Darren Farber - 国防生意 - [Invest Like the Best, EP.417]

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Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and wanna go deeper, check out Colossus Review, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus Review along with all of our podcasts at joincolossus.com.

Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc.

My guest today is Daren Farber. Daren is the managing partner of Albion River, a private direct investment firm focused on acquiring companies that produce highly technical defense products and services. He is a former special advisor to the deputy under secretary of defense, a former member of US Department of Defense Task Force for Business and Stability Operation, and the list goes on and on. Daren is a wealth of knowledge in this space and someone I am grateful to have in the US corner. He shares his perspective on the changing role of the US in global defense and how recent conflicts have shaped military technology and strategy. Daren explains his investment approach at Albion, focusing on finding one of one suppliers and getting as close to what he calls the fundamental molecules as possible in defense technology. We discuss insights on evaluating the Taiwan situation, lessons from Ukraine, how the defense budget is allocated, what investors can learn from defense primes, and why technological superiority remains America's greatest advantage. Please enjoy this incredible discussion with Daren Farber.

Maybe the fun place to begin is for you to describe, with defense investing being so incredibly popular, your state of the union of defense in general. You've been in and around this world for a long time, and there are active wars in the world right now in a way that there weren't many years ago. Just describe how you see the landscape overall, and then we're going to dig into each element of it.

1. Defense Enters A New Era

Daren Farber

We're in a very topical moment right now, just by virtue of what appears to be a decoupling from this longstanding relationship that's existed since immediately after World War II. Borders did not change in the Western world by force for the last 80 years, and we're seeing that paradigm change. That's a pretty big change, but I completely understand why we're going through it.

Let's say you and I have a contract. I'm going to mow your lawn for the next 80 years, and you're never going to pay me, or you're going to pay me sporadically. If you don't pay into the system, then who's invalidated the contract? Should I have the reasonable expectation that you're going to honor your obligations if I refuse to pay into the system? You have an administration that views that kind of contractual compact as meaningful. These are deal people, fundamentally. They come from business, and so they view themselves as completely justified: you're breaking the contract, and so what's my general obligation to you? I don't think they're incorrect, and so it leads to this very serious moment that we're experiencing right now.

The question now becomes: European defense capability is extremely limited. Their nuclear capability is limited to ICBMs, which is really end-of-the-world nuclear weaponry. There's nothing tactical in that. That's only good for whatever video-game scenario where it's the end of the world. In terms of the projection of force, Europe really doesn't have a lot. They've exclusively relied on the United States, and now I think they're having this moment where they realize, “Okay, maybe we exhausted the good offices here, and we need to power up and have our own capability.” It's going to take them a while. It's not going to happen overnight.

Maybe another perspective to offer: you spent a lot of time in the Pentagon.

Daren Farber

Mm-hmm.

There's the $870-some-odd-billion annual defense budget. Talk about the shifting nature of that dollar amount that gets outlaid, what it has gone to historically that's been most important, how what's most important is shifting, and whether or not the Pentagon is good at keeping up with a shifting landscape in the way it spends its money.

2. The Pentagon Has Two Missions

Daren Farber

I think a good frame for me to understand the building has been that there are 2 parts. There are the front office and the back office. This is the best way to think about it in my mind. What's the front office? It's warfighting. That is lethality. It's projecting force. The back office is called the business mission area. It's everything except warfighting.

In the business mission area, the ball has moved forward, but not nearly enough in terms of where it needs to go, in terms of the general efficiency of how we run the back office of the building. In the front office, we have very pristine, exquisite weapon systems, but some of the massing on the battlefield is going to be this very inexpensive, very permissive autonomous capability that we're watching unfold in a live contingency in the Ukrainian theater.

It's ironic because I had a whole series of dinners with Baltic ministers of defense, and they weren't asking me for drone technology from America. I was at the National Security Council looking at a Ukrainian drone that was printed in their area, in their theater of war, and they're doing it for $150. I view a lot of what's happening in drone warfare as the arc of flat-panel TVs. They're very expensive, and they just keep on dropping in price, and the low-cost manufacturer is the leader today. It's why Walmart bought Vizio.

I see a lot of that in drones. The back end will be more important, like the software that coordinates them. The shaped charge will be more important, or just modifying a grenade. But it's not clear to me that making the drone will be this fabulous profit center. I think the department does best when it lets dual-use commercial technology advance so it can adapt it and pull it in internally, as opposed to trying to develop a technology exclusively for defense if there's an adjacent commercial development.

What's a quintessential example of that playing out, commercial to modified?

Daren Farber

I was part of a program in Afghanistan where we were trying to create handheld computing so that contracting officers could go outside the wire, conduct commerce on the economy, and do our counterinsurgency mission. We used this little parking ticket. It's called a Standard Form 44. It looks like a parking ticket. It's in triplicate, with a carbon copy. It's exactly what you grew up with—a parking ticket—and that's how we give money and procure resources on the economy in a theater of war.

There's a special limit that we raised to a few million dollars. One of my jobs was to clear these tickets into the accounting system in Kandahar, and I remember looking at one that said $2 million in cash. I remember the field-ordering officer saying, “What's this?” Given our general lack of financial visibility, I'd love to have some compute, because for them to trace this route back to base is crazy dangerous, and they're only coming back to meet the general obligation of clearing these tickets in order to give them more cash. Maybe I can do it digitally over the air.

We built this huge thing. It hung off your belt, had a huge, expensive battery, and had a thermal printer. It lasted 2 hours. It was horrible. Then, over a weekend, the first version of the iPhone came out. A Marine built an entire app over the weekend. He said, “Why don't we use this?” Of course, it's so much better.

But you have to remember, the department is the largest organization of its kind on Earth, and for many years it was the largest organization. The Army is still the largest operator of golf courses in the world. Everything the U.S. Army does is at the limit of size, and so it always thought that its internal requirements would drive the best solution because it could bring so much demand.

I'm 47. I never contemplated trillion-dollar-balance-sheet corporations that had, in the iPhone, 90% global market share or something crazy for a phone above $1,000. We do so much better adapting something commercial, and I happen to think that's what's going to happen with a lot of these new emerging technologies. The department didn't come up with its own flat-panel TV. It bought it commercially, and if you go on the high side for all the cleared information, it's showing it on—

On a Dell screen.

Daren Farber

Yeah. It's not a custom screen that we made for ourselves. Then there are instances, like Palantir, where they've crossed into the commercial domain, and this is wonderful for the department because you're getting more reps.

So I happen to think a lot of the autonomy in the commercial world will ultimately be adapted into the Defense Department. What am I talking about? Joby, Waymo, and Tesla. That commercial adaptation is going to be very helpful for a defense application, so I think there’s huge benefit where we should be keying off the commercial side of industry.

By the way, there’s legislation related to this, and I was intimately involved in it because we owned a business that benefited from the legislation, and we advocated for it. But it really turbocharged Palantir as a business. This was the National Defense Appropriation Act, where there was a line put in at our behest to say, “Commercial off-the-shelf first if it already exists.”

