, which is totally different than anybody else, and people thought it was crazy and wouldn't work. And now it's the gold standard for enterprise software is monthly recurring or annual recurring revenue based on a SaaS model. So I think that you could see something if a sales force for the DoD breaking out a totally new business model that works and it unlocks demand in a totally new way that the government has never been able to, it's never been able to have demand in the market that way.
Speaker 2:And if it, and if that happens, then you'll see a ton of clones that are all venture backed immediately, because now you're creating a new category and, as everybody knows in the venture world, like, if you can own the category, you get the category returns, which is you know the power. A lot takes over and those investments make a ton of money and then you'll end up having it. You know, salesforce is not the most valuable company in the SaaS world, but it's a very valuable company. It's in the top and that's how you could get. You could get one or two new primes that are just using a different business model and man, that would just be fundamentally different Maybe. So that's just sort of like something that I think is particularly interesting to see. If you can make it profitable without a sustainment tail, if the government can find a way to be a customer where a business can match it in that way and you have that kind of pairing, then it's man. The sky's the limit at that point.
Speaker 1:If you could buy Lattice like you can buy Office 365. Man, because you make me think, and I think the largest SaaS product by volume that the government buys is Office 365. So you know.
Speaker 2:You know Kerasoft is a good example of this. Right. You know it's a value added reseller government facing does billions in revenue. A ton of that actually is the Salesforce. I think it's like something like 30% of their of their revenue is Salesforce family of products. But all they're doing and not to say that I don't mean to be dismissive, but like they're making it something the government, government can buy and they own the relationships, the contract vehicles and they have a partnered ecosystem to help people deliver that software into the government. Great. So what if, instead of commercial software, that was just a drone?
Speaker 1:Correct. Yeah, and I think that this is. Let me try to break this, because I get into these arguments with people about there being a bubble in defense tech VC and then, if you look at the numbers Wait, are you saying that there is or isn't?
Speaker 2:Because I think that there is.
Speaker 1:Well, I think that there is, so we're in a. I can make both arguments. One I think that there's a lot of money that shouldn't be in and a lot of investments that shouldn't be made. So there is money chasing where they're not going to get venture returns. It's impossible to get venture returns out of some of the investments that I'm seeing people make. They lack acquisition experience or technical expertise on the investment team to actually, in my opinion, be involved in some of those investments. So they're kind some of those investments. So they're kind of me too. Investments. But if you look at the investment dollars relative to the TAM of the market, hey, I'm going to solve this particular challenge.
Speaker 1:Let's call it generic tech for defense. The total dollars that have entered the market are inconsequential relative to the size of the market. It's not disruptive, whereas if you look at general tech, if you look at medical, if you look at SAS, you look at any other market. It is quite significant the amount of money that had this pick on SAS, because SAS initially was a very profitable business model for companies but for the past 10 years hasn't really made much of a promise of return because the SAS revolution already is a thing right, and so now customer acquisition costs are high. There is no switching value of going from on-prem to subscription or to getting subscription income. It is like the basis of the new normal right. So there's a ton of dollars that made that happen from an investment from the bottom to the top, whereas right now, if you were to look at the amount of venture-backed startups and what their capture is relative to the market, it's still 1% or less than 1% of the total market value right.
Speaker 2:Right, as measured by discretionary fund funding.
Speaker 1:yeah, yeah I've seen those charts, those are depressing charts yeah, so so like the elasticity in the market is is bizarre, right you? There's no market that has this level of venture elasticity in it, where the amount of investment dollars relative to the market is so small.
Speaker 2:Also, I do think that there is kind of there'll be a right sizing, as as um you know, of the investment, but it's still relatively very, very small, and so that Think about like automotive too, right, like it's not, like you're not having the best venture returns, trying to like Fisker and Rivian and like you know that just because there's a Tesla, right, you can point to like an Anduril and be like, hey, yeah, there's an Anduril, there's a Palantir, but like that doesn't mean that anyone who wants to start these companies can start them. Uh, it is a mature industry and it takes a very long time to break in and shape large contracts, large programs of record Right.
Speaker 1:So I'm bull. I'm bullish on it from this long view. I'm bearish on it in the short view because there's when you see poor entrepreneur math instead of boring financial spreadsheet math. It's kind of dangerous.
Speaker 2:You know the best. So this is just a funny example of how I've really benefited from just the relationships in my unit. One of the guys in my unit is a buy side advisor in aerospace and defense right. So he works a lot with the strategics in this community and sees a lot of deals. He's orchestrated personally to done several dozen deals in this world and he knows the multiples right. So he knows what companies are bought for in mid cap, small cap, in aerospace and defense.
Speaker 2:And there's just, there's no equation that you can write that makes gets you to those venture returns as, as you were saying, the only. So the the exits are either we get have a billionaire writing, writing you checks in the sort of Palantir-Anderle model, or possibly you could be a lucky one that's acquired by one of them where their valuation would justify them acquiring you in like a stock deal maybe or something like that. But there aren't a lot of exits in that world for that very reason, and so people this is the interesting part about it world for that very reason, and so people this is the interesting part about it it's kind of the opposite of, like enterprise tech or consumer tech there's, so you have to get. What you're seeing is an insane amount of creativity around. How do you hack, go to market, how do you figure out all these different creative ways and people pop out of the ecosystem.
