# What Nobody Tells You About Building Defense Tech Companies | Trae Stephens

Markdown copy of https://realalpha.app/v/wlH0lfkLRRU/ on Real Alpha, the best minutes from long interviews with the people building AI. Cite and link the page, not this copy.

Trae Stephens argues that defense tech founders should start with a focused product and build toward a broad, multi-domain company.

- Show: Minus One
- Hosts: [Aditya Agarwal](https://realalpha.app/people/aditya-agarwal/)
- Guest: [Trae Stephens](https://realalpha.app/builders/trae-stephens/) is cofounder of Anduril Industries and Partner at Founders Fund.
- Published: Nov 5, 2026
- Length: 42 min

## The best minutes

- [23:45](https://realalpha.app/v/wlH0lfkLRRU/?t=1425) [High valuations can make even successful startups poor investments](https://realalpha.app/s/high-valuations-can-make-even-successful-startups-poor/) (6 min)
- [30:28](https://realalpha.app/v/wlH0lfkLRRU/?t=1828) [Anduril grew out of a search for software-led hardware](https://realalpha.app/s/anduril-grew-out-of-a-search-for-software-led-hardware/) (4 min)
- [34:20](https://realalpha.app/v/wlH0lfkLRRU/?t=2060) [Anduril started with a deployable product, not its ultimate ambitions](https://realalpha.app/s/anduril-started-with-a-deployable-product-not-its-ultimate/) (5 min)

## Also worth watching

- [39:18](https://realalpha.app/v/wlH0lfkLRRU/?t=2358) [Defense startups must expand beyond a single product category](https://realalpha.app/s/defense-startups-must-expand-beyond-a-single-product/) (3 min)
- [12:01](https://realalpha.app/v/wlH0lfkLRRU/?t=721) [Palantir took a decade to reach $1 billion in revenue](https://realalpha.app/s/palantir-took-a-decade-to-reach-1-billion-in-revenue/) (4 min)
- [17:24](https://realalpha.app/v/wlH0lfkLRRU/?t=1044) [Twelve companies generated over 95% of Founders Fund's returns](https://realalpha.app/s/twelve-companies-generated-over-95-of-founders-funds-returns/) (6 min)
- [2:50](https://realalpha.app/v/wlH0lfkLRRU/?t=170) [Palantir's culture won him over by turning ideas into action](https://realalpha.app/s/palantirs-culture-won-him-over-by-turning-ideas-into-action/) (6 min)

Skip the opening discussion of entrepreneurial quests and the Facebook office, hiring, and growth anecdotes.

## Full analysis: Trae Stephens says Anduril landed a program in 22 months

- Stephens says Anduril had a multi-hundred-million-dollar program of record 22 months after founding.
- That supports his case for sequencing, but not a general promise that defense sales move quickly.
- Founders should price financing against the next round and build only what field use requires.

Its 7 sections, what it means for you and what to watch are on [the page](https://realalpha.app/v/wlH0lfkLRRU/#analysis), free with an account:

- [0:49](https://realalpha.app/v/wlH0lfkLRRU/?t=49) A quest can matter more than founder identity
- [8:03](https://realalpha.app/v/wlH0lfkLRRU/?t=483) Palantir paired fast execution with slow adoption
- [21:42](https://realalpha.app/v/wlH0lfkLRRU/?t=1302) Fund returns make scale the investment filter
- [24:40](https://realalpha.app/v/wlH0lfkLRRU/?t=1480) High marks can make success hard to finance
- [29:16](https://realalpha.app/v/wlH0lfkLRRU/?t=1756) AI may support higher prices only with proof
- [36:14](https://realalpha.app/v/wlH0lfkLRRU/?t=2174) Anduril won access by starting with a fieldable product
- [40:49](https://realalpha.app/v/wlH0lfkLRRU/?t=2449) Defense prime ambitions require crossing categories

## Summary

Trae Stephens is a cofounder of Anduril Industries and a Partner at Founders Fund. Before that, he worked in the U.S. intelligence community and spent six years at Palantir, where he ran the sales side of the business.

Stephens argues that founders should pursue problems they become deeply obsessed with, rather than search for a startup idea to match an entrepreneurial identity. He describes how Palantir’s execution-focused culture and his years selling to government shaped his approach to hiring and defense tech. At Founders Fund, he learned that a small number of very large outcomes drive most returns, making investment discipline and careful startup valuations important. He says Anduril started with a product it could deploy quickly, then used that foothold to build toward a broader defense company.