That was a new feature of law, and it said, “Look, if the capability exists off the shelf, then you must try that first. And at a minimum, if you decide not to use it, or if you use it in some capacity, you can’t treat it like a military system and demand P and visibility into cost and pricing and all these other things because it’s commercially available.” I believe that piece of legislation was enormously helpful to Palantir because it was commercially available, although it didn’t have the size of commercial business it has today. The Army was creating a program at 5 times the funding of Palantir to do it its own way, and they were attempting to literally just turn off Palantir, which would have been a huge cost to the government. I’m sure the system wouldn’t have been as effective.

3. Rebuilding The Defense Portfolio

Patrick O’Shaughnessy

If I think about our armed forces as a stock of stuff—of assets, of soldiers, of current capability—and as a flow of new dollars being spent on stuff, which adds assets to that stock, changes the stock, or whatever, where do you think, if you were doing a 3G zero-based-budgeting-style approach, you would spend the money? I’m sure there are tremendous amounts of inertia, and a lot of the spending that happens this year is just the same as the spending that happened the year before. But if you were starting from scratch, how differently do you think you would spend the $870 billion if you were in charge versus how it’s being spent?

It’s so tough. This is a very tough question because, in your mind’s eye, you can say, “I think this is where the world’s going to go.” But the department functions off of these plans, these operational views of how we integrate the force. They’re called OV-1s, and it’s a visual concept of planning how we plan the force.

We haven’t come to grips with what we do or don’t really need for next-generation warfare. Nonlinear warfare may still require a lot of the old stuff. John Spencer at West Point talks about how war is really a combination of old and new. It’s never all new, and it’s never all old.

If you think about the Ukrainian contingency, there are many World War II-esque components of this: 155 millimeter shells, small caliber munitions, bicycle bombs, mines. The minefield in Ukraine is about twice the size of the state of Florida now. Landmines—we’re talking about old technology.

My concern is that I think we’re over-indexing to a near-peer threat, maybe, and not thinking about some of the capabilities we may need in, let’s say, a nonlinear kind of threat. What do I worry about? I worry about the ability for people to make fissile material now with lasers, and they don’t require centrifuges, and a non-state actor can actually build a nuclear capability. That’s pretty concerning.

It was usually, oh, you needed these pristine alloys, you needed access to the molecule that just made it so hard, and it was exclusively the provenance of nation states. Now, you can have someone who’s sufficiently capitalized, with an alternative form of technology, actually building a small tactical nuclear weapon. I’m not saying it’s super easy, but the march of technology makes things easier.

What’s going to happen when a non-state actor—choose your flavor of the month—gets access to these kinds of things? We’ve been building a force exclusively to fight a near-peer in China or something like that. It’s just a big world with a lot of different kinds of threats.

I’m not as convinced that I need to get rid of every enterprise class carrier, every submarine, every frigate. There are true failures, like the littoral combat ship, and we should turn it off—and they’re doing it. These enterprise carriers are $11 billion, and they take forever to build, so we’re going to need a better paradigm there.

To be responsive to your question, one issue is the process of how we get the stuff out. That needs to be improved. The other thing is curating the portfolio. It’s both. But I wouldn’t say exclusively.

It may sound like I’m dodging the question to a certain extent, but do we still need enterprise carriers? Hmm. I would suggest we do. What the Israelis did with 5 F-35s was pretty much knock out 100% of Iran’s aerial defense. That was 5 pilots. That’s a pretty mission-capable plane.

I know that the autonomous logistics and the cost of the aircraft haven’t been great, but the way detractors have marketed that isn’t totally fair. It’s a joint strike fighter by definition. So what does “joint” mean? If you’re the Navy and I’m the Air Force, we all have 1 strike fighter now. It’s joint. It’s this F-35, and so it’s taking away many other programs. That’s why the program volume is so high.

But we have it at under $110 million a copy. When a Gulfstream 800 is $85 million a copy, you say to yourself, “Okay, this is getting—”

Seems reasonable.

There’s some convergence here, but the cost of logistics and these things need to get better over time. These are actually very well-run businesses, and if we work to change the incentives for these companies, which I think is very important, then you’ll see a fundamental change.

The CEO of Lockheed Martin is a world-class capital allocator. I don’t know if we’ve ever talked about it before, but Jim was the CEO of American Tower. It had about a $2 billion market cap. When he left, it was $100 billion—10 years, 50 times. This is not someone who doesn’t understand capital allocation or return.

But when the incentive structure is to let the department figure out what they want and then give you a very complicated requirements document—and in the requirements document they’re asking you to push the limits of engineering—then what’s the most appropriate way to compensate someone who’s pushing the envelope of physics or technology?

Historically, you had businesses that would leave the ecosystem because they were saying, “This is too tough. I don’t want to take the risk on my balance sheet.” That’s how we came up with cost-plus. We said, “Look, you’re going to take this kind of risk, and I’m going to find a way to make a good enough business for you that you don’t want to abandon the effort.” Cost-plus.

Cost-plus by contract volume is only 15% of the department. It’s about 30% of the budget now because we have programs moving into something called Low-Rate Initial Production, or LRIP. That’s when a program grows up and pushes out. Then, as it crosses into this mainstream production line, we go to firm-fixed-price.

Sometimes the artifact stays too long because we’re constantly pushing the envelope of the technology, and so you leave cost-plus in to make it meritorious for a business. But I think a lot of people think the budget is 100% cost-plus. This is not true. The supermajority of contract volume is lowest price technically acceptable.

I worked for a lot of people who drilled it into my brain that every contract I signed would be LPTA—lowest price technically acceptable. In a budget so big, when the buffet is so big, it’s very easy to point to these sides and say how inefficient it is. There’s a ton of inefficiency.

This effort by DOGE is extremely meritorious, and it happens in defense about every 20 years. So for people to say this is unprecedented, it’s bunk. There’s precedent everywhere in the department. It’s a necessary extinction event.

We also have to be able to manage these other contingent activities, and we need to modernize. This happens over and over again, so it’s just more exposed this time. There are tweet storms about it. The form is unusual, but the substance is not at all.

4. America Reconsiders Its Global Role

I want to come back to about 7 things you said—cost-plus, process, portfolio, all these things. Probably the question I should have asked even before this last one was: all of this to what end?

For the last 80 years, when borders haven’t changed, very famously, the U.S. has been the world’s police. We’ve policed shipping lanes. We’ve been the big bat at the table. I think the world is obviously becoming more multipolar. Maybe describe how you view the end that justifies all of this—everything else that we’re going to talk about: the portfolio, the process, the team, the assets, everything else.

How would you describe what the U.S.’s North Star was in defense for the last 80 years, what it is today, and how fast it’s changing?

Daren Farber

Well, doctrine would say it was our ability to fight 2 continuous wars at the same time against near-peers all over the globe and maintain world order. And look, it largely worked. It’s an amazing run, at enormous expense to the U.S. taxpayer. Enormous expense.

If you look at the rest of the G20 and add up their contributions, and then you look at what the United States spent in order to protect the free world—which is really what it did—the G20 got a huge peace dividend. What’s the peace dividend? Outside of the United States, in the G19, education is largely free and health care is largely free, and you can do that when you don’t have to protect the free world.

