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 AntiCreative with Shyam Sankar

In this episode of 20 VC, host Harry Stebbings converses with Palantir's CTO Shyam Sankar about the defense tech industry's evolution and the challenges of government contracting. Sankar criticizes the government's preference for process over content, which he believes stifles catastrophic success and innovation, advocating for a model that rewards risk-taking and maverick innovators. They discuss the importance of defense tech companies like Palantir in shaping modern government procurement strategies, moving away from traditional cost-plus models towards value-driven, product-based solutions. Sankar emphasizes the need for the DoD to pick winners to foster a competitive, innovative defense tech ecosystem. He also reflects on Palantir's own transformations, the importance of talent over process, and the potential of AI to address institutional legitimacy, suggesting a future where AI partners with institutions for real transformation amidst geopolitical instability.

• The process-heavy approach to project management aims to minimize the risk of failure.
• This risk-averse strategy inadvertently limits the potential for exceptional success.
• The emphasis on process overcomes the pursuit of excellence, leading to a culture of mediocrity.

"The greatest travesty of all this is in order to constrain the variance and 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."

The quote highlights the dilemma between risk management and innovation. By overly focusing on avoiding failure, organizations may inadvertently stifle the potential for groundbreaking success, settling for average results.

• There has been a significant increase in defense technology investment over the past 18 months.
• Companies like Palantir, Anduril, and Helsing are at the forefront of this surge in Europe and the U.S.
• The podcast aims to explore the intricacies of government procurement and the future of defense technology.

"Over the last 18 months, we've seen investment in defense tech skyrocket it, Palantir, Angeril, Helsing in Europe being the leaders."

The quote indicates a trend in defense technology investment, with a few key players leading the market. It sets the stage for a deeper discussion on government interactions with these tech companies.

• The podcast will delve into how governments make purchases, which governments excel at it, and the potential improvements in the Department of Defense (DoD) procurement process.
• Shyam Sankar, Palantir's CTO, is recognized for shaping modern strategies for selling to governments.

"Really understand how governments buy, which governments are best at it, what that looks like moving forwards, what the DoD can do to improve."

This quote outlines the central questions the podcast intends to address, focusing on the nuances of government procurement processes and the role of companies like Palantir in that space.

• Shyam Sankar attributes his work ethic to his father, who faced significant challenges and demonstrated perseverance.
• His father's journey from India to Africa, facing adversities, instilled a sense of duty and the importance of hard work in Shyam.
• Shyam's upbringing underlined the value of resilience and the importance of not squandering opportunities.

"It comes from my father. My father. As a young man in his 20s, he left India to set up the first pharmaceutical manufacturing facility in Africa."

The quote explains the origin of Shyam Sankar's work ethic, emphasizing the role of his father's experiences and the impact they had on shaping his drive and determination.

• Shyam Sankar's family history includes overcoming extreme challenges, such as armed violence and starting anew in the U.S.
• The experience of nearly losing his father and fleeing their home country left a lasting impression on Shyam's perspective on life and work.
• The sense of gratitude for the present and the focus on future opportunities are central to his outlook.

"We suffered horrible armed violence. He was almost executed. He had to start over. We fled Nigeria. We resettled in the U.S., effectively as refugees, starting from scratch."

This quote provides a glimpse into the traumatic events that shaped Shyam's early life and the resilience his family demonstrated in the face of such adversity, highlighting the importance of gratitude and perseverance.

• Shyam emphasizes the significance of collaboration and support within a unit, whether it's family or a business team.
• He compares successful endeavors to a rock band, where chemistry and collective effort are key to achieving great things.
• The concept of unsung heroes and the collective over the individual is a recurrent theme in Shyam's philosophy.

"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."

The quote conveys the idea that success is rarely a solo endeavor, and it's the collective effort and synergy of a group that leads to remarkable achievements.

• Shyam has mixed feelings about the role of luck in success, preferring to focus on hard work, which is within one's control.
• He suggests that acknowledging luck may not be productive and that hard work has been undervalued in recent times.
• The emphasis should be on effort and perseverance rather than attributing success to chance.

"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."

This quote reflects Shyam's belief that a productive mindset involves focusing on hard work rather than relying on the concept of luck, which is less tangible and controllable.

• Shyam joined Palantir when it was a small team with a focus on national security issues, which resonated with him personally.
• The company aimed to solve complex problems without clear knowledge of classified environments, relying on a commitment to the cause.
• Palantir's beginnings were marked by a determination to succeed despite the uncertainty of its future.