### Minute by minute

- [0:26](https://realalpha.app/v/wlH0lfkLRRU/?t=26) **A good quest finds the founder.** Stephens says the best companies often begin when someone becomes obsessed with a problem that will not leave their mind. He argues that starting a company just because someone identifies as an entrepreneur can lead to bad ideas.
- [2:50](https://realalpha.app/v/wlH0lfkLRRU/?t=170) **Palantir emerged from a real need.** Stephens says he was working in the U.S. intelligence community and had no plan to enter tech when he encountered Palantir. After his agency resisted using the existing product, he contacted the small team, visited Palo Alto and decided its people were a fit.
- [5:28](https://realalpha.app/v/wlH0lfkLRRU/?t=328) **Execution revealed the right people.** Stephens says he could often tell quickly whether a founder or company was a fit, though he tried to respond respectfully when passing. At Palantir, he saw colleagues build and demonstrate their work rather than spend meetings planning around bureaucracy. He says the company also let people shift roles to match their strengths.
- [11:42](https://realalpha.app/v/wlH0lfkLRRU/?t=702) **Palantir's growth took years.** Stephens says Palantir took five years to reach its first $10 million in revenue and 10 years to reach $1 billion. After six difficult years and unsuccessful efforts including partnerships with large firms, Peter Thiel asked him to join Founders Fund; Stephens says it took nine months before he joined.
- [17:24](https://realalpha.app/v/wlH0lfkLRRU/?t=1044) **Investing took hundreds of meetings.** Stephens says a Founders Fund partner challenged him to take 500 pitch meetings in his first year, without making investments. The experience showed him how few companies were investable and helped him recognize teams and opportunities with the potential to return a fund. He says repeated practice also helped the partnership align on what makes a strong investment.
- [21:19](https://realalpha.app/v/wlH0lfkLRRU/?t=1279) **A few companies drive returns.** Stephens says 12 companies returned more than 95% of Founders Fund’s returns, including Facebook, SpaceX, Airbnb, Spotify and Stripe. He argues that investors need to assess whether a company could become a $60 billion to $100 billion business, since a smaller win may not matter much for a billion-dollar fund.
- [22:55](https://realalpha.app/v/wlH0lfkLRRU/?t=1375) **High valuations raise the return bar.** Stephens says large AI rounds can require a company to reach a trillion-dollar outcome just to deliver the venture returns investors once expected from a more ordinary exit. He argues that investors need to stay disciplined and founders should consider dilution, future fundraising and downturns before accepting a high valuation.
- [29:11](https://realalpha.app/v/wlH0lfkLRRU/?t=1751) **AI can justify selective price increases.** Stephens says AI creates markets that may not have worked a decade ago and can let companies operate with smaller teams and better margins. He says that can justify somewhat higher entry prices for companies pursuing genuinely large opportunities, but optimism about AI alone is not enough.
- [30:01](https://realalpha.app/v/wlH0lfkLRRU/?t=1801) **Anduril began with a thesis.** Stephens says he reviewed public federal-contract data and met with hundreds of companies before concluding that defense needed a software-driven, hardware-enabled business focused on low-cost autonomous systems. Peter Thiel urged him to build it, and Stephens recruited Palmer Luckey, who later agreed to join after leaving Meta.
- [34:11](https://realalpha.app/v/wlH0lfkLRRU/?t=2051) **Start small, then expand the product.** Stephens says Anduril took an iterative approach, like SpaceX moving from Falcon 1 toward Starship, and began with Sentry, a counter-intrusion tower. The team deployed a test unit in September and its first towers in December, then secured a multi-hundred-million-dollar government program 22 months after founding. He says Sentry helped the company build and improve the software brain used across its products.
- [39:18](https://realalpha.app/v/wlH0lfkLRRU/?t=2358) **Defense has no free space.** Stephens argues that a company aiming to become a defense prime cannot remain in a single niche: Anduril competes with major contractors and sometimes works with them. He points to the company’s work with General Dynamics Electric Boat on submarine modules as an example of how its activities expanded beyond its original plans.

## Transcript

Minus One, hosted by Aditya Agarwal, with Trae Stephens.

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

[0:00](https://realalpha.app/v/wlH0lfkLRRU/?t=0) I don't think you find a good quest. I think a good quest finds you. People are really desperate for like the, you know, the insight. How do you know that this company idea is going to be a great company idea? And the reality is, is like, it's actually really obvious most of the time. Almost all these companies are completely uninvestable. If you believe that you're operating in free space, it's just not true. There is no free space left in defense. And this is actually an important lesson for entrepreneurs. SpaceX did not build Starship from day one. One of the things I admire in your career is that you seem to have made very good decisions or very interesting decisions about things you have picked to work on, either people or companies.

[0:43](https://realalpha.app/v/wlH0lfkLRRU/?t=43) What's your organizing framework for how to think about good quests and ideas worth working on? I don't think you find a good quest. I think a good quest finds you. I'm a huge Monty Python fan. I don't know if any of you are. But there's this scene in Monty Python and the Holy Grail where King Arthur and his knights are just randomly wandering around and he's acquiring some of them. And then God appears in the clouds and they all start groveling. And he says, King Arthur, I have a quest for you. And it's a quest for the Holy Grail. And that's like what ends up happening through the whole movie.

[1:16](https://realalpha.app/v/wlH0lfkLRRU/?t=76) But King Arthur wasn't going around knocking on doors being like, what are your problems? Tell me about how I might be able to build enterprise sass. No, it's just God gave him the quest. And I think too often in entrepreneurship, people, their identity is I'm an entrepreneur and now I have to find a quest. And I think actually the best companies are I'm not an entrepreneur. I'm just a guy. And I like I'm obsessed. I become obsessed with this thing that can it won't leave my head. And that's that's the beginning of the entrepreneurial journey, not the other way around. And I think getting that mixed up, it leads to a lot of bad quests, really dumb companies.

[1:58](https://realalpha.app/v/wlH0lfkLRRU/?t=118) You know, I love that answer. I mean, I actually think that this is something that Zuck used to talk a lot about at Facebook, which he was that the like, you know, doing a company is really hard. Most companies don't work. It is absolutely the hardest thing to kind of do in terms of building a career. So you should almost do a company as an act of last resort. if this is the best vehicle that you can find to bring an idea to life, then you should kind of embark on a company. And in some ways, it should kind of, you know, really draw you to it as opposed to the other way around. So maybe with that framing, Trey, how do you recognize when you are getting pulled, particularly in a super noisy environment like we live in today, where there are so many different distractions and ideas and people, and a lot of it sounds pretty enticing. And frankly, I'm assuming that the time when you joined Palantir, it was a bit easier because it was not as noisy then, right? So how do you almost winnow out the noise that invariably exists in the ecosystem right now? Yeah, I mean, the Palantir story is actually maybe a relevant one here because I was working in the US intelligence community. I wasn't looking at

[3:04](https://realalpha.app/v/wlH0lfkLRRU/?t=184) startups. I frankly had no expectation that I would spend my career in tech. I thought I was to be a civil servant my entire life. So not only was tech less noisy in 2007, but tech for national security purposes was, you know, nothing other than Palantir. So I had this experience of basically trying to fight to get Palantir into the agency where I was working. And I was told, no, they basically said, if you believe that there's a requirement that isn't being met, you need to write up like a statement of work, and then we'll see if we can get it funded. And I'm like, whoa, whoa, whoa, this already exists.

