Podcast: Lux Capital Explains Thinking On A&D

A discussion with Lux Capital Co-Founder Josh Wolfe and Partner Bilal Zuberi about where the venture capital investment company is placing its bets and how it pinpoints successful new aerospace and defense technologies.

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Rush transcript:

Jennifer DiMascio:

Welcome to the Check 6 podcast. I'm Jen DiMascio, the executive editor for Defense and Space. I'm here with business editor, Michael Bruno and our very special guests from Lux Capital, Josh Wolfe, the co-founder and managing partner, and Lux partner, Bilal Zuberi. So anyway, we're here to talk about Lux Capital and its various investments. They've invested in a lot of companies across the board, but many in the aerospace and defense industry including Anduril, Applied Intuition, Orbital Insights, and SailDrone, and scores of others. So we really want to learn about how venture capital firms are seeing the aerospace and defense market, and where it is headed. So Josh, maybe you can start us off there. And talk about what are some of the current relevant investments, you think.

Josh Wolfe:

Well, Jen and Mike, thanks for having us. And privileged to get to talk to you guys. It really starts with of us finding incredible entrepreneurs. These are often scientists, engineers, people who have some sort of rebel mindset that look at the way that things are done and think, often with the arrogance of the highest order, that there is a better way to do it. Sometimes that starts with some breakthrough coming out of a university or government lab. Sometimes that starts with the identification of some problem area. Oftentimes when it's a problem area identification, they come to us and share something. And we often have the same reaction, which is two words, wait, what? And you learn that something is done a certain way, and you can't believe it. I remember being at an air force base and was looking at a B-2 bomber.

            And while we were doing a tour, it had a blue screen of death. And I learned that it was effectively, running on Windows NT. And this was less than a decade ago. And so, whether it's cutting edge hardware or software, there's some basic, low hanging fruit in modernization. And then, there's a really sophisticated, cutting edge that particularly, on the defense side of the aerospace and defense equation. And keeping up with peer who are in many domains, ahead of us. Particularly, in space and in AI and software overseas, that's where some of the great opportunity is.

Michael Bruno:

So, I just want to follow up if I can. First of all, thank you gentlemen, for coming in and talking to us. It just blows my mind, even 10 years ago, which is just yesterday in the aerospace and defense industry. The idea of talking to some investors like you all, would just be crazy. But here you have not only investments that are ongoing, you have a track record of success with companies like Anduril. So I'm curious, you talked about rebel mindset and type of... the wait, what issue. Is that any different in the aerospace and defense in particular, then it is in maybe the greater commercial ecosystem? Or does the wait, what question drive just as much of your interest, when it comes to investing? Even though the wait, what has to do with government and military, which is a very different customer.

Josh Wolfe:

No, it doesn't really. I mean, we factor in this risk. Which hopefully, many years from now, we won't look at as a risk. Which is, how slow will a bureaucracy be? How entrenched were the incumbents? How much of a chance does the superior technology actually have? But the wait, what is often not just in the system itself and the processes, but it really is in the technology. That wait, you're using that? When there's something that's cost commercial off the shelf, that is superior? And why aren't we using that technology? The answer to that is often, a process question. But if there's another technology and they say, my gosh, I never knew that, that technology that you guys have funded, existed, that's something where it's really just the quality of the tech. And not the process itself.

Bilal Zuberi:

And I think, Michael, I'll add to this. That venture capital interest and association of the tech industry broadly with military and defense, is not new. It used to, even Silicon Valley was built on top of defense industry needs. For a while, maybe for two, three decades, we wandered off. And when building out the internet infrastructure for communications and e-commerce et cetera, became primarily an occupation for most of us. But then, the realization happened that some of the technologies that have been developed alongside, whether it's in the machine learning, AI space, data and data analytics broadly, and even some of the work done in advanced hardware and distributed sensors and so on, could be very applicable to the range of problems that the defense industry is dealing with right now.

