Katherine Boyle on Investing in America's next great technology companies

Katherine Boyle – Investing for America | Invest Like the Best with Patrick O’Shaughnessy

Check out Invest Like The Best’s Episode Page and Show Notes 

Key Takeaways

  • Improvements in the highly regulated American Dynamism sectors like defense, housing, education, and healthcare will come from technological improvements, not policy improvements
    • These are the most regulated, most subsidized, and lowest-competition sectors
  • American Dynamism is an initiative to repair and strengthen the relationship between Silicon Valley and Washington to solve issues facing all Americans 
  • Washington has a zero-sum culture that operates on short time horizons, while Silicon Valley has a positive-sum culture that operates on long time horizons
  • Authoritarianism gives Russia and China certain advantages over the U.S. because they can order their best technologists to build what the country needs, whereas the best technologists in the U.S. are left free to create better ad-optimizing tech for Snapchat 
  • American Dynamism founders must be great storytellers; the technology is important, but the founder must be able to convince investors, customers, employees, and potential future employees that they are a paradigm-shifting company 
  • The government must turn to other sources than its defense-industrial base to solve its shortcomings in software, the Department of Defense’s realization of this has marked a paradigm shift in Washington 
  • The playbook for defense tech startups: Start competing for the smaller pockets of money that don’t touch the five defense primes (that receive 40% of the defense budget), and then move up the categories of spend and compete for contracts in areas that have been around for awhile 
  • People opting out of a system oftentimes improves the underlying system
  • COVID forced parents to adopt a new model of educating their children, and like remote work, many parents were pleasantly surprised by the efficacy of the home-schooling and micro-schooling method 
  • If all you need for work is an internet connection, people will move to states that are more aligned with their values and preferred policies, thus placing positive pressure on states to improve 
  • Prices in regulated, subsidized, low-competition industries like defense, healthcare, and education don’t come down because they don’t need to come down
  • Investors must be mission-aligned with the company or they shouldn’t be working with them  

Intro

  • Katherine Boyle (@KTmBoyle) is a general partner at Andreessen Horowitz where she invests in companies that promote American Dynamism. Prior to entering the venture capital world, she was a general assignment reporter at The Washington Post. 
  • In this conversation, Katherine and Patrick discuss investing in American Dynamism companies operating in areas like defense, education, housing, and healthcare
  • Check out these Podcast Notes that cover Marc Andreessen’s beliefs in American Dynamism 
  • Host – Patrick O’Shaughnessy (@patrick_oshag)

Books and Articles Mentioned

The Origins & Overview of American Dynamism 

  • American Dynamism is actively investing in things that support the national interest 
    • Aerospace & Defense
    • National Security 
    • Housing
    • Education 
  • Improvements in these highly regulated sector will come from technological improvements, not policy improvements
  • Katherine moved to Silicon Valley after working in media in D.C., and was shocked at the disconnect between Washington and Silicon Valley 
  • Historically, Washington and technologists worked closely together, but their relationship has been bifurcated for the last fifteen years or so, to the point where its become taboo to work with government 
  • American Dynamism is an initiative to repair and strengthen the relationship between Silicon Valley and Washington to solve issues facing all Americans 

Move Slow & Don’t Break Things 

  • Washington has a zero-sum culture that operates on short time horizons, while Silicon Valley has a positive-sum culture that operates on long time horizons
  • The Department of Defense’s technological procurement process optimizes for error reduction and tends to be relatively risk-averse, which is not true of its competitors like Russia and China
  • Authoritarianism gives Russia and China certain advantages over the U.S. because they can order their best technologists to build what the country needs, whereas the best technologists in the U.S. are left free to create better ad-optimizing tech for Snapchat 

The Broken Aspects of American Exceptionalism 

  • Innovation comes from an open system of risk capital, which is not symbiotic with Washington’s culture 
  • In addition to the cultural differences between Washington and Silicon Valley, the regulatory side of government limits innovation that can freely be achieved by entrepreneurs operating in other, less regulated areas 
  • The DoD and Silicon Valley must work better together to bridge their cultural and regulatory differences so that innovation can flourish in the areas that are historically highly-regulated 

