Within the Pentagon, there's an elite unit dedicated to bringing Silicon Valley innovation to slow-moving Washington. It's called Unit X. Chris Kirchhoff and Raj Shah built that unit. In this podcast, they join Motley Fool host Ricky Mulvey for a conversation on the changing defense landscape and what it's like to bring a venture capital mindset to bureaucrats.
They also discuss:
- What it's like to disrupt Washington's "primes."
- Supersonic drones and electric vertical takeoff and landing (eVTOL) aircraft.
- How investors and lawmakers can distinguish "statistical techniques" from genuine AI.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $18,237!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $39,157!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $328,736!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of August 6, 2024
This video was recorded on August 03, 2024.
Christopher Kirchhoff: It's been a real wake up call to everybody that the old weapons platforms can no longer work in the way they were originally designed to work, that there is a whole new hybrid way of fighting war and that we need to master it quickly if we're going to have a military as dominant as we had before the conflict kicked off.
Mary Long: I'm Mary Long, and that's Chris Kirchhoff. He's an expert on emerging technologies, who, along with venture capitalist Raj Shah, launched and led the Pentagon's Defense Innovation Unit, also called Unit X, this group piloted the use of flying cars and microsatellites for military missions. Shah and Kirchhoff's new book is called Unit X, how the Pentagon and Silicon Valley are transforming the future of war. It tells a story of how that elite unit came to be and takes a look at the cutting edge technology that's shaping modern warfare. Shah Kirchhoff joined my colleague, Ricky Mulvey, for a conversation about what happens when the Pentagon and Silicon Valley come together to develop defense technology. They also discuss bringing a VC mindset to Washington, DC, why the military is interested in eVTols, and how to distinguish statistical techniques from genuine artificial intelligence.
Ricky Mulvey: Let's set the table because for those who are not in this world, they may think, there is an innovation unit within the government in defense, and it's called DARPA, where they're creating all of these really cool technologies for the military to use. How is Unit X different from that?
Christopher Kirchhoff: Well, Ricky DARPA is an incredible part of the government, that has been a part of some of the most storied developments in technology, and not only inventing the Internet and global position in systems, but also importantly for warfare stuff. All of the technology or most of the technology that DARPA works with is experimental in some way. It requires, essentially a team of really advanced scientists and engineers that are pursuing cutting edge science, things that have never been done before, audacious things. The mission that Raj and I were given with Defense innovation Unit, which is separate from DARPA, though a sister organization, was to take a different approach to look at technology that was already being created by the consumer technology market, and that you could just buy off the shelf without having to do a lot of bench and engineering work too, but that nevertheless would be really instrumental and important to military missions.
Ricky Mulvey: Even more basic question, why wasn't the Pentagon just buying this already? They have a massive amount of money to spend. It seems like they could sprinkle a little bit of that at some of these start-ups creating things like drones that they can bring into wars.
Raj Shah: Ricky think, you have to look back historically, and the Pentagon was designed in its processes, in the 50s and 60s when the things that the Pentagon needed, aircraft carriers, fighter jets could only be made by what we now call the defense industrial base, defense primes, really large companies like Boeing and Lockheed. If you wanted the best technology in the world, that's where you went, or you went to IBM, and you got massive mainframes, and they literally had the best technology in the world. If you wanted to be a cryptographer in the '60s, then you wanted access supercomputers, you went to the government. What had happened, there was a revolution in technology development in the private sector, from the microchip to the problems of software, cloud, and all of these things moved so quickly that it really caught the government and the Pentagon with their feet back on their heels. They could not imagine that plucky group of technologists and engineers working out of a garage in a couple of years could build something that was better and faster than their billion dollar programs. The DOD had missed much of this revolution. Interestingly, Secretary Ash Carter, in 2001, had written a seminal paper Williams Harvard, basically saying, look, commercial technology is going to be decisive to prevent and win wars, we need to be part of it. It wasn't until he was secretary in 15 years later that he put together the Defense Innovation Unit. But just to give you a tangible example in the cover of the book, we have an F 35 and an iPhone. The F 35 design was set and complete in 2001, and it reached full operational capability in 2016. The iPhone didn't even exist in 2001, and now we're on version 16, and the iPhone today has about 100 times of processing power as our frontline fighter jet. It's just a different way of thinking about technology and imagining how fast it can move.
