#14: Choosing Good Quests: Innovation, AI, and Winning in a World of Regulation
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So I think that this belief that you can just build a cool product and it's going to work is very naive. You need to basically wake up every morning in a cold sweat thinking about what is Lockheed trying to do today to take you down. - To destroy you. - Yeah. And I think only the businesses that have super high degrees of paranoia are going to work in this market.

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This episode is brought to you by Salesforce. For this week's episode, I'm at Startup Grind's global conference. It's a community that I helped start about 15 years ago that brings entrepreneurs and investors and people that want to grow and build innovative products together. And once a year, we have a summit right here in Redwood City, California. We have the best of the best telling about how they created their startup, how they came up with their product, how to get funding and all those kinds of things.

This week, I'm interviewing Trey Stephens. He is one of Silicon Valley's great entrepreneurs. He co-founded a company called Andro. It's a defense tech company helping build the next generation of rockets and drones. He's also a partner at Founders Fund, focused on helping founders to build great companies. Hope you enjoy it. Tell us about GoodQuest. What is that? How does it apply to founders?

I had no background in venture capital at all. I was actually running sales at Palantir for six years and kind of accidentally stumbled into venture. And one of the things I noticed in the first couple of years of taking hundreds of pitch meetings is that there was an enormous amount of people that were, their identity was tied up in being a founder. It wasn't tied up in the idea that they were passionate about. It was just tied up in this idea like they really wanted to be an entrepreneur.

And this felt off for a number of reasons. I think that most of the best companies are started by people who are kind of almost irrationally obsessed with something that it is that they're working on. And yet there's the majority of people that are starting companies are what I would call whiteboard entrepreneurs. They're like standing in front of a whiteboard, writing down 100 ideas and then picking the least bad one and then starting that company.

And that doesn't really work. It's generally not like a great recipe for startup success. And so this idea of good quest is about like, what is your calling? Like what is living inside of you that needs to come out of you? And if you don't have a good answer to that question, it's probably not good.

a good idea to start a company. And then the other side of this is like what happens to the most important problems that need to be worked on that are massively capital intensive, take an enormous amount of time. Usually they just don't get tackled. And the people that are the best suited for solving those problems are

you know, in quasi-retirement. You know, there are successful founders that end up going into venture capital as kind of like a lifestyle post, you know, founder job or something like that. And we need some of those people.

who have kind of graduated into quasi retirement to come out of quasi retirement and work on really important problems. But this is like the equivalent of a celebrity in Hollywood starting a tequila company. It's meaningless, it's a total commodity, but they're able to sell it because of their brand. And we have too many people in Silicon Valley that are essentially starting tequila companies instead of building important businesses.

When you listen to people talk about these ideas, what things do you listen for or do you hear at Founders Fund where you're like, okay, they're like...

they're in that bucket versus in the first bucket. I mean, one of the first questions we ask almost every company that walks in the door is, "What's the origin story? Tell us how you came to this idea." And it's almost immediately clear in the first 30 seconds of the founder answering that question whether or not there is something that's deeply personal about the mission that it is that they're working on. How do I determine if it actually is a good quest?

and it's not just this random idea like what if I do feel deeply passionate about it but it's actually

maybe not the right thing to work on. How do I decide? Well, I think that a lot of things can be good quests. It's not specifically one category of things. For every person, their questing is going to look a little different. And I think the only thing that really defines a good quest is, is this something that's going to be good for moving humanity forward? Or is it something that's just like...

a vain, self-advancing goal where you figured out there's some really sick arbitrage or something that you can find in the market. That's probably a good opportunity, not a good quest. You can also kind of think about all of the things that you could possibly work on

as plotted somewhere on this two by two matrix where one axis is, is good, is bad. And then the other axis is feels good, feels bad. Everyone loves things in the feels good, is good category. This is like, you know, healthcare and early childhood education and nonprofits. Like, sure, it feels good. It is good. Everyone agrees it becomes highly commoditized.

We also agree with the feels bad is bad category like murder and abuse and assault in You know literal theft we all agree that those things are bad and you shouldn't work on them Most of the interesting companies happen in that other diagonal in the is bad feels good category and this is I think Like some drugs, you know psychedelics Maybe we do a certain extent whatever or like

kind of very suggestive, like OnlyFans probably fits in this category. And then you have the other one that's Is Good, Feels Bad. And I think Founders Fund has done incredibly well investing in this category. It's things like defense and nuclear energy and all these things that have some sort of weird societal taboo to them, but they're actually really important and really kind of critical for advancing humanity.