I believe the American taxpayer funded all of that peace dividend to enormous effect for these countries. And look, they didn’t live up to the contract that they signed. At what point is it no longer the U.S.’s obligation to maintain stability?

There’s a classical thinking in Washington that if we don’t lead, what fills the void could be complete chaos. It’s totally possible, but we’ve reached the guns-and-butter moment in terms of how big the deficit is.

And so you have this perfect storm: an executive that's tired of freeloading, plus a balance sheet that can't afford to do it in the same way anymore, and a technological shift, which is actually the perfect opportunity for these people to go ahead and give it a try and take responsibility for their own backyard.

I mean, the aid that the Europeans have provided to Ukraine, don't get me wrong, is very important. It is peer or near-peer to the United States. The United States defense complex has gotten a huge benefit from it because they've been buying mostly American gear. But the Europeans gave a loan guarantee. They expect to get paid back. We gave the money, no strings attached.

So largesse is expected ad infinitum, and it's a very difficult moment. I view it as a very necessary moment. I think a lot of people have problems with the form, but the substance is absolutely meritorious. You just can't argue with it, because I live in suburban Washington. I'm blown away by how the narrative that government is inefficient has totally captured the zeitgeist of the entire Beltway, and 6 months ago, no one was talking about it. No one. No one was talking about the general inefficiency of government, and now both sides of the aisle agree that the broader government is extremely inefficient.

And so that's been amazing to me, how the social zeitgeist can just change and move in this direction. But I think these are very necessary events. I think it's a good thing.

I want to come back to the DOGE thing that's happened before, just less visibly so. But if you think about the United States' new set of priorities, or at least its new orientation, where it wants to be compensated for its help and its risk, how do you think the portfolio needs to change based on that changing role in the world?

Daren Farber

That's a really wonderful question. It's really a function of what our allies will be able to construct and build. We have a line of sight to this in the AUKUS partnership that we have with Australia and New Zealand. We're going to maintain an entire nuclear capability in Australia, and it's clear that that's the bug-out point for a war with China. It's not going to be Guam.

I was in an unclassified briefing the other day in the Pentagon. The stockpiles that China has—Guam is not sufficient standoff in order to be protected. We can't project enough force from there, and so Australia becomes the new jump-off point. The battle plans have been set, and we've given the Australians this huge capability. We expect them to start spending, and we're sending our subs there, and they're going to maintain them.

Part of it can be maintenance of a capability we already have, and then the other part is de novo capability. Aircraft carriers, nuclear subs, the three-pronged nuclear deterrent—those things take a long time. I suspect we're going to keep a lot of that capability. But smaller stuff, like anything autonomous in the water or hypersonics, these kinds of things that have a new development tail where the per-unit cost for development is lower, I see the Europeans doing a lot there because they can manage the full life cycle of that.

Yeah, nuclear subs are a huge effort, but look, the Brits have nuclear capability. The French have nuclear capability. But until they actually have a cooperative agreement for how they're going to run a joint military, I think it's hard to pinpoint. They can build tanks and small-caliber munitions. Look, all the sidearms for the US Army historically were European guns: Beretta, SIG Sauer. They weren't even American guns.

So the Europeans, on a per-unit basis, will do a lot. I just think when the system becomes very exquisite and big, it's clear that if it's still needed in the doctrine of force structure, we're probably going to have to do it.

5. China Tests American Massing

If you go back to the old doctrine of 2 wars at once and maintaining global order, how close do we skirt to that line of being able to fulfill that capability, like if we had 2 near-peer battles today?

Daren Farber

We can't do that anymore because I think—

What would break?

Daren Farber

Well, it's just massing.

Describe that. That's a key concept.

Yeah. Massing is just the quantum you can produce in order to win the war. America won World War II by virtue of its enormous industrial capacity. I always say, if America galvanizes around something, it's unbelievable to me what it can produce.

But China has built a stockpile of conventional weapons that it would take us decades of production to build. They have 250 times our naval construction capacity today. You're not possibly going to catch up in any legitimate timeframe.

And so I think we're going to win through technology. I also think that capitalism is this huge advantage that we have here in America, because we call on the capitalistic system in order to deliver the goods to the Department. The Department really doesn't make anything. It's buying it from companies.

The dynamism in the American capitalistic system is the edge, in that we can tap into private markets and the commercial market in order to adapt these technologies, and then we're also creating a profit incentive for people. Look at all the Chinese generals that have gone to jail over and over again because they check the ICBMs and they're filled with water, because no one in that industrial complex has a financial incentive in the same way.

What's interesting is, I was with a prominent Chinese businessman a few weeks ago, and I asked him, I said, "There's been this shift here in the US where young people want to go into defense technology outside of the five-sided building, as we call it. Is there an analog in China?"

He goes, "Oh, no." He goes, "Chinese entrepreneurs want to tap into the American market. They want to be able to sell their product." It's so funny. The young people there are just as capitalistic, but the incentive structure in the PLA is not there.

And so I think that's a huge edge for us. I also think our ability to fight joint warfare is a huge edge for us, for now.

Describe what that means.

Daren Farber

Every war we fight is joint, in that it's all the services together, integrated and working together. It's widely regarded that the PLA and their setup have an enormous lack of trust up and down the chain of command. There's a worry about corruption.

And so even in the vertical of the individual chain of command—let's say in their army or in their air force—it becomes even harder when you have to have a joint operation. We went through this here in the United States. We had this thing called Goldwater-Nichols, which said, if you're going to be a commander in the military, O-6 or above, you're going to get a joint assignment.

We're going to make this service joint so we can fully project the power of each branch of the service and work in concert together. We're not competing with each other. The Chinese have never fought a joint war. They have these branches of services. They've built all this technological capability, but their ability necessarily to exercise in this joint concept is very unclear, especially when there's low trust in command and control.

The flip side to that is I could see a scenario where the Chinese hand over command and control to an AI to overcome the institutional resistance and the lack of trust up and down and across the branches of services, because that thing would be dispassionate and would start tasking it.

And I actually think that they have a much stronger incentive to push the bleeding edge of adapting and planning the war with AI, because they're fundamentally less joint. They're not trained in a joint way. Because they have to rely on it more, that adaptation may happen faster, whereas we have a very successful joint capability, and so maybe we'll be less inclined to change.

That's what I worry about now: this new capability of a thinking machine. Maybe it can overcome the institutional weakness of their military.

If I again zoom to the so-what of all of this stuff, 2 big ones seem to be: being able to defend ourselves—it seems like we can do that; having deterrence—it seems like we've got that; and then there's the ability to do things in faraway theaters that matter to us, so of course Taiwan comes to mind. In that last category, what are the most sensitive so-whats in your mind?

6. Taiwan Faces An Insurgent War

Daren Farber

I think it's going to be extremely hard for us to stop the Chinese from a Taiwanese invasion. I asked a former Secretary of Defense probably 2 or 3 months ago, I said, "Do we have a moral obligation to defend Taiwan?" Not, can we do it tactically, because that's always an engineering problem and a massing problem and a planning problem. Ultimately, we can run the simulations, and maybe there are these outcomes where we can make a dent in it.

