Pod Insights The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch 20VC: Palantir CTO on The Broken Incentive Structure of How Governments Buy Defence, The Danger of Defence Spending at Historic Lows, How Elections and Wars Change Government Defence Buying & Why Budgets are Anti-Creative with Shyam Sankar About this episode Shyam Sankar is Chief Technology Officer and Executive Vice President of Palantir Technologies in addition to the Chairman of Ginkgo Bioworks. Shyam holds a B. S. in Electrical and Computer Engineering from Cornell University and a M. S. in Management Science and Engineering from Stanford University. In Today's Episode with Shyam Sankar: 1. Journey to the Top of Defence: How did Shyam make his way into the world of startups and get a role with Kevin Hartz at Xoom? How did seeing Shyam's parents lose everything impact his mindset and drive? What does Shyam know now that he wishes he had known when he started his career? 2. How the World's Governments Buy Defence: What is the playbook for selling defence to different governments? Why is the way that governments purchase and procure so broken? If Shyam were head of the DOD, what would he change? Why does the DOD "need to pick winners"? Which governments are the best to work with? Which are the worst? 3. A World In Conflict: What Changes: How does conflict change the buying process and urgency for governments? How do elections change the buying cadence and process for different governments? Looking forward to 2024, how does Shyam predict the state of different global conflicts? 4. Hiring 101: You Have To Hire Artists: What have been Shyam's single biggest lessons on what it takes to hire the best of the best? Why does Shyam believe that hiring great people is like talent management in Hollywood? Why does Shyam believe talent should be "shielded from budgets"? What have been some of Shyam's biggest hiring mistakes? How did he learn from them?
Transcript 13,209 words · 3 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Speaker 00 The greatest travesty of all this is in order to constrain the variance in outcomes, we have constrained ourselves to mediocrity. We don't want projects to fail catastrophically, but that also means you can't have projects succeed catastrophically. The amount of process we put in place just ensures mediocrity.
0:16 Harry Stebbings? This is 20 VC with me, Harry Stebbings, and I'm so excited for the episode today. It's a different one. Over the last 18 months, we've seen investment in defence tech skyrocket. Palantir, Anduril, Helsing in Europe being the leaders. And so I wanted to sit down with one of the leaders today and really understand how governments buy, which governments are best at it, what that looks like moving forwards, what the DOD can do to improve. And I'm thrilled today to be joined by Palantir's CTO and the man who built much of the modern playbook for selling to governments, Shyam Sankar. Also, I want to say a huge thank you to Trey at Founders Fund and Joe Lonsdale at 8VC for some amazing questions and suggestions today. But before we dive into the show today, there's no shortage of helpful AI tools out there, but using them
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3:04 Speaker 02 You have now arrived at your destination.
3:07 Harry Stebbings? Sharm, I'm so excited for this. Now, you were described to me by Joe Lonsdale as the hardest working person in Silicon Valley, and that's coming from Joe. So first, thank you so much for joining me today.
3:19 Speaker 00 I'm so thrilled to be here. Thanks for having me, Harry.
3:21 Harry Stebbings? Not at all, but I do want to start on that. I want to unpack just that work ethic a little bit. I think I'm a child like armchair psychologist. I think a lot's driven by childhood. Where do you think you get that work ethic and drive from?
3:34 Speaker 00 It comes from my father. My father, as a young man in his twenties, he left India to set up the first pharmaceutical manufacturing facility in Africa. And even before that, he was the youngest of nine children. He lived in this structure where all of his siblings were working their ass off to send him to college. And this sense of, look, I have to make something of this, given all this opportunity I've been given. He was a great man.
3:57 Harry Stebbings? And so that inspired you that the only way to win was by working hard?
4:00 Speaker 00 That there was kind of this obligation to family, to society, that there's just so much value in that. And I think in his life, in many ways, I think you could say it would be, it would be kind of a trivial story if it was like, look, my dad was this guy who worked really hard, he took this risk and it all worked out. That's not what happened. It all didn't work out. When my dad went to Nigeria, when I was a young kid, we suffered horrible armed violence. He was almost executed. He had to start over. We fled Nigeria, we resettled in the US effectively as refugees, starting from scratch. I was raised and he lived his life with this deep understanding of the counterfactual. Like, no matter how bad it is, remember what it could have been. Your alternative to this present moment is being dead in a ditch.
4:42 Speaker 00 And how grateful you should be for that and how you should not squander the opportunity that you have as a consequence of that.
4:48 Harry Stebbings? How old were you when you had to restart?
4:50 Speaker 00 I was two and a half. So fortunately, you know, I was not mentally scarred, traumatically scarred by that, but it had a profound effect on my parents.
4:57 Harry Stebbings? Can I ask, when you look back on your lessons from them and seeing them, how do you think it impacted you?
5:03 Speaker 00 It really gave me this sense of looking forward. Look, all these bad things happen, what are you supposed to do about it? What, the most productive thing you can do about it is stick together as a unit and focus on what you could do next and support each other through that and support each other's ambitions. I think accomplishing great things in the world very rarely can be done alone. At least I've never experienced that. It's really the unit, there's all these unsung heroes. It's better to think about it as a rock band, not a solo act. And getting that chemistry right is, I think, crucial. And it's as crucial at home as it is in business.
5:35 Harry Stebbings? Can I ask you, have you seen General McRaven's commencement speech where he says about the importance of making your bed at the start of every day? And one of his is find someone to help you paddle. And it's very much along those lines. Can I ask, with that realization that bad things happen and it's about putting your next step forward, do you believe in luck? And how do you think about the importance of luck versus pure hard work in factoring towards success?
6:00 Speaker 00 I kind of have a mixed feeling on it. On one end, I think, I'm not sure why it's productive to believe in luck, especially if you think your luck can vary. I think the most productive mind frame is something like, I have good luck and the only thing I actually have control over is how hard I work. And so let me focus on that part of it. The other view of it is, is there such a thing as luck? Probably. But it's like quantum. We often think it's like, what matters more, luck or hard work? Or why not both? And only one of these variables do you really have a lot of control over. You know, we probably somehow in this current epoch, I think we've under valued or under focused on hard work and over emphasized the role of luck in in success.
6:35 Harry Stebbings? I don't think it's that, actually. I think we just overvalued the role of fake humility, which is like, I think a lot of us are happy to admit to ourselves. I worked my ass off and I got to where I am because largely because of that. Can I ask you, how did Palantir come to be? Because you were like Zoom in the early days. This was like Kevin Hart's night. I think 2002, 2003 style. This was like dawn of like Silicon Valley greats.
6:58 Speaker 00 Yeah. So for the audience, this is Zoom with an X, which was the the money transfer company that subsequently ended up with PayPal. I mean, that was great. Like, I really got to the that maybe backing up a little bit. I got to the Valley because in this period of time, having graduated from Cornell, your opportunities as an engineer were really finance, consulting, or maybe a very large tech company where you were going to be a cog in the machine. Like, Google didn't even come to the campus to recruit in those days. And so I just needed to get to Silicon Valley. I went to to Stanford for that. Within two months of getting to Stanford, I had like begged and broken down Kevin Hart's door to get a job at Zoom. That's really how this kind of all started. So I joined Zoom as the fifth employee and I spent three amazing and wonderful years there.