Ricky Mulvey: You described facing these antibodies when you're essentially trying to bring new technology in faster, disrupting these large defense contractors, which are getting hundreds of millions of dollars in contracts from the Pentagon. What was it disrupting the primes? What was that process like?
Raj Shah: Well, maybe I'll start, then, I'll turn it over to Chris. The real disruption and fights were actually internal to the government. It was within the Pentagon, and it was within Congress. The first branch of government, they write the checks, they have the power of the purse. Day 2 of our tenure in this organization, Secretary Carters come in on Air Force two and made a big splash. We get a phone call from Congress that says, we got some bad news. Your budget has been zeroized. I don't know what that means, but it sounds terrible, and it's worse than you think not only is our budget zero it's done with prejudice, so funds can't be transferred to that inside the Pentagon. Chris and I get on a flight to DC, and there we meet the Senate and House staffers that are in charge of this. There's about 100 professional staff members that control this $800 billion budget. They were really upset with the Pentagon because one of the things Congress does is go on delegations around the world to visit companies and places, and oftentimes, the Pentagon the Air Force provides the air transportation. For whatever reason, Secretary Carter's staff had denied air transport. This group of staffers were really upset, and they said, we know this is important to the secretary. We don't like the fact we didn't provide this transport. The Secretary doesn't work for me, I work for him. But it gives you insight into the type of things that we had to deal with plus the skepticism that places like the valley could actually create technology that had military capability.
Christopher Kirchhoff: Well, the story is actually worse because our first trip to Washington was supposed to be this beautiful moment, where we go and sit with the heads of each of the military services and the head acquisition officials in each military service to understand their needs and to really calibrate our priorities to make sure that our new organization would be serving them. Halfway through our flight to Washington, we get this email message on the United Airlines flight that we were flying on that says, your government hotel reservation has been canceled because your credit card no longer works. We quickly realized that the old office that had set up DAU that had been relieved of its command when we got announced out of spite had canceled our government credit cards. Here we are taking an Uber over to Capital Hill to understand why it was that some staffers were trying to end our organization, we're having to pay out of our pocket. Small things like this that you don't forget that sometimes petty infighting, can ruin your whole day.
Ricky Mulvey: Some of it came from what was it? You didn't have enough presence in the State of Indiana, which one of the people in charge of the budget was really upset about. I see the petty infighting, but did any of that pressure, you think come from those large government contractors that are like here's this scrappy group that's trying to get in the middle of the hundreds of millions of dollars that we're getting for these contracts?
Raj Shah: It's hard to draw a straight line. I don't think we have any direct evidence, but clearly, I think some of these entrenched interests were worried about what we were doing. They had a really good lobbying game and had the right relationships with these members. But I think you have to take a step back, and the pettiness, of course, is there, and that's in any bureaucracy. But there was just some fundamental disagreement or understanding of how this modern technology world could solve problems. If you're a Acquisition Officer or Program Manager in the Pentagon, you're probably not going to get fired if you choose Boeing to build the next Airplane or Fighter Jet. But if you went to some plucky little start-up and then it failed, you're going to get a lot of career risk. There's just a ton of conservatism inside there, plus the whole view, again, I say lack of imagination that how could a small team in the Valley do better than this massive engineering team at a traditional company. I think people forget that Google Maps, there was a team of five people that built that. The modern tools allowed people to move so much faster in particular in building software. I don't think people are necessarily doing it bad. These worlds had divided. In fact, when Secretary Carter came to Silicon Valley, he was the first sitting Secretary in 20 years to do so.
Ricky Mulvey: One of the reasons, I think is because the Large Defense Contractors were running these tech projects. One you mentioned is Northrop Grumman, who had almost $750 million over ten years for a tech overhaul, but they essentially produced nothing. We've gone from the Pentagon spending now to these Defense Conglomerates. Why are they to use a kind word inefficient at running tech projects or bringing innovation to the armed forces.