            And as Josh said, when you look at the broad array of technologies that Silicon Valley either has developed, or is developing and working on, and you look at the applicability of that to our defense needs, you see a pretty good match in many areas. And that's why you're seeing Silicon Valley spend time in those areas. I don't think VCs are necessarily sitting there looking at every aspect of the defense industry. We're not bending metal and making tanks and bombs. But certainly, when it comes to hardware, software, and software defined hardware, and analytics and that type of stuff, geospatial stuff, where intelligence is really important, you'll see Silicon Valley playing a more important role now. And more and more VCs paying attention to.

Michael Bruno:

And when you're looking at the technology, I can certainly understand, there's an attraction to, oh, hey. The customer, the government has this need, and we know this technology that it can be applied to. But what about the customer itself? Is there any attraction to the fact that it is the government? I mean, if there's one thing the government is well known for, it's generally paying its bills, no matter what else is going on in the economy. Other extreme events aside, like a pandemic. But even there, the government was very good at getting money into the ecosystem of its suppliers. So is that an attraction as well, for you all? Does the customer actually bring something that maybe, you don't get from the commercial side?

Josh Wolfe:

Well, certainly the size is something that's very attractive. The perception, which I think has actually changed in the past 10 years, it used to be a risk when somebody said, we're going to have a dual-use technology, and we would go to the commercial world, and we would go to the government, and defense world in particular. And people would say, oh, it's going to be slow and sclerotic, and bureaucratic. And you're never going to get any big wins.

            Something has changed over the past 10 years. There's a zeitgeist. And when we talk about Silicon Valley, it isn't just the Bay Area. It's all over the country. But it's technologists who are almost re-awakening to the roots of what Silicon Valley was. I mean, we talk about Silicon Valley and we think about orchards and halting and catching fire, in the proverbial garage of Hewlett Packard. But post World War II, in the '40s and '50s, U.S Government began funding universities for cutting edge technology, to research weapons technology. The DOD. And you had a Stanford professor, Fred Turman. Who was basically, the first to really encourage grad students, hey, why don't you go and actually pursue spinoffs and startup companies, and then actually sell specifically, to defense contractors?

            You go back in history, the first IPO out of Silicon Valley, wasn't Apple. Wasn't a Microsoft, it was Varian Semiconductors, which were selling microwave tubes for military applications. And the dawn of the computer chip, which many called the soul of the new machine, was all Defense Department funded. You go back a year after that first IPO for Varian, you had Fairchild Semiconductor. Which was born out of Shockley in Bell Labs, and is really considered both the progenitor, the pioneer of today's modern Silicon Valley. And all of its first contracts were military contracts, building the chips that helped the U.S, send astronauts to the moon and helped build missiles that armed the U.S, in the Cold War.

            You go back to Lockheed Martin today, a giant prime, very successful. It set up shop in Sunnyvale. Gets a contract to build the submarine missiles for the U.S, and employee base. So they went from zero to 25,000 people, in four years. So, I think there is a re-awakening to the history and the roots of venture capital in Silicon Valley, that we were really about electronic warfare and defense. And we've forgotten that history, over two years of success. Much of which, was consumer facing. With names that had dominated, like Facebook, and Google, and Instagram, and Snapchat, and Clubhouse, and Amazon.

            And that coincided also, with arguably, a generation or half generation that increasing, was anti defense. And you saw that culturally, with people staging walkouts and protests of Google working on things like Project Maven. And it's one thing to be anti-war, but it's another thing to be pro-defense. And I really think that, that Zeigeist is changing. Where a prior generation, was really focused on being warned of the military industrial complex that Eisenhower warned about. And now you see in China, something like military-civil fusion. Where it isn't just a warning, it's an admonition and an overt state policy. So you have a group of young patriotic engineers and entrepreneurs that want to serve the government, and are excited about its size, but also about the urgency.

Michael Bruno:

What about those legacy primes you mentioned? The biggest one, Lockheed Martin, what kind of relationship do you gentlemen have in working with them, and doing some of these investments? And how have you seen that changed, just in the past decade or so? That you've really come to the forefront.

