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    Lockheed Martin

    Venture-backed companies can benefit from partnering with Tiny, while discovering the fascinating history behind Silicon Valley's development and the enduring impact of radar technology.

    enMay 30, 2023

    About this Episode

    Today we bring you two absolutely incredible stories. The first is Lockheed’s legendary Skunk Works division — the elite team of aviation geniuses who produced some of the greatest airplanes in history: the U-2, the Stealth Fighter, and the incomparable SR-71 Blackbird. The second story is arguably even more important, but not widely known! It's the secret and true origins of Silicon Valley — and Lockheed’s primary role in it. We take you from WWII to the Cold War, all the way to today to unpack and analyze the industry dynamics of defense contractors in the modern era. Tune in and prepare to be blown away by what you’ll learn about the history of our industry!

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    🔑 Key Takeaways

    • From a small tourist attraction to the largest defense contractor, Lockheed Martin has contributed greatly to technological advancements and global security, while also sparking innovation in Silicon Valley.
    • Despite humble beginnings, dedication and innovation at Lockheed, including the creation of Skunk Works, propelled the aviation industry forward. Hard work and perseverance can lead to great success.
    • Kelly Johnson was a brilliant engineer who designed legendary aircrafts during WWII, including the P-38 Lightning Fighter. He also mastered an entirely different technology to design the world's first operational jet-powered aircraft.
    • Outsourcing non-core functions and keeping the team highly focused can lead to incredibly efficient and innovative results, as demonstrated by Kelly Johnson and the creation of Skunk Works.
    • Using Skunk Works principles for security compliance can streamline the process, and Vanta's platform helps companies achieve certification efficiently, even with limited resources, while meeting complex security needs.
    • Empowering a single program manager with control and rewarding good performance with pay instead of personnel management can lead to success when paired with a highly motivated team driven by a greater mission.
    • Skunk Works' innovative collaboration with Shell Oil enabled the creation of the U-2 spy plane, capable of gathering critical intel from an unprecedented altitude and providing the US an advantage during the Cold War.
    • A collaboration between government agencies and private corporations resulted in the successful creation of a groundbreaking spy plane, demonstrating the value of partnerships and innovation in achieving extraordinary outcomes.
    • The U-2 spy plane played a crucial role in gathering intelligence and providing photographic evidence during the Cold War, highlighting the incredible engineering advances made during its development.
    • Sometimes obstacles give rise to breakthrough innovations and technologies that shape our present and future.
    • Venture-backed companies can benefit from partnering with Tiny, while discovering the fascinating history behind Silicon Valley's development and the enduring impact of radar technology.
    • Terman's policy of encouraging top talents to leave campus and set up their own companies, along with leasing out commercial space, created a unique ecosystem that fostered innovation and better served the nation.
    • Fred Terman's industrial park provided crucial support for Lockheed's missile systems division, leading to the company's growth and the development of Silicon Valley.
    • Lockheed Martin's decision to invest in academic research and their development of the Navy's FBM system were crucial to their success and impacted the strategic landscape of the Cold War.
    • The development of undersea-fired nuclear warhead ballistic missiles played a significant role in preventing wars by supplying the deterrence capability, and manufacturing plants disguised as suburbs was instrumental to the war efforts.
    • During the early days of the US space program, LMSC ran a secret space program that launched operational spy satellites with cameras that revolutionized the intelligence gathering process.
    • The Corona Satellite Program was a classified program that provided high-resolution images of the Soviet Union, utilizing film photography and custom-designed canisters that were retrieved midair. The program's advancements led to further developments in space exploration.
    • Founders should prioritize building meaningful products over performing tasks they perceive as "CEO-like," and avoid getting sidetracked by irrelevant work.
    • As an early stage startup founder, prioritize finding product/market fit, focus on the core mission, and partner number one or two instead of low priority tasks. Learn from successful operating principles and outsource finance and accounting for better focus.
    • Understanding the market context is crucial for building superior products. Skunk Works' approach to developing the SR-71 Blackbird serves as a concept of how market need can drive innovation, even in specialized fields.
    • The creation of the Blackbird required innovative approaches to achieve unprecedented speed and heat resistance, leading to unique design challenges and high maintenance costs.
    • The Blackbird SR-71 was an ingenious creation that used an innovative spike inlet system as a supercharger, making it the fastest plane that missiles couldn't bring down, providing real-time coverage where satellites couldn't.
    • The SR-71 Blackbird was a groundbreaking aircraft designed without modern technology, inspiring future planes. Kelly Johnson's unwavering principles resulted in a better design, though he lost the bid initially.
    • Despite facing financial and political scandals and struggling to receive a bailout from Congress, Lockheed's Skunk Works division developed a groundbreaking stealth technology that ultimately saved the company from collapse.
    • Skunk Works' success in developing an invisible airplane with unconventional design and intense customer focus highlights the rare instance of a defense contractor taking significant risks without research contracts from the government.
    • The F-117A Nighthawk, created by Skunk Works, marked a significant step forward in aerospace technology. It was designed to be undetectable by radar and deliver precise raids, but sadly its use in warfare resulted in many casualties.
    • Government policies can shape industries, as seen in the 90s when the US Defense Department instructed major defense contractors to consolidate, ultimately leading to the creation of five big primes.
    • In order to compete for big contracts in the US military industrial complex, companies had to consolidate and increase their market share. This led to a few dominant players, with the prime contractor holding the most power and profits.
    • Piecemeal manufacturing in aerospace projects can lead to increased costs, reduced efficiency, and lower quality. Contractors may prioritize profit over risk-taking, resulting in higher costs per unit and decreased capacities for research and development. However, emerging technologies like 3D modeling offer new possibilities for creating complex surfaces and improving the design process.
    • By diversifying operations and leveraging political relationships, companies can secure government contracts and thrive in a highly competitive industry. The F-35 Lightning 2 program exemplifies the benefits of collaboration and resource sharing across armed services and international partners.
    • While defense spending is significant, contractors like Lockheed Martin bear the brunt of receiving high federal spending. Cost-plus contracts may work for unpredictable expenses, but they hinder modern technology investment opportunities from operating leverage and gross margins. Government's support of Silicon Valley remains ironic.
    • Selling software solutions to the government can be more profitable than hardware. Perception of threats drives behavior and economy. Competition and innovation drive the defense sector forward.
    • Becoming a prime contractor in the aerospace industry is difficult due to the cornered resource and process power of existing primes. While the seven powers framework may not fully apply, coordination and integration remain key advantages for incumbents.
    • Lockheed Martin serves not only its stakeholders but also the interests of America, with the US government playing a heavy role in dictating how the industry plays out. However, the funding of companies to keep them alive, even if not needed, is a misappropriation of funds.
    • Emphasize rapid iteration, internal testing, and data-gathering to achieve better outcomes with limited resources and potentially better safety. Learn from organizations like Skunk Works and LMSC to address complex challenges.
    • Threats can inspire innovation, but the nature of motivation has shifted from war to other challenges. The reach of such motivation has expanded from the military to Silicon Valley, where it drives progress and innovation.
    • Switching to battery-powered lawn tools, like Ego Lawn Tools, can make yard work more enjoyable while providing a good escape from screen time and relieving stress. Check out Acquired's other episodes on different industries and join their Slack community to learn from industry professionals.