7:40 Speaker 00 But through Joe's freshman year roommate, actually, I learned about Palantir, this this very eclectic character, Gabe Rosen, who is a poet who swims at the South End Rowing Club in freezing cold San Francisco Bay waters. I mean, this guy, you can't really put in a box, but he's like, you know, you really need to meet Joe and hear about this company. And at the time, it was 12 people and they wanted to work on problems of national security. My uncle was a victim of the 2006 coordinated train bombings in Bombay. I was very much, and I was in upstate New York during nine 11. It was, I think that was a seminal moment for many folks of my generation. I actually tried to drop out of school to join CIA, but I think everyone had that idea at that time. I didn't even have a college degree. So they didn't quite respond to my electronic application.
8:22 Speaker 00 And so, yeah, I would have much rather failed, and it certainly seemed in 2005, Palantir. It wasn't at all clear how it was going to work, but I would have much rather failed working on something that I thought was so important.
8:34 Harry Stebbings? What state was Palantir in 2005? Because we see it today as this incredible company serving many different governments around the world. Where was it in 2005? Like, where was the entry point for you?
8:43 Speaker 00 They had focused on only hiring engineers. They were kind of at the point where it's like, okay, well, who's going to actually interact with the customers to shape how we're building the product? This is a very deep and complicated problem. The intersection of the domain and the software will be nuanced. You have a massive asymmetry of information that most of the software you're deploying is into a classified environment where at the time, none of us had clearances. We were all wild outsiders with no knowledge of what was happening behind these magical doors, but just almost maniacal commitment to trying to solve the problem nonetheless.
9:16 Harry Stebbings? How do you think you were so successful then? Because when I look at like Android, obviously, we mentioned Trey beforehand. When we look at like Android, you know, a lot of the success I always believed was the combination of Palmer and Trey and actually Trey bringing a lot of the experience of how government and selling to government works. If you were the V1, how on earth did you make it work when no one had a clue how to do it?
9:38 Speaker 00 Well, I think we were just committed to building the right product. And I don't want that to sound naive because actually I think it took us longer and was harder because we didn't know how to sell the government. There was all these things that were kind of zero to one. There was no one else to really learn from. All the people who really knew it were not of the technology world and couldn't get it to work in our context anyways. So we had to kind of flail our way through feeling it out from first principles and developing a new playbook that was going to work. And I think a playbook that subsequently has been really valuable to the rest of defense tech.
10:07 Harry Stebbings? What is that? We're just jumping around here, but this is what I love about the show. But, Ian, Trey said you literally kind of built a new business model for selling to governments and defense tech. What is that playbook?
10:16 Speaker 00 If you were to follow, so before I tell you what the new playbook is, just understand the old playbook, right? The way the government really wants to buy everything is to pay you by the hour to build it. So some assessment of who should be doing it, but fundamentally it's a labor model and it's a labor model where they really want, and through cost accounting and audits, will look at your actual costs. They will build in overhead rates. They will then say, this is how much profit you're allowed to have. It's kind of actually pretty communist for a country's entire economic engine has been powered by capitalism as a monotonous buyer. And you can say, well, why is this? It's not totally crazy. But assume you're the only buyer for a product in the world. You're the only buyer for the aircraft carrier. How should I compensate someone who's building an aircraft carrier for me? What's a fair price to pay?
11:01 Speaker 00 So the way that they solve this really starting in the last century was thinking about is cost plus. I don't know, it seems fair that it costs you something, you have to pay people, you have to buy materials and I'll give you some profit on top of that. Now, this has obvious consequences in terms of what the long-term incentives end up being. Why would you ever invest in innovation? And to the extent the government wants you to innovate, they actually pay you the money to do the R and D. You're not putting your money into it, really. You're putting their money into it. As the world transitioned from a place where all of the R and D was done by the government, 50s, 60s, obviously, the preponderance of R and D is done by the commercial world. This model makes no sense. You really want to leverage the beauty of what we've really pioneered in the valley is this high-risk, high-return approach.
11:43 Harry Stebbings? Can I jump in and just ask? You mentioned that kind of, well, if you're the only buyer of said product. But I believe there's always a market. And so you could sell that aircraft to the US, but you could also sell it to the UK or to France or Germany or any others. There's probably 10 buyers. In which case, if you want the concentrated supply, well, then you can pay a premium. Then we have an efficient market. Am I wrong?
12:06 Speaker 00 I think you're right. I was trying to steel man it, which is like, okay, how did we end up here? Like, let's just assume, you know, it's Chesterton's fence. We didn't end up here because somehow the system is totally broken and incompetent. There was some thinking to it. But I think we're now in a world where the second-order consequences of that system are dominating. And that's what's leading to a structural inability to innovate. Technology is supposed to make things cheaper. Somehow that doesn't happen in government. Why? You know, and to the extent things do get cheaper, they get cheaper because they're benefiting from the massive tailwinds from the commercial markets R and D that then subsequently makes its way to government.
12:37 Harry Stebbings? Is that not happening in government, though? There's no profit incentive. Why is the NHS not always looking to cost-cut? Because there's no benefits of getting rid of middle management.
12:46 Speaker 00 And so I think the great opportunity, and really, so the playbook was, look, I'm not going to let you pay me by the hour. I'm going to refuse to accept any revenue that services based from you. And instead, I'm going to build a product. And I'm going to keep investing in the product. And that means I have to go sell a part of my company to finance that, right? I have to go raise money to go do this. But this product's going to be so good, you're going to want to buy it. And when you're going to buy it, you're going to buy it on a license fee basis. You're going to pay some sort of subscription, software, the service. I know to the Silicon Valley lessors, this is like, obviously. I don't, what are you talking about? How is this? But there's a lot of brain damage to getting the government to this model. Even now, we've made a huge amount of headway. But the low entropy, the like lowest path, least resistance is to try to pay someone by the hour.
13:27 Harry Stebbings? What was their reaction? It's a big shift for them to make mentally.
13:30 Speaker 00 One of the other complexities of government is there's a disconnect between who is the buyer exactly and who is the user? And so in the early days, and even today, you know, the preponderance of our time is spent with the user. How do I know I'm building the right product? How do I know what I should be building next? Where is the utility? How do I get these folks who are the users to tell the buyers? No, no, really, this is way better. If you go to the buyers, they're going to always want to push you down to the conventional model of how do I buy this by the hour? And so I think that the way to do it is to create capability that's so compelling, so necessary that people are willing to go through a more difficult, but more rewarding process in order to acquire it.
14:09 Harry Stebbings? On decision makers, what does the decision making structure look like when selling to governments? Is it committees? Is it single points? Is it panels? How does that look?
14:19 Speaker 00 It's closer to committees. I mean, it's still a Byzantine process. I'm not sure even I, after 18 years of doing this, could really fully put it on a piece of paper and it kind of tell you it out. You're kind of feeling your way through it. But, you know, people would say that you need a requirement, you need resource, i.e. money, and you need a contract. And I think at a highest level, you're trying to figure out how do you line up those three elements within the government customer you're working with to accomplish this? Now, the pathing of doing that, I think, is specific to every opportunity you're kind of going after.
14:48 Harry Stebbings? So I actually spoke to many, many people before the show, as you know, and they said, one of the things that you and Panty have done so well is really just nailing the land and expand model with government contracts. What do you think has enabled you to do that so successfully? And then do you get real margin optimization? Because once you're in, you're retained. It's such a sticky customer.