Speaker 2:Chris Moran from Lockheed Ventures has one approach. I don't know the Raytheon folks, the RTX folks really well, but they have a totally different approach. The guys Brian McCarthy and his team of Booz Allen Ventures are doing like really cool stuff. His whole thesis wouldn't make sense if the market was different. So he says we don't know how to build products, so we're going to help other entrepreneurs who know how to build products. So we're going to help other entrepreneurs who know how to build products and we're going to take their product like bacon wrapped shrimp, right, we're going to wrap our people, which we have a lot of people at Booz Allen. That's how we make our money. We're going to sell their product wrapped with our people around it.
Speaker 2:They're the shrimp, we're the bacon and we have contract vehicles. We have people doing business development all the time. We have capture folks who can write proposals and do all that stuff and they are more likely to win a contract if they have a differentiated offering. It's not just booze people. It's booze people plus this cool startup that's doing really cool stuff. Right, that's a win-win and that's a super creative way. It may or may not work. The point is just people are experimenting and doing cool stuff.
Speaker 1:Chris Moran. I really like what they're doing. Yeah, Lockheed's doing a totally different way as well, which I like. That and they've invested in friends of friends and it's getting in really early.
Speaker 2:Yeah, and Chris has told me a really interesting example where Lockheed's capture teams have a floor where a deal is worth under a certain amount. They just won't go after it. It doesn't make any sense. The juice isn't worth the squeeze for Lockheed. They sneeze and it costs them $10 million just in terms of just overhead cost of having tens of thousands of people. So they have made investments in companies that were Lockheed is a sub to them. They're a product.
Speaker 2:Lockheed brings in past performance and adds the like oh, they've got. Lockheed brings in past performance and adds the like oh, they've got Lockheed on the team, right, but they're not leading. And so somebody else. They're investing in a company that has their own capture folks and they're going off and they win a contract and work with Lockheed, who is an investor. But they're not relying on Lockheed to do the BD, they're doing it themselves. And then Lockheed helps them win because they're bringing in past performance, program management, compliance, all these other things that Lockheed knows how to do very well.
Speaker 2:And that's I mean. You've reversed the polarity of how this is supposed to work. You make a deal, you know you're the, you're the gorilla, you're supposed to be the one coming in and doing the stuff. Those things didn't need to happen because they're a reflection of how hard it is to build a business inside of the DoD. But I have a lot of faith in entrepreneurial folks around the country to figure out which of these models will work. And there's going to be a first person and, you know, office of strategic capital is a whole other thing. Like let's get more money in there, let's let's be, you know, help them tax advantages. Or be a friendly LP that helps drive up returns, even if you're not hitting. You're hitting doubles instead of home runs, but you but your actual return is much higher because the government is helping you offset taxes or whatever. Right, these are all interesting ways to get money flowing, get entrepreneurs interested, give them capital to kind of work on things. And it's my favorite part about this is that I know I have absolutely no idea what we would talk about in 10 years to say, like that was the thing, like that ended up being the right bet, that was the one that totally worked, you know. And now that's a model that people roll out. That's the SaaS, the one that totally worked, you know. And now that's a model that people were all that's the SAS. That became the SAS model and now everybody knows that they can do that and that helps bring new entrants into the market and brings new capabilities.
Speaker 2:Because the DoD cannot be it can't be a walled garden in the way that it has been, and everybody knows that now we just don't have the right ways to move into some sort of intermediate form that where they are able to ingest new commercial technologies, or technologies have been built for the DOD but that just haven't been built inside of the defense industrial base, if they're coming from the outside as a hot new startup that didn't exist a year ago, how does the government start to think about working with those people, assuming it even wants to? How does it learn about them working with those people, assuming it even wants to? How does it learn about them? How does it? You know, I was just talking to a group and it doesn't matter who they were in the government.
Speaker 2:I won't name them, but they're doing an industry day and they forgot to. They forgot to. They couldn't find, like their slides from the 2024 industry day, but they said. They said, oh, I'll just send you the 2023 ones. They're basically the same, and I was like was like, oh my gosh, like the world has changed. What do you mean? Nothing has changed in 12 months. And they're like yeah, no, it's basically the same. I was like oh my gosh, I feel like you're.
Speaker 1:I feel like you're teasing me because you know how wonkish I get about business models and and looking at, yeah, the the new approaches that people have, but we'll just have to have you back on the show. That's the bottom line. I can talk more about about what? Because I am I'm really trying to follow what Lockheed Ventures is doing. I have a little bit more familiarity with what booze is doing, but both really interesting. Yeah, like, like I said, I feel like you just teased me right there at the end. But, william, thank you so much for taking the time to be on the show. This is great. I feel like I open up another little research project for myself every time that you and I get a chance to talk.
Speaker 2:I feel the same way. Yeah, thank you again for having me on. It's an honor and I'm looking forward to keep listening to whoever the next person has you have on after this.
Speaker 1:My name is Callie Keene and this has been the Startup Defense.