    📝 Podcast Summary

    The Inspiring History and Impact of Lockheed Martin

    Lockheed Martin, the largest defense contractor in the U.S, makes weapons synonymous with overwhelming force and air superiority. Though most of these weapons are used as deterrents to keep peace, their usage cannot be ignored. The company has an inspiring history and has contributed immensely to the birth of Silicon Valley. The company that eventually became Lockheed Martin was actually two companies- Lockheed and Martin Marietta- and had a huge merger in 1995. The first Lockheed Company was founded in 1912 by Allan Lockheed and was mostly a tourist attraction, flying tourists around the bay in their one plane. Malcolm, Allan's brother, left the company and invented the modern hydraulic brake system used in automobiles today.

    Lockheed's Humble Beginnings and Skunk Works Innovations

    Lockheed, a major defense contractor today, had a humble beginning and was bought for $40,000 out of bankruptcy during the Great Depression. The famous Electra airplane, that was a symbol of romance and adventure, was built by Lockheed in the 30s. World War II transformed Lockheed and led to the founding of Skunk Works, a division that developed some of the most advanced airplanes ever built. Clarence Kelly Johnson, the leader of Skunk Works, was an incredible airplane designer and a tough guy who loved arm wrestling and design challenges. Despite its challenges, Lockheed emerged as a great company thanks to the dedication and hard work of the Gross brothers, Robert and Courtlandt. Overall, these events contributed to the growth of the aviation industry.

    Kelly Johnson, a Legendary Engineer and American Hero.

    Kelly Johnson was a brilliant engineer who designed and built many legendary aircrafts including the Electra and the P-38 Lightning Fighter during World War II. He had a unique ability to intuit complex mathematical and physics problems, and was a true American hero who won the Collier Trophy twice and was bestowed the Presidential Medal of Freedom. During the war, Kelly and Lockheed adapted the Electra into a bombing vehicle called the Hudson, and later designed the P-38 Lightning Fighter which shot down the transport carrying Japanese Admiral Yamamoto, mastermind of the Pearl Harbor attack. When the US faced the problem of jet-powered fighter planes emerging on the German side, Kelly and his team designed and mastered an entirely different technology to create the world's first operational jet-powered aircraft.

    The Birth of Skunk Works: How Lockheed Created the First US Jet Fighter

    In less than six months, Kelly Johnson and a super elite team from Lockheed built the first prototype US jet fighter named Lulu Belle, which became the P-80 Shooting Star, the US' first jet fighter plane. They achieved this by outsourcing everything that was not their core competency, including the engine, which they acquired from a British company called Halford. This amazing feat became the beginning of skunk works, a highly secret and efficient division of Lockheed. This division's core tenet was not taking too much money and not distracting from the rest of the company. Skunk Works designed and built some of the most advanced aircraft of the 20th century, including the F-104 Starfighter, for which Kelly won the Collier Trophy.