Josh Wolfe:

We've been close to senior leadership there. The former CTO's a good friend. Lockheed itself, has been a limited partner with Lux. Lockheed has invested in some of our portfolio companies. So they've been a bit forward thinking about wanting to understand where there are young, emerging, unseasoned companies with cutting edge technology that they can partner with for advantage. And in some cases, alert them to potential threats. David versus Goliath. There's a handful of other primes that are taking that approach.

            And then, most small companies historically said, look, we're just going to develop the technology. And we're not going to even really try to compete with the primes. Because I mean, my gosh. We just can't do it. We need the kind of capital, and we'll never get that. Now, you have a new generation of companies, including Anduril and SailDrone and others, that are saying, yes. Of course, we'll partner in some domains with big primes. But we are able to raise the capital in a historic moment, that we've never been able to before. That hundreds of millions of dollars, if not, billion-dollar-plus capital raises, to be able to buttress the balance sheet of these companies, to go independently.

            So, I think that's a real step change.

Jennifer DiMascio:

Where do you think things are headed? What areas are you interested in investing in? I mean, if you think of Anduril reaching a little bit of a level of maturity. And you are a firm that's looking 10 years, 20 years down the line. What are some areas that you think, will be hot into the future?

Josh Wolfe:

Well, Bilal can talk about this particularly, but there's certain areas that are well known in the rise of autonomous systems. The rise of manufacturing techniques, additive manufacturing, software space. Almost every facet of space, we can double click into. But even if you were to start with the Navy and the architecture of the Navy, and a shift away from going from large aircraft carriers, to increase small little combat ships and autonomous systems. Bilal is on the board of a very important company, that started with really academic interests. And has now becoming increasingly part of the future, geopolitically. And bearing straight into south China's sea and beyond. Bilal, you want to talk a bit about SailDrone?

Bilal Zuberi:

Yeah. I think as Josh mentioning, that venture capital is no longer about just toys and games and e-commerce, and maybe email communication systems. It's invading almost every aspect of our economy. From automotive, to industrial manufacturing. To construction tech, so on and so forth. And I think, what you're starting to see is a lot of those technology areas, overlap with the needs in the defense sector as well. So, autonomous system as an example. If you're building an autonomous vehicle to be on the streets of San Francisco or New York City. A lot of the sensor technology, simulation technology and autonomous driving tech, is applicable to vehicles that are out in the desert, and doing work for the defense department, as well.

            Similarly, the SailDrone as an example. When you're thinking about economy, it's not just on land and in air with aerial drones. But in the oceans as well.

            At 70% of the surface area, we have a very large fleet. And globally, an increasingly difficult space, which is our oceans and managing them. On the commercial side, it's called the blue economy. A lot of our economy, trillions of dollars of the economy globally, is driven by the oceans. And making sure that those pathways are clear for our ships to pass through, and so on. But at the same time, to supplement the efforts of our Navy, you need autonomous systems that are collecting data and doing surveillance when necessary, and so on and so forth. So, SailDrone is an example of a company that's doing that.

            As you think about space, we have a new space force. I mean, clearly we are threatened. Clearly we need technology, to be able to manage that. And whether you have satellite launch systems, satellite and space systems, you have sensors on board, you have all kinds of data analytics. Techniques of analyzing the data, Project Maven, Josh mentioned. There's a whole bunch of similar projects that are relevant. Synthetic data creation, looking at security in space. So there's a lot of different sectors where, a lot of the work that's been done or extension of that, that's been done for the commercial world, is very relevant. And we are investing in that.

            One of the things for Lux is that, we don't limit ourselves to thinking, is this a hardware only company? Then, it's a relevant company to us. Or, it has to be a pure software company, it's relevant to us. A lot of people tend to do that demarcation. And for us it's, are you solving a real problem? Going back to, wait, what? So the solution itself, might be a hardware solution. Hardware, software solution. Software only solution, in the cloud, on premise, on your mobile devices. Could be a cybersecurity, warfare situation you're dealing with. It could be any of those. For us, it's more of a, are you building a solution that addresses the problem? And if yes, do you have a market that you can go after?