Does the size of the market have to be part of it being a good quest? Because at the beginning, it's so hard to figure out, is this actually something that can be big or not? You kind of sometimes you're defining a new market or you're sort of changing the paradigm of how maybe commerce is spent in that area. Like, how do I determine how big it is or does it not matter? Just like if it's in your heart, get it out, do it.

Albeit not in some of these other quadrants. Yeah, I mean there are a lot of really good quests that I wouldn't invest in at Founders Fund. Not because they're bad quests, just because they're not going to return a venture fund. And that's okay. It's actually perfectly awesome to be on a good quest. If you have a passion about education and you want to go teach elementary school kids,

That feels like a pretty good quest. I'm all for it. Does that mean that there's something investable for founders fund? No, so not all good quests are going to be venture investable and that's okay I think we have too many businesses that assume that they should be capitalized via venture and it's just not true There are very few businesses that should actually raise venture capital What's changed the most of founders fund since you joined just over a decade ago? I

Not much, honestly. The fund is 20 years old. We were started by the PayPal mafia, so kind of Peter and the other co-founders.

And the original idea, the reason why we're called Founders Fund is that we believe that venture capital has biased too much towards the institutional funds rather than the people that they're investing in. And so our goal is to be incredibly founder aligned. We've never voted against a founder. We generally don't take board seats. We don't want to be in a position where our incentives are not aligned with the founders incentives.

And that has held true to today. That's not any different than it was 20 years ago. Not taking a board seat is a really big idea and almost all venture firms that invest serious dollars into company make it basically like a minimum requirement we want to join the board. Why does Founders Fund feel like that's not something that they need to do to protect their investors money?

Well, venture capital returns are kind of distributed on what people would call a power law curve, which means that there's a very, very small number of companies that return almost all of the capital to the market, and then everything else is a rounding error to zero. And so Founders Fund, as I said, we've been around for 20 years. We have close to $20 billion in AUM and

probably 95% of every dollar that we've returned to our investors came from returns from 12 companies. So we've invested in thousands of companies and only 12 have mattered. So oftentimes what the governance thing does is it tries to downside minimize.

So you're trying to figure out how you can make sure that you get your prep stack to return your capital if things don't go well. Or you're trying to manage a company out of a difficult situation. You're trying to replace the CEO. And all of these things are just downside mitigation. In our mind, it's like, do we care that we get $10 million back on a deal gone bad? Or would we rather just let it go to zero and focus on the 12 companies that are going to return everything to the fund?

And our answer is the latter. We just don't feel like there's any need to play around with tinkering with governance to try to get our money back when things aren't working. How do you coach founders when it comes to, let's say,

more ethically gray areas of tech or ideas. What do you say? How do you think about that? The beauty of being Founders Fund is that we don't view it as our responsibility to come up with those answers for the founders. I think we only invest in companies where we believe the founders

are the right people to be running the businesses. If we thought that we had better perspectives on the company than they did, well then we should start those companies. We shouldn't invest in someone else and then try to change their mind on anything. I think as far as ethics go,

I believe having a debate-driven culture is really important. It doesn't matter what the business is, you should have people internally that are having strong arguments about what they should be doing, what they shouldn't be doing, the direction of the business. And that debate culture has been lacking, I would argue, in Silicon Valley for a long time. It's kind of a mono-party perspective.

And I don't just mean that politically, I mean like kind of as a cultural movement. And so generally speaking, we just encourage people like if you find yourself constantly agreeing with everyone around you, that's bad. You should find people that don't agree with you and try to make sure that you're fleshing these ideas out to conclusion. You started Andrill in 2017. What were the early data points that led you to believe that this was the right quest to start?

I'm still like even almost eight years from founding, I'm still always surprised that you can just say you started Anduril and just assume that people know what it is that you're talking about. Fair enough. So maybe I have to explain. Tell us what it is. Yeah, please tell us what Anduril is. So when I joined FF 11 years ago, I didn't know anything about venture as I said. And so I was kind of confused as to why Peter thought that he wanted me to work at the fund.