    Applying Skunk Works Principles to Security Compliance with Vanta

    Skunk works, pioneered by Kelly Johnson, emphasizes on keeping the designers as close as possible to production for quick structural or parts changes, and using a small number of 10%-25% compared to normal systems. This approach allows a small number of good people to collaborate, build relationships and work together to produce the best product. Skunk works work mainly by prioritizing the rapid delivery of superior products, cutting through the red tape, and selecting hand-picked people to solve problems. Vanta, a security compliance platform, enables companies to get SOC 2, ISO 27001, and other certifications that they wouldn't have the resources for, and allows customization to meet increasingly complex security needs, making maintaining compliance more efficient and robust.

    The Key to Skunk Works' Success: Delegated Control and Motivated Teams

    The success of Skunk Works relied on delegated and ultimate control given to a single person, who was the program manager. The rewards for good performance were based on pay and not the number of personnel supervised. All these rules can only work efficiently with highly motivated people, and this was taken for granted for all of Skunk Works heyday. With great power comes great responsibility. Skunk Works addressed the post-war's two major problems that America and its allies faced: jets and a new war- the cold war. The success of Skunk Works was possible because of the highly motivated team, and the belief that the mission was preserving the life of their loved ones and America from the threats of the Soviet Union.

    Skunk Works' Role in Creating the U-2 Spy Plane during the Cold War

    During the Cold War Arms Race, Skunk Works was tasked by the CIA to design a spy plane that could fly undetected over Russia. The U-2 spy plane was built to fly at an altitude of 70,000 feet, which was higher than anyone had ever flown before. Skunk Works had to work with Shell Oil to create a new type of jet fuel and design a pressurized cabin that could keep pilots alive at that altitude. Skunk Works was successful in creating a spy plane that could gather classified intelligence about Soviet Union's capabilities, which was vital during the Cold War. It was in service for more than three decades from 1955 to 1989.

    Skunk Works, the CIA, and Polaroid: The Making of the U-2 Spy Plane.

    Skunk Works, Lockheed and the CIA worked together to create the U-2 spy plane, which needed a special camera to take photographs of objects 70,000 feet away through multiple layers of atmosphere. Dr. Edwin Land and the Polaroid company were inspired to build the camera for them, which convinced President Eisenhower to fund the project. To test the U-2, they needed a location with no people and ended up creating Area 51 in Nevada, which had previously been used for nuclear testing. Despite the dangerous surroundings, Skunk Works completed the project successfully and delivered the plane in just a year and a half for $3 million dollars- an incredibly impressive feat.

    The U-2 Spy Plane: A Key Asset for US Intelligence during the Cold War

    The U-2 spy plane and subsequent Skunk Works programs became a major chess piece for the US on their side of the board to keep the Soviets in check during the war of perception. The prep work that pilots had to go through before test flights were nuts, including breathing pure oxygen for two hours to remove all the nitrogen from their blood in case they had to eject. The Intel gathered from flying the U-2 spy plane on various missions over Russia was incredible, providing photographic observational evidence for the US. The camera used in the U-2 spy plane was remarkable for the mid-50s. The engineering advances made during the development of the U-2 spy plane were incredible.

    How the Birth of Digital Camera Emerged from the Collapse of the U-2 Program

    The U-2 program allowed the US to get real-time information about the Soviet Union's nuclear test sites, missile locations, and radar capabilities but it ended abruptly when the USSR shot down a U-2 plane in 1960. This left the US blind and with no way to take photos of the military sites in Russia. However, a super-secretive Lockheed division in California found another way for us to take pictures of the Soviet Union. This led to the birth of one of the most important technologies, the digital camera, that we use today. Tiny, a publicly traded holding company similar to Berkshire Hathaway, is buying small internet businesses with high-profit margins.

    Tiny Acquires and Empowers Independent Businesses

    Tiny, a company that specializes in acquiring and empowering independent businesses, is a valuable option for venture-backed companies that no longer fit the criteria for a VC portfolio. It provides a win-win situation for those companies and ensures their continued growth. Additionally, the story of Silicon Valley's development and its ties to World War II and radar technology is lesser-known but fascinating, with the Harvard Radio Research Laboratory playing a significant role. Frederick Terman, a Stanford professor, was the head of the lab during the war years and brought his expertise back to Stanford after the lab was shut down. The importance of radar continued in the Cold War, as seen with U-2 flights.

