00:26:15 · Trae Stephens
[00:26:15] S0: That's the... And that's the floor for venture capital. Yeah. If you don't beat the S and P 500 as an asset class, why are you putting money on venture capital? It doesn't make any sense. Correct. And so that's like on the investor side. We have a responsibility to to be Percent. You know, disciplined Yeah. And understand the bar that we're being held to by our limited partners. On the entrepreneur side, and this isn't a critique. It's like I don't expect that they would think about this. But I genuinely don't think most entrepreneurs have thought even one second about how economics works. They just think someone is willing to give me this much money, and they're willing to give it to me at this price. Therefore, that's the market price. But there's like long long running, long range implications and consequences from those decisions, and there's just no economic awareness of what those consequences are because no one has lived through a down round. They haven't lived through a recap. They haven't lived through getting stuck and not being able to raise. They haven't lived through an economic downturn. And so it's just like you're just yeeting cash at some point because you think everything is up and to the right forever. And this has just never been true. There will be downturns. You have to be responsible in the way that you raise because otherwise, you're literally playing a game of chicken with your company, which is not just an organization. It's people. You're playing chicken with people. And I I think people deserve better than that. Yeah. Like, I I have a responsibility to the 10,000 employees of Anduril to not raise at a price that I'm not not going to be able to beat the next round.
00:27:47 · Aditya Agarwal, Trae Stephens
[00:27:47] S1: That's right. [00:27:47] S0: That is my responsibility as a founder. And I think too often founders are just like, whatever. The market price is the market price. And it's like, man, you're you're playing you're playing a dangerous game.
00:27:57 · Aditya Agarwal
[00:27:57] S1: Yeah. Wanna I come back to the pro version in a second, but I think this is also just a hard message often for investors to obviously say without sounding self serving, which is that the price that you are setting for your round, you better be confident that you can get a healthy multiple for the round after that. Right? Because if this is the high watermark that you can anticipate for the next three or four years, that is a very hard spot to be in, particularly if you still need the capital to grow. And then accepting the highest price right now is often kind of like... It's it's actually a very hard thing to do. And I'd say this having lived through this at Dropbox. We took a bunch of, like, super high marks. And then, like, you know, we were the first kind of public market... Sorry, private market Decacorn, I think, back in 2014 or '15. But then that meant from that point onwards, it was very hard to raise capital to grow unless we had insane economics. And any kind of blip in the market or the product in the... In our growth would just make it really hard. And I think we suffered through that. Right? And so... But then, you know... So my story is like take... Know, it's okay to take a 20% haircut right now if it means that it allows you more flexibility for the future. But it's often a lesson that I think it's hard to kind of, like, tell people about and they almost have to live through. But what's your positive version of kind of the AI valuation story?
00:29:16 · Trae Stephens, Aditya Agarwal
[00:29:16] S0: The the positive version is that there are new market opportunities. Yep. And, you know, there are companies that wouldn't have worked ten years ago that will absolutely work today and can be done at... You know, with much smaller teams, with better margins. I think because of that, you can kind of justify seeing average entry prices shift a little bit. And I think every venture fund has seen this. Like, companies like Bob's company, Arda. It's like, we're willing to pay a higher price because we think that this is an enormous market. And we believe in him as an entrepreneur. And so there there will be some of that. But it really has to be... You really have to be dialed on chasing the right big market opportunities rather than just, like, being generally optimistic about AI, which is... I don't think is a... It's a sufficient argument. [00:30:06] S1: Maybe take us through the founding of Anduril. Like, you know, it sounds like... I don't know if the story is accurate, but it sounds like you kind of pitched, you know, Palmer on this and you kind of got him excited. And the two of you and along with a bunch of other folks started the company. But did you just... You know, you're like, okay. I'm an investor, but I also can start companies on this side. I know Founders Fund has done this historically. But did it feel pretty natural to kind of, like, follow that kind of, like, calling or that kind of question in your head?
00:30:33 · Trae Stephens
[00:30:33] S0: No. Actually, not at all. So because I didn't know anything about venture, but I understood government tech pretty well, When I was just running through that first 500 pitch meetings, I decided that I wanted to try to see if I could find the next Palantir SpaceX. So incidentally, government acquisitions is all public. And so you can find out everyone that bid on contract or bid on RFPs. And so I just went and started scraping down all the data I could about companies that had raised venture capital that had also bid on federal contracts. Oh, interesting. And then I outbounded to get meetings with these companies. And I met with a couple 100 companies in the first two years that were that were doing that. Ended up making one investment into a company called Expanse. It was started out being named Cadium. This started by Tim Junior and Sean Maguire, who's now one of the partners at at Sequoia. So we we led their seed round in their series a. Ended up being a good acquisition by Palo Alto Networks. Again, it's like... It doesn't really move the needle for a fund of our size, but it was a a great company. I'm glad we invested. But that was it. I didn't find anything else. And over the course of these 200 plus pitch meetings, the realization that I had come to is that we needed a hardware like a hardware defined company that was driven by software to pair along with Palantir, which was just doing software. And one of the things that I had learned doing software sales at Palantir is that the government has no idea how to value it. They think of it as just hours. It's like hours and lines of code. And so you could deliver the most perfect software ever as a product, and they're always going to think it was too expensive. But hardware, there's a bill of materials. And so it's actually much easier to sell hardware. And so I came back to the team, and I said, well, I've taken all these meetings. Unfortunately, I don't think there's a next Palantir. But the thing that I'm looking for is a software defined but hardware enabled company that works on low cost autonomous systems. That would be like the thing that I would be excited about investing in. And everyone just sat there silently. And Peter was like, great. It sounds like there's nobody better to build that company than you. And I'm like, oh, no. No. You did this to me once.
00:32:44 · Trae Stephens
I'm working at Founders Fund. I'm not saying that I wanna build this company. And he was like, no. You should build the company. And I thought I had the ace in the hole. I was like, well, you know, Peter, Palantir and SpaceX were both founded by billionaires. And I think that's pretty important to building a government company because it takes a long time, and you need a lot of hype. You need a face to the company. And I'm like, I got him on this one because I'm not a billionaire. And he said, well, you know a lot of billionaires. I I was already friends with Palmer. We did the first institutional round in Oculus. So I reached out to him, and I pitched this idea. And he was like, that's dope. I definitely think you should do that. You should come to my house in Woodside. I'm building a... I drained my swimming pool, and I'm building a ramjet in my swimming pool. Of course. Of course. Yeah. And so I went to his house and checked out his ramjet. And I'm like, so seriously, you should... You know, you're working for the corporate overlords now at Meta. And he's like, Zuck is VR boy number one. Like, I'm VR boy number two. Like, we're we're gonna do this VR thing forever. I'm like, oh, well, I guess that... That's one billionaire down. I need to go figure out how I'm gonna do this. And then a couple months later, he called me out of the blue, and he was like, you still wanna do that company? And I'm like, yeah, man. What changed? She's like, I totally got fired. So that's how we started Anduril.