15:07 Speaker 00 There's two pieces to this. The first is that the land and expand doesn't work the way it does for commercial SaaS companies. It very much is about expanding the product surface area as opposed to the license surface area, or I'm trying to get more users. So I'm trying to, so it's not sales-driven expansion. It's actually product-driven expansion. And if you think about how do I connect up more of what this customer is doing? Like, I've landed with this capability. How do I expand to the lateral capabilities that are valuable to them? Many of those capabilities, you're not going to think those things up in Palo Alto eating strawberries. You need to be in Jabuti or in Kandahar or in Balad or in Ramstein, sitting with the users to understand what's next. Because the truth is out there. It's not in some document somewhere.
15:52 Speaker 00 It's not in DC. The deep understanding of what's missing that you can build true stickiness around. That's that's one dimension. The other dimension of this, like the reason you have to be there to your margin optimization. It doesn't actually come from lock in or just like rent collection. It actually comes from understanding how do I continuously productize and create the efficiency in how I deliver what I deliver. There are unique constraints in this environment, right? You don't have one big multi-tenant or three big multi-tenant geographic instances of your software that you're running on the public internet. You're delivering software into air gapped environments that are tightly controlled and constrained. And people need clearances to access them. And so you need to have some sort of product methodology to invest in the software infrastructure.
16:36 Speaker 00 You have your software, then you have the infrastructure below that. That is essentially an army of robots that manages your software in production. Otherwise, you're going to end up deploying a team of 20 people to go manage your software in these environments. And you're going to have a really hard time getting to scale.
16:51 Harry Stebbings? How do you think about propensity to buy within governments? Again, you're like, what? This schedule has completely gone out the window. I'm loving this. But like propensity to buy with governments when you compare software versus hardware. Are they the same? Are mindsets the same? Or do they differ in terms of their approaches?
17:06 Speaker 00 Yeah, the whole government system is geared up to buy hardware. Because they kind of, especially in the US government, but I think you can see it's analogous everywhere. Living in a world where government used to finance all R and D. It starts with R and D. Okay, I'm going to pay you to do some R and D. Build a prototype. If I like this thing, I'm going to procure it. I'm going to buy it at scale. Once I've procured it, I have to sustain it. So they expect costs to go like this. Of course, that's not how software works. First of all, software R and D costs only increase. No investor thinks Microsoft is going to spend less in the future on R and D than they spend in the present moment. That would be crazy. But the government somehow expects that to be true. And the second part is there is no difference in our modern technology world between procurement and sustainment.
17:48 Speaker 00 Like those concepts, even as I say the words, they may be like, what do you mean exactly here? You know, you're delivering software as a service. You're continuously innovating on it. It's never done. I think the government has absorbed that idea that software is never done, but they haven't absorbed the idea that that means there's at least a constant cost to that software.
18:03 Harry Stebbings? Can we just hone in on one particular country being yours? Because you said a great statement when we chatted before that you didn't expand on any of these. So thanks for the cliffhangers. They were great, like titles for a show, by the way. But I was like, okay, writing a follow up question is interesting. America has a defense industrial problem. Why does America have a defense industrial problem? Can you help me understand this?
18:25 Speaker 00 Yeah, you could think about like, when were we amazing at this? And I think it was really at the dawn of World War Two. And there's this great book by Arthur Herman called The Arsenal of Democracy. Probably the book I'm most obsessed with right now. I've read it a couple of times. It really talks about how the industrial mobilization worked. We brought Bill Nudson, a Danish immigrant, who was a very senior executive at Ford and General Motors into government. We made him from a civilian to an army three star general. And he was in charge of the industrial mobilization. And we had this immense luxury during World War Two, which was that we were at peace. Britain was at war and we were supplying Britain.
19:03 Speaker 00 We had 18 months when we were not getting shot at to turn on our industrial production, to build factories and to retool them. And that took 18 months. We needed that time. The counterfactual would have been brutal. We also needed to leverage American industry. We had just figured out mass production and we, America, had just figured out mass production. It was our unique strength in the world. So we applied that mass production technique, not to Model Ts. We turned it to bombers and fighters and tanks and all the machinery of war you needed to actually help the Brits go forth. And then subsequently to help America fight as well. And we had these crazy founders, you know? It was Henry Kaiser. We think of Lockheed Martin, but it was Glenn Martin. It wasn't Northrop Grumman. It was Jack Northrop.
19:48 Speaker 00 All of that innovation was not driven by faceless companies run by eighth generation leaders. They were built and run by these just maverick founders, people we would recognize their personality structure in the valley today. You know, as a consequence, after we won the Cold War, rightly, we expected a peace dividend. Why would you continue to? I think it's hard for a legitimate democracy to continue to sustain that level of spending in the absence of an adversary. So in 1993, the Assistant Deputy Secretary of Defense, Bill Perry, who was himself an entrepreneur. He started a Silicon Valley company called Electronic Systems Laboratories. He had what was called the Last Supper. He invited the 51 defense primes. Today we have five. Back then, we had 51. He invited the 51 defense primes in and he said, look,
20:33 Speaker 00 the budget is going to get much smaller. And it did. For every dollar they had before, they had 33 cents going forward. Not all of you are going to survive. I'm kind of giving you permission and a mandate to consolidate, to get lean, to get efficient. And so this is how we went from 51 to five. And I think the off-sided consequence of doing this is that the industrial base became less competitive. Oh, we only have five people to pick a month. So, you know, prices are high or something like that. And there's some truth to that. But I think the much more profound consequence of The Last Supper is it began a deep financialization of defense. It became about dividends and buybacks and leverage ratios. You know, it became about M and A. New venture formation was about spinouts and mergers, not about venture-backed,
21:17 Speaker 00 creative, risk-taking ideas to go build entirely new things.
21:21 Harry Stebbings? And so the financialization was a negative thing? Is that what you're saying?
21:26 Speaker 00 Yes, because all the emphasis went away from creative, big idea. You know, Alex Karp says this all the time. It's like, no great company was created primarily to make money. Yes, there's a consequence to that and it has to happen. But you know, like, I don't think Larry and Sergey were like, hey, how do we make money? In fact, I think they were kind of pulled kicking and screaming into that part of it. So when suddenly it was very much first, the business that became quite challenging. And I think it also bred a sort of dysfunction in the relationship between government and what government calls industry, the term that really we don't use anywhere else when we talk about the partners you use to solve problems. And it's that like, you're transactional, you're money grubbing, I am doing this mission here. I've given up a lot to work in the government. I think
22:08 Speaker 00 we can really fix that. And we have this opportunity that's happened right now because of how much interest there is in defense tech.
22:15 Harry Stebbings? Just so I understand then, the problem is the mindset chasm between you're profiteering private companies and we're here for a mission of being the government. Is that the core industrial problem?
22:25 Speaker 00 Well, I think that's a consequence. But the core industrial problem is that we don't have a way to reward mavericks and innovators that we're breeding. We've historically bred a marketplace that's driven towards conformity. We all have the same business model. We all want to get paid by the hour. Hey, I don't want to take risk. Because I need to know you're going to buy this government. There's no way for VC to be applied here because I can't figure out how to get to a scale of return that's going to matter.
22:50 Harry Stebbings? Does that change in a time of leverage? And what I mean by that is in in peacetimes, you're absolutely right. People can wait. They can say, I want to pay by the hour, pay by the hour. When there is sadly conflicts around the world and you need to buy and you need to innovate and improve, you and private companies have leverage to say align to our business model or don't buy. Does time not change that?