    Terman's Influence on Stanford's Success in Tech Transfer and Innovation

    Stanford's success as an engineering institution and its friendly tech transfer policy is attributed to Terman, who recruited top talents, gave them tenure and encouraged them to leave the campus and set up their own companies, carving off a big part of the campus to be leased out as commercial space to corporations and government. Thanks to Terman's influence, Stanford's ecosystem led to more innovation than one purely happening in academia and better served the nation.  One of the very first tenants of Stanford Industrial Park is Lockheed's secret division, Lockheed Missile Systems Company. Its bigger impact to the country, the world, and business to Lockheed and to Silicon Valley than Skunk Works, making Stanford's contribution to Silicon Valley an often-overlooked but powerful force.

    The Challenges of Building a Top-Secret Missile Systems Division

    Lockheed's decision to start a missile systems division in 1954 in Southern California, similar to Skunk Works, posed two major problems for the company. The first was the difficulty of having two top-secret, unmarked divisions in such proximity while keeping them unaware of each other's activity. The second was the necessary addition of radar and computing systems that were not commonly available in Southern California. This is where Fred Terman, who had just developed an industrial park in Stanford, proved to be a crucial connection. As a result, Lockheed moved its missile systems division to the Stanford Industrial Park, becoming one of its first and largest tenants. Building missiles was a new challenge, but it led Lockheed to become the biggest employer in Sunnyvale, a town they essentially built, and Silicon Valley as a whole, which initially revolved around defense contracting.

    The Role of Lockheed Martin in Shaping Silicon Valley and the Cold War Strategy Shift.

    The growth of Silicon Valley is directly attributed to Lockheed Martin and Terman's belief to convert companies into academic research. The division of Lockheed Missiles and Space Corporation's two big projects, one going up to space and the other underwater, became the biggest drivers of profits for the company and kept it alive. The Navy contracted Lockheed to work on building the Navy's fleet ballistic missile system (FBM), which completely changed the strategic landscape of deterrence, as it created a naval-based intercontinental nuclear strike capability, making the first strike off the table. This was a huge strategic win for the US during the Cold War.

    The Role of Undersea-Fired Nuclear Warhead Ballistic Missiles and Manufacturing in Preventing Wars.

    The development of the undersea-fired nuclear warhead ballistic missiles, such as Polaris, Poseidon, and Trident, prevented war by building these systems and advancing all of this capability that prevented it from being used. The submarines carried intercontinental ballistic missiles, and the point of deterrence was to let the Soviet Union know that the US had nuclear power. The nuclear warheads were not manufactured by Lockheed, but rather by government contractors in national labs, such as Sandia. Moreover, during World War II, Lockheed and other companies built burlap cities on top of factories that resembled suburbs to create a disguise for their manufacturing facilities, which was beneficial to the war efforts.

    The Secret Space Program of Lockheed Missiles and Space Corporation

    During the early days of the US space program, while NASA was conducting its basic science research missions, a secret US space program was being run by Lockheed Missiles and Space Corporation (LMSC) out of Silicon Valley. The cover story was that they were sending up animals for life form research, but in reality, they were launching operational spy satellites with cameras that took pictures anywhere in the world at a resolution as low as five feet from space. This intelligence gap was filled by project Corona, which provided more photo coverage of the Soviet Union in one month than all the previous U-2 flights combined. The Blackbird was a decoy and the real intelligence was gathered by LMSC.

    The Secret of Corona Satellite Program

    The Corona satellite program was a top secret black classified program that started in 1960. It was designed to take photographs of the Soviet Union from space with the goal of achieving a circular, polar, and stabilized orbit to take photos at a five-foot resolution. Over 800,000 film photographs were taken by the satellites, which were then jettisoned in a custom-designed canister called a film bucket, floated down with a parachute, and caught in midair by a C-130 airplane towing a claw. The program also pioneered the concept of a second stage, allowing them to get to specific orbits. This program and its follow-up programs have contributed significantly to the history of space exploration but remained classified for over three decades.

    LMSC's Role in Space-Based Surveillance and Beyond

    LMSC played a pivotal role in launching some of the most significant space-based surveillance systems, ranging from see-it-all (Hexagon), see-it-well (Gambit), and see-it-now (Kennen). The development of these systems involved cutting-edge technologies and was driven primarily by Cold War era compulsions. Later, as the Cold War ebbed, LMSC began exploring non-military applications, partnering with NASA to develop the iconic Hubble telescope, among other projects. Founders should avoid indulging in fake work and focus on building products that matter, resisting the temptation to do things that they think a CEO should do, such as spending time networking with VCs or researching corporate cards.

    Prioritizing the Core Mission for Early Stage Startups.

    As an early stage startup founder, the main focus should be on finding the product/market fit by talking to customers and building something they love and are willing to pay for. Anything else is fake work and can be dangerous for the mission of the company. It's important to prioritize and focus on partner number one or two rather than lower priority tasks that don't move the company forward. LMSC became the crown jewel of Lockheed because they focused on developing products that were different from building planes and had high margins. Their operating principles emphasized focusing on a threat-based need, which was missing from Skunk Works and Kelly's philosophy. Outsourcing finance and accounting to companies like Pilot can help startups stay focused on their core mission.