Katherine’s Background as a Journalist 

  • Truth-seeking is the through-line between journalism and venture capital
  • She observed technology companies disrupt several parts of the legacy media’s business model, and wanted to learn how and why the new technology was able to 
  • She left the Washington Post for Stanford Business school, and approached it as a research opportunity to learn more about the intersection of technology and journalism 

The Different Categories of American Dynamism 

  • Aerospace & Defense is the obvious category 
    • Successful aerospace & defense tech companies have emerged from Silicon Valley in the last decade, which is a relatively new phenomenon
  • There are suppliers to aerospace & defense companies, such as Hadrian, a company building highly automated factories designed to accelerate advanced manufacturing  
  • Early-stage and higher education companies like Labster and Maven 
  • American Dynamism founders are unique historians of the sectors they operate in; they are intimately familiar with the problem they are trying to solve, and understand it in ways that founders working on the next consumer product might not understand their respective problem 
  • American Dynamism founders must be great storytellers
    • The technology is important, but the founder must be able to convince others that they are a paradigm-shifting company 
    • There have been a lot of deep tech and hard tech companies with great technology that never made it because their founders weren’t able to tell great stories
  • “Storytelling” is not superficial hype narratives; it is a deep understanding of the industry’s history and the ability to convince investors, current employees, and potential employees that the company will survive the hard years  

The Problems with Government 

  • The government is good at making laws, and many of these laws are made by unelected bureaucrats that have held their position for several decades 
  • Entrepreneurs can make more impact on a shorter time horizon operating in the private sector than in the public sector, so many of them opt for the former 

Investing in Aerospace and Defense 

  • There is a paradigm shift happening in the DoD: the procurement process was optimized to acquired hardware (tanks and battleships), but now it needs software 
  • The best software engineers don’t work for the legacy defense primes like Lockheed Martin, they work for technology companies
    • The government must turn to other sources than its defense-industrial base to solve its shortcomings in software, and it has realized this 
  • SpaceX’s success unlocked the potential for the aerospace sector; Elon Musk showed other entrepreneurs that they too could be successful in this industry and gave them a replicable playbook to follow
  • Anduril is another success story in the aerospace and defense sector, and showed that it is possible to work with the Department of Defense 
  • About 40% of the $1.3 trillion in U.S. and ally annual defense spend goes to the five legacy defense primes
    • A large portion of the $1.3T has been pre-spent on contracts with the five defense primes due to decades of lobbying, so the realistic addressable defense market is much smaller for new companies going after contracts 
  • Anduril, for example, went after apolitical pockets of spend and began making products that the other primes wouldn’t (or couldn’t) make 
  • The playbook for defense technology startups: Start competing for the smaller pockets of money that don’t touch the legacy defense primes, and then move up the categories of spend and compete for contracts in areas that have been around for awhile 

Lobbying 

  • An example of the problems with lobbying: The Chinese Communist Party was able to successfully lobby the U.S. government to remove a ban that prevented its drone company DJI from being sold to U.S. law enforcement companies
  • The hard thing about lobbying is there are so many in-roads to stop legislation from happening or not happening 
  • Companies lobby to become institutionalized with the DoD or government to become a program-of-record
  • Being chosen as the government’s perpetual supplier for a given product or service on a contract that is infrequently re-competed is a primary goal for most lobbyists

Top-Down vs. Bottom-Up Investing In The Technology Sector

  • Katherines subscribes more to bottom-up investing in American Dynamism categories because there is more signal from founders having a deep understanding of their sector than exclusively evaluating secular trends 
  • The founders are the most educated on their specific problems, so a16z listens to them

Education is Changing

  • COVID changed how parents think about their children’s education
    • This sea-change put some pressure on state and local politicians to focus more on education 
  • People opting out of a system oftentimes improves the underlying system
  • The best way to educate kids is in small environments, but education was forced to become scalable when America transitioned to a two-income household structure and kids had to go somewhere where they could be watched during the day 
  • COVID forced parents to adopt a new model of educating their children, and like remote work, many parents were pleasantly surprised by the efficacy of the home-schooling and micro-schooling method 
  • American public schools are not providing universal STEM education today; they are still teaching the subjects that were most important going into the 19th century, such as grammar 
  • The economy has completely changed, and parents are realizing their children need education in areas that are not being taught at public schools if they want their children to be equipped with valuable skills