23:13 Speaker 00 I'm forgetting Churchill's chief of the general staff. He had an observation, which is that when you go to war, the first thing you need to do is fire all your generals. Generals that succeed in peacetime, and this was a general himself, right? The generals that succeed in peacetime are not the right generals to succeed in war and vice versa. What I'm saying, there is something a little smaller, which is that when there is war, you do have a different sort of mobilization. You have a different sort of leadership. People are willing to make different decisions. It's almost like the only thing that works when it really matters is breaking the process and doing what's right. And the process never really works. It's kind of a digression from the main point around this. But I think you don't have leverage in the sense that, look, you're going to buy whatever model works. It's the opposite, which is the leadership says, oh, I'm willing to break the model because
23:58 Speaker 00 I see what's right. You know, like there wasn't a problem big enough to solve before, so I wasn't going to change how we did business. I have a problem to solve and I, as a leader, I'm going to say, yes, this is the right path.
24:08 Harry Stebbings? If we go back to the days of Lockheed Martin, the founders innovating there, was there a political structure that was flexible enough then to make the changes that we need to happen now?
24:18 Speaker 00 I think there was almost a lack of political structures. You know, there was a willingness to move fast and break things. Kelly, and when I say founder, I really mean it in the broadest sense of the word. It's almost like renegade, maverick, innovator. Kelly Johnson is one of my favorite examples. This is the guy who founded Skunk Works at Lockheed Martin. This guy, as a, and we would recognize him as a 100x engineer in the valley today, right? 23 years old, joins Lockheed Martin, looks at a 2D diagram of schematics of a plane and says, this plane is fatally flawed. He goes to the senior engineer at Lockheed and almost to get rid of Kelly, he's like, yo, why don't you fix it? Of course, he fixed it. So this guy built 26 airframes in his career. Today, if you're an aerospace engineer, you're lucky to work on a third of a plane over your entire career.
25:03 Speaker 00 So you're never even going to ship a plane. And this guy shipped 26. And some of his planes, like the U2, we still fly. He built the first U2 in nine months. We can do this again. There's a way in which we've built up so much process, so much risk aversion. In order to constrain, I think that the greatest travesty of all of this is like, in order to constrain the variance in outcomes, we have constrained ourselves to mediocrity. You know, it's like, we don't want projects to fail catastrophically, but that also means you can't have projects succeed catastrophically. And the amount of process we put in place just ensures mediocrity.
25:36 Harry Stebbings? What worries me also is the procurement processes and the tenders are so challenging that for anyone other than, I'm not picking on them, but just the most well-known, than like your Lockley Martins, you can't engage in even the tender process because also you don't have the insurance premiums to cover some of the guarantees that are required on the directors. Only they have that large an insurance premium. And so it just means that in the end, only one or two go for them. I'm sure Palantir are now in that league, but it really is a constraint on innovation, having such a stringent tender process.
26:06 Speaker 00 I think it is. I've been thinking about this. You know, it's dangerous to say this because if you take me too literally, it'll, it'll sound politically unpopular. But in an effort to have a perception of fair competition, we have created so much process that we neither have fair competition nor speed. If you, you could just juxtapose the European procurement process, which I've seen the US process and maybe alternatives. And I'd say the European process is even more slow because there's an even greater emphasis on how do I show fairness across all of the EU states? And so then you could say, okay, the American process is a little more streamlined, but it still takes years. Kelly Johnson could build a plane in nine months. We can't even procure something in twice that long. That's crazy. It's not because we're not competent enough to do it.
26:51 Speaker 00 It's because we have created a structure where we do not want protests. We do not want to be blamed. We do not want to lose public trust in how these decisions are made. But I think we are retarding the growth. Of the human capital in government as a consequence of this. You can make mistakes. That's how you're going to learn. No one wants to make mistakes. No one wants to be wrong. I wish we could all be right all the time. But I have screwed up so many things at this company over 18 years. If the standard of surviving here was something like you can never be wrong, or you must optically be seen to be making every decision in a way that, you know, it will never blow back on you. This company would not exist. I would be screwed. It's not a way to actually make the world better.
27:31 Harry Stebbings? Which country has the best process, do you find? US is more streamlined than Europe. Does anyone stand out as being good?
27:37 Speaker 00 I think the most honest answer to that question is America actually does have the best process when we're serious. When there's the political will and alignment and the problem is clear and we're ready to go. That's when we throw all the rules and the doctrine out the window and we go and we get it done. And this is kind of the Churchillian thing, right? The Americans screw everything up until they've exhausted all the options and then they do the right thing. And so that's the other part that's frustrating is we are so clearly capable of this. I've seen it demonstrated in our greatest moments of need, but in the steady state, we reject it.
28:07 Harry Stebbings? So when you put your mind to it, you can do it. You said that the DOD needs to pick a winner. How do you think about what that would look like in reality?
28:16 Speaker 00 Pick winners plural, to be very clear. So I think this is one of the greatest disconnects, I'd say, between the hypergrowth technology community and DOD. So we've had roughly $100 billion of venture investment enter defense tech recently, last couple of years. And the VC model is not that everyone needs to be a mediocre outcome, right? Like, I'd say the median return in a venture fund might be zero, but the average return is maybe 2, 3X, right, for the portfolio. And so this is the dynamics that matter, which is like, what? The peanut butter spreading, as it's kind of called. Like, I have this much money and I'm going to spread it across all the companies that have come in here. That just ensures that they're all zombies. They're neither alive nor dead. Those firms are not going to be able to raise their next round. There's not enough return.
29:00 Speaker 00 And a much better strategy is realizing, look, we need to pick a few winners. And we're going to go after it with scale. And these companies are going to become large as a consequence, which then allows those funds to go bring more money and innovation in our ecosystem. And there's a virtuous cycle here and the talent is going to stay. So maybe their one company didn't work out, but they're going to have many shots at the apple. We're going to have this ravenous new tech industrial base focused on defense problems with the capital behind it and the economics that support it. This is the part that DOD is a little uncomfortable with, which is like, well, I'd rather it's a little bit more an aesthetic towards fair socialist returns. Like, I just want to spread out the money across all of these participants so that no one's upset. But I think in reality, everyone will be upset.
29:42 Speaker 00 And if you talk to these venture capitalists, it's like, yes, I'd prefer that my companies win. But if that's not possible, someone has to win because otherwise this market's not going to exist. And getting the Defense Department to realize that one of the greatest lies they tell themselves is we don't pick winners. If you interact with acquisition folks, you'll get this sort of like, well, we don't pick winners. But no, literally, you're a monopsonist. Every contract you award, you're picking a winner. So we have to kind of regroove how we do this to support the broader ecosystem.
30:10 Harry Stebbings? One thing I do worry about when we said about that kind of spread and the diversification is actually the nationalization of buying, which sounds incredibly intelligent, but it's actually quite simple really, which is just countries and kind of continents would rather buy their own suppliers' products. So Europe would rather buy European companies' product. America would rather buy an American. You know, you're not going to buy Chinese defense tech.