Christopher Kirchhoff: Well, Ricky, it's important to take a look at the economics and the incentive structure that these companies are forced to operate under, because you can't go on Amazon and price comparison shop for advanced military hardware, like aircraft carriers or submarines. Oftentimes there's a very small number of firms that have the capability to actually build those. Once a contract is awarded to one of them to ensure that there aren't cost overruns that are unfair to the taxpayer that misuse taxpayer funds, the Pentagon has developed a very elaborate system of auditing and cost accounting. In fact, these companies have to have a unique, bespoke system of financial management to be compliant with how the Pentagon does audits. Not only that, but they have to follow to the letter, a very sophisticated set of requirements that the Pentagon will lay out in the contract. To go back to the F 35, if those requirements are frozen in time in the late '90s, and then the production contract isn't awarded to 2001, if you're still constructing that system in 2015 before making it fully operational, you're bound by history. You're not like a private company in Silicon Valley able to be as agile. There are reasons why cultures of cost overrun and schedule delay have become the norm. This is part of the structure of the older system of production that was the goal to move beyond by introducing this new office in Silicon Valley Defense Innovation Unit.
Ricky Mulvey: Your first project was a program that essential scheduled mid-air refuelings, and until that point, there was a command center in the Middle East, where people were literally using hockey pucks on whiteboards to try to schedule these things. Something that's interesting about these two worlds is that you have a world with very conservative incentives, and then the world of Silicon Valley, where Raj I know you're a VC, if you hit a home run in one in ten shots, that's really good. But when you're doing something in this position, you can't miss on your first shot. How did you decide upon that being your first project? What was that pressure for trying to essentially have a project that in Silicon Valley, may have a lower chance of success, but you also know that it really can't fail for this project to continue?
Raj Shah: Well the military has very important missions, many of which are no fail. It's literally life and death. I think it's a little bit of [inaudible] to think that the Valley or this iterative approach is, I'm going to put $2 billion behind a company, come back in ten years and see if it succeeded. There's multiple steps along the way. I think, in fact, the method that the Pentagon was using, which is, we're going to have this really big program. This was to overhaul that combined air operation center, which probably has 50 different individual applications. We're going to give it to one contractor. We're going to give them $700 billion, and we're going to see what they come back with in eight years. That's very risky because you're now stuck to one performer and you won't know for a very long time, but it's working, and it's hard to change. Our approach was let's take an inter approach. We'll take a little bit of money. In this case, I think it was just one or $2 million We'll start with one literal program. This is the Tanker planning tool, which is, again, where should air refuelers be so [inaudible] can get gas in the Middle East? Then if it works, we'll scale it. I actually think it takes less macro risk to do this iterative approach, but it's a whole new way of thinking about Software. I think the code of the story, which is quite positive is that at the end, the air force, in particular, really began to realize the value of software, and they built the first software factory. It's called Castle Run. It's based in Boston, I think 200 engineers in a Valley style office. The first commander of it was Colonel Enrique Oti, the person on our team that led this tanker planning refresh.
Ricky Mulvey: There's a lot of positives in your story. It was good for me to read just to honestly hear about people who are trying to make a positive change in the government to make our nation safer right now. I really appreciated that in the latter half of your book, though, you mentioned that essentially it's harder to sell a drone to the Pentagon than it is to build an autonomous drone that can carry 300 pounds of cargo. What sort of the state at play for these companies now that are trying to sell tools and technology to the Pentagon?
Raj Shah: It's progressed significantly from ten years ago. There is a boom in venture investing in companies focused on national security at last count was nearly $40 billion last year. I've never seen more entrepreneurs and technologists want to solve it. The group that Chris and I ran, the Defense Innovation Unit, this last year got $1 billion budget, which is real money, even for the Pentagon. But the question now, Ricky, do you point out is, if we believe that drones are the future of warfare and, I'll let Chris talk about our recent visit to Ukraine here shortly. If we believe that's the future, should we spend 1%, 2%, 10% of the Pentagon's $800 billion budget on this? I really think it's still a matter of scale for us to achieve this true integration.