The Resurgence of Federalism  

  • Starlink will enable a new type of Federalism in ways that other technology hasn’t.” – Katherine Boyle
  • If all you need for work is an internet connection, people will move to states that are more aligned with their values and preferred policies  
  • Katherine participated in the great migration: she moved from California to Florida in 2020
  • States organizing themselves around the policies they care about is good for America 

Immigration 

  • About 50% of unicorn companies have a foreign-born founder
    • This number was from a 2018 study; a 2022 article by Forbes revealed that almost 80% of America’s unicorn companies have an immigrant founder or an immigrant in a key leadership role 
  • Many foreign-born founders come from places whose economic system collapsed; these founders have a certain hustle to them that contributes to their success as entrepreneurs in a capitalist system
  • Immigrants are excited to build in America, and they are proud to be in America
  • We should celebrate the fact that people from all over the world want to come to the United States and build a better life; it is a distinguishing feature of America

Housing 

  • One of the most fundamental human goods is where you live and whether or not you can afford housing 
  • Entrepreneurs operating in the housing sector run into more government regulation problems than technology problems 
  • States with highly-regulated housing policies are now under pressure as people are leaving them for states with less regulated housing

Government-Induced Inflation 

  • The most regulated sectors are also the most subsidized by government: housing, education, and healthcare 
Source: AEI.org
  • College has become 10X more expensive than it was for the previous generation because college was forced onto everyone as the only way to solve society’s problems
  • Taking on the amount of debt required to earn a college education has contributed to the hollowing out of the middle class 
  • Bringing more young people into trades is good for America 
  • Sectors that are highly regulated, and where consolidation is common, tend to have less competition, which reduces the positive impacts of free-market innovation
  • Prices in regulated, subsidized, low-competition industries like defense, healthcare, and education don’t come down because they don’t need to come down 

Investing in Atoms, Not Bits 

  • Early stage investing in hardware-software companies is difficult, which is why a16z is investing in these types of companies in their seed round  
  • Revenue growth tends to be slower in the early stages of hardware-software companies; the founder must be able to keep internal camaraderie high to keep the company on track 
  • There are network effects when working in government that is often overlooked
    • Example: If one county implements a new technology that adds value to its citizens, such as Flock Safety, then neighboring counties will also implement it 
  • After a hardware-software company secures a few government contracts, it starts to compete with the incumbents that tend to have older tech
    • Hardware-software companies often accelerate growth at Series C and D when they find themselves competing against no one
  • Companies like SpaceX and Anduril do not have fast followers because it is difficult to build hardware-intensive companies in the real world 
    • This is unlike Software-as-a-Service companies whose barrier to entry is much smaller  
  • Founders must have a deep empathy for the customer, which oftentimes requires experience having worked in government 
  • Investors must be mission-aligned with the company, or they shouldn’t be working with them 

The Anatomy of a Great Story 

  • Katherine looks for “seriousness” in the storyteller, which is the unique combination of capability and will 
  • Ideally, there is a ferocity to the founder where he will run through walls to accomplish the company’s mission 
  • The seriousness of the founder reveals the seriousness of the company 
  • Andreessen Horowitz likes to invest early because it’s easier to assess the seriousness of a company before it’s experienced massive growth 

Additional Notes 

  • “Silicon Valley”, as it is used these notes, is representative of the broader tech community, and is not limited to the founders, startups, and investors geographically operating in Palo Alto 
  • “The Factory Is The Product” concept: The actual decisions you make about the system is the resulting product 
  • Katherine’s answer to Patrick’s closing question, “What is the nicest thing anyone has ever done for you?”: Her mother committing her twilight years to help raise their child 
    • Multi-generational living has benefits that our current society has disregarded
Invest Like the Best : , , , , , , , , , , ,
Notes By Stan Rizzo

More Notes on these topics

Top Insights and Tactics From

31 Best Podcasts of All Time

FREE when you join over 35,000 subscribers to the
Podcast Notes newsletter

No Thanks