"I would have much rather failed working on something that I thought was so important."

The quote illustrates Shyam's commitment to working on meaningful projects, even at the risk of failure, underscoring the importance he places on the significance of the work over its guaranteed success.

• Palantir's business model was a departure from the traditional government contracting approach of cost-plus pricing.
• Shyam and Palantir focused on building a product so compelling that the government would be willing to adopt a new purchasing model.
• The company's strategy involved rejecting hourly payment for services in favor of a product-based, subscription model.

"I'm going to refuse to accept any revenue that's services based from you. And instead I'm going to build a product and I'm going to keep investing in the product."

This quote encapsulates the innovative approach Palantir took in selling to the government, rejecting the conventional service-based revenue model in favor of product investment and a subscription-based model.

• Selling to the government involves navigating a complex and often opaque decision-making process.
• The government's traditional preference for paying by the hour creates challenges for innovative companies seeking to introduce new procurement models.
• Palantir's success required creating a product so valuable that it compelled government buyers to engage in a more arduous but ultimately rewarding purchasing process.

"The low entropy, the lowest path, least resistance is to try to pay someone by the hour."

The quote highlights the government's default procurement method, which poses a barrier to companies like Palantir that are trying to introduce a more product-centric model.

• Palantir has effectively implemented a "land and expand" strategy with government contracts.
• Once established within a government agency, Palantir's products become deeply integrated and difficult to replace, leading to retention and margin optimization.
• The company's ability to demonstrate the value of its products has been key to its expansion within the government sector.

"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."

The question points to Palantir's successful strategy of securing a foothold within government agencies and then expanding its presence, which leads to strong customer retention and financial benefits for the company.

• The expansion strategy for government SaaS is product-driven rather than sales-driven.
• Expansion involves increasing product capabilities that are valuable to the customer, not just user licenses.
• Deep understanding of customer needs is essential for product expansion and cannot be conceived remotely; on-site engagement is critical.
• Margin optimization in government SaaS comes from productizing and creating efficiency in delivery, not from customer lock-in.

"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."

This quote emphasizes that the focus of expansion in government SaaS is on enhancing the product's capabilities, not just increasing the number of licenses sold.

"You need to be in Djibouti or in Kandahar or in balad or in Rammstein sitting with the users to understand what's next."

The quote highlights the importance of being physically present with users in their environments to understand their needs and develop relevant product expansions.

"You're delivering software into air gapped environments that are tightly controlled and constrained, and people need clearances to access them."

This quote describes the unique challenges of deploying software in secure government environments, which requires a different approach to product development and delivery.

• The U.S. government system is traditionally set up to procure hardware, not software.
• Government expectations for R&D and procurement costs are misaligned with the nature of software development.
• There is a misunderstanding in government about the continuous nature and associated costs of software as a service.

"The whole government system is geared up to buy hardware because they kind of, especially in the US government."

This quote points out the traditional focus of government procurement systems on hardware, which does not align well with the needs of software acquisition.

"Software R&D costs only increase. No investor thinks Microsoft's gonna spend less in the future on R&D than they spend in the present moment."

The quote reflects the misconception in government procurement that software R&D costs should decrease over time, contrary to the industry norm where R&D costs increase.

• America's prowess in defense manufacturing peaked during World War II, leveraging mass production techniques.
• The "Last Supper" in 1993 led to the consolidation of defense companies from 51 to five, which resulted in less competition and a focus on financialization over innovation.
• The financialization of defense has shifted the focus from creative problem-solving to financial metrics like dividends and buybacks.
• The current defense industry discourages risk-taking and rewards conformity, hindering the support for mavericks and innovators.

"We had 18 months when we were not getting shot at, to turn on our industrial production, to build factories and to retool them."

This quote explains how America had a unique opportunity during World War II to ramp up its industrial production without being directly engaged in combat, which is not the case today.

"After we won the Cold War, rightly, we expected a peace dividend."

The quote addresses the expectation that defense spending would decrease after the end of the Cold War, which led to the consolidation of defense companies and a shift towards financialization.

"The core industrial problem is that we don't have a way to reward mavericks and innovators that we're breeding."

This quote identifies the fundamental issue in the defense industry: the lack of support for innovative thinkers who are essential for breakthrough developments.

• The procurement process in government is cumbersome and tends to favor established companies with the resources to navigate it.
• There is a tension between the desire for fair competition and the need for speed and innovation in government procurement.
• The U.S. procurement process is more streamlined compared to Europe but still slow and risk-averse.
• Mistakes and learning experiences are discouraged in the government procurement process, leading to a culture of mediocrity.