I believe that the moral will of the country actually drives all that other activity. I'm not giving it away because it's only been male Secretaries of Defense, but his answer was, "I don't know." I was flabbergasted by it because I thought I understood his politics.

What it tells me is that I think the vast majority of both sides of the aisle don't view it as the moral obligation of the United States to protect Taiwan. It's interesting, because I wonder if it's the case because people think we can't win. We can't win in a conventional sense. If it was a cakewalk for us to win, would we just do it?

I happen to believe the latter. If everyone believed that we had the ability to stop the PLA from crossing the Taiwanese Strait, and it was a nothingburger for us, we'd do it. Of course, we'd have the will because it's an easy win.

And it's the tough win. It would just be too hard for us relative to the quantum of capability that they've been stockpiling for the express purpose. But we've learned a lot in counterinsurgency over the years. How long did the Afghan contingency take for us to win the war part? 2 weeks? What was the Iraq part? 1 week?

Supply chain.

Daren Farber

Yeah, it was the nation-state activity after. China can bomb Taiwan into oblivion, but if they want to take it over and want the vast majority of people to stay alive, the terrain of Taiwan is spectacular for insurgency. One of the most compelling plans I saw was the Taiwanese looking at America and going, “America can never be overtaken because there are anywhere from 300 to 600 million guns in the country. How would you take over the country functionally?”

The Taiwanese have a very good healthcare system and safety net to prevent deranged people from getting firearms. My view is that a firearm culture there may already be taking hold, and if every adult had a long rifle, I don’t know how the Chinese would take over that island. But it wouldn’t be warfare like you and I are thinking of, with generals sitting at tables. It would be insurgency—small groups, exactly how the Taliban ground us down, hiding in plain sight.

That terrain, by the way, is just as hard. It’s very mountainous and very lush. So if the Chinese are committed to killing everyone on the island, well then—

What’s the point?

There’s nothing to defend. They can liquefy the island, roll in after the nuclear fallout, and figure it out. But if they want to take it over and the Taiwanese are prepared to fight, I think it’s a perfect setup for insurgency. We spent 20 years getting ground down with enormous military capability against a completely underfunded insurgency.

And so, if the population is prepared, how are you going to separate someone who’s for the PRC from someone who isn’t in Taiwan? Forget it. If the population supports the activity, I think you could see something very interesting. Obviously, supply lines would become a big challenge, and there’s a ring that you can create around the island over time, or starve it out.

What’s your expectation for how that whole situation evolves?

I don’t think in terms of binary outcomes. Obviously, there’s the one outcome where it’s some combination of a false-flag activity: “Oh, Taiwan, through an inadvertent exercise, sunk a frigate of ours, and we’re bringing in a cooperative peacekeeping force to ensure that this doesn’t get out of hand,” and then they surreptitiously take over the government or something like that.

I think they’re much more inclined toward an activity like this, where it’s ambiguous as to what’s happening. I think that really works in their favor. I think something that’s just overt command-and-control war wouldn’t be in keeping with their strategy. I mean, they could do that probability distribution as well. I don’t think it’s as likely.

And then there’s one theory that’s gaining more traction: that the Taiwanese government can be successfully co-opted, and so a bullet doesn’t need to be fired. A lot of Taiwanese have second passports and places to go, so the question is, what’s left as it gets hotter and hotter, and could the political structure be co-opted with a combination of a carrot and a stick?

That branch of thinking seems to be gaining more popularity. It may not even be a shot fired. It may be Hong Kong-esque: They’ve agreed we’re a separate system; it’s no problem. And then it’s a slow degradation of whatever system was previously there, so it ultimately comports with Beijing.

What have we learned about the future of warfare from the war in Ukraine?

7. Ukraine Blends Old And New

Daren Farber

That war is always a combination of old and new. John’s clearly right in that, too. I think the Ukrainian contingency is a love letter to the American defense industrial base. For all of its faults, when we make something, it works well.

I mentioned to you some of those. I’m going to be in the Baltics in about 2 weeks, and I know what those meetings are going to be: “Get me more Javelins. Can you get me more Javelins?” Every time I sit down, it’s, “How come I can’t get more Javelins?”

Javelin is a fire-and-forget anti-tank missile. Why do the Baltics want it so badly? Because they have this vision of Russian TU tanks storming across their border and taking positive control, and places like Lithuania, Latvia, and Estonia in particular really feel that sensation. And so for them, it’s, “Give me Javelins.”

The transcripts that have been captured in signals intelligence of the Russians talking to each other on the battlefield are, “They have American stuff down there. Be careful. They have the American stuff.” And the Taiwanese just got a delivery of HIMARS, which is our mobile rocket-launching system.

ATACMS goes inside of it, and GMLRS goes inside of it. These are medium and long range ground to air or surface to surface medium range missile systems. These things work, man. I get it—they’re expensive. Let’s get some more mass into it so we can drive the cost down. Let’s sell a whole bunch more to everyone who wants them. Run up the production.

Let’s create a series of incentives for these primes with these industrial bases to blow out production. They’ll respond to the incentives. You just change the incentives. I think that’s part of it.

I think, too, I see this parallel to DeepSeek and what’s happened there and the Ukrainian contingency. There are a lot of newfangled drones that we introduced into those theaters that were completely unsuccessful. They were coming from next-generation companies, but they didn’t work because the nature of that theater was evolving so fast.

And, of course, now the de facto Ukrainian drone is this little 3D-printed thing that they do themselves. They’re running the software, and they just need the shaped charge, and they’re printing it. I think what it shows is that when you’re on the leading or bleeding edge, the franchise isn’t that secure, even if you’re the first there or even if you’ve done something new and novel.

That’s the analog to DeepSeek. I think that was a shot across the bow: Hey, maybe there’s a different way to do this thing. New technologies—the phase shift, or the sigmoid curve—can be really, really quick in a war. It can be much faster than in a commercial environment, and so we’re seeing that, too.

I also think that it’s a love letter to some of the old stuff. These missile systems get cooperatively upgraded. It’s not like the Patriot missile from 1991 is the same Patriot missile of today. We’ve cooperatively upgraded it with the manufacturers 100 times.

So I think there’s lots of technological capability. You have to remember, before the wall fell, two-thirds of the world’s scientists worked in defense. Everyone was working on these problems. Jim Simons at Renaissance worked at the Institute for Defense Analyses, which is around the corner from the Pentagon.

So it was actually pretty difficult to have a huge preponderance of scientists working in these technologies and capabilities. The wall comes down, the Last Supper happens at the Pentagon, and all these defense businesses merge. It’s no coincidence that you get an internet revolution on the back end of this, a biotech revolution on the back end of this, because we let loose this technical ability all over the country and really all over the world.

And so now there’s a little bit of, “We’re going to suck some of this capability back in here,” and it’s going to manifest itself in some new businesses, which is wonderful. But I think the lesson learned is that going forward, it’s going to be a combination of old and new.

When I talk to lots of the leaders of new companies, especially those building lots of drones and software systems to control and coordinate those drones, they imagine a future battlefield where there aren’t a lot of soldiers because a soldier can’t survive. Let’s just picture a border to start, or something. A soldier cannot cross a border where there are just infinite $150, well-coordinated drones with charges attached to them, and therefore the future of warfare is drone swarms fighting each other.