And so for the first couple of years, I made it my goal to find the next Palantir or SpaceX. We were huge investors in both of these companies. They obviously both did really well. And so I kind of ran this very intentional search process to see if I can find the next investment that we would make in the national security federal government space.

And I didn't find anything I met with hundreds of companies and I went back to the team and I said man I feel like I have a really good understanding of what I'm looking for But I couldn't find it and I don't know maybe that means that Peter you should fire me because I'm not actually gonna be that useful to the fund and he asked me to explain what it is that I thought needed to exist which was a

hardware enabled but software defined defense prime. So I believe that in the next 50, 100 years the capabilities that will matter most for national security are software capabilities. But the government doesn't really know how to buy software. That was a lesson that I learned from Palantir. And I believe that we needed to build entire platforms with software as kind of the central concept. And to my surprise, the team was really enthusiastic about this and they suggested that we

go and find a founding team and start a company to build it. And that became Anduril and now it's a $32 billion company. And we're doing some really cool stuff that has been awesome to see develop and come to fruition. Were there moments along those two years in your search for a company to back, solving this problem that you were looking for that you

that you've got discouraged enough that you thought maybe this shouldn't exist or were you just, was it so

tightly held by you that it should exist, that it didn't deter you? Well, I mean, one of the realizations that I had as I was going through this is I kept finding that people were not nearly paranoid enough. They were just super optimistic. They kind of believed that it was the field of dreams. All they had to do was just build a working product and the government would show up skipping down the yellow brick road being like, "Yay, thank you for building this really cool piece of tech." And they would just buy as much of it as they could.

And the experience at Palantir was not that. It was actually that it didn't matter how good the product was unless you knew how to sell it or had the patient capital to survive for a decade without any revenue. It just wasn't going to work. And I came to the conclusion that it wasn't pure chance that both Palantir and SpaceX were started by billionaires. It actually was really important that they had

an endless supply of funds to wait out the bad procurement activity from their customer, their sole customer. And so, you know, I think

Because of that, when we started down this process with Anduril, I felt like we had the patient capital and we also had the long experience at both Palantir and SpaceX to kind of understand what it is that you shouldn't do when you're building one of these businesses. I think your first raise was around $17 million, which at the time was like this kind of eye-opening mega round. I raised around that same year. It was $1 million, and I felt like that was a lot.

Today we're seeing these just massive rounds of hundreds of millions of dollars before people even launch a product As you think about the right amount to raise how do you encourage founders to? You know prepare in the right way for that

Yeah, I feel like the important thing is you should only raise what you need to hit your next milestone. And the seed rounds have definitely gotten out of control. I would say basically every stage has gotten pretty out of control. And I would call these rounds like kamikaze rounds. It's like, I don't know, maybe it works, but you're probably dead. And there's too many people raising kamikaze rounds.

So I think the real lesson is

you know, you want to keep demand in the company really strong so that there's momentum every time you go back out to the market. And if you go out and you raise at a really high valuation because you can when you're pre-revenue, and then you go back out when people expect that you've made traction on the business development side of things and you haven't, you're going to be way out over your skis and you're not going to have that consistent momentum and demand. And I think this is like why HBO's Silicon Valley, there's this hilarious scene where

The guy with the doors that go like this, I forget what his name is, he starts telling the founders of Pied Piper, "Don't get revenue." Like, you want to be pre-revenue forever. - Pure play. - Yeah, the pure play. And I think people are doing these kamikaze rounds pre-revenue without realizing that at some point you have to pay the piper.

There's, there's no way around it. And you know, you can get all that free juice up front, but it's going to hurt you in the long run. Do you remember the first deal you did it, Andrew, how much it was and how long it took to get?

Yeah, I mean this is kind of the crazy thing about the trajectory. So both Palantir and SpaceX took almost five years to get their first 10 million in revenue. I mean it was a really, really long slog. At Anduril, we started the company on a Monday. We hired a lobbyist on a Tuesday, and we ended up meeting with our first customer on that Wednesday. So it was like the most epic three first days in company history.