    Responding to Market Needs in Aerospace Engineering

    Market context is important for building superior products. Skunk Works' focus on a threat-based need led to the creation of the A-12 OXCART and ultimately the SR-71 Blackbird, which had to fly faster than Mach 3 to avoid surface-to-air missiles. This need for speed resulted in an airplane that could not evade missiles or turn easily, but it served its purpose by outrunning them. The SR-71 also required a new navigational system to navigate by the stars at high altitudes. This shows the importance of identifying and responding to market needs, even in a highly classified and specialized field like aerospace engineering.

    The Technical Marvels and Challenges of the Blackbird

    The creation of the Blackbird required a blend of technical miracles, including using jet engines to achieve sustained speeds above Mach 3 while keeping humans aboard. To make this possible, the engineers had to design something that could run with afterburners on all the time and build an airplane out of titanium, which required machining the new tools for the Blackbird out of titanium itself. Moreover, the airplane's components were subjected to unprecedented levels of heat and panel gaps, leading to a custom fuel that was not flammable on the ground. Consequently, the airplane became a widely-feared beast from hell that was difficult to operate, costing $300 million per year to maintain.

    The Blackbird SR-71: An Engineering Feat That Will Leave You in Awe

    The Blackbird, also known as the SR-71, was an incredible engineering feat with an innovative spike inlet system that acted as the world's most badass supercharger, providing three quarters of the thrust needed to reach Mach 3-plus and sustain it. It was a strategic reconnaissance airplane that only carried cameras and had never been shot down despite over 4,000 missiles being launched at it. Its ability to fly faster than the missiles were an awe-inspiring feat. While it had a niche use case, it provided full flexibility in situations where satellites couldn't give real-time coverage. This airplane was a testament to human innovation and still fascinates people today.

    The Revolutionary SR-71 Blackbird and the Design Philosophy behind it

    The SR-71 Blackbird was an engineering marvel with a flat bottom that made it stealthy. It was built without the help of computers and calculators, which makes it more impressive. It was decommissioned because it was very expensive to build and maintain. Additionally, it was only used for reconnaissance purposes and not as a fighter or bomber plane. Despite its shortcomings, it was a significant technical achievement, and its design influenced later planes. The bidding for the F-16 fighter project was lost because Kelly Johnson didn't want to compromise on price and made an airplane that he thought met the needs of how it would be used in the field instead of what the government requested. In the long run, his design turned out to be better.

    Skunk Works' Stealth Technology Saves Lockheed from Financial Ruin

    Lockheed faced financial and political scandals, resulting in the American public viewing them as a corrupt arms dealer. They needed a bailout from the government, and their finances were so bad that Congress almost did not pass it. However, the profits from the LMSC kept the company afloat. Amidst all these crises, Skunk Works came up with the idea of using stealth technology to make an airplane go from looking smaller than it is to something like a ball bearing on radar. Dennis Overholser, a mathematician, read a Russian paper and brought the idea to Ben Rich, who had just taken over as the head of Skunk Works. This discovery marked the last hurrah for the traditional Skunk Works organization in Lockheed.

    The Risky Pursuit of an Invisible Airplane

    The pursuit of stealth technology through the creation of an invisible airplane was a risky endeavor for Skunk Works and Ben Rich but ultimately successful. The unconventional design of the aircraft, nicknamed Have Blue and the Hopeless Diamond, posed challenges in lift generation and controllability, but its radar invisibility was proven in testing. The lack of rounded shapes and large triangles in the design resulted in faceted surfaces like those seen in 16-bit video games. The success of this project was a rare instance of a defense contractor taking a significant risk without a research contract from the government, and highlights the intense customer focus within the industry.

    The F-117A Nighthawk: A Stealthy Advancement in Air Warfare

    The F-117A Nighthawk created by Skunk Works and its successful use in Operation Desert Storm marked a quantum advance in air warfare. The stealth fighter was designed to be undetectable by radar, controlled by computers through fly-by-wire technology, and could deliver surgically precise raids. The success of the Nighthawk brought in $2 billion in revenue for Lockheed and marked the end of the Cold War era. However, the paradox lies in the fact that this awe-inspiring weaponry was designed to deter aggression rather than cause destruction. Sadly, its use in warfare caused a lot of casualties. The success of the Nighthawk was a major milestone for aerospace technology, the development of which was kept secret by the 10,000 people who worked on it for 21 years.

    The Government's Role in Consolidating America's Defense Industry

    In the 90s, the US Defense Department instructed major defense contractors to consolidate and merge to maintain America's military industrial base amidst a shrinking market. This intentional government policy around combining companies led to a series of mergers and spinouts, creating five big primes - Lockheed Martin, Boeing, Raytheon, Northrop Grumman, and General Dynamics. L3 Communications, a spinout from Lockheed Martin, has become a formidable competitor today. The government's interest in maintaining capability in the national interest made them an extremely interested party, and the customer in this unique episode. This event of the government instructing the industry was an amazing event as it is uncommon in America.