30:34 Speaker 00 I think there's two dimensions to this. One is you don't want to be beholden to your adversaries. So that's like an obvious one I think everyone can agree to. The second dimension to this is we often forget that one of the roles of government is its economic role. You know, there's an aspect of government that is a jobs program, that is welfare for the people. I think where it gets tricky with defense is where that's the case and it's unacknowledged. In the US, we have these CIBR programs, these small business innovation kind of grants of research. To a VC, this is like the kiss of death. Study after study shows that you get these CIBR grants and your company never actually achieves scale. They don't really want to invest in the companies that are pursuing this. It's not a strategy to actually become a big company. It's a strategy to stay. A zombie. I think we'd be better off asking ourselves, okay, if we want the cyber program,
31:19 Speaker 00 if we believe in small business and the aesthetic of small business, this is a type of like wall white collar jobs program. And that might be quite good. It's creating more STEM jobs. There's, that's a policy question I'll leave to our policymakers. But we should not think that from this program, we're going to get massive defense innovation. We're going to get new champions. We're going to get competition. We're going to get any of the transformation that we actually need to win these next fights.
31:44 Harry Stebbings? You know, I'm a venture investor for a living. The most beautiful thing in the world is when you see Tams expanding, you know, Uber moving from chauffeur driven cars to the car for everyone is a beautiful and very clear example of just an expansion of TAM. When conflict arises and budgets increase significantly, as callous as it sounds, it's an expanding TAM.
32:02 Speaker 00 I'd flag two things there. One is we are spending at historic lows relative to the Cold War. As a percentage of GDP, so absolute dollars, yes, are bigger. But as a percentage of GDP, like what, what do you think is the defense insurance premium? The country should pay every year to protect, you know, PAX Americana and the Western international rules based order.
32:23 Harry Stebbings? What is it in context of GDP?
32:25 Speaker 00 Two to 3%.
32:26 Harry Stebbings? What was it in the Cold War?
32:27 Speaker 00 At its peak, I think it's like, when you look at like Vietnam, you look at other periods of the Cold War, it's like closer to six. But it's like half as a percentage of GDP. I'm not sure that it should double. That's not the point, but I think like we somehow view this in a context of like, we could view it as like, what is the insurance premium we're willing to pay on GDP to protect GDP?
32:44 Harry Stebbings? What do you think it should be?
32:45 Speaker 00 I think it's between where we are now and where it was during the Cold War. It was absolutely right to get a, even though we suffered long-term consequences of the Last Supper. I don't think you could have political legitimacy without having a peace dividend after the Cold War. So I think, I think what happened was correct. But now we should analyze what needs to happen in the context of great power competition. Like we do not live in that world anymore. It has changed radically. And we have developed some sclerotic habits of 30 years of living at, quote unquote, the end of history that we need to really shake off and organize against. And no place more so than Europe, where in many ways they've kind of forgotten the distant past and have enjoyed a lot of what the West collectively has been able to create.
33:29 Harry Stebbings? Can I ask you, have you seen conversations change since? Sadly, Israel, but Russia. Has the discussion changed with buyers in terms of their tone, their requirement? Has the world changed significantly then, or has it continued in the same way?
33:44 Speaker 00 The buyers here are very serious people who wake up every day thinking, I might have to fight tonight. I'm in the position of providing capability to people who might have to fight tonight. I don't feel a shift in tone. What I do feel is a shift in the rate of learning. What is there to learn from? You look at the tactics, you look at what is working on the battlefield. Many of these things are surprising. They're different. They're innovating very quickly. They're changing the concepts of what you think you would even need to buy to have survivable capability, to win the next conflict. And that is evolving incredibly rapidly. And I think it continues to speak to this concept of lower cost attributable capabilities. Instead of buying something that you think like an aircraft carrier or some space-based capability
34:27 Speaker 00 that's going to be around for 30 or 50 years, and because it's going to be around that long, it's going to be so expensive, it's got to just be perfect. It's like, I'm buying something I might use for the next year. You look at Ukraine, many of these drones are single-use drones. So there is no sustainment. What are we talking about here? There is like your whole supply chain changes, like the whole theory of how you're going to employ the weapon is very, very different. And as a consequence, the logistics you need around it become very different. And that can liberate you to have entirely new concepts, entirely new business models that enable you to deliver the innovation, recognizing that what you're going to fight with in two years is not what you're going to fight with in a year, and it's not what you'd use today.
35:03 Harry Stebbings? If you were to be in charge of the DOD today, what would you do from the procurement process, from the budgets, from deployment? What would you do if you were in charge?
35:12 Speaker 00 One wish. It would be to return to a structure that we actually used to use, which is to have multiple competing programs to go after the same capability. So when we were building submarine-launched ballistic missiles, we didn't have one program to build it. I think we had four. And there's a human factors element to this, and there's a practical technology element to this. Well, we weren't sure if they should be solid-fueled, liquid-fueled. There was all sorts of technical questions. And so you can either have the loudest voice win, or you could do a forever, never-ending research. Project, or you can compete the ideas. And that means, you know, you're going much faster, you're learning, you're iterating. It's it's an empirical discussion rather than a theoretical one. You're buying down technology risk. But I think what's even more compelling than that is the human factor.
35:56 Speaker 00 I often think about what would motivate so many of these programs? Like, what would motivate the program manager to want to go faster? To want to insert new technologies more quickly? And the answer is nothing, because the distant threat of an enemy for a conflict that you might want to fight one day does not warrant blowing up your schedule, introducing risk, maybe having someone yell at you, because you're just judged by cost schedule performance. And that's all you're going to think about. But I don't think that's healthy. So my counterfactual would be, what if there are two PMs who woke up every day? It's human competition. You know, it's like, the government is going to buy some percentage of my product, some percentage of their product. And I am going to wake up every day to win this. That's like a uniquely American thing. I think we're very good at that.
36:40 Speaker 00 And I think it is going to drive a lot of innovation. It solves a lot of the problems, like, how do we get things to be cheaper? Well, I want the government to buy more of my products. So I'm going to build it cheaper. How do I insert new technologies? How do I go faster? Like, these problems are actually kind of a lack of internal competition. The government focuses on competition in the industrial base. I think there's not enough competition inside of government.
37:00 Harry Stebbings? Is winning this attributable? Like, if you think about single-use drones as an example, does someone in DC have attribution on their procurement process, working out it being a good buy, it being effective, and it's deployed four months later in wherever it is, thousands of miles away? Is there attribution?
37:18 Speaker 00 There's definitely going to be ex post attribution. How do we get closer to something ex ante? How are you making that decision? So today, there is a pretty big disconnect between the people who are responsible for fighting, really the combatant commanders, and the people who are responsible for providing the equipment. And really, these guys, the fighters, they don't really have a vote. And I think that's one of the things we need to change, where winning the competition should really be about, okay, well, how much does the Indo-PACOM commander or the CENTCOM commander want of this variant versus that competing variant? And it doesn't have to be winner take all. It can be something like, I want 20% of these and 80% of those. And next year, come back to me with better ideas. Let me let me taste the steaks and see which one I like. And, you know, I might allocate resources differently next time.