[3:40](https://realalpha.app/v/wlH0lfkLRRU/?t=220) Like literally the product exists. Other people in the intelligence community are using it. We can just use the existing product. And they're like, oh, no, no, no. We don't buy things. We build things. I'm like, whoa, this is crazy. And so I reached out to the guy who gave the demo. It was a very small team at the time. They're only like 20 people. So some of you might know Shyam Sankar, who's... like the president of Palantir now, he was the guy that gave the demo. And I reached out to him and I'm like, man, I hope you're not wasting your time because this is going nowhere. Like I've been fighting this battle internally. And he just sent me this email and he's like, wow, it's adorable that you think you're going to be a government civil servant if this is bothering you of all things. And so he asked me to come out to Palo Alto. So I took a day off of work and flew out on a red eye and hung out for one day at Palantir. And I was like, oh my gosh, these are my people.

[4:31](https://realalpha.app/v/wlH0lfkLRRU/?t=271) He offered me a job. Well, Dr. Karp offered me a job on the spot after talking to me for literally five minutes. And I'm like, whoa, I had spent 18 months going through an interview process for a government job. And I just met the CEO and he offered me a job five minutes later. It was like a baptism by fire into like how startups really work. Two questions. Why was it immediately apparent to you that these were your people and also why did he offer you the job do you think after just five minutes man by the way for what it's worth my experience at facebook was actually very similar which is that i remember walking into the facebook kind of like house slash office and my first reaction was like oh these are my people this is going to be super fun this reminds me of like the people that i love hanging out with it feels like a dorm room they're writing code drinking beer, eating pizza, playing video games.

[5:20](https://realalpha.app/v/wlH0lfkLRRU/?t=320) Like I am going to love it here. And I think I talked to Mark for literally five to seven minutes. He asked me maybe one question about databases and he's like, you seem to know databases. So it was very apparent, like on both sides pretty quickly. I'm curious, like what was your experience like? Well, I think there's like a corollary to venture capital here that's probably worth mentioning in quick passing. Please, please, yeah. Which is that people believe that there's some like KPIs or something that VCs are looking for and that, you know, when you ask, how do you know that, like, this founder is going to be a great founder?

[5:55](https://realalpha.app/v/wlH0lfkLRRU/?t=355) How do you know that this company idea is going to be a great company idea? And, you know, I think people are really desperate for, like, the, you know, the insight. The reality is, is, like, it's actually really obvious most of the time. And if you're just being honest, like, within five minutes, you can usually tell, like, okay, this person is insane. Like, I obviously want to have, like, a 10-year relationship going on with this person. And 95% of the time, you know, you meet with a company and you're like, oh, my gosh, this is not it. Like, I'm not going to do this. Now, there's, like, the mean way of handling that where people are like, I'm going to pass in the meeting.

[6:33](https://realalpha.app/v/wlH0lfkLRRU/?t=393) And I try not to do that because I think people have passion and you want to, like, be respectful to that and be helpful if you can. But I think it's the same thing in recruiting for hiring. You know, in the government, a typical meeting is basically like 20 people come into a room. You have like the 10 people sitting at the rolling chairs around the table. And then you have the 10 people sitting along the back benches in the chairs that don't roll, if you've been in a room like this. And the people in the chairs that don't roll are junior and usually incredibly ambitious with ideas and opinions.

[7:07](https://realalpha.app/v/wlH0lfkLRRU/?t=427) And the people in the rolling chairs are focused on not breaking any rules. They're the ones that are saying, like, let's go around and introduce ourselves. And it's like, you know, my name is John. I've been here 10 years. Here are the projects that I've worked on. Thank you for convening this conversation. It's really important that we have this discussion. Here's the agenda. At the end of the meeting, I want to, like, requisition a white paper. And then you move on to the next person. They do the same thing. Hour-long meeting, 40 minutes in, the rolling chair people are still introducing each other.

[7:40](https://realalpha.app/v/wlH0lfkLRRU/?t=460) And the last 20 minutes, it's just like this mad rush to like, okay, now what is the white paper that we need to write? And that was infuriating for 23-year-old Trey. I couldn't do that. And so going into Palantir, you know, I'd be chatting with someone and they'd be like, okay. you have to see this. And they would go over, they'd open up their IDE, they would show me something, they would make a change, they would launch it in the product, they would show me like how this thing worked in the product and how we were thinking about changing it. And it was just that for an entire day. And I'm like, oh my gosh, these people, like they do things. Like they're literally just doing the things that they're talking about.

[8:21](https://realalpha.app/v/wlH0lfkLRRU/?t=501) And then having this conversation with Dr. Karp, who was clearly insane, like just, I love him, but he's a wacky dude. He's a wacky dude. I was just totally blown away by this idea that there are these band of renegades, sort of like the Rebel Alliance in Star Wars, that they're just fully committed to breaking the bureaucracy.