Where does that future fall down? Where is that not accurate?

Daren Farber

I think it could be accurate and fall down. I actually think it’s a false choice. So in the opening skirmish of the drone swarms fighting each other, one drone swarm wins. Let’s just say the casualties are 75 percent. What’s next? Do you want to kill everyone in that theater of operation? Should everyone be dead, or do you need to take it over?

The second you need to take over an environment with people, well—

Guess what? Old stuff.

Here comes the old stuff. We’re going to need some of the old stuff. We’re not thinking much about the Gaza contingency as a place to learn stuff. There’s tons to learn from what’s happening there.

One is how to hide from a vastly superior force. Clearly, you go subterranean. There’s a whole tactic there. The other thing is that some of the most capable things the Israelis have in that theater are up-armored bulldozers—bulletproof bulldozers. These are the unsung heroes of the Gaza contingency, with tanks following right behind them.

So I think when you’re clearly outmatched, you’re going to revert to this form of insurgent behavior, where you can embed in the population. If they want to take over the population and not kill the population, we’re going to need to move to some hybrid of old and new.

Look, the Israelis have tons of technology, and don’t get me wrong, the drones and the technology were very important. I don’t know if you saw the Sinwar video of that drone just hovering. So, super important. But tanks and bulldozers and troops in Gaza were pretty damn important, too.

And so I just think the phase of the warfare will ultimately lead to using some old stuff at some point. I just don’t think it’ll kick off in the same way anymore.

Can you describe your view on the dynamic at play today, where there’s been, in the same way that now we have a lot fewer people in defense technology, a resurgence of interest in that space from an entrepreneurial and investing perspective?

8. Defense Investing Needs Scale

There are venture investors and private equity investors wholly dedicated to backing these kinds of companies. There are interesting new technologies being developed—subs, drones, everything you can imagine. Anduril is one of the most popular and most valuable private companies.

Daren Farber

It's a wonderful thing for the country.

For the U.S.

Daren Farber

Yes. The fact that there's this interest, going back to that conversation with the Chinese industrialists—“Oh, no, no one would go into this thing.” Well, I remember no one wanted to go into this. I remember protests in Mountain View at Google's campus that they shouldn't be doing work for the Department of Defense, and I feel like that is wholesale gone.

Gone. Yeah. That wasn't that long ago.

Yeah, it wasn't that long ago. So that's pretty good, man. I'm pretty happy about that.

I'm interested in your perspective, I guess, from 2 sides. The first you sort of already addressed, which is setting aside returns on capital and returns that investors will earn on the deployment of these dollars. It sounds like a huge thing. This is just a net good for the system, and it's great.

What about on the pure investing side? What are the dynamics that will drive returns? What sorts of returns do you expect if you add all this up into some sort of index? I get to just put dollars to work at the market prices in private rounds in defense-only companies. Do you expect good returns?

Daren Farber

You would call it next-generation defense. I think it's gonna be very challenging, and I worry about that, too. I worry about capital leaving the system. I'm old enough that 1999 and 2000 are not an ancient memory for me, and so the technologies that came out of that push were absolutely meritorious, and the capital structure for a lot of these businesses didn't work.

I think at the limit, maybe a Global Crossing or something like that. But what Global Crossing built was so important, and we still use it every day. The recognition by capital markets that this was extremely important and that it would fundamentally change our life was right. It was a good directional view. It was a very bad weighing machine in terms of rate of return on capital—how much needed to be deployed, how much you would get back. There was a lot of carnage on the back end of that.

So I worry about that in these next-generation defense rounds because you have to understand how the budget is built. The budget is not built 3G-style and zero-based budgeting. We look at the previous requirements for the year. We look at these different colors of money that Congress appropriates to the Pentagon. So, in a synthetic attempt to control the way the Pentagon spends, we give it types of money: operations and maintenance, research development, and technological evaluation.

For many years, there was something called GWOT, Global War on Terror money. The Commander's Emergency Response Program, which David Petraeus was very important in creating, was a form of money that allowed him a more permissive environment for a theater of war. He co-authored a manual called Money as a Weapon System, about how they would use it in a theater.

So those colors of money drive and dictate spending to a certain extent, and so when you set up the budget, it's largely allocated. You know who's gonna get the money. It's not like people look at last year's NDAA and say, “$858 billion, without any black ops or special appropriations in it, and that's my TAM.” And I'm like, “Whoa, whoa, whoa. These programs are accounted for.” It goes on this multiyear contract, or this, or this, or this.

And so, to grab market share takes much longer than in a conventional market, and I think the investors in this ecosystem have to understand that. You're not gonna take over a market in 24 months unless it's fundamentally a brand-new requirement and we haven't run the competition yet.

That's where I think these next-generation defense businesses are uniquely set up, because if the requirement's new, there's no incumbency advantage. You don't have to dislodge an existing program. It's not gerrymandered into a district, all these kinds of things. So if it's fundamentally new and novel, then there's a much greater opportunity, obviously.

But if it's trying to displace something existing and the Pentagon's built the requirement—they're saying, “This is what I need”—well, it's gonna be an enormous capital lift for someone to spend investors' dollars to say, “You're wrong, and my taste is better than your requirement.”

By the way, I don't view that as necessarily a bad setup. I think this is a whole separate line of conversation: this concept of a responsible party. We have that in the nuclear Navy, and we should talk about that. But the net-net is, in terms of capital allocation, the manner in which the market behaves and the fact that we have these preexisting capabilities that we're still connected to is gonna require a major change in acquisition and a major change in requirements activity.

I believe the big change that should happen should be, quote-unquote, the responsible party who gets to own all the fame and the blame for an activity in order to move it forward.

And to loop it back to the first part of your question, I think there'll be lots of pain on the investing side of it, where the revenues won't show up until we do wholesale reform of who gets to own what and how responsible they are. And that's because what we call RIP TOA and the transfer of authority, you're typically in a job for 24 months when you wear a uniform. You don't get to see the fruition.

The guy who started on the Joint Strike Fighter didn't deliver the Joint Strike Fighter. We've gone through a slew of flag officers. And so Admiral Rickover, who invented the nuclear Navy, was a guy from World War II and is the longest-serving flag officer in American military history. He served until his late 70s or even his 80s and never wore a uniform, by the way. He was a total iconoclast.

He was like, “We have to have a responsible party.” And so the job was gonna be 8 years for the guy running the nuclear Navy. We don't have that anywhere else in the service. And by the way, the Navy declined to promote this guy over and over again.

Rickover.

Yes.

Yeah.

And the Senate and Scoop Jackson said, “No, you're gonna make him an admiral. Now you're gonna make him a 2-star. You're gonna make him a 3-star. You're gonna make him a 4-star.”

And so the institution fought back tooth and nail to stop this, but that's a wonderful gift he gave the Navy to create. We've never had an incident in our nuclear Navy, running reactors that move with tons of kinetic stuff around them all over the world. It's an amazing statement that we have to create responsible parties.