38:01 Speaker 00 And I think getting that faster feedback iteration cycle would be super valuable. It also lets us be a little bit more critical of quote unquote requirements. The requirements are the things that must, we've done this analysis and we said these things must exist and we're going to build all of them. Well, clearly requirements change. The only thing you know for sure is the requirements are wrong. And so how do we enable our program managers to take more risk and say, well, I think these requirements are more important than those requirements. And I think there are requirements they haven't even thought of that really matter. Because at the end of the day, you've got to taste the steak. You've got to eel the product, use the product. And that's the only way you're going to know if it's good or not. Can you imagine if the Valley didn't have something like that with its buyers? That the way that every new product was going to be evaluated was through a historical list of requirements that someone else came
38:45 Speaker 00 up with, and a paper PowerPoint exercise to see which product someone was going to buy. No, we innovate because we fight with our technology in the customer's office.
38:54 Harry Stebbings? Can I ask you, how do leadership changes impact buying processes? I know that's a weird one, but as you look towards elections, both in the UK, the US, like, do discussions just kind of break down because everyone's wondering which government will be in power? How does it change processes?
39:10 Speaker 00 Much less than people think. There's obviously some effect. And I think it varies by country. In the UK system, given how involved the cabinet is with approving contracts and the oversight and integration with Treasury, it's actually more relevant in terms of what agenda people will be following. In the US, I think the bigger issue is really Congress and whether there's a budget or not. If we don't have a budget, we'll enter a continuing resolution. In a continuing resolution, that means you can't have any new starts. So all the things the department wants to do, they're gated and waiting until there is a new budget. This is a consequence of our system. I think it's a little facile to say like, Congress should just pass a budget on time. And yeah, that would be a nice world. But this is how we exercise political power and arrive at consensus. And I think there are things that we can do to make this better. But I think that's
39:55 Speaker 00 kind of the bigger issue in the US.
39:56 Harry Stebbings? Is there anything that Silicon Valley and VCs could do to better serve the defense market?
40:01 Speaker 00 If you'd asked me 10 years ago, I would have had a long list of things that I think the capital class could be doing better to help in the national interest. I don't have those critiques. The capital class has showed up. The capital has showed up. The entrepreneurs have showed up. People are working on these problems. To the extent I had an ask from the VCs, it would be to engage with the policymakers so they understand the dynamics of your business. What is it going to take so that the $100 billion or more continues to show up? What does it take for these entrepreneurs to stay in this ecosystem? Why is a labor-based business model so bad? Because I think we can underestimate the size of the gulf between these two worlds. And you could even say it as something as simple as, you know, in DC, there's a like no conflict of interest. This idea of like, we're going to manage all the conflicts of interest.
40:45 Speaker 00 And if you have any conflict, then it's just very bad. And obviously, conflict of interest can be bad. On the other hand, in the valley, it's like, well, if you haven't invested in something, how do you even have an opinion about it? You're not even willing to put your own money behind an idea. So what do you know about it? I mean, it's like, it's almost like no conflict, no interest. There's a middle ground between these things. But I think that's the first place to kind of get the relationship grooved so people understand it. So it really comes down to high-trust, human interaction. We're not going to scale this process. It's going to come down to these two worlds coming together, and they've never been closer. But we still have a lot of work to do there.
41:15 Harry Stebbings? I do want to move a little bit of a layer deeper, just into the company level with Palantir. You said something that I thought was fascinating. You said, "Content, not process, is the eternal substance." What did you mean, "Content, not process, is the eternal substance"?
41:28 Speaker 00 Steve Jobs has this Great Loss interview about how companies get confused when they're trying to replicate their success. They look at the process they went through to deliver their first success. Then they follow the process, and it doesn't work. Because actually, you know, the first and most important thing is the content. It's the creativity, it's the substance. And that substance rarely, and as he points out, people who are good at content tend to be a pain in the ass to manage. You know, that they're a pain in the butt, I think was his quote. But you put up with them because the content is just so good. And so I think there's this way in which process as a medicine is okay. You know, it's like, can you have zero process? No. But if you hold process up as the deity, if process ends up being what is actually an opioid, it's very bad.
42:12 Speaker 00 It's like, look, we just need to follow the process and we'll get to the outcome. That's almost never correct. When the process becomes more important than the content, you're going to lose. And a lot of this comes up like, well, I wish the interaction could be less frictionful. I wish there was more predictability. I wish there was all sorts of things which are just not true in the real world. Like, yes, we all wish the world could be different. But when you honor what the world is, you kind of recognize how important it is to have the right rock band. Right? There's no, hey, follow this process and we're going to get there.
42:39 Harry Stebbings? Does that scale though? Because the challenge is you need process with scaling teams with increasing team sizes. And the magicians who come up with great content, it's really hard to have structure around that.
42:50 Speaker 00 Absolutely. So, you know, I think you need some way of having both, but you can't ever lose the primacy of content. Put it this way, you can get really far with incredible content and bad process. You're going to get nowhere with incredible process and bad content. And so the primacy of it, you need to keep in mind. And this is what I mean by process as medicine versus opioid. And so there's a rule for this here, but especially when you're, and I feel, you know, Palantir is this company that keeps reinventing itself. In those moments of reinvention, there's just content. There's just the crazy content and your commitment to it and making it better. And then you figure out how to get it to scale. And sometimes maybe getting things to scale is itself not scalable, which I don't mean as a critique. It's more like first you've got to figure out the substance and then you work really hard every day to get it to scale.
43:33 Speaker 00 There's an old Silicon Valley saying, there's the first 80% and the second 80%. And so maybe there's a little bit of this in this where it's like, yeah, the first part of the content is 80% of the work. And then getting it to scale through process is 80% of the work.
43:45 Harry Stebbings? It's so hard to hire because you need to be able to detect those magicians. But then you also need to hire for process around them as well. And there is room for structure in both, as you said. When you reflect on hiring, you said talent spotting eats strategy for breakfast. How do you think about talent spotting and how has how you approach it changed over time?
44:05 Speaker 00 Yeah, I think this is so important. I think there's a way in which we've kind of constrained our cultures and our companies. Because we've leaned into the opioid of structure essentially. Like, look, I'm going to structure my company as a factory. Here are all the roles and the levels I have, and here's the org chart, and it's all very clean and laid out. And if you play by these rules, you can figure out how to navigate. I think one of the challenges is that like really talented people are highly asymmetric. You're much better off designing a role around who they are rather than saying, what role can I slot you into? None of those roles are going to fit them. It's going to put them in a position of relative weakness. They're going to blow something up. They're going to feel like they have to be good at something they're never going to be good at. And so it's a total evisceration of their potential.
44:50 Speaker 00 And if you said, instead of being a factory, we're going to be an artist colony. I don't get Dalí to paint better by yelling at him to paint more like Monet. Each one of these individuals is an individual and I'm going to go on a journey to craft a role around who they are. And I'm going to make it okay for them to like flex their role to meet their capabilities. Even more importantly, artists' work don't monotonically get better. This idea that you're going to climb levels in this sort of strictly increasing way, I think is deeply inauthentic. Some of your works are going to be hits and then you're going to go through a lull. And you know, your work might not be great. The community might not appreciate it. And then your next piece is going to be a masterpiece. And so how do you get into a place where you can be committed to your talent over a long duration?
45:32 Speaker 00 You know, there's going to be ups and downs, but they're so fundamentally talented that you're going to stick with them. And you're not going to be judging them work to work. It's not like a daily mark to market. It's like, look, this is, you are special. This is a home for you and we value you over this long arc of what we're building together. That means that when they're not performing, you don't suddenly have this responsibility to sideline them and put them in a hole or fire them.