            And a lot of the entrepreneurs find a wedge into a market, and then expand from that. So, you don't start off by saying, I'm going to take U.S. naval fleet, and I'm going to make them autonomous. You start building boats that you build, that are fully autonomous. And you realize that you can actually provide them to the Navy, at the cost of thousands of dollars a day. When they're used to spending hundreds of thousands of dollars a day, to manage entire crew on top of a ship, to collect the same data. Not only risking the life of the soldiers that are on board, but actually having... there's only that much money to go around, even for the U.S military. When you can do 10 or a hundred times more with the same amount of money, it starts to become a really valuable proposition for the Defense Department.

Michael Bruno:

Okay. But you all as investors, you still got to make money, right? There's some sort of total addressable market that you're looking at. Eventually, some kind of exit plan. Whether it's three, seven, 10 years or something, to monetize on that. How are you figuring out within the defense realm, what is a worthy investment? Are you looking at the national defense strategy going forward? Is it a combination of looking at the five-year presidential budget request? Or, are you just literally going and talking to the pacific commander or SOCOM commander and saying, what kind of budget do you have to spend right now? Because, I've probably got some technology that can help you. I mean, how do you all figure out the financial side of this, as to what's actually a good investment?

Josh Wolfe:

It really starts in the way that we look at almost every other facet, outside of defense. Which is, can you build something that is truly an end of one? Something that's very special, technologically competitive, or people amazing. And in a sense, that always has an element of the field of the dreams. If you build it, they will come. We are certainly looking at areas where you think the directional arrows of progress are going, in terms of budgetary and strategy spent. But we are not looking at line items in the defense budget and thinking, okay, this has increased year over year, 7%. We think it's a growth area. It's much more of, what kind of capability didn't exist before. That if it existed, somebody is going to want. And so, what Bilal is just describing in the panoply of different things that we touch.

            If you were to look at this in a post-facto, linear way. Meaning, when we look back, it's easy to connect the data. But if you're intellectually honest, A priority, a lot of this is what I consider, randomness and optionality. And you pay very close attention. You have enough paranoia, and curiosity, and ambition, that you're tuned to hear a clue. We got very interested going back nearly a decade, in a breakthrough in physics called Metamaterials. Metamaterials had the possibility of having a negative index of refraction, so that... people were talking about Harry Potter invisibility cloaks. Now, it turns out that the visible wavelength of light, that's not actual, practical reality. But at other parts of the electoral magnetic spectrum, you can have a beam steerable antenna, with no moving partners. Okay. So you look at that and you say, who might care about that?

            Well, anybody with a ground station or a plane, or train on the move that is trying to walk onto a satellite. At that point, it was geo satellites. But you move, and the satellite is locked into earth. And you want to be able to track back on, then you have a gimble that steers and mechanically moves it. It's slow, and it loses track. If you're a mission, critical application in geo, let alone with a panoply and constellations that are launching in lower of orbit and [inaudible 00:18:28], you need something that is effectively, what we have already experienced on ground. When you go from 14th street to 34th street, and you switch to four different cell towers in those 20 blocks. You need to be able to do the same thing, without any moving parts. Just like our cell phone antennas made by Qualcomm, did.

            And so, this ended up becoming a company, this breakthrough called Kymeta. And Locks and Bill Gates were the main backers. And Liberty Global and others, ended up joining in. And they make a flat panel antenna with no moving parts, in the Ka and Ku band, and that can do high-speed bandwidth up and down. And the first key applications of that of course, are on military and first responders. The idea that you can have something with a very low signature, as flat as an iPad, no moving parts, and be able to send and receive sign through triple canopy cover in the Philippines, is a significant thing. Exactly for what you were talking about, a SOCOM commander. Being inside of the boardroom in Bill Gates' office, we're able to sit there and listen. Hey, there's these guys in San Francisco that want to take these small antennas and put them onto these small satellites.

