Matt Grimm
speaker
244 appearances
1 recordings
1 series
first heard Nov 2024
last heard Nov 2024
Matt Grimm’s voice in public audio — every appearance, attributed to the second.
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I think it's like, it's kind of pithy to be like, they're all just idiots. It's like, no, they're not. They're not. They're just operating under a different incentive structure, a different reward scheme, a different kind of careerist kind of mentality that for those of us in Silicon Valley, entrepreneurs and VCs and investors alike. It's just a fundamentally different kind of worldview.
So I think what you have to do is understand where they're coming from and then translate to them, okay, here I have this core technology. Here's how it could actually impact the lives and the capabilities of your soldiers in conflict. Here's how we'd field it. Let me show that to you. Let me do the work that's often pretty painful.
And you talk to a lot of enterprise entrepreneurs and enterprise investors. It's like, There's a headline that makes sense. You're like, oh, bringing X innovation to the enterprise. And then when you actually get into the weeds of enterprise implementation, it's really hard. Really, really, really hard.
And even closed, understood.
I mean, you talk to plenty of entrepreneurs who come in here and say like, oh, AI is totally going to transform ex-corporate infrastructure, totally going to transform accounting. We won't need accountants anymore. I've heard that pitch a couple of times. And you're like, really?
First of all, would appreciate the urgency of the problem. Over the last, call it decade, the governments of the West have largely gotten complacent to what we view as the major geopolitical strategic problems facing the West, especially vis-a-vis China, and to a slightly lesser extent, Russia. So appreciating the urgency, I think, is point number one.
Point number two, I would say, is bringing capitalism back to the defense sector. My former boss and now friend and mentor, Sham Sankar Palantir, who you've had on the show, he's been on a tear lately talking about this. And he had this tweet that I think perfectly encapsulates it, where he said that everyone, including Russia and China, have given up on communism, except Cuba and the DOD.
And it's like, that's kind of the mentality, right? It's like a mentality of a cost plus style contracting. We'll get to that in a second, where ultimately a competitive win, a better technology, a better approach doesn't always necessarily win out.
And like, oftentimes there are different incentives at play that lead to a little bit more of a kind of communistic or socialistic approach to the defense sector that I think is fundamentally bad and is ultimately squeezing out kind of the crazy entrepreneurs and the crazy inventors from working in the sector.
So the third point that I would change would be way less cost plus contracting, way, way, way less cost plus contracting, moving many more things to firm fixed price, and then being comfortable with- Just for those that don't understand, what is cost plus contracting? Oh, man. So if you've... spend any time around lawyers or accountants or folks of that type that bill by the hour.
So what happens on these large defense procurements is that one of these prime contractors will come in and they will pitch a PowerPoint slide about how they would do something. And then they hire engineers to build to that vision. Then they bill those engineers to the government at an hourly rate with a fixed margin. So that's a cost plus. So it costs us this.
There's a fixed margin on top of that. And then they charge that back to the government up to the limit of the particular program budget. So what ends up happening, and it's like, I started with lawyers and accountants for a reason, is like when you incentivize someone to work by the hour, it will take more time.
And when you incentivize somebody to work by a firm fixed price, it'll go a whole lot shorter. So it's like if you take those fundamental incentives and then you extrapolate that to the entirety of the industry, there's actually not a lot of incentive
the existing prime contractors to make the plane cheaper or faster fundamentally not the incentive what they're incentivized to do given that their profit margins are ultimately driven by how high they can drive the cost up because they get a firm fixed margin on top of that cost then you get the behavior that you incentivize and i think like if you look at some of the statistics and some of the performance of these companies honestly it's kind of hard to blame them it
Genuinely is. Like the stock performance of the top five defense primes in the U.S. is wildly outperforms the S&P 500. I have the statistics right here. I wrote them down.
Yeah. So Northrop Grumman over the last 15 years has had a total compounded annual shareholder return of just over 20%. Lockheed and Boeing are just behind them at about 15%. The S&P 500 over the exact same time period has an 11.6% total compounded annual return.
Yeah, I'm enjoying the light bulb going off. What's happening is that the incentive structure within the Pentagon, within the procurement office, has said like, This is how we prefer to do business because we don't want to have our companies make too much money. So this firm fixed margin is something like 8%, 9%, 10%, thereabouts, depending on the particular contract.
So that's how they've structured many of their large procurements, including the F-35, including large submarine programs, have all been designed under this kind of cost plus type structure.
So what the defense primes have gotten very good at is they've gotten very good at figuring out ways to take their overhead kind of corporate costs, including their buildings, including their HR departments, their finance departments, their legal departments, kind of all of these, their IT infrastructure, all of that, bundling that into that cost framework.
number on the beginning part of the equation, then taking that firm fixed kind of price margin markup on top of that, such that that free cash flow that comes off of that contract, actually pretty free. So then the companies perform financially very well, including some wild stats about stock buybacks and dividends.
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