45:55 Harry Stebbings? Let's just break that one down. In terms of creating the environment where they are able to fail, create masterpieces as well. How do you think about doing that as, I hate saying here, but as their manager, was the person responsible for their work?
46:10 Speaker 00 Well, we could keep leaning into the Hollywood metaphor here of the talent agent and the talent. How do you manage talent is a very open ended question, but I think that's roughly how you would think about it, which is like, look, I'm really here to support. I need to create the environment that allows your art to flourish. I'm not the one managing your art. So if you think about that, okay, they need a huge amount of autonomy. They need the resources. They need some protections from the daily distractions of certain aspects of the business. If you're always inhaling the full visceral scary reality of everything going on, I think that distracts you from doing the art. So how do you have complete autonomy over an area that you're very, very good at? And the ability then to execute against it? And then I think a maxim I always think about is smart people cannot be taught anything. They can learn and that's the environment you're trying to set up.
46:55 Speaker 00 It's like, how do I create this environment of maximum learning for these incredibly talented artists?
46:59 Harry Stebbings? What happens if you continuously do duds? What if the masterpieces don't show?
47:04 Speaker 00 Yeah, I mean, I look, I think the artist might even blow up at that point. Artists want their art to be really good, too. If they're really going through a rough batch for a long time, that might be part of it. I think that's going to be a judgment call as the talent manager. No, no, I really believe, like, I understand this is a long dry spell here. I'm going to keep you motivated, I'm keep you managing, I'm going to figure it out. But of course, you could just be wrong. Maybe the moment has passed, the art and the inspiration and the muse doesn't exist.
47:28 Harry Stebbings? Do you think, is it potentially a bit of an ideological perspective to take? Because suddenly I tell you that your budgets have been cut, we're doing a 15% layoff. Sorry, artists, you haven't hit it out of the park for quite some time. Charm?
47:40 Speaker 00 There are sometimes, there's just external realities. You may have to do that because that's reality. This is one of those things you have to think about how you shield or when you choose to shield the artist from, like budgets. Budgets are anti-creative. Constraints are important, don't get me wrong. Budgets are just anti-creative. So you have to think about what's the right mix of like, hey, at this moment, we really need budgets. It matters for these reasons and here's why. And so, and I think you tend to find that, like, you kind of oscillate between two ends of a continuum, right? Like, there's no budgets, it's free for all, it's max creative. It's like, oh, this is completely ungoverned and we need, you know, this thing. And you're just trying to maintain the stable, unstable equilibrium, rather.
48:16 Harry Stebbings? VCs love to say something, constraints enforces creativity. Do you agree with that, with the idea that budgets are anti-creative? Because budgets are constraints.
48:26 Speaker 00 I definitely agree that constraints drive creativity. Now, I think you can be overly constrained. So I already have a time constraint, I have a customer constraint, I have a problem constraint. And, you know, maybe the budget constraint blows it up. I mean, that's the job of the talent manager. It's to manage to the budget without exposing the brutal reality of the budget to the talent. You know, how can I get the talent to feel a few less constraints while actually being constrained?
48:49 Harry Stebbings? You mentioned mistakes over 18 years. I've made many mistakes at hiring. When you reflect on yours, what have been some of your biggest hiring mistakes? And how did that change how you actually approach hiring?
49:00 Speaker 00 My biggest hiring mistakes were hiring for a factory, hiring what I thought I would need, hiring what the world told me, you know, the way to solve this problem is to hire this profile. And, you know, I didn't earn it from first principles. The most successful ones have always been when I took the talent and grew them into the roles that actually reflected their talent. And the worst mistakes were it's where I tried to import a solution to a problem. Cause that's the version, that's my version of the opioid. Wouldn't it be nice if I could just magically import this solution? And it will solve all my problems in this area. I think I'm like zero for 10. It's never worked for me.
49:35 Harry Stebbings? So what do you do now?
49:37 Speaker 00 First principles. Who do I have? How can I give people more responsibility? How can I stretch them? How do I bet on just raw talent? And when I'm out there, meeting people, and I still spend a fair amount of time doing this, I'm not really even thinking about the role. I'm thinking about this human. And it's like, would I be excited to fight shoulder to shoulder with this person over the next decade? And can I imagine continuing to invest and grow in them to take on more problems? And if they're talented, I'll figure out the role. They'll figure out the role. We have so many needs.
50:04 Harry Stebbings? When you've been wrong, what did you get wrong about that decision? So like for me, I've been wrong, actually often on my surprise, where I've hired very boring people. And my secret to hiring is hire boring people because no one's quite as boring as they seem in a job interview. But they will always be humble if they're boring in the interview. And so I find hire the boring.
50:23 Speaker 00 The form of the mistake is thinking that outside knowledge will translate here without a massive retranslation function. And so the sort of personality that's like, look, I've solved this problem before. I know the answer versus I'm betting on my talent to be able to solve the answer. That's the shape of the challenge.
50:39 Harry Stebbings? Can I ask one final one before we do a quickfire? But you've mentioned that Palantir has had quite a few transformations or reincarnations. What do you think was the most challenging reincarnation that Palantir made? And why that one?
50:52 Speaker 00 I honestly think all of them have been challenging. And the reason they're challenging, there's the work, which is more obvious. The less obvious part of this sort of reinvention is reinventing yourself. It's the toll on the individual where you're like, look, but I got this thing and it's at this place and it's successful. And where is my earned credibility from having done that? And in the reinvention, what you're saying is no, like, we're all, every single person, we're starting from zero. And it might be true that some person who joined this company two months ago is going to be more sophisticated at this new problem than you who joined five years ago. And that's, you know, there's like a commitment to pushing through that. And I think it's actually only survivable because the whole thing is set up as an artist calling.
51:34 Harry Stebbings? Is it not harder with more people? Because you have to reengage, recommunicate that to 2,000, 1,000, whatever that number is. Whereas when there's 100, it's much easier. So actually, the reincarnation gets harder over time.
51:46 Speaker 00 That's one aspect that gets harder. Let me give you one aspect that gets easier. The first few times we're doing it, I felt this deep personal responsibility to like handhold everyone through their own reinvention. And that is exhausting. And I felt their pain of it. And it's not that I don't feel it now, but I now recognize like, that's the medicine. Like, I was trying to minimize the pain of the reinvention. But actually, their greatness is going to come from going through this crucible and being proud of how they reinvented themselves. So now I kind of view it as, I view it proudly rather than with trepidation.
52:17 Harry Stebbings? Shyam, I want to move into a quick fire round. So I say a short statement, you give me your immediate thoughts. Does that sound okay?
52:23 Speaker 00 Sounds great.
52:23 Harry Stebbings? Okay, so where does value accrue in AI? Startups or incumbents and why?
52:28 Speaker 00 I think it biases towards the incumbents who own applications in the app layer.
52:32 Harry Stebbings? Why?
52:33 Speaker 00 I think the models are going to be commoditized. Because the models are not going to really give you enough of the value. It turns out that, like, you have the model, then getting to a business outcome with that model happens in an application. And so if you own those pixels, you're going to be able to apply it more quickly. I also think that very few problems are 100% AI. They're like a third AI, a third traditional deterministic code, a third human thought. The only place you can drive that elegant integration is at the app layer.
53:01 Harry Stebbings? So you think we'll see the commoditization of LLMs?
53:03 Speaker 00 I think so. I'm not saying some won't be better than others, but I'm saying most of them are going to be good enough.