These billets have to be responsible for the delivery of the program. If we take someone and say, “You're responsible for drones, 10-year job,” well, I think we'll see some major change. And so if it's a way station along the way, then the current system will crowd out the ability for these new businesses to be successful.

What's in the way of having that pervade the entire armed forces—the responsible party for major programs?

Part of it is that so much of this is the history of the way we've set up the rotation of how we train people. All of these things come from good places, by the way. I should say that there are very intelligent and motivated people in the armed services, and everyone goes into that building wanting to do the right thing.

And so this came from the concept that a well-rounded leader is gonna do a lot of jobs. Think about it in a corporation: “Okay, you're gonna do finance, you're gonna do operations, you're gonna be in marketing. You're gonna understand the enterprise that you manage.” And so, in a limited life, you can't leave someone in the gig for 8 years or 10 years or something like that.

But in these engineering disciplines, and where the hybrid of science and engineering is extremely important to build technological superiority, it's clear we need more responsible parties. The nuclear Navy shows it. It absolutely shows it.

So I think we're gonna have to recognize that our only chance of technological superiority is gonna have to change the paradigm of the way we've done it in the past. And we can do that. We've changed it before. We'll change it again.

We were talking before hitting record about this funny circumstance where you might have more investing firms than you do assets that will be good to invest in. Can you maybe say just a little bit more about that? And then I wanna ask, where is the money actually to be made in defense investing?

On the venture side, if you were to draw it as a tree diagram, it's like we were talking about a large institutional LP that we both know, and I thought, “I bet they have more GP relationships in defense venture than they actually have defense venture investments,” because they're all flowing back into the same deals.

And so I actually believe that to be true. It seems like the capital aggregators, the ones that are getting the enormous capital, will probably be able to live out any design or economic cycle here and ultimately come out the other end and be okay.

And so I think resources really matter, and I think that's what you see happen in these valuations: accumulating more resources is a form of industrial power. I don't think it's a surprise that after Anduril's latest raise, they announced a 1-million-square-foot facility. They're building industrial capacity.

That's part of aggregating lots of resources. It's becoming so important from an industrial standpoint that we gotta keep it alive. And there are a lot of businesses like that that have existed for 50, 75, 100 years within the country that support the department.

So you can see those guys win, and the ones that aren't well-capitalized, irrespective of their technology, won't survive.

Because it's not about making 1 new widget. It's about making millions of widgets at scale. And so I see what Anduril's doing. I'm like, “Okay, I think they're thinking about this correctly.” You've aggregated these resources. You must build the industrial capacity, because when push comes to shove, it's going to be the ability to produce X number of whatever at scale.

And ergo, the investors who themselves have more access to capital, which means they can win the rounds to invest more capital in the companies, also probably have an advantage. This is not a place for the lean mentality.

Daren Farber

I never say never, because maybe there's someone so brilliant who's figured out how to turn apple juice into rocket fuel or something like that. There's a huge technological phase shift. But if I'm betting defense venture dollars, I'm going to the largest rounds, the largest raises, and the largest balance sheets.

Almost separate from the technology, I think the balance sheet of these businesses is so important—how big they get—because they will be able to survive, and then hopefully some of them will be able to thrive. That's it. There's a ballooning effect to the big firms that can write these big checks and be there to support them.

What else can we learn from the US defense primes? What can venture-backed younger defense companies learn from the primes? So much of the narrative in support of the new class of companies is how sclerotic and terrible the primes are.

Some of these primes are very impressive to me. Northrop Grumman's business is remarkably impressive, and the executives know their business. So I owned the nation's only maker of missile fuel for a number of years. It's the only maker of the intermediate chemicals, too, which is actually very important.

I've seen some business plans that they're going to make. I'm like, “Yeah, but where are you getting the derivative chemical? In India?” The concept falls down. The whole concept of Fortress America is that you're self-contained.

The counterparty sitting across from me in these negotiations knew 100% of what my margin was and knew exactly the technology. These were brutal negotiations over them managing costs, because they're managed almost in a public market's way, quarter to quarter. Their incentive structure right now is to make sure that they are passing along costs that they bump into in the development of a program.

They really can't take this multiquarter bet without the government showing up. What you see these next-generation guys doing is taking huge bets based on their taste. They're betting that their taste is greater than the requirements process of the Pentagon. In some cases, that's true, and in some cases, it isn't.

I would say the second there's an incentive for these primes to comport with “Just give me your best,” and someone says, “Go ahead and give me your best, whatever you think it is. Screw the requirement,” I think they can produce enormous technological stuff. Look, Lockheed is one of the top 5 patent owners on Earth, on the whole Earth. There's enormous technology in these businesses, and we have 50 years of the world's best scientists working in these businesses. There's still a tradition of that engineering talent and capability. These guys can do a lot, man.

I remember when I was focused on public markets and capital allocation as a quantitative study, Northrop Grumman was one of the great stories to study: the acquisitions up through the '90s and then the share buybacks all the way through the present.

Daren Farber

They've been compounding at 15% for 20—

Yeah.

—25 years.

It's really nuts. Cody Kittle told me to ask you, in this theme, about the lessons of TransDigm versus HEICO and what you've learned from those 2 businesses.

Daren Farber

These are broadly diversified conglomerates, and there are things inside of both of them that I want to own. I think highly of those management teams. The margin tells the story a lot in these businesses, in that TransDigm probably has, what, $3 billion of EBITDA, give or take, right now, and it has 50% EBITDA margins. Very sporty.

When you look at it and say to yourself, “Good grief, how do they do this?” and you talk downstream—not to all their customers, but let's say some of their big customers—they hate these guys. That's a very tough paradigm to grow from.

Actually, I think it's evidenced by the kinds of businesses that they're buying today. They bought Calspan, which isn't really an aftermarket product. It's a wind-tunnel testing activity for Boeing and Airbus.

Boeing was so big at one point it moved 2% of GDP by itself. If you're the elephant walking around the jungle and there's a bunch of peanuts on your back and some birds are eating it, okay, it's fine. It's de minimis relative to my share. I think the challenge now is the law of large numbers, that they're getting big enough.

Think about their business. Who owns the type certificate of these aircraft? It's the designers. It's the Boeings and the Airbuses. They own the design. If it becomes so expensive to move through the supply chain, then it's going to incentivize a verticalization in certain areas.

By the way, before Dennis Muilenburg was fired, that was his plan. He had 2 things. He had Boeing Business Services, which was to control some of the activity in the aftermarket, and then also what he called Partnering for Success, which was, “You're not going to make this margin on me anymore, the supply chain. I'm not going to design you into the next generation. You're going to be off the list if the toilet seat goes to $800. You're not going to be in that program.”

I think the business model works beautifully when the downstream customer is so immense they almost don't notice the difference. I always joke that the optimal business for TransDigm is owning the cup holder in the Joint Strike Fighter. That would be amazing for them. You're not going to requalify that thing. It's craziness.

I just think there's a limit to how big you can do that. The institutional shareholders in the primes, like the Boeings of the world and the T. Rowes that own Boeing and stuff like that, or Capital, or whoever, are going to management at these primes and going, “You guys do all the design, and these guys make—

All the money.