    The Survival and Consolidation Strategy of the US Military Industrial Complex

    The military industrial complex in the US reached a stasis with five major players dominating the big contracts. The DoJ blocked the combination of Lockheed and Northrop, as it would eliminate all competition. To win the big F-35 Joint Strike Fighter program contract, Boeing and McDonnell Douglas needed to combine and size up against Lockheed Martin. Losing this contract was life or death for the companies involved. Norm Augustine, the CEO of Martin Marietta, came up with the survival strategy of increasing market share in existing markets during a period of declining businesses, which led to a massive consolidation of 17 independent entities in the industry. All contractors rotated contracts, but the prime contractor made the most money and had the most sway.

    The Challenges of Piecemeal Manufacturing in Aerospace Projects

    Large aerospace projects will be characterized by piecemeal manufacturing approach and few projects. This approach raises concerns about efficiency, quality, and decision making. The F-22 program shows how total program costs can increase as the production line is cut down, resulting in fewer planes being built at higher costs per unit. Contractors like Lockheed don't take risks, instead, the government pays more for each airplane, and R&D costs cannot be spread across as many units. Advances in technology enable building lifelike-looking 3D models out of complex surfaces that were previously impossible. Developing an airplane takes a very long time and is a costly process involving many subcontractors and a huge amount of money.

    Lockheed Martin's Strategy for Success in the Aerospace Industry

    Lockheed Martin has become world-class in understanding where their bread is buttered. They spread their operations around, employ people in different states to create jobs for their constituents, and benefit from pork barrel politics. The F-35 Lightning 2 program, which has the most technology-forward plane ever, is being developed by pulling resources from all armed services and allies. The national defense budget in the United States is $800 billion, and it's 3%4% of their GDP. Despite being the highest budget among all countries, it's down on a percentage basis of federal revenue spent on defense and has fluctuated between 12% and 20% in recent years.

    The Role of Defense Spending in Federal Budget and its Impact on Contractors and Technologies

    Defense spending accounts for between 12-20% of the federal budget, which is less than other important areas such as social security, healthcare, and income security. A large percentage of the defense budget is spent on contractors like Lockheed Martin, who are the single largest recipient of federal spending. While cost-plus contracts are useful for defense expenditures where costs are unknown but investment is important, they do not make sense for purchasing modern technologies like software as a service. The way cost-plus contracts are structured prevents companies from achieving operating leverage and big fat gross margins which is the opposite of what every tech company tries to do. This incompatibility is ironic considering that the government, together with Lockheed, really seeded Silicon Valley.

    The Future of Warfare: Software Reigns Supreme

    Modern warfare is likely to occur more in software than in hardware in the future. With the government's interest in security, selling software solutions to the government could be more profitable for startups than selling hardware. The motivation of people who work in the defense sector has changed from patriotism to innovation. The perception of the threat drives people's behavior and the economy, and technology changes but human nature doesn't. The need for security is set by the person who's most willing to come and take your stuff. The Cold War led to tremendous advances in society as it promoted competition. Lockheed Martin's largest program generating 20% of all net sales across all segments is the F-35 and modern startups like Anduril, Palantir and SpaceX are determined to hire top talent.

    ULA Up for Sale: The Challenges of the Prime Contractor Industry

    Lockheed Martin and Boeing's joint venture, United Launch Alliance (ULA), is an important part of NASA's Artemis program, but is up for sale. Although ULA has 2X capacity with 25 launches per year, it is still more expensive than SpaceX because they started from being big incumbents rather than a startup. The prime contractor industry as a whole has a cornered resource and process power in being the ones that receive prime contracts from the government and being incredible systems integrators. It is difficult to become a new prime, making it a tough industry to enter. The seven powers framework by Hamilton Helmer may not fully apply to the prime contractor industry, but the primes have a comparative advantage in coordination and integration.

    The Dual Purpose of Lockheed Martin

    Lockheed Martin's existence serves a dual purpose. In addition to serving normal stakeholders like customers and shareholders, they also exist to serve the interests of America, which leads to interesting second order effects. The US government plays a heavy role in dictating how the industry plays out, as they are in charge of the well-being of the country. The market cannot ensure America stays globally competitive, which is why the government must put their hand on the scale in many different ways in this market. The military industrial complex is not a market-driven organization, and it funds companies to keep them alive so they can keep employees trained, even if they are not needed. Congress people often vote affirmatively for things because it puts jobs in their state. This serves as an argument for a pro big military industrial complex, but it is a massive misappropriation of funds.

    The Skunk Works Mindset for the Military Industrial Complex

    The military industrial complex has become a large, complex entity that prioritizes job creation over efficacy and safety. In order to achieve great feats within a tight timeframe and limited resources, the Skunk Works mindset is a valuable approach. Rapid iteration and internal testing, being unafraid to show failures, and gathering data from them can lead to equivalent or better outcomes with lower budgets and potentially better safety. Non-market-based dynamics may be warranted, but the military industrial complex should not overrun the rest of the economy. It is important to reflect on the lessons learned from organizations like Skunk Works and LMSC in order to address the challenges of the complex world we live in.