53:08 Harry Stebbings? Well, no, I'm just interested because when you look at, you know, say, cloud over the last 10 years, cloud has relatively been commoditized in terms of like actual product offering. But the biggest players are huge and they're in the infrastructure layer. And they are the same size as 100 application layer companies. And so I'm just wondering, I get you on the commoditization side, but I still think the value will accrue to those incumbents in the infrastructure layer.
53:34 Speaker 00 I think they'll get a lot of the compute for sure. And I should say, I think the value is going to accrue in those two directions, infrastructure and app layer, and that the models are going to be squeezed.
53:44 Harry Stebbings? If you are a model company that doesn't own full vertical supply of compute, are you not screwed?
53:50 Speaker 00 If I was a model company, I would be pushing into the app layer. I'd be trying to figure out how to own more of the value I'm creating with the model, rather than just selling an endpoint. This is usually the opposite advice you're going to get from traditional venture, where they're like, build something simple that scales with an API.
54:05 Harry Stebbings? Every venture investor says, oh, it's a thin layer on top of an LLM. What's the difference between a thin layer and a thick layer, do you think?
54:12 Speaker 00 Well, I think a lot of their criticisms are right, that essentially if you're just building a chatbot, it's a pretty thin layer. So you could say, what makes it a thick layer is what's the use of deterministic code or algorithmic reasoning in addition to the LLM? What's the integration into workflow? Are we still chatting here? Are prompts for developers or for users?
54:30 Harry Stebbings? Why do LLMs need tools?
54:32 Speaker 00 Because otherwise you're completely constrained to the parametric knowledge of the model. And I think that's a Sisyphean task. You're, people keep trying to jam more and more knowledge into the model. But what they fail to recognize is that these models are actually very good at speaking regular grammars. JSON, code, it's a regular grammar. How do you use these models in their current state to manage and manipulate application state?
54:53 Harry Stebbings? Have the core LLM winners been already created or will we see more over the next few years?
54:59 Speaker 00 Some of the folks who have been created are definitely going to be core winners. I think there will be more winners to come.
55:04 Harry Stebbings? Who do you think the winner's been so far?
55:06 Speaker 00 Unquestionably, OpenAI has done quite well. I think we have some time to see where does Google really shake up in all of this. And I think Meta has, I mean, it's amazing to see how much they've reinvented themselves around this.
55:18 Harry Stebbings? Do you worry that development is so far ahead of adoption? I think we all overly get excited and actually 50% of European corporates don't know what Slack is.
55:27 Speaker 00 The fear I really have here is how much are we modeling the appropriate use? And how fixated are we on proof of value instead of proof of concept? We had a self-driving car demo in 2005. It drove 132 miles through the desert. That's really impressive. That's not a toy-like demo. You could argue only in 2023 did we have a proof of a self-driving car that could drive around the city reliably as a commercial offering. Nobody wants to be in that business. No enterprise wants to adopt this thing where the demos are amazing. In 20 years from now, they might be able to put this in production. And I think as technologists, in order for us to not be in a bubble, we need to be really focused on proof, not proof of concepts, and the speed by which we can affect these enterprises.
56:09 Harry Stebbings? What have you changed your mind on in the last 12 months?
56:12 Speaker 00 Probably the biggest one is content and process. I mean, look, content has always mattered, but I always had this view that like it's got to scale. And I'm now willing to fight incrementally, you know, almost like trench warfare to get things to scale. As long as the content is gorgeous.
56:26 Harry Stebbings? You can have dinner with one person, dead or alive. Who would it be and what would you ask them?
56:30 Speaker 00 I'd probably Begin, former prime minister of Israel, one of the founding fathers. I'm so obsessed with the conditions around founding. You could also pick a US founding father. I think we don't study like that the mindset of 1776, the unlikelihood of this, the unlikelihood of founding the modern Israel state, how difficult it was. I just want to relish those founder stories.
56:50 Harry Stebbings? What was your biggest lesson from working with Alex?
56:53 Speaker 00 Probably the most important one is this idea of the artist colony, that humans are unique individuals and that you maximize value by staying true to that and never letting yourself aggregate or think about them as a class.
57:05 Harry Stebbings? What do the next five years hold for you and for Palantir's 2028? We sit down again. Where are we then?
57:11 Speaker 00 I think the world is likely to change much more in the next five years than most people are modeling. The geopolitics are highly unstable. That maybe is a more obvious statement now to say after October 7th. And I think we're entering a very challenging time here. And I think that has consequences for the commercial world as well as governments. But the other aspect of this is as we approach that sort of instability, what is the role for real transformation? Like, we have this unique opportunity with AI to actually change things, not just to build businesses, but to fix many of the problems that drive at the fundamental legitimacy of the institutions we have in the world. Why don't these institutions work? Well, I am not someone who thinks you're going to fix them by tearing them down. You're going to fix them by partnering with them and helping them,
57:54 Speaker 00 helping the humans who wake up every day trying to make their institutions work, work better.
57:58 Harry Stebbings? Listen, Shyam, I've loved this. This has been so nice to do one where I'm not talking about pre and post money valuations. It's been a very different style, but you've been fantastic. So thank you so much for doing this with me.
58:09 Speaker 00 Thank you, Harry, for having me. It's been fun.
58:12 Harry Stebbings? I mean, what a fantastic discussion that was. If you want to see the full video, you can check it out on YouTube by searching for 20 VC. I always love to see you there. But before we leave you today, there's no shortage of helpful AI tools out there. But using them means switching back and forth between yet another digital tool. What was supposed to simplify your workflow just made it way more complicated. Unless, of course, you're in Notion. In Notion, you can automate the tedious tasks like summarizing meeting notes or finding next steps, really freeing you up to do the deep work that we all want to do. And that's why Notion is used by over 50%, 50% of Fortune 500 companies. And teams that use Notion send less emails, cancel more meetings and reduce spending on tools.
58:56 Harry Stebbings? Try Notion for free when you go to notion.com/20vc. And speaking of amazing products like Notion there, I'd like to talk to you about a company called Digi. They're a full-service AI accounting company. And if you're in need of an accountant or looking to switch, there's no better solution than Digi, starting at just $350. Dollars a month, which is less than half of what you'd pay a traditional firm. Digits is the most accurate, most efficient solution on the market. They've developed proprietary AI technology that automates tedious financial tasks and delivers reports for the actual close of the month, not two to three weeks later as always. And they also allow you to keep track of key metrics like revenue, burn, cash flow and runway in an incredible live dashboard.
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1:00:19 Harry Stebbings? and expense super app that they'll give you $250 in personal travel credit just for taking a quick demo. Check them out now at navan.com/20vc. As always, I so appreciate all your support and stay tuned for an incredible episode this coming Friday on 20 Growth with the head of TikTok at Duolingo, who scaled their TikTok to over 7 million followers.
Previous 20VC: Hubspot Co-Founder Brian Halligan on Leadership Lessons Scaling Hubspot to a $28BN Market Cap | The Best Series A Investment in Venture History & What Makes Sequoia so Successful? Next 20VC: How Duolingo Scaled to 8M TikTok Followers, How to Create Viral Content, Why Most Companies Suck at Content Marketing and How to Change & Why You Should Not Work with Content Agencies with Zaria Parvez, Global Social Media Manager @ Duolingo Page updated October 26, 2026 · transcript and summary are machine-generated