—2.5 times the margin. Tell me how that works.”

At some point, you kick the bear long enough, or you pick the elephant's food off long enough, and the paradigm will change. What's that number? Is it $5 billion of EBITDA? I don't know, but you're seeing competitors already. That quantum of profit is also attracting competitors into the system, and that's meaningful.

When you make that much money for that long—and look, Lore went public in a pretty spectacular way. That used to sit inside of JLL Partners. It's a private equity firm. It went public at about $130-some-odd million of EBITDA, and it trades at 50 times because there's a general expectation that, off of a smaller base, it's easier to run the TransDigm playbook over again.

I think it's going to be harder at a certain size. But when you're Pluto and the market is Jupiter, it works. I just don't know how long it works for. If Boeing continues to get smaller and that quantum of profit gets more and more meaningful, I think it's going to be harder.

When you and I first met, the very first conversation that we were in together many years ago was a conversation around the most undervalued assets in the entire world.

Daren Farber

I remember this conversation.

I think yours was firearms and uncut pink diamonds. This was at an amazing Graham Duncan East Rock event. It struck me at the time that the way that you thought about both of those things was that the money to be made was understood through the lens of simple supply and demand.

Yes.

And that your frame on investing is kind of that. Can you describe that in some more detail, however you'd like? It just struck me as so elemental to the way you think about things.

Daren Farber

I wish it was more complicated. Then maybe it could justify my existence a little bit better. What I want to see are structural impediments to you getting into my business.

Why was I able to buy the nation's only maker of missile fuel? Think about it. We're like 8 people in a plant in an office park in suburban Washington, DC. Why do I get to buy that capability? Why doesn't a prime buy it? Why don't they verticalize?

On the surface, that business was very low growth. It didn't seem terribly interesting to someone. The margins weren't TransDigm margins, let's just say. The business had imputed growth of 100 basis points. It has huge contingent risk. The largest non-nuclear explosion in US history was at the former plant. There's a Discovery Channel episode on this thing. The blast threw planes off the tarmac at McCarran.

Wow.

Daren Farber

And the department's like, “Yeah, we're going to move this factory to the Utah desert.” Our view is we want to own the defense annuities. But when we analyzed the factory and the cost to replace it, we said, “Oh, it's $2 billion.” That was our number.

Now, there's a group in the Pentagon that does this for a living: Cost Assessment and Program Evaluation. This is a good use of taxpayer money, and they should not cut this, because this is an analysis of our industrial capability to produce at scale to fight contingencies globally.

There's real thinking that happens in the Pentagon about, if this thing blows up, how much do we need to invest in order to create another source of supply? And, by the way, the defense establishment is littered with monopolies because the defense market is the opposite of a monopoly. It's a monopsony.

It’s one customer, many suppliers. And so if you have one customer in a business, how much capital are you going to deploy into your factory? You’re going to try and just mirror-match it. So there are a lot of natural one-of-one suppliers to the department by virtue of who the customer is.

And so our analysis of the factory is there’s no alternative. There are ways for us to improve it. Technologically, the business is unbelievable. It’s a national asset because of the quality of what it produces.

So if the Pentagon’s own number was between $2 billion and $2.5 billion, I’m saying to myself, “I can buy it for a very small fraction of that value.” It is guaranteed to make money as an annuity. It can hold an enormous quantum of leverage because it’s a 10-year set of take-or-pay contracts, getting paid no matter what.

And, oh, by the way, there’s an embedded option value in this in that if all of a sudden it gets more dangerous, consumption goes way up. You can’t build a financial model that has a toggle in it called “war.” Base case, upside, war. No one does that.

But that’s actually a huge benefit to us because, look, the world is dangerous. We know something like that will happen, and we don’t model it in, but we tell ourselves we’re getting an option value in here that we know exists, but you can’t logically price it. And so the seller can’t expect you to pay for it. But you know, if you have duration, the world’s a pretty dangerous place. It seems like every couple of years something happens, and you’re going to get paid for that as well.

And so, coupled with things like commercial off-the-shelf, we made sure when we bought that business, we started selling commercially. To what? To commercial space launch, to next-generation suppliers. What happened there? Ultimately, the value was recognized, and we sold it probably too early. We always sell too early is my refrain.

You’re going to do really well owning a one-of-one business that costs 20 times your purchase price to replace, that can, by the way, hold nearly infinite leverage in it. That purchase looked like an LBO from 1975. It looked like the American Greetings LBO. It’s like very little equity put up relative to the total quantum of leverage.

Yeah.

So I think it’s really recognizing replacement cost, how important it is to a downstream system, how we train and equip the forces, right? How important is it to the projection of force? And my goal is I want to be a supplier to everyone. We own a set of businesses right now where Anduril’s a customer, Northrop’s a customer. I want to get as close to the physics that won’t change.

That way, I’m not choosing sides. I’m not making a value judgment on the future because it’s hard to change the physics.

Ergo, get closer to the molecule.

Daren Farber

My top of the mountain is to be as close to the molecule as possible. There may be new molecules, but the reality is it’s usually engineering. It’s usually engineering downstream. And so if I can be close to the molecule and have some value-added engineering around it, especially if I’m in the front office of the department, there’s tons of money that’s been made in the back office, in the business mission area. Tons of money.

There are private equity firms that focus on that complex that have aggregated $100 billion of AUM. It’s amazing to me, and they’re doing the non-kinetic activities. I understand that if you view yourself as an asset gatherer, you won’t do anything that will infringe on your ability to gather assets, and so there is a whole host of pension plans and endowments and all these things all over the world, especially in Europe, that will not give you money if you make anything that ultimately kills someone.

But we’ve never been confused about the front office for the back office, and I want to be as close to the front office as possible, because the back office at some point always needs to get modernized or changed or automated away.

Whether it’s the pink diamond example or something else, is there a second supply-and-demand story you can tell to really drive home the way that you look at things as you approach them?

Daren Farber

I still remain the chairman of the largest manufacturer of firearm accessories to Western militaries based here in the United States. Wonderful business. That business can produce 100,000 magazines for military weapons a day. Its scale is so enormous.

So, by reinvesting in the enterprise, taking market share, and defending its patents worldwide—all over Europe—we’ve taken all that market share from these historical European vendors that would push their products into the U.S. Defense Department. And what have we done? We’ve lowered the price point.

So we went from 60% market share to 90% market share, and we verticalized the business. We’re the largest consumer of a certain kind of nylon in the United States for that business now. And what we’re able to deliver to the department and Western allies is this wonderful, very capable product where the previous-generation product would jam after 3,000 rounds. Ours went for 300,000 rounds, and they just stopped the test because they ran out of ammo.

And so if you can make a series of investments where you can ultimately become the sole-source supplier in the activity, then you can actually deliver a better value proposition to the government, and you can have a wonderful annuity-like business.

So, pink diamonds—why was I even talking about pink diamonds?

One mine, right?

Daren Farber

It was running out.

Yeah.

And so I was like, “Okay, that’s very interesting to me.” There’s no other source of pink diamonds. What is the cost of trying to find another resource of pink diamonds? Forget it. It’s impossibly expensive.