[8:43](https://realalpha.app/v/wlH0lfkLRRU/?t=523) **Trae Stephens:** And after spending two and a half years working in the government, I believed nothing more than that the bureaucracy needed to be broken.

[8:49](https://realalpha.app/v/wlH0lfkLRRU/?t=529) Yeah, very interesting. Actually, I didn't realize that you were at Palentry in 2007. I have an interesting story, which is that in that time period, Facebook was scattered through a bunch of different offices in downtown Palo Alto. And we would keep on like getting new office space and then kind of growing out of it. But then I got introduced to this guy from Palantir, Aki. And so Aki's strategy was basically like, I don't need to look for office space. I'm just going to find somebody from Facebook. And as they keep on vacating office space, I will keep on taking it. And so Aki and I would meet every three months.

[9:22](https://realalpha.app/v/wlH0lfkLRRU/?t=562) He's like, hey, do you have any office space for me? I'm like, yeah, this is the one we're going to be leaving soon. And he would just end up taking, he's a great guy. Well, you know, the beautiful thing about that story actually is that Aki was the CTO at the time. And I think that the reason this is relevant in like the context of hiring is that when you're building a startup, you have this idea, I think, that you should hire people for the specific skills or whatever. And the reality is, is like no one at Palantir ended up doing the thing that they were hired to do. Like Aki did a lot of things.

[9:52](https://realalpha.app/v/wlH0lfkLRRU/?t=592) Like, did he write code? Yeah, sure. Everyone was writing code. You know, I started writing code at Palantir too. And then in the first three weeks, I was dinking around with like a training exercise, onboarding, during onboarding. It's funny how like these people have come around to do crazy stuff. So Bob McGrew was the head of engineering. Yeah, Bob was here just a few months ago. Yeah, Bob is, he was the head of research at OpenAI. And then he recently just started a company called Arda that's doing manufacturing automation. I think they just kind of did a huge public thing today. Yeah, yesterday.

[10:23](https://realalpha.app/v/wlH0lfkLRRU/?t=623) They just launched publicly actually on Monday. But yeah, this week. But Bob, who I'd never met before, walked up behind me and he was like, hi, I'm Bob. Who are you? And I was like, Trey. And he's like, never touch my code base ever again. Your code is garbage. And I just kind of laughed and, you know, within a week I was running sales, which is exactly what I should have been doing, actually, because, you know, a top 5% engineer working in the intelligence community is like a bottom 5% engineer working on a software company in Silicon Valley. So I think it's like that having that flexibility and awareness of how skills align was like a driving force at Palantir that worked for us really well.

[11:12](https://realalpha.app/v/wlH0lfkLRRU/?t=672) One thing based on kind of the slight tangent that you took earlier that I want to mention, I think this is really important advice for founders in this room, which is the longer your diligence process drags on with a venture capital firm, the less likely they are to invest. right i think that oftentimes founders think that it is an indication of a lot of interest when people take the fifth or the sixth meeting it's actually a case of like they are struggling to find a reason to kind of invest because they generally know in the beginning they generally know pretty quickly whether they love it or not so anyways coming back to uh to your stories right here um okay so you were at palantir for six years six years that's right and then you make your way over to founders fund what made you transition kind of like from being an operator to kind of an investor they just kind of like They wanted to work with Peter Thiel.

[12:01](https://realalpha.app/v/wlH0lfkLRRU/?t=721) Was there some underlying motivation or kind of thought process there? Or was it, again, like, listen, went in, loved the team, loved the mission, and kind of knew it within 10 or 15 minutes? Not at all. So, yeah, I was kind of laughing internally when you opened this up by saying that I had this very successful trajectory of good decisions. That was not the case at all. I was at Palantir, as I said, kind of running the sales side of the business, really for most of the time that I was there, it was really hard. Like, I can't even begin to explain how hard it was. You guys were not a cool or sexy company for a very long time.

[12:40](https://realalpha.app/v/wlH0lfkLRRU/?t=760) No. And I think that actually, like, we should talk about this in this conversation, like the difference between Facebook and Palantir. Because like Facebook, things just worked. Like, you know, users are coming on. The company always had a lot of money. Palantir was not like this at

[12:54](https://realalpha.app/v/wlH0lfkLRRU/?t=774) **Trae Stephens:** all. Like, you know, it took us five years to get our first 10 million in revenue. It took us 10 years to get to a billion. You know, the company is accelerating now. It's kind of been figured

[13:06](https://realalpha.app/v/wlH0lfkLRRU/?t=786) out, but we needed cultural change with our customer in order to win, which is not a great place to start a business. Like if you're requiring on something that you can't control for the company to work, like it's going to take a long time. And so we tried everything. We hired retired generals. We hired former ambassadors. We brought on consultants in Washington, D.C. who were supposed to be able to do this for us. I spent a lot of time with SpaceX, like sharing notes about what was working, what wasn't working. We tried to do partnerships with the big primes. Like, you know, we had a partnership agreement thing with Boeing and Booz Allen and Deloitte and Accenture and SAP and none of the, nothing worked. I mean, it was like death by a thousand cuts. We were sure that it just was going to die. And I was exhausted after six years. And so it's like easy to look back in hindsight and be like, wow, like, you know, when I left, we had a billion dollars of revenue and like, gosh, that probably says something about Trey and Sean figuring this out. Actually, like, no, it was bad. We sucked. We were terrible at this. And you could maybe blame the customer for some of that as well. But like, it was really hard. And there were moments

[14:20](https://realalpha.app/v/wlH0lfkLRRU/?t=860) where like, I would leave a meeting with Dr. Karp and Dr. Karp would be like, wow, you are bad. Like, this is not working at all. And so I was constantly talking to Peter, where I would have like these biweekly calls where we would catch up and he'd be like, okay, what is the thing that we're running into now? How do we get through this hurdle? And so I played Ultimate Frisbee at Georgetown, and we had this alumni Ultimate Frisbee game. And I kept getting calls from Peter during the Ultimate Frisbee game. And I was like, I'll talk to him after. But he kept calling. So finally, I answered the phone. I was like, is there a problem? Do we need to solve something?