            And we say, well, how small are the satellites? And he's like, the ball of aerospace, digital globe, kind of satellites. That cost half a billion dollars, and depreciate over 10 years? And he says, no. These things are a hundred thousand dollars each. They're about the size of a loaf of bread, and they're going to launch hundreds of these things. So, we run and chase those guys down. At the time, they were a company. They would change their name to Planet Labs. And then, to Planet. They would end up buying Google's intern acquisition of Skybox. And so, a whole suite of satellites that have launched in space that, price failure taking static pictures. And then, with video dynamic pictures of all parts of the world, reporting to supply governments with supplemental information, humanitarian efforts, news organizations... I mean, pretty much every time you open up the New York Times, the FT, the Wall Street Journal, there's something that's being reported. Whether it's in XiJiang province, or potential nuclear silos, or migrations of people in an environmental disaster, it is Planet's imagery that's doing that.

            Bilal then have the insight... okay. Over time, the imagery is going to become a commodity. Whether it's coming in from Planet, or whether it's coming from Drones, or whether it's coming from planes, the real value is going to be in digitally processing those images as an asset, and running machine learning and AI algorithms, so that no humans have to actually do the detection. And that ended up becoming a company called, Orbital Insight.

            And we backed those guys. It was a guy, Jimmy Crawford. Who had built the AI for the Mars Rover, built Google books, and had a similar insight. So us, and Sequoia, and Bloomberg, and Google all came together, funded that company. And you're able to do longitudinal analysis now, over these ortho normalized images of satellite, or plain, or aerial imagery. And you can look at everything from what commercial interests and hedge funds care about like, how many cars are in that parking lot of a home Depot? And what does it apply for the retail sales for the day, or the month, or the quarter? To hey, is that caravan in China, going to a productive chemical facility? Or is it going to a ghost town, residential neighborhood?

            And so, what starts with something in a crazy breakthrough area of physics in metamaterials, leads to this company, which then, leads to Planet. Which then, leads to Orbital Insight. Which then, leads to the realization that over time, the cost per kilogram of the things that we're launching up into space, is getting cheaper and cheaper. The launch costs are coming down. You look at companies like Rocket Lab and SpaceX, you look at the positioning of satellites and the technologies there. You start to look at software where for identifying space debris, and space junk. You look at manufacturing in lower earth orbit. And all of a sudden this entire ecosystem, which if you're intellectually honest, A priority, was never knowable. You didn't see it. But I always like to say that, Lux, which is Latin for light. It's a spotlight that's shining. And on the edge of that spotlight, that circumference is all the stuff that's unknown. And that's where we just keep pushing. As that spotlight expands, there's always new opportunities on that horizon, that are the next investments we're going to make.

Michael Bruno:

But I'm really interested because, you said something about, you also picked up clues, sitting in on the board meetings of the big corporations. And working with those commercial types, not defense types. People out of uniform, the CXOs. So, you're saying you get just as much insight there?

Josh Wolfe:

In fact, it is the best insight. Because, it is legal, inside information. I mean, you are sitting in a boardroom of a private company, and you hear a tidbit. And you're able to chase something down from one, to the next. I'll give you an example, and I'll it turn it to Bilal to talk about one of our companies, Applied Intuition. But, we had these brilliant technologists that were starting a company on the Stanford Linear Accelerator. The SLAC. The secretive part of campus. They had taken over a firehouse there, and there were about six people when they started. It was a company called, Zoox. And they were developing fully autonomous, self-driving cars. And the way that they were thinking about the cars, was entirely different. The way that they designed and engineered them from scratch. And they had a lot of problems to solve.

            They had software and sensor problems. They had imagery, they had tele operations. I mean, you name it. Every facet of this, was very difficult. One day we're in there, and we had probably invested 25 or 30 million dollars. And we see all those people playing video games. And we start to get annoyed. We're like, what are these people doing? Shouldn't they be spending our money wisely? And the CTO said, no, you don't understand. They're not playing video games. And we said, what do you mean? They said, well, outside the cars that you see, that are running autonomously around this facility, they are ingesting LiDAR data, optical data, thermal, vibrational, every sensor that you could imagine. They are processing all of that, at the rate of one second per second. What we all call, reality. Inside, these guys are not playing video games. They are training the vehicles, doing thousands of simulations a second. Almost something that look like a video game, like a Grandtheft Auto, Call of Duty, kind of thing.