    Threats and Motivation: From Military to Silicon Valley

    Threats can spur human ingenuity and creativity and motivate people to achieve great things. While Lockheed Martin exists to ensure Americaness continues as we know it today, protected with the necessary types of protections, other teams will accomplish great things in response to other threats. It's a good thing that the nature of that motivation has moved mostly out of the war arena, and it doesn't have to be because of threats of war. The introduction of those threats has directly transferred from Lockheed in the military into Silicon Valley, making it special. The game NieR:Automata is a fun game that is thought-provoking and revisits the theme of whether machines can think and feel.

    The Rise of Battery-Powered Lawn Tools as a Cleaner & Quieter Alternative to Gas-Powered Tools.

    Battery-powered lawn tools like Ego Lawn Tools are becoming more popular and powerful, making them a great alternative to traditional gas-powered tools. They are quieter, cleaner, and more convenient to use, making yard work more enjoyable. Acquiring these tools can provide a good escape from screen time and relieve stress. If you are interested in becoming an LP and helping choose future episodes of Acquired, visit acquired.fm/lp. Additionally, if you're new to Acquired, check out their other episodes on different industries, and join their Slack community to discuss and learn from industry professionals.

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    Microsoft

    Microsoft. After nearly a decade of Acquired episodes, we are finally ready to tackle the most valuable company ever created. The company that put a computer on every desk and in every home. The company that invented the software business model. The company that so thoroughly and completely dominated every conceivable competitor that the United States government intervened and kneecapped it… yet it’s STILL the most valuable company in the world today.

    This episode tells the story of Microsoft in its heyday, the PC Era. We cover its rise from a teenage dream to the most powerful business and technology force in history — the 20-year period from 1975 to 1995 that took Bill and Paul from the Lakeside high school computer room to launching Windows 95 alongside Jay Leno and the Rolling Stones. From BASIC to DOS, Windows, Office, Intel, IBM, Xerox PARC, Apple, Steve Jobs, Steve Ballmer… it’s all here, and it’s all amazing. Tune in and enjoy… Microsoft.

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

    Renaissance Technologies

    Renaissance Technologies

    Renaissance Technologies is the best performing investment firm of all time. And yet no one at RenTec would consider themselves an “investor”, at least in any traditional sense of the word. It’d rather be more accurate to call them scientists — scientists who’ve discovered a system of math, computers and artificial intelligence that has evolved into the greatest money making machine the world has ever seen. And boy does it work: RenTec’s alchemic colossus has posted annual returns in the firm’s flagship Medallion Fund of 68% gross and 40% net over the past 34 years, while never once losing money. (For those keeping track at home, $1,000 invested in Medallion in 1988 would have compounded to $46.5B today… if you’d been allowed to keep it in.) Tune in for an incredible story of the small group of rebel mathematicians who didn’t just beat the market, but in the words of author Greg Zuckerman “solved it.”

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

    Hermès

    Hermès

    In luxury, there’s Hermès… and there’s everyone else. Stewarded by one French family over six generations, Hermès sells the absolute pinnacle of the French luxury dream. Loyal clients will wait years simply for the opportunity to buy one of the company’s flagship Birkin or Kelly bags. Unlike every other luxury brand, Hermès:

    • Doesn’t increase supply to meet demand (hence the waitlists)
    • Doesn’t loudly brand their products (IYKYK)
    • Doesn’t do celebrity endorsements (stars buy their bags just like everyone else)
    • Doesn’t even have a marketing department! (they barely advertise at all)

    And yet everyone knows who they are and what they represent. But, despite all their iconoclasm, this is not a company that’s stood still for six generations. Unbeknownst to most, Hermès has completely reinvented itself at least three times in its 187-year history. Including most recently (and most dramatically) by the family’s current leaders, who responded to LVMH and Bernard Arnault’s 2010 takeover attempt by pursuing a radical strategy — scaling hand craftsmanship. And in the process they turned the company from a sleepy, ~$10B family enterprise into a $200B market cap European giant. Tune in for one incredible story!

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

    Novo Nordisk (Ozempic)

    Novo Nordisk (Ozempic)

    Last year Novo Nordisk, the Danish pharmaceutical company behind Ozempic and Wegovy, overtook LVMH to become Europe’s most valuable company. And the pull for Acquired to finally tackle healthcare (18% of US GDP!) became too strong for us to resist. While we didn’t know much about Novo Nordisk before diving in, our first thought was, “wow, seems like these new diabetes and obesity drugs mean serious trouble for big insulin companies.”

    And then… we realized that Novo Nordisk IS the big insulin company. And in a story befitting of Steve Jobs and Apple, they’d just disrupted themselves with the drug equivalent of an iPhone moment. Once we dug further, we quickly realized this company has it all: an incredible 100+ year history filled with Nobel Prizes, bitter personal rivalries, board room dramas, a generation-defining silicon valley innovation, lone voices persevering against all odds — and oh yeah, the world’s largest charitable foundation at its helm. Tune in for one incredible story!