[14:54](https://realalpha.app/v/wlH0lfkLRRU/?t=894) And he's like, I would like for you to leave Palantir and come join me at Founders Fund. And I'm like, I don't know anything about venture capital. I don't know anything about finance. Like, I haven't taken a math class since high school. I do not understand why you think this is a good idea. Am I being fired? Like, technically, you're my boss at Palantir, but you want me to leave? Is this a soft landing? Yeah, I'm like, I'm pretty sure I'm being fired. This is really weird. And he's like, just meet the team. And so a couple of weeks later, I went up to New York. For some reason, the Founders Fund team was there.

[15:29](https://realalpha.app/v/wlH0lfkLRRU/?t=929) And I sat down with Lauren Gross, who's the CEO. She runs CEO. She runs Founders Fund. And she's like, why am I talking to you? And I'm like, I don't know. Peter asked me to talk to you. And she was like, why are you interested in venture capital? And I'm like, you misunderstand. I am not interested in venture capital. And so I had like this nine month process where everyone was just confused. And then on Thanksgiving Day of 2013, Peter called me and he was like, OK, you're going to join Founders Fund. And I'm like, I don't understand. There's no offer. I haven't agreed to leave my job to join Founders Fund.

[16:06](https://realalpha.app/v/wlH0lfkLRRU/?t=966) And he's like, no, you're going to join January 1st of the year. You're going to move to San Francisco and work at Founders Fund. I'm like, great. All right. I guess that's what I'm doing. So it was not the good decision that you made it sound like. I mean, nine months is a long time. I want to get back to what the first four or five years at Founders Fund were like before you also did Entral. But coming back to your point about Zuck, you are right that Facebook led a charmed life in the beginning. However, internally, Zuck always kept on raising the bar. We never felt like we were winning. It was always like, why are we not winning more?

[16:47](https://realalpha.app/v/wlH0lfkLRRU/?t=1007) Right. Like why? Like every like there would be either some fucking competitor that we needed to crush or some metric that like was the next. Like if you can get to 100 million users, why can't we go a billion? If it's a million miles, if it's a billion miles, why can't it be a billion dows, right? And so it was always a case of our ambitions grew faster than I think our success. And so my almost like visceral memory of Facebook is always like, we can do more. We must do more because it's almost, it would be a shame to not capitalize on this opportunity that we have because these opportunities don't come around very often.

[17:22](https://realalpha.app/v/wlH0lfkLRRU/?t=1042) So I think Mark is just like, I mean, Mark is still pushing the company super hard today. And I think this is one of his best qualities. You come to Founders Fund. What is the biggest kind of like culture shock that you have relative to being an operator? I think I come in, again, not knowing anything about venture. I come in thinking there are probably like hundreds of startups and we're going to spend a bunch of time like learning about these companies. And we're going to sit around a table and we're going to make really hard decisions about which companies we're going to deploy capital into.

[17:46](https://realalpha.app/v/wlH0lfkLRRU/?t=1066) That was totally wrong. It turns out there are thousands of companies. As I said before, you generally know pretty quickly whether or not it's going to be one that you're going to back. And it wasn't really about the decision making. It was really more about like having an understanding and an opinion on what was likely to work and what wasn't likely to work. And so, you know, in the first couple of weeks, Brian Singerman, who was one of the GP at that time, he's now running his own fund. He sat me down and he said, your only goal for the first year, your goal is not to make investments. Your goal is to take as many pitch meetings as you can.

[18:23](https://realalpha.app/v/wlH0lfkLRRU/?t=1103) And he was like, I'm going to challenge you to take 500 pitch meetings in your first year, which is a lot. A lot. Without making any investments, that's just. Right, right. And I didn't really understand why he wanted me to do this. But after like 200 pitch meetings, I was like, oh, man, he's trying to show me this critically important lesson about investing, which is that almost all these companies are completely uninvestable. And you only get to get that knowledge if you lower your bar and you have a lot less discrimination, which you can do when it's your first year in venture capital. I can't do this today. This would be an incredibly poor use of my time. But it was really important for me to see everything in the market so that I was able to tighten it up so that I could make much more efficient use of, you know, what a good intro looks like, what a good founding team looks like, what, you know, types of companies have the potential to return the fund rather than just be like good acquisition targets, which for a billion plus dollar venture fund doesn't move the needle.

[19:28](https://realalpha.app/v/wlH0lfkLRRU/?t=1168) Yeah. But you said something earlier, which is interesting, which is that you said that it's, you expected venture capital to be surveying the landscape and then kind of making decisions, but instead it was about coming to a shared understanding of what good looks like. So is it, is that what you were trying to, like, is, do you think that one of the key aspects of Founders Fund's success is that as a partnership, you have a very strong point of view, a shared point of view on what great looks like? Yeah, yeah. So a great example of this, and my chief of staff, Ellie, is somewhere over here. Ellie does a lot of this work for me now, which is great.

