The a16z Show
00:29:03 · Connor Love
[00:29:03] S2: I mean, it's interesting because when we look at defense autonomous systems in particular, look, Saronic making a lot of boats, Covenant's making a lot of missiles, Castelion's making lot of missiles, and Anduril's making a lot of things. Like, When you build many systems, you also require many subsystems below that. And again, there are really interesting military systems being built today. The corollary though, back to the comment we had earlier, by building towards defense, you also build for a different industry. We actually don't have a lot of humanoids or robotics that exist in the world today. I mean, there are thousands, maybe, I don't know the exact number, but when you think about the subsystems that go into some of our military systems, it's the exact same subsystems that are gonna go into the future robotic systems. It's the actuators, like it's the motors, it's the valves and switches and those type of things. And I think when you can build those to quality and to cost, then all of a sudden you make other markets that maybe weren't viable or real, all of a sudden makes sense. And again, I think that's gonna happen in the robotics world, which is, we're gonna spend all this time on shoring development of all those sub components, We're gonna build for a lot of these military systems, which is good. We need it for security and safety and deterrence. But then all of a sudden, you're gonna have this kind of robotic wave that will come in America. I said that AI can't turn a wrench yet. They can. They will eventually. And that will be enabled by all that actuators and switches and subsystems that we built. It's gonna serve a different market. And it's gonna make it financially viable, and we're not gonna have to rely on factories in China. And again, I think that is net good because as you build an industrial base, an industrial base can be used for many things, and down to the component level, I just think we don't have enough of it in America, and it's a decision. You talk to a robotics company today that wants to build, you know, some robotic deployment. There's a 99% chance that majority of what they are buying is coming from China and
00:30:57 · Erin Price-Wright
[00:30:57] S1: some much more reform. They, for many reasons, not just geopolitical, want to onshore that purchasing for quality cost, speed of iteration, yeah, and geopolitical reasons. I think, like, one thing it... You know, it's really... Over the last three years, even just it's remarkable how much of a supplier ecosystem has developed. Like, one of the companies in our portfolio, three years ago, would order two times the number of PCB boards... PCBs that they needed because they assumed that they would have throw 50% of them away for quality issues. They would get the batch from their supplier. They would do the testing, and 50% of them wouldn't pass a quality test. Know, then startups have emerged in this category and are like, we're gonna fix this problem. We're gonna use software and modern technology to redo the way PCBs are manufactured in The US. We're gonna do it faster. We're gonna do it cheaper. And guess what? We're gonna do it better. And now that same company buys you know, PCBs from new suppliers and, you know, they're keeping 70, 80, 90% passing quality tests. So it's... Yeah. I think like we underestimate how much the, you know, close colocation and co development of some of this technology with the end customer and their suppliers really matters to to drive quality higher.
00:32:20 · Connor Love
[00:32:20] S2: So something really interesting is happening, I believe, the industrial base. Like we talked about earlier, you get this top down demand signal from these new systems companies, like we're building new military systems, but oh by the way, you know, Joby and Archer, we're building new planes too, like we're building new end systems, that is a fact, like cars are being built different, planes are being built, military systems are being built different. When you build these new systems, inherently the inputs of those systems need to change as well, and when you look at the industrial base in America today, like historically, if you go look at how Boeing makes a seven thirty seven, you know, Boeing's a great company, important to the fabric of America, they but just pick up the phone and they call Honeywell, and Honeywell helps them kind of build all the different subcomponents. And it's not Honeywell's fault, but what Honeywell does is they say, I don't wanna build a new landing gear again. We have this landing gear that meets the spec and does the thing, so let's just keep going and doing that same thing again and again. And again, it's rational. They're gonna build more seven thirty seven's. They're gonna get paid the same way if it's a... For a 50 year old landing gear or if it's a new landing gear. The problem, is when you keep iterating on these new requirements for end systems, at some point the 50 year old subsystem just doesn't work. And maybe it physically works in terms of meets the requirements, but it's been designed and it's been developed in a way that inherently we haven't innovated on it. And why does that matter? It's because we've developed new materials, like yes, physics hasn't changed, but the inputs to the physics and the inputs to that design has changed. So I think what's happening with the opportunity for a lot of these manufacturing companies, is to do what I call co engineering. And we talked about the long tail of these sub tier suppliers, they've been in receive mode for the last forty years. Honeywell's picked up the phone and they've said, Hey, I need another landing gear, go make that landing gear, and they've executed on the specs with that IP and building it.
00:34:21 · Connor Love
When you want a new requirement, that middle layer cannot think on behalf of Honeywell and change the requirement because, again, they're not in the position to do it. But I think what's gonna happen in the future is you're gonna have this middle layer of supply companies that will effectively be co engineers with the end OEM of rethinking not just what the end system can do by way of speed or kind of, you know, a weight or mass, but the individual sub components will be rethought, will be reengineered, and will be rebuilt. And so, the end system will change from a top level, the individual parts and components will change, and I think that just hasn't happened in the last forty or fifty years, so you're gonna see a completely new wave of what I believe will be called the manufacturing middle, that will be co engineering and pushing design and development upward in the supply chain, as opposed to just being in receive mode and saying, okay, can build the same thing I built forty years from now. And I just, I think that's an opportunity. I mean, I defined it previously as like, we're creating the American manufacturing asset class right now. I mean, private equity has been playing in this ecosystem for a long time, and looking at an asset, and buying it, and improving the cost, and selling it off again, that's not fundamentally changing the things that we build. Right now, companies will change the the the the different things that we'll build.
00:35:40 · Erin Price-Wright, Connor Love
[00:35:40] S1: A good example of this is kind of the... On the on the grid. And when you think about sort of like the electronic stack. And we're about to go through a a huge step change in how we manage and transfer power on the grid, moving from a system of sort of static and mechanical systems that were deployed in large scale across The US in, like, the seventies and eighties to now sort of modern power electronics, battery storage, architectures, which are much more software native and flexible. And, you know, that is is just... When when you have such a complete step change in technology where the technology that's replacing the previous thing is just completely different, you have this opportunity to rethink the entire supply chain behind that and the way all of that design and engineering work happens. [00:36:26] S2: And and in the energy world, it's the same thing that's happening in the defense or the Yeah. The commercial systems world, which is you have this massive amount of demand for, you know, data centers and, you know, new factories and new build. And when you get this top down level, you have the ability to innovate, like Erin's talking about, and rethink the entire architecture. And look like [00:36:42] S1: Because it's a completely new architecture. Exactly. So, you know, you can't rely on these components that worked in the previous world to just reconfigure. Like, you actually have the opportunity to rethink that from the ground up.
00:36:42 · Erin Price-Wright, Connor Love
[00:36:42] S1: Because it's a completely new architecture. Exactly. So, you know, you can't rely on these components that worked in the previous world to just reconfigure. Like, you actually have the opportunity to rethink that from the ground up. [00:36:54] S2: And another important point here is, you know, you can be pessimistic and you can say, okay, Connor, all these new military or end systems, like, not all of them are gonna be adopted. So, like, that that top down demand or or or or Erin, like, we're not actually gonna increase energy by four times, like there's not gonna be that much demand. I actually don't think it matters because I think once you start the snowball of the demand cycle moving in one way, even if you deliver half of that, you know, requirement [00:37:21] S1: You're not going back. [00:37:21] S2: You're not going back. And it doesn't make financial sense. It... And again, it's it's like when you rethink something first principles and you make the, like, new design, new engineering decision, and a lot of times that comes with better cost, better efficiency, You're just gonna buy that thing now [00:37:35] S1: going serviceability, easier to manufacture. Yeah. Yeah. You're never going back.