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

    Holiday Special 2023

    Holiday Special 2023

    Ben has some big news. Actually, double big news! On what has become a holiday tradition here at Acquired, we cozy up to the fire to do our annual review of the show “in public”. We reflect on what can only be described as an absolutely mind-blowing 2023 (LVMH! Jensen! Costco! Charlie! Half a million plus listeners!) and look ahead to some big things cooking for 2024. Plus as always, we wrap with extended carve outs (joined this year by some surprise guests) for anyone still shopping for those holiday perfect gifts.

    Huge thank you to everyone for making 2023 an amazing year again here in Acquired-land, and cheers to even greater things to come in 2023!

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    ‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

    Visa

    Visa

    To paraphrase Visa founder Dee Hock, how many of you know Visa? Great, all of you. Now, how many of you know how it started? Or, for that matter, who started it? Who runs and governs it? Where is it headquartered? What’s its business model?

    For the 11th largest market cap company in the world, Visa’s history and strategy is almost shockingly unknown. A huge portion of the world’s population uses their products on a daily basis (you might say Visa is… everywhere people want to be), but very few know the amazing story behind how that came to be. Or why Visa continues to be one of the most incredible and incredibly durable business franchises of all-time. (50%+ net income margins!! On $30B of revenue!) Today we do our part to change that. Tune in for one heck of a journey.

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    Charlie Munger

    Charlie Munger

    We sit down with the legendary Charlie Munger in the only dedicated longform podcast interview that he has done in his 99 years on Earth. We’ve gotten to have some special conversations on Acquired over the years, but this one truly takes the cake. Over dinner at his Los Angeles home, Charlie reflected with us on his own career and his nearly 50-year partnership at Berkshire Hathaway with Warren Buffett. He offered lessons and advice for investors today, and of course he shared his speech on the virtues of Costco once again (among other favorite investments). We’re so glad that we got the opportunity to record and share this with you all — break out your notebooks, tune in, and enjoy the singular wit and wisdom of Charlie Munger.

    A transcript is available here.

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    NVIDIA CEO Jensen Huang

    NVIDIA CEO Jensen Huang

    We finally sit down with the man himself: Nvidia Cofounder & CEO Jensen Huang. After three parts and seven+ hours of covering the company, we thought we knew everything but — unsurprisingly — Jensen knows more. A couple teasers: we learned that the company’s initial motivation to enter the datacenter business came from perhaps not where you’d think, and the roots of Nvidia’s platform strategy stretch back beyond CUDA all the way to the origin of the company.

    We also got a peek into Jensen’s mindset and calculus behind “betting the company” multiple times, and his surprising feelings about whether he’d go on the founder journey again if he could rewind time. We can’t think of any better way to tie a bow on our Nvidia series (for now). Tune in!

    Editorial Note: We originally recorded this episode before the horrific terrorist attacks in Israel. It feels wrong to release this episode — where the nation of Israel and the Mellanox team are discussed — without sharing our profound sadness for all the families who had innocent loved ones or friends killed, injured, or taken hostage. Our hearts go out to everyone coping through this dark moment in history.

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    Nvidia Part III: The Dawn of the AI Era (2022-2023)

    Nvidia Part III: The Dawn of the AI Era (2022-2023)

    It’s a(nother) new era for Nvidia.

    We thought we’d closed the Acquired book on Nvidia back in April 2022. The story was all wrapped up: Jensen & crew had set out on an amazing journey to accelerate the world’s computing workloads. Along the way they’d discovered a wondrous opportunity (machine learning powered social media feed recommendations). They forged incredible Power in the CUDA platform, and used it to triumph over seemingly insurmountable adversity — the stock market penalty-box.

    But, it turned out that was only the precursor to an even wilder journey. Over the past 18 months Nvidia has weathered one of the steepest stock crashes in history ($500B+ market cap wiped away peak-to-trough!). And, it has of course also experienced an even more fantastical rise — becoming the platform that’s powering the emergence of perhaps a new form of intelligence itself… and in the process becoming a trillion-dollar company.

    Today we tell another chapter in the amazing Nvidia saga: the dawn of the AI era. Tune in!

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    Costco

    Costco

    Costco is not only Charlie Munger’s favorite company of all time (plus he’s on the board, natch), it’s an absolutely fascinating study in how seemingly opposite characteristics can combine to create incredible company value. For instance: Costco has the cheapest prices of any major retailer in America — and also the wealthiest customer base. They pay their hourly workers 30% above the industry norm (and give them excellent healthcare + 401k benefits) — and are almost 3x more profitable on labor than Walmart. Speaking of Walmart, Costco stocks 40x fewer SKUs than their Bentonville-based rivals — yet sells an average of 15x more volume of each. And oh yeah, practically all of Costco’s C-Suite started their careers as baggers and checkout clerks! Tune in for a mind-bending exploration of one of the world’s most iconic — and iconically unique — companies.

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