[20:02](https://realalpha.app/v/wlH0lfkLRRU/?t=1202) But as the GP of the venture fund, if someone on our team says, I believe this is an investment that we should make and I need to get Trey to meet with the company, there's like a 90% chance that I will agree. Because our bar is really high and we generally understand what it means to create fund returning opportunities, what concentration means, what is the fund strategy for deploying capital, how we're thinking about average interest. price like we're kind of like pretty aligned on this and so when someone brings something to the GP it's going to be pretty bait like it's not just an exploratory meeting at that point and I think you just need a lot of reps to get there like a brilliant person like you know 160 IQ person can't walk in and be good at this just because they like understand science like you need to have thousands of reps before you truly are able to understand what a good opportunity looks like. So maybe this is too much inside baseball and venture, but I'm curious, when does that 10% occur? Where is often the source of disagreement? Is it in priors on market shape, product shape?

[21:12](https://realalpha.app/v/wlH0lfkLRRU/?t=1272) Is there just a different read on founder characteristics? Are there common sources of misalignment or disagreement? Founders Fund is 20 years old. I've been around for 13 of those. or just a little over half, you know, you could make an argument about if it's the best venture fund of all time or if there's two or three other firms that have similar return profiles, but we've done really well. And I can't take a ton of credit for that. 13 years is actually not that long to like see the upside that's been generated. In those 20 years for one of the best

[21:42](https://realalpha.app/v/wlH0lfkLRRU/?t=1302) **Trae Stephens:** performing venture funds of all time, I can genuinely say that like 12 companies have returned 95 plus percent of all the returns to the fund. It's like Facebook, we did seed in

[21:51](https://realalpha.app/v/wlH0lfkLRRU/?t=1311) Series A, SpaceX, Airbnb, Spotify, Stripe. There's only 12. And so when you're meeting with companies, your question needs to be, is this a $10 billion success story? Is it a $50 billion success story? Is it a $100 billion success story? Is it a trillion dollar success story? Now, if you have a company that comes in, and I'm not going to target anything that I've seen, but let's say it's like a manufacturing autonomy for welding tubes. I don't know. It could be anything. You could meet that and be like, that's a cool idea. Somebody should do that. It's likely to work. There's a lot of customers for that. Is this a $100 billion company? It is not. And so if you have a billion dollar venture fund and I own 10% of a $1 billion success story, That's $100 million.

[22:41](https://realalpha.app/v/wlH0lfkLRRU/?t=1361) I have now, in the success profile, I have returned one-tenth of my fund. It just economically doesn't matter. And so you start attuning to that. It's like, I need to believe this is going to be a $60 to $100 billion company. And there's just not that many companies that have the potential to grow to that scale. Okay, so this is a good segue, which is perhaps, I think that there was broad consensus around outcome sizes and kind of market segments for those outcome sizes, I think across our industry, broadly, you know, maybe up until three or four years ago. But I think over the last three or four years, it feels as though a lot of kind of like, you know, the kind of, you know, like, hey, this could be a $10 billion company. Now it's like maybe like, you know, a much bigger kind of like, you know, potential size than we all thought it was going to be.

[23:33](https://realalpha.app/v/wlH0lfkLRRU/?t=1413) So I guess maybe the question here is that how have either you yourself at Andrel or maybe at Founders Fund started to adjust some of your own priors on how big some of these outcomes can be in a world where we actually have kind of the tailwinds of massive acceleration through AI? Well, I could give you the pro version of this argument. Give me both. I'll start with the negative version of this argument. And I'm not saying that this is always right. There are always exceptions to the rule. But I, my general assumption is that it's actually not true. Like there's company values at liquidity, at the point of liquidity are not going to move meaningfully beyond where they have historically. Like there will be exceptions, OpenAI, Anthropic, you know, they're going to go out at over one and a half trillion dollars market cap. And that's incredibly unusual for a tech company. But like Airbnb is worth $100 billion. Stripe is worth $150 billion. These are incredibly awesome venture outcomes.

[24:30](https://realalpha.app/v/wlH0lfkLRRU/?t=1470) And this belief that every AI company is going to be a trillion dollar company, there's just not enough money in the universe that there's going to be a hundred one trillion dollar companies. What ends up happening is now we have these companies that are coming in that are saying we're doing a 300 million dollar round. And we literally have to ask them, that's how much you're raising or that's the valuation? And we don't we don't know the answer to that question. And it's just math at that point. Yeah. It's like if you're raising like pre-revenue, pre-incorporation round of 100 plus million dollars, you can just walk the math out with dilution, with capital costs, everything like that. And you basically get to the point where it's like, even if this works, like at 100 billion dollar level, we don't return the fund, which means that you require it to be a trillion dollar outcome to see the same venture dynamic that you see in a normal company 10 or 15 years ago.

[25:26](https://realalpha.app/v/wlH0lfkLRRU/?t=1526) And I think that there's like two problems here, and it's both on the investor side and the entrepreneur side. On the investor side, there's this belief like venture capital is far too aspirational. It doesn't make any sense. The asset class can't support 100 successes. You know, being an investor should- the enterprises that we have? No, not at the enterprises that we have right now. There are too many VCs. I think this is like just a, it's a truism. And because of that, you have all of these people that are chasing deals, knowing that they have to get in the winners to make it work. And they're willing to pay any price to do that without recognizing that like the baseline for a successful venture fund is you have to beat the S&P 500. And at these prices, you're not, you're just not. I mean, the S&P 500 is like 25% IRR, even 20. I mean, that's not easy.

[26:14](https://realalpha.app/v/wlH0lfkLRRU/?t=1574) easy to beat. And that's the floor for venture capital. If you don't beat the S&P 500 as an asset class, why are you putting money in venture capital? It doesn't make any sense. And so that's like on the investor side, we have a responsibility to be disciplined 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.