Christopher Kirchhoff: Ricky, on the one hand, there is a lot more attention to this innovation ecosystem. But on the other hand, developments and war are moving quite fast. If you just look at the battlefield in Ukraine, we all know that Ukraine is the first drone war, and we've seen it on both sides. But just a few weeks ago, there was a striking development where the Ukrainians had to pull back from the front, all 31 of the M1A1 Abrams battle tanks that we had provided the Ukrainian military. This is the most advanced battle tank in the world, in our Arsenal and the Arsenal, all of our allies. A quarter of the 31 tanks have been disabled or destroyed by Russian Kamikaze drones. When you see something like that, you realize that drone warfare is on the verge of ending a century of mechanized warfare that began in the First World War. If you think about that, that means that the incredible investments that we, that NATO, that our other allies had made in tanks might now be a sunk cost. It could be that in modern warfare, tanks are not any longer survivable. Yes, the ecosystem is surging forward. Last year, there were, I think, 537 venture deals with new defense tech start ups. But the end of mechanized warfare demands, I think, a much larger response.
Ricky Mulvey: Razor and F 16 pilot, and now that job has become even more dangerous with drones that can do these swarm attacks. If you were starting out today, do you think you would still learn to be a fighter pilot, or would you learn to be a drone operator?
Raj Shah: It's a really good question. I think the future of aerial combat is going to change with drones, the ability of drones to collaborate and work in teams. Again, these things that Chris described in Ukraine. I think there's still a role for man fighters, and maybe I'm part of that old crew problem, but there's still a role, but it's rapidly changing. It's going to change in ways that I think are going to surprise us all as AI begins to make more and more tactical decisions and we can leave with humans the strategic decisions, particularly matters of life and death.
Christopher Kirchhoff: Ricky, there's a neat thread here actually from one of the early projects that we led at Defense Innovation Unit that actually involved a supersonic drone. That was autonomous and driven in part by artificial intelligence to be a wind man to a manned fighter aircraft. In just a few short years, the air force has really decided to harness this new generation of autonomous flying drones, such to the point that the current Secretary of the Air Force, Frank Kendall, has announced his intention to acquire something like 10,000 what he calls Combat Collaborative Aircraft. These are autonomous drones that can serve as Wingmans, that can swarm, that have incredible range, that can do surveillance, can also carry weapons payloads. The contract for that program is down to two final performers. They're both non-traditional performers. They're not the Traditional Defense Primes. One is General Atomics, and the other is Anderl, one of the companies that was started in part by early contracts from Defense Innovation Unit Experimental.
Ricky Mulvey: That's I think hopeful because toward the beginning of your book, a lot of soldiers were using cheaper Chinese created drones. Essentially, the idea was that American drones were pretty much unusable. Now it seems like that situation has changed for something that's increasingly important for national security. I want to get to AI a second. You talk about Job and eVTols. These electric electric airplanes that are these Jetson style aircraft. Air taxis is how we normally think about them. But what are the defense applications for eVTols? What are you hoping from this technology?
Raj Shah: I can take a crack at it. This vertical takeoff in land technology allows you to move people and material where there is no runways. It can really help get supplies to troops in the field. The second piece is not having a human. If they're autonomous, they can go into higher risk areas. We've had in the wars in the Middle East many tragic occurrences where helicopters full of people have been shot down. If we can take those humans out, it really lowers the risk to our men and women uniforms. I think there's a lot of really interesting applications of this beyond even just the air taxis here in crowded cities.
Ricky Mulvey: Now, let's talk about AI. Towards the end, you basically say that now these entrenched contractors are trying to repackage old technology, marketed as new, and they take statistical techniques and with a straight face, sell them is artificial intelligence to officials who are none the wiser, I think there may be some investors who are none the wiser. I might have trouble knowing the difference between a statistical technique in true AI, what's that look like?
Christopher Kirchhoff: Ricky, artificial intelligence is a technology that's being developed primarily in the private sector, which is something new for the government. The government is in a sense used to situations where a place like DARPA will sometimes take the lead, and so the only way our nation will be able to harness the most effective and the most cutting edge artificial intelligence will be to work with the very small number of firms in the private sector that are leading its development. What's also I'd say unique about this is this is a situation where the United States has a clear lead over all of our potential adversaries. The small number of frontier labs that are creating the most advanced AI models are largely here in San Francisco. If you're a military strategist, that makes you realize that we have a unique advantage as a nation, and it'll be up to us to harness it to build it into our military technology, and therefore create a level of battlefield advantage that no one else will have.
Ricky Mulvey: What's the line between AI analysis and human decision making in the Military right now?