"Kelly Johnson could build a plane in nine months. We can't even procure something in twice that long."

This quote contrasts the speed and efficiency of past innovators like Kelly Johnson with the current slow procurement process, highlighting the need for change.

"In an effort to have a perception of fair competition, we have created so much process that we neither have fair competition nor speed."

The quote criticizes the current procurement process for being overly concerned with the appearance of fairness at the expense of actual fair competition and efficiency.

• The Department of Defense (DoD) must pick multiple winners to foster a competitive and innovative defense tech ecosystem.
• The venture capital model of investment in defense tech is not compatible with the current approach of evenly spreading funding across companies.
• The DoD's reluctance to pick winners is based on a misconception, as every contract awarded inherently selects a winner.
• The DoD needs to support a few successful companies to encourage a virtuous cycle of investment and innovation in the defense tech sector.

"Pick winners, plural, to be very clear."

This quote clarifies that the strategy should be to support multiple successful companies, not just one, to promote a healthy and competitive defense tech environment.

"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."

The quote criticizes the current funding strategy of evenly distributing funds among many companies, which results in none being fully successful or innovative.

"We don't pick winners, but no, literally, you're a monopsonist. Every contract you award, you're picking a winner."

This quote challenges the DoD's claim that it does not pick winners by pointing out that every contract awarded by definition selects a winner, and thus the DoD should consciously support the most promising companies.

• Government has economic responsibilities, including job creation and welfare.
• Defense spending can sometimes be disguised as an economic initiative rather than acknowledged as a defense expenditure.
• The Small Business Innovation Research (SBIR) program is critiqued for not fostering scalable companies, but rather maintaining "zombie" companies.
• There is a debate about the role of small business and government programs in creating jobs versus driving defense innovation.

"There's an aspect of government that is a jobs program, that is welfare for the people."

This quote emphasizes the economic function of government, particularly in the context of providing jobs and welfare.

"Study after study shows that you get these siber grants and your company never actually achieves scale."

The quote criticizes the SBIR program for not leading to significant growth in companies, suggesting it may not be an effective strategy for fostering large-scale defense innovation.

• Historical comparison of defense spending relative to GDP during the Cold War and present times.
• Discussion on the ideal "defense insurance premium" as a percentage of GDP to maintain global order.
• The peace dividend post-Cold War was necessary for political legitimacy but has led to complacency in defense spending.

"So absolute dollars, yes, are bigger. But as a percentage of GDP, what do you think is the defense insurance premium the country should pay every year to protect Pax Americana and the western international rules based order?"

This quote questions the current defense spending in relation to GDP and its sufficiency in protecting the established international order.

"I think it's between where we are now and where it was during the cold war."

Shyam Sankar suggests that the ideal defense spending level should be between the lower current percentage of GDP and the higher percentages seen during the Cold War.

• The shift in defense procurement towards lower-cost, rapidly evolving capabilities.
• The importance of competition within government programs to foster innovation and reduce costs.
• The need for feedback and adaptation in procurement to reflect changing requirements on the battlefield.

"What is there to learn from you? Look at the tactics, you look at what is working on the battlefield."

Shyam Sankar points out that defense procurement must learn and adapt based on actual battlefield experiences and evolving tactics.

"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."

The speaker advocates for the reintroduction of competing government programs to spur innovation and technological advancement.

• Leadership changes have less impact on procurement processes than expected, though they do have some effect.
• The UK government's involvement in contract approvals and the US Congress's role in budgeting are highlighted as significant factors.

"How does it change processes much less than people think."

Shyam Sankar downplays the impact of leadership changes on defense procurement processes, suggesting continuity despite changes in government.

• Silicon Valley has shown up with capital and entrepreneurs to address national security challenges.
• Venture capitalists are encouraged to engage with policymakers to bridge understanding between business dynamics and policy.

"The capital class has showed up. The capital has showed up. The entrepreneurs have showed up."

Shyam Sankar acknowledges the significant participation of Silicon Valley in the defense sector.

• Emphasizes the importance of content (substance) over process in business success.
• Steve Jobs' perspective on the primacy of content in a company's success is cited.
• The balance between content and process is necessary, especially in scaling a business.

"Content, not process, is the eternal substance."

This quote asserts that the core value of a business lies in its content or substance, rather than the processes it follows.