And we had 10 million in revenue in 22 months. We had 100 million in four years. So things moved incredibly fast. That first deal started off by being a couple million dollars and then it scaled into tens of millions of dollars. And then inside of three years, it was a multi hundred million dollar congressionally line itemed program of record. So that contract still runs today and has generated probably close to a billion in revenue for the business. - Wow.

How-- so you-- I mean--

Andrew you're only selling to the United States. Do you sell are there other? Nations that you can sell to or will tell to um Almost all of our revenue is US government But we do have a bunch of international customers as well that are just at a smaller scale a typical defense contractor like a Lockheed Martin or Northrop Grumman has about 15 to 20 percent of their revenue coming from international But we're not building like, you know dual use

Commercial software that we're selling to that we happen to sell to the government. We're building weapon systems And so all of that is heavily regulated The US government is involved in all of the foreign military sales that we're conducting and so even when our customer is international The customer is still the US government because they have to approve and oftentimes finance the the sale itself I mean having primarily one customer especially in the beginning that you have to sell into that's a

That's sort of terrifying in some ways. What would you say or advise people that are going after government contracts, trying to get into the government, especially now with the changes that are being made?

Where do you start or how do you advise startups where to start and and how to start eating the elephant one bite at a time? Yeah, well it is kind of one customer in that the government is one entity but in reality there are hundreds if not thousands of customers that are inside of the bureaucracy in different places in different departments and different offices and program offices within the the larger agency

So there are actually quite a few. One of the mistakes that we made at Palantir is we waited for years before we hired a lobbyist. We kind of believed the Field of Dreams thing, where we just had to build a cool product.

And it turns out that the customer that's using the product is not the person that's making the procurement decision. And the person that's making the procurement decision isn't making a decision based on their own money. That money has to be authorized and appropriated by Congress. And then there are political appointees that also have a say in it that are politically appointed by the president. And so your constituency is not the end user. The people that you're selling to is the whole stack of government.

And so one of the things that I often will make sure companies that are approaching this sector are aware of is you really need to hire a lobbyist. There's almost no way around it. You have to figure out how to communicate with the people who are authorizing and appropriating funds. The other thing is you need to have a high level of paranoia. Why is that? There's just no world in which your business does well where the big legacy companies, whether it's the

you know, the software development companies, whether it's Deloitte or Accenture or Booz Allen Hamilton, or the big legacy defense primes like Lockheed, Northrop, Boeing, Raytheon, there's no world in which they're going to let you exist without opposition. Like, they are going to try to eat your lunch.

And so I think that this belief that you can just build a cool product and it's going to work is very naive. You need to basically wake up every morning in a cold sweat thinking about what is Lockheed trying to do today to take you down? - To destroy you. - Yeah. And I think only the businesses that have super high degrees of paranoia are going to work in this market. - How do you see AI changing defense now and how do you see it impacting the future?

Yeah, I think it really depends on how you define AI. The way that most people in Silicon Valley think about AI in April of 2025 is LLMs. It's like chat-based applied artificial intelligence. And that's not really what is going to move the needle for weapon systems and the national security ecosystem. But there are a lot of questions around

applied artificial intelligence for computer vision, perception, reasoning, command and control. And I think that will be the things that make the difference for the next 50 years. We're moving away from really expensive, exquisite systems like aircraft carriers and fifth generation fighter jets, manned fighter jets. And we're moving into highly distributed, large quantities of attributable systems, which means

Just yesterday, we lost an F-14. - $60 million plane or something. - Lost a $60 million F-14 that was engaging in evasive maneuvers in the Gulf and basically skidded out and slid off an aircraft carrier. This is like an unthinkable loss. There's a human being on the ground

on that plane. It's a $60 million piece of equipment. And that's not the future of warfare. The future of warfare is hundreds of very low-cost things that are, it's not unthinkable to lose. And the only way that you can command and control, you know, a battlefield with thousands of assets is by using artificial intelligence in a really robust way. And so that's really what Anduril is focused on is trying to help us step into that future.

Trey Stevens, general partner at Founders Fund and co-founder of Endrel. Thank you so much for being here. Thank you so much. Yeah. Appreciate it. See ya. On next week's episode. Talk about it opening now because the regime in Syria just collapsed. So I have nothing about it. So I end up hacking the internet, shut it down for two weeks. So, you know, this is how my revenge, you know. The internet just in your city or in? The whole country.