Raj Shah: I can take a quick at that. The Pentagon has released a policy on the use of artificial intelligence. One of the key tenets is that for life and death decisions, there must be a human in the loop, and that we're not going to outsource those types of decisions to machines or computers, which makes a lot of sense, and I think most of us would agree with. But I think it's going to get more challenging in the future if our adversaries or potential adversaries don't have the same scruples and ethics. If they do have automated decision making, how do we respond to that? How do we make sure our decisions move fast enough to ensure that we still have the upper hand, yet not move away from our ethical view of things. I think these are tricky questions that we'll need to that will continue to unfold in the coming years?
Ricky Mulvey: A lot of investors are enthusiastic about Palantir, which is a company you also read about, and that's one that's using an American company using AI to help the military make more informed decisions, where it's like tracking different ships, and then the options you could use from that, let's say, if a ship disappears, whether or not you try to track it with a satellite, if you put in an unmanned drone, that thing. You'll see it from the defense side. Is there a lot of enthusiasm about their software applications?
Raj Shah: I think in general, you're seeing enthusiasm for newer entrants, Palger being one, and there's a whole slew of other companies now focus on the National Security customer base. We started this discussion with the topic of that command center in Qatar. I tell you, going into that center, at least a few years ago, it was like walking back into the '80s, to see how technology used to be employed, Microsoft Excel and Mark chat for those that are familiar with that we which is like a text based chat box. I was on how we were doing operations. I think there's a real desire for this generation that's grown up on the iPhone to have modern software and the same quality of tools. These new companies are getting a good reception, and I'm optimistic that that will continue to scale.
Ricky Mulvey: One thing that I'm afraid of is nuclear escalation. I know it's something y'all think a lot about? One of the things you write about is basically, today, it's Ukraine, and then next, it might be China, and especially with their military exercises in the South China Sea, looking potentially to invade Taiwan. I've also heard the take that TSMC, Taiwan Semiconductor, which produces the majority of the world's advanced ships, is a deterrent for that invasion. Do you think that's a real deterrent, or do you think that despite that, we could still see that kind of escalation?
Christopher Kirchhoff: I think your question really points out the highest priority needs to be avoiding great power war, war between sophisticated nations that have sophisticated militaries that would be incredibly violent and destructive in a way that we haven't seen in several generations. We're a long time away from anyone who has actually lived through great power conflict. I think our highest goal needs to be to avoid it, and one of the ways to avoid it is to come up with a set of technology that is so impressively powerful in the battlefield that you actually deter war from starting in the first place.
Ricky Mulvey: Then so we can end this conversation hopefully on a more optimistic note. Are there any defense tech trends or just, trends in keeping America secure that you're keeping an eye on that you're particularly optimistic about?
Raj Shah: I think there's a lot. First and foremost, these are human endeavors, building companies, running the Pentagon, fighting wars, and so we really need our best and brightest working on these problem sets, and at the level of interest that great engineers have in this space, the realization that America, while not perfect, is the world's oldest democracy, and that democracy is worth preserving over autocracy, as we've seen, so Blatant in Ukraine is leading people to work on this. I think that gives me the greatest amount of optimism is seeing talent that wants to build technology to keep our troops our country safe rather than just doing photo sharing.
Ricky Mulvey: Anything to add to that before we go?
Christopher Kirchhoff: I think Ukraine is something actually that as tragic as it's been as a conflict, and Raj and I got a chance to visit and see the human toll up close. It's been a real wake-up call to everybody that the old weapons platforms can no longer work in the way they were originally designed to work, that there is a whole new hybrid way of fighting war, and that we need to master it quickly if we're going to have a military as dominant as we had before the conflict kicked off.
Ricky Mulvey: Christopher Kirchhoff, Raj Shah, thank you for your service to our country, and thank you for joining us on Motley Full Money. I appreciate your time and your insight.
Raj Shah: Thanks, Ricky.
Christopher Kirchhoff: Thanks, Ricky.
Mary Long: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against Stone fire cell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Mary Long has no position in any of the stocks mentioned. Ricky Mulvey has positions in Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Amazon, Palantir Technologies, Taiwan Semiconductor Manufacturing, and Uber Technologies. The Motley Fool recommends International Business Machines and Lockheed Martin. The Motley Fool has a disclosure policy.