[26:49](https://realalpha.app/v/wlH0lfkLRRU/?t=1609) 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 into the right forever and this has just never been true there will be downturns

[27:24](https://realalpha.app/v/wlH0lfkLRRU/?t=1644) **Trae Stephens:** 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

[27:35](https://realalpha.app/v/wlH0lfkLRRU/?t=1655) chicken with people and i think people deserve better than that like i i have a responsibility to the 10,000 employees of Vanderell to not raise at a price that I'm not going to be able to beat the next round. 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 playing a dangerous game. Yeah, I want to 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?

[28:15](https://realalpha.app/v/wlH0lfkLRRU/?t=1695) 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. um and then accepting the highest price right now is often kind of like 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 uh public market so a private market decacorn i think back in 2014 or 15 but then that meant from that point onwards like it was very hard to raise capital to grow unless like you know we had insane economics and any kind of blip in the market or the product 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, 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?

[29:16](https://realalpha.app/v/wlH0lfkLRRU/?t=1756) The positive version is that there are new market opportunities. And, you know, there are companies that wouldn't have worked 10 years ago that will absolutely work today and can be done 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. 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 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 I don't think is a sufficient argument.

[30:05](https://realalpha.app/v/wlH0lfkLRRU/?t=1805) Yeah. Maybe take us through the founding of Andrel. Like, you know, it sounds like I don't know if the story is accurate, but it sounds like you kind of pitch, 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, OK, I'm an investor, but I also can start companies on the 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? 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 like first 500 pitch meetings, I decided that I wanted to try to see if I could find the next Palantir Space X.

[30:48](https://realalpha.app/v/wlH0lfkLRRU/?t=1848) 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. And then I outbounded to get meetings with these companies. And I met with a couple hundred companies in the first two years that were doing that. Ended up making one investment into a company called Expanse. It started out being named KDM. This started by Tim Junio and Sean McGuire, who's now one of the partners at Sequoia.

[31:24](https://realalpha.app/v/wlH0lfkLRRU/?t=1884) So we led their seed round in their Series A. Ended up being a good acquisition by Palo Alto Networks. Again, it doesn't really move the needle for a fund of our size, but it was 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.

[32:00](https://realalpha.app/v/wlH0lfkLRRU/?t=1920) value it. Like they think of it as just hours. It's like hours and lines of code. And so you could deliver like 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, you know, 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.

[32:34](https://realalpha.app/v/wlH0lfkLRRU/?t=1954) 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. I'm working at Founders Fund. I'm not saying that I want to build this company. And he was like, no, you should build the company.

[32:50](https://realalpha.app/v/wlH0lfkLRRU/?t=1970) **Trae Stephens:** 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.

[32:56](https://realalpha.app/v/wlH0lfkLRRU/?t=1976) And I think that's pretty important to building a government company because it takes a long time and you need like a lot of hype. You need, you know, 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 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.

[33:30](https://realalpha.app/v/wlH0lfkLRRU/?t=2010) 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 gonna do this VR thing forever. I'm like, oh, well, I guess that's one billionaire down. I need to go figure out how I'm going to do this. And then a couple of months later, he called me out of the blue and he was like, you still want to 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.

[34:08](https://realalpha.app/v/wlH0lfkLRRU/?t=2048) Oh, man, it's amazing. It's actually based on what I know of Palmer and kind of that situation. And it's all tracks. Some stories are stranger than fiction. That's true. So what does it mean to, I mean, I get the soundbite, I understand it, a software-defined kind of hardware platform that kind of works across, you know, autonomously across a bunch of different form factors, but what did that mean actually in terms of building the first product or the first set of products? Was it that you needed to make sure you're working with the same software foundation across all of the different things? And how is that, you know, I haven't worked in defense, I haven't really worked at a hardware company either.

[34:47](https://realalpha.app/v/wlH0lfkLRRU/?t=2087) So what does that mean in terms of what you had to do for the first couple of years? Yeah. So we had this like Google Slides pitch deck that we used for our seed round. This was before there were three rounds before your seed round. It was just our first money in was our seed round. Old school. Yeah. So weird. And there was a slide in this deck where we had like a list of all the things we wanted to build. And it was like crazy stuff. I mean, it was like fully autonomous fighter planes and like submarines, autonomous submarines and like low cost cruise missiles to compete with Patriots, like all this crazy stuff.

[35:23](https://realalpha.app/v/wlH0lfkLRRU/?t=2123) We had this recognition that SpaceX did not build the Starship on day one. And this is actually an important lesson for entrepreneurs. SpaceX did not build Starship from day one. They built Falcon 1. They built a rocket that had a single engine, and then they built Falcon 9, and then they did reusability, and then they did Starlink, and now they're doing Starship. It's an iterative process to get to Mars, but it's not a one-step jump to Mars. And so that was the approach that we took, as we said, we know that all of these things are going to require Jarvis from Iron Man. We need that AI brain, but we also need a quick way to deploy that, that we're going to be able to test on real world data, that we're going to be able to deploy quickly, that doesn't have this like massive basic science problem associated with it.

[36:14](https://realalpha.app/v/wlH0lfkLRRU/?t=2174) And so we wanted to build something that we could get deployed into the field in six months or less. And so that was really the origin as we build this counterintrusion product called Sentry. That's just a, it's a camera on a stick. It's a little bit more complicated than that. But basically, solar power, a big steel pole, solid-state metamaterial radar, an infrared camera, like a standard EO optical camera, a pan-tilt unit, and compute at the edge with comms. And this sounds like not that complicated. It turns out it's really complicated. No one had really deployed, like, NVIDIA GPUs at the edge with bad comms before, doing, like, object recognition.