• The importance of recognizing and fostering individual talent within a company.
• The challenge of structuring a company to accommodate unique talents without stifling creativity.
• The analogy of an artist colony is used to describe an ideal company culture that nurtures individuality.

"Talent spotting eats strategy for breakfast."

Shyam Sankar highlights the critical role of identifying and leveraging individual talent over rigid strategic planning.

"You're much better off designing a role around who they are, rather than saying, what role can I slot you into?"

The speaker advocates for customizing roles to fit individual talents, rather than forcing individuals into predefined roles.

• Recognizing and committing to the long-term value of fundamentally talented individuals.
• Understanding that talented individuals will experience ups and downs.
• Creating a supportive environment that values the individual over a long arc.
• Avoiding judgment based on short-term performance fluctuations.

"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."

This quote emphasizes the importance of commitment to talented individuals despite the inevitable fluctuations in their performance, suggesting a focus on their long-term potential rather than short-term results.

• Providing autonomy, resources, and protection from daily distractions.
• Allowing artists to focus on their craft without the pressures of the business's daily realities.
• Setting up an environment that maximizes learning opportunities for talented individuals.

"How do you manage edge? 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."

This quote discusses the role of a manager in fostering a supportive environment that enables talented individuals to thrive and produce their best work.

• Recognizing that even talented artists can go through rough patches.
• Balancing support and motivation with the reality that sometimes a change may be needed.
• Making judgment calls as a manager when an artist is not producing successful work.

"If they're really going through a rough batch for a long time, that might be part of your... I think that's going to be a judgment call as the talent manager."

This quote acknowledges the difficult decisions that a manager must make when an artist is consistently not meeting expectations, indicating the need for a nuanced approach to managing talent.

• Balancing the need for budgets with the creative process.
• Recognizing that while constraints can drive creativity, excessive constraints can hinder it.
• Managing budget realities without stifling the creative freedom of the talent.

"Budgets are anticreative. So you have to think about what's the right mix of like, hey, at this moment we really need budgets."

This quote suggests that while budgets are necessary, they can be detrimental to the creative process if not managed carefully, highlighting the delicate balance needed between financial constraints and creative freedom.

• Reflecting on past hiring mistakes, such as hiring based on external expectations rather than from first principles.
• Learning to grow talent into roles that reflect their abilities.
• Focusing on raw talent and potential rather than specific roles during the hiring process.

"My biggest hiring mistakes were hiring for a factory, hiring what I thought I would need hiring... It's never worked for me."

This quote reveals the speaker's realization that hiring based on preconceived notions or external advice often leads to poor outcomes, and that a more organic, talent-focused approach is preferable.

• The challenge of reinventing oneself during organizational transformations.
• The difficulty of communicating and engaging with a larger number of employees during change.
• Recognizing that personal growth through reinvention is crucial for individual and company success.

"The less obvious part of this sort of reinvention is reinventing yourself... 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."

This quote discusses the personal challenges that come with an organization's transformation, emphasizing the need for individuals to adapt and grow in order to remain relevant and effective.

• Belief that value in AI accrues to incumbents who own applications at the app layer.
• The commoditization of AI models and the importance of integrating them into applications.
• The necessity for model companies to own more of the value they create rather than just selling an endpoint.

"I think it biases towards the incumbents who own applications in the app layer... The only place you can drive that elegant integration is at the app layer."

This quote suggests that the real value of AI lies in its integration into applications, where incumbents have an advantage, rather than in the AI models themselves, which are likely to become commoditized.

• Adapting views on content and process, recognizing the importance of scaling content incrementally.
• The shift from minimizing the pain of reinvention to embracing it as a necessary part of growth.

"Probably the biggest one is content and process... I'm now willing to fight incrementally, almost like trench warfare, to get things to scale."

This quote reflects a change in mindset regarding the approach to scaling content, indicating a willingness to engage in a more gradual and challenging process to achieve growth.

• Fascination with the mindset and conditions surrounding founding moments in history.
• The desire to understand the challenges and mindset of founders from critical historical periods.

"I'm so obsessed with the conditions around founding... How difficult it was. I just want to relish those founder stories."

This quote expresses a deep interest in the experiences and challenges faced by founders during significant historical moments, seeking to draw lessons and inspiration from their stories.

• Viewing each individual as unique and maximizing value by recognizing their individuality.
• Avoiding the aggregation of individuals into a class and instead focusing on their unique contributions.

"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."

This quote captures the philosophy of treating each individual as unique, which is central to the speaker's approach to managing and valuing talent within an organization.