            And, the computer does not know the difference between reality and simulation. The physics have gotten that good. And we said, well, what are these things running on? They said, these new chips from Invidia. And we said, okay, that's amazing. So then, we went. And that gave us a clue to look for the next generation of chips that can do AI processing. We end up finding this company called, Nirvana. A year later, Intel buys those that company.

            Then we get the insight that the LiDAR for these vehicles, is insufficient. So, we end up funding a company called AVA. Where we took a team out of Apple, that was developing part of their special, secretive automotive projects. We funded them. That's now, a public, multi-billion dollar company. And then, we also learned that the simulation stack needed to get better and better. And that led to our investment in Applied Intuition, which Bilal can talk about. That also has direct applicability as he has alluded to. Outside of the commercial automotive world, into the defense world.

Bilal Zuberi:

Yeah. And I think just to continue that which Josh was saying that, when you're in these rooms and you realize that the... well, what are the artist problems that our companies are solving? And where they're seeing challenges. Or what tools are they using, that are giving them an unfair advantage over their competition? You pay attention. That is our job, to do that. That is not necessarily job description for an executive at a prime, or a board member at a prime. But that is our job, to look for the, what's next. And in that context, when you see these people playing these games and starting to talk about what's called simulation, and what kind of simulation with a panoply of sensors that are used on autonomous cars. And then you combine them with some data, you learn that a certain percentage of Google's entire compute capacity over the world, is utilized for a simulation purposes of their Waymo cars.

            You very quickly realize that both on the capability, the technical capability that's needed to build these real physics models that can be simulated, and the compute that's required to do that and the infrastructure, and the security that's needed. And all of that stuff that's needed around it. You start to realize that most automotive companies in the world, are not going to be capable of doing that independently. Automotive companies today, are not software companies. They're not software and data infrastructure companies either. So you very quickly, realize there's an opportunity to build something new. And obviously, an entrepreneur is what's making this more obvious to us. That this is an opportunity. So, we end up backing Qasar Younis and Peter Ludwig, who built this company called Applied Intuition. Which is building a series of products that start with simulation, and a whole bunch of technologies around simulation, data ingestion, data provenance, data security, over the air updates, and so on and so forth.

            So, series of products that are utilized by some of the largest automotive companies in the world today, to do their autonomous vehicle development purposes. But then when you're doing that, you also realize that there are other entities out there, primes and otherwise, that are developing autonomous systems, and autonomous vehicles, and autonomous tanks, and ropers and Humvees and whatnot, for the military use cases.

            And all of their problems are similar. And in fact, their solutions that we can provide, are simpler than what we are providing already to the commercial entities. Dodging traffic in the middle of a city in New York City, is a much harder problem than being in the middle of a desert somewhere. So, we end up providing those solutions for military applications as well.

            And I think, you see this repeatedly again and again as I said. You sit in these boardrooms and not only are you trying to assist and help the existing portfolio companies with your networks and insights, but you're also learning from them, on where's the next thing that I should be paying attention to. Because at the cutting edge of what these companies are dealing with, is the next wave.

            And if you pay attention to the right things, you start to look like a genius in five, 10 years.

Josh Wolfe:

And to your question earlier, at the end of the day, we are investors. And we're trying to figure out, what's the market for this going to be? It maybe sounds a little flippant, but I truly believe that if you are backing a team with a technology that nobody else has, you have the leverage in negotiations, in the end when it becomes coveted and highly sought after. And anybody that models out some discounted cash flow, some DCF at the time of investment, two decimal points, based on some future [inaudible 00:28:26], it just shows I think, they have a sense of humor.

Jennifer DiMascio:

Well, I think, that's unfortunately all we have time for today. So I'd encourage you to tune in again next week, for another edition of Check 6. Which can be downloaded on iTunes, Spotify, Google Play, and other streaming services. Thank you very much for listening, goodbye.

Jen DiMascio

Based in Washington, Jen manages Aviation Week’s worldwide defense, space and security coverage.

Michael Bruno

Based in Washington, Michael Bruno is Aviation Week Network’s Executive Editor for Business. He oversees coverage of aviation, aerospace and defense businesses, supply chains and related issues.