And that’s the way I think about all these businesses: Can we own a very important business to a market, and can I expand the moat by reinvesting in the enterprise?

Can you explain the concept of net-centric warfare?

9. Networks Become The Next Battlefield

It’s really just everything connected for the purposes of situational awareness. So the drone knows what the ship and the soldier are doing. Everyone has full situational awareness of all of these connected devices.

The most expensive war game in U.S. history showed that if you knock out the network, everything turns into nothing. I think it was called MC02, and the actor they had on the opposite side was a retired flag officer who was like, “I’m just going to knock out the network, and I’m going to win this war game. I’m going to use smoke signals, and I’m going to use all these things.”

And this guy just won the war game over and over and over again because his goal was, “I just knock out the network.” And so in a network-denied environment, think about how important connectivity is for all of these systems and how dumb some of them may become in the absence of connectivity.

And so get ready. Network denial will be the first fulcrum of a full-scale near-peer war. I mean, look at the contingency in Ukraine. They wouldn’t dream of criticizing Elon because what’s their network? It’s Starlink.

Starlink is the unsung hero of the Ukrainian contingency. For whatever you think about the proprietor, that contingency would’ve been lost already without Starlink, and that’s a hard network that they can’t crack. It’s all their comms. It’s all of their ability to navigate all of these different new UASs.

At its simplest form, it’s just the ability for all of these things to do what we would call C4ISR or C5ISR. It’s just command and control of these connected things. And we’ve designed everything to be connected.

I think the next iteration is going to be that these things actually have to be autonomous and have to have inertial navigation and these other things. Assuming it’s flying in the dark, it’s not connected to GPS. It’s not connected to something else on the ground. It’s not connected to a mesh network. It’s going to have to have its own situational awareness individually when a network is denied.

Say one more click about, in a net-centric world where autonomy and AI specifically play important roles, the future of warfare.

Daren Farber

Just the ability to pump in an end goal for something to go prosecute it is kind of spectacular. I view it as very similar to the paradigm of when we’re going to let the Waymos drive us 100%, that kind of thing. There’s going to be this push and pull of who’s going to grab the yoke on all these activities.

And I think someone who doesn’t have well-defined joint doctrine is actually going to do much better with AI because they’re more likely to just give it over to them. Just tell me what to do. As opposed to us, where we have well-defined protocol and paradigms, and we’re not going to give over the steering wheel as easily. That’s harder.

The fighter pilot union, if you will, is going to fight pretty hard about what they do or don’t give up. But I wouldn’t give up on human ingenuity to hack a system, to screw up a system, to trick a system. I’m not saying we should exclusively rely on that. We should have every kind of capability.

If we think about this whole system and how it’s all evolved, could you draw or give a narrative of the scenario of your greatest hope and the scenario of your greatest fear—2 separate ones—for the future of kinetic warfare?

Daren Farber

My greatest hope is that there’s symmetry in the development of these technologies that functionally makes them moot for adversaries and us to use, and that we end up in a new form of Cold War. So it’s an arms race. It’s mutually assured destruction.

I think the amazing thing about the Ukrainian contingency is, Putin has threatened nuclear activity how many times? And he hasn’t used it. And so I say to myself, “Wow, he has this arsenal of nuclear capability, and he is not prepared to cross it,” even though he almost went through a coup, which Bellingcat accurately predicted.

My hope is that if we can develop symmetrical capabilities over time, and if one person pulls out too far ahead, then there will be this enormous temptation to flex.

And so that’s the challenge in a race to the future: you just can’t be second. You just can’t allow it, because the human temptation—war is a human endeavor. By the way, I should say I trust the United States, a democracy, to be more measured than any other end user of something.

My hope is that we pull away and that creates the new opportunity for data, because I think in an alternative scenario, it’d be a lot more dangerous.

What about the other path?

Daren Farber

The worst is the march of technology putting more and more power in fewer and fewer people’s hands. There are a lot of stories of how we run these nuclear drills and then the missileer won’t turn the key or something like that. There’s a human. Technology is removing people from a lot of these steps.

It’s also putting these capabilities into things that were exclusively the provenance of nation-states. Now it could be a company of 100 people. There’s a very credible path toward something extremely dangerous happening, and it kicks off a chain reaction that brings us to the precipice.

Why are some nations that have resources nuclear and some others not? Ultimately, if you have enough smart people and you have resources, you get the capability. So I really worry about something like that, and I almost view it, to a certain extent, with the march of technology, as inevitable.

We’re going to have to go back to the physics of it and how we govern it, like the molecule. That’s why these things around it will have to be so important and controlled, because if the substrates exist in the system, there’ll be enough technology to build a capability.

Is there any part of this world that you’re surprised by, where you think about it or put a lot more importance on it than the people around you do?

Daren Farber

My entire experience is in acquisition. I don’t come from the policy and planning world. I don’t come from strategy and plans. There are people in the building who spend their lives thinking about these things.

I come to it with a merchant’s nose: What do you need in order to prosecute the mission? I think about it in terms of the long-term impact on our business. But what’s amazing is how wrong the capabilities we impute into an adversary can be.

Look, no one thought the result of the Ukrainian contingency would be this. No one. I forget who attributed the quote, but it says something to the effect of, “Surprise attacks are so common, they shouldn’t be a surprise.” It’s kind of like, “Man makes plans and God laughs.”

I feel like there’s so much probability distribution in the way a lot of this happens. The best insurance policy to wrap around all this is technological superiority, and that’s why I’m so happy to see the level of energy investment that’s going into it.

I view my job as being a good steward of capital for the inputs into a lot of these systems, so that we can continue to leverage the capitalistic system to make good returns and create continuity of supply for the system.

There are a million things and aspects of this. We could pick any part of our conversation and spend another 2 hours on each part. We’ll keep it here for Part 1. I think you know my traditional closing question for everybody: What is the kindest thing that anyone’s ever done for you?

Daren Farber

On the professional side, there are 2 people. One is my former boss at the Pentagon, Paul Brinkley. He was DOGE Part 1, this guy. He just wanted to modernize the place, and he didn’t care about how much China he broke in order to improve it. There are very few people like that in a bureaucracy. He accumulated energy off of it, and he wrote a book about it. It was published by Wiley a number of years ago.

Then there’s Tom Pritzker, who really put me in business. I’d never bought a company before when I left the Pentagon. I don’t have an MBA. I never worked at a private equity firm. I never worked as an investor in any kind of capacity.

So here’s a guy sitting across from you going, “Okay, you’re smart. You can figure out business. We’ll help you along.” If it wasn’t for meeting him in that environment that he creates—and they’re really builders of companies; they’ve incubated so many businesses—you have to have someone believe in you before you embark on it.

I can tell you, when I started asking people for money, many people did not believe in it. To have someone of that stature say, “You can do this. Don’t worry about it,” means everything. X number of years later or so—

Well, it’s worked out pretty well for the people who did believe in you. I love our conversations. I think they’re among the most interesting and different of any that I have with investors. I’m so glad we finally got to do this. Thanks for the time.

It’s a privilege to be here.