[36:55](https://realalpha.app/v/wlH0lfkLRRU/?t=2215) So doing edge inference, basically. Yeah, doing edge inference, doing like object detection, tracking at range in like weird desert environments with, you know, environmental distortion from temperature. Like it was really hard, but it was doable in six months. There was no basic science. In fact, at the time, we didn't even think we needed to build any of the components ourselves. It was just a hardware integration problem. We ended up having to do that, which is a fun story that I'll tell. So pan tilt units, in theory, it should be the simplest part of the entire stack. It literally is just like a thing that moves the sensor payload.

[37:29](https://realalpha.app/v/wlH0lfkLRRU/?t=2249) But it turns out that if the normal way that a pan tilt unit is operated is with a joystick, where it's just like you move until you see something and then you stop and you look at the thing. And if you miss, you just slew back a little bit, a few degrees in the other direction until you have target on. We had a computer doing all this. And so the pan tilt unit, we'd say go 117 degrees. it would turn 116 degrees. It would just be like a few clicks off for some reason. Now you multiply that against 100 movements within an hour. You're no longer even looking remotely close at the thing that the radar is telling you to slew to.

[38:05](https://realalpha.app/v/wlH0lfkLRRU/?t=2285) So no one had built a pan-tilt unit that needed to have the level of accuracy that we needed it to have because we were using a computer to control it. So we had to build our own pan-tilt unit. Super annoying, wish we didn't have to do that. This is still the philosophy of the company today. We don't want to build hardware. unless we need to build hardware. And we were able to get that deployed.

[38:24](https://realalpha.app/v/wlH0lfkLRRU/?t=2304) **Trae Stephens:** The company was started in June. We had a test unit in September. We had first towers deployed in December.

[38:33](https://realalpha.app/v/wlH0lfkLRRU/?t=2313) And then 22 months from founding, we had a multi-hundred million dollar program of record with the federal government to operate Century Towers. And that program is still running today. It's worth billions of dollars. We have hundreds and hundreds and hundreds of towers deployed at military bases, national borders, maritime environments, both in the U.S. and abroad. And it's the best margin profile of any product in our entire portfolio, which is with maturity and, you know, you can tighten things up. That's the way that all of our products should work over time. But the key lesson from that is that we got to build the software that ended up being the brain that goes into everything else that we build.

[39:13](https://realalpha.app/v/wlH0lfkLRRU/?t=2353) We could only do that because we had operational access, the customer trusted us, and the And we were able to continue iterating to make sure that it did exactly what we wanted it to do. In the spectrum of things that you could build, how do you do in some ways product selection or prioritization? And then similarly, you know, you've kind of talked about building the modern defense prime. I think there are five other, you know, kind of recognized primes, right? Five or six. Do you think there's room for a bunch more? Like, can people go out and start kind of like new defense companies that can get to scale?

[39:43](https://realalpha.app/v/wlH0lfkLRRU/?t=2383) Yeah. So, you know, the five big defense primes are all household names. It's like Boeing, which actually does a lot of commercial as well. So their market cap is not entirely tied to defense. But Boeing, Lockheed Martin, Northrop Grumman, General Dynamics, and RTX, which used to be called Raytheon. These are huge companies. and they don't build a single thing. They build a bunch of things. In fact, they build general aviation aircraft. Like they're building private jets. Private jets, yeah. They're building elevators in the case of RTX. I mean, these are thousands of SKUs at every company. And so when we talk about building a modern defense prime, it's actually very different than how startups have been talking about this in the defense tech community.

[40:26](https://realalpha.app/v/wlH0lfkLRRU/?t=2426) Because if you come in with like an idea where you're like, I'm going to build, you know, a unmanned surface vessel, or I'm going to build like a electronic warfare platform or something like that. That is a product or it's a category of products. You don't get to a hundred plus billion dollar market cap with the Department of Defense building in a single category. And that was something that we have a lot of conviction around early on at Anderrill is that we knew we need to be multi-domain, just like Lockheed is, just like Northrop is. And so the, I think the reality for a lot of defense tech companies that they haven't quite figured out yet is that all paths converge at Andrel. Even if the thing that you're building at first is not competitive with Andrel, you are going to end up competing with Andrel if you want your company to be worth a lot of money. And I'm not saying that I'm not okay with that. I'm totally fine with having competition. I'm just saying like, if you believe that you're

[41:21](https://realalpha.app/v/wlH0lfkLRRU/?t=2481) **Trae Stephens:** operating in free space. It's just not true. There is no free space left in defense. Every

[41:28](https://realalpha.app/v/wlH0lfkLRRU/?t=2488) major contract that we go after, we compete with Lockheed, we compete with Northrop, we compete with RTX, we compete with General Dynamics. We have to work with them in some cases. We just announced a few weeks ago that we're building a massive submarine shipyard to build supermodules for Virginia-class submarines. We have to work with General Dynamics Electric Boat to make that happen. When we started the company, did we think we're going to build nuclear submarines? No. But in order to play in this ecosystem, you're going to have to do all of this stuff over time. And so there's no such thing as like a niche domain defense tech company, if your plan is to be a next generation prime. And I think you just have to like really think about the implications of that. That's a pretty good answer. I will call it here. Trey, thank you for showing up with authenticity and kind of like relaying us with a bunch of your stories you're always welcome back at svc thank you so much thanks guys appreciate it