The next Silicon Valley
- Stephen McBride
- Mar 28
- 10 min read
Updated: 6 days ago
Important note:
For exciting reasons, The Rational Optimist Diary is moving to Substack, a newsletter publishing platform.
First, the housekeeping: You don’t have to do anything to keep receiving this Rational Optimist Diary. The next time you receive it, on Sunday, April 6, it will be sent by Substack. It should land in your inbox just like this issue did.
On the off chance it gets hung up because it’s coming from a domain your computer doesn’t recognize, check your spam or promotions folders. If you have issues, respond to this email and we’ll help.
So why are we moving to Substack?
Because the original Rational Optimist himself is joining forces with us.
Matt Ridley, author of the 2010 The Rational Optimist book that started it all, will be writing for the Rational Optimist Society.
Get excited! More soon.
Dan |
"We believe that Google should not be in the business of war."
Those 12 words kicked off a 2018 petition signed by thousands of Google employees. It demanded Google sever ties with the Pentagon's AI initiatives.
Google complied. The rest of the tech world mostly agreed: We want nothing to do with the US military.
Oh man, what a difference a few years makes. Stanford's brightest kids are now dropping out to launch defense tech startups.
The same campus that once protested Palantir now hosts crowded defense tech clubs with long waiting lists.
One of our core missions at the Rational Optimist Society is to spotlight innovators doing truly world-changing stuff. The entrepreneurs building the future with their bare hands.
It turns out a critical mass of these impressive young founders are now clustered in a gritty refinery town outside LA. Unlike their predecessors, they’re not working on social media apps. They’re working on new, hard, physical technologies, mostly for the defense industry.
This is big. Military tech is transforming from an inefficient, inflexible industry to the source of innovation reshaping our world. I’m telling you, this industry towers over all others when it comes to raw, physical, cutting-edge innovation happening right now.
War is a tough subject to write about. As a Rational Optimist I’d rather write about life-affirming technologies, and usually do. But the world is dangerous. I’m glad our brightest and most ambitious people are revitalizing America’s military tech industry. As you’ll see, we sorely need it.
Picture a 19-year-old kid living in a camper van, parked in his parents' driveway. He survives on frozen burritos.
That was Palmer Luckey. Night after night, he tinkered until he created the Oculus Rift, the first VR headset good enough to go mainstream. Facebook acquired his company for $2 billion.
These days Palmer Luckey is building more important stuff: self-flying drones and fighter jets that will revolutionize the battlefield. His company Anduril, while still private, is already one of America's 10 most important companies. Its innovations include:
Roadrunner. A drone that takes off like a helicopter but flies like a jet. It waits quietly until enemy drones appear, then screams toward them at jet speed, knocking them out of the sky.
Fury. A fully autonomous drone that attacks in swarms traveling at 700 mph.
Ghost. The invisible guardian that hovers over battlefields and can spot a person climbing a fence three miles away, day or night.
Anduril just landed its biggest win ever: a $22 billion contract with the US Army to build augmented reality helmets, complete with thermal vision that allows soldiers to detect threats through walls.
We owe Anduril gratitude. Until recently, military tech startups were considered "uninvestable." Anduril has made defense tech exciting. It blazed a trail once considered impenetrable for startups. Now a flood of entrepreneurs is following in its footsteps.
Here are six revolutionary small companies to watch:
Imagine a missile that crosses the Atlantic in 30 minutes, flying five times the speed of sound. By the time you hear it coming, it's already gone. So maneuverable, it can dodge any existing defense system.
The Pentagon spent billions to develop hypersonic weapons with embarrassingly little to show for it. Castelion, founded by former SpaceX engineers, is succeeding by iterating and failing fast. It tests hypersonic missiles almost weekly in the California desert.
Why fly a drone when you can fly a swarm of them? Shield AI makes fully autonomous drones that work together like digital wolf packs. It’s created what military strategists dream about: aircraft that can fly, fight, and coordinate without human pilots. They don’t rely on GPS, making them immune to enemy jamming.
Epirus makes microwave weapons that instantly disable enemy drones by frying their electronics. It can knock swarms of 100+ drones out of the sky.
The US Marines have already purchased portable versions that can be towed behind a Humvee.
Saronic is building “self-sailing boats” that patrol the seas on their own. These sleek, unmanned ships can scout ahead of Navy vessels and hunt submarines for weeks without refueling or risking human lives. Hello robo-Navy.
Over 3,000 US soldiers were killed in fuel supply convoys in Iraq and Afghanistan between 2003 and 2007. Imagine how many lives would be saved with an energy source that eliminated the need for constant refueling.
That's what Antares is building: micro nuclear reactors that can power military bases and even ships without refueling for years.
All these revolutionary systems need someone to build them. Hadrian is using AI-powered robotics to reinvent manufacturing for the defense industry.
Its automated factories can churn out defense components 10 times faster at half the cost of traditional methods.
How can you not be excited about what these companies are building?
Kids these days. Every generation feels like today’s kids are lazy, entitled, and soft. We’ve been saying this forever. A newspaper clipping from 1942:
The new breed of defence tech founders is young. And anything but soft. Palmer Luckey was 24 when he founded Anduril. Isaiah Taylor of Valar Atomics is 24. Augustus Doricko of Rainmaker, making cloud-seeding drones to control the weather, is 23.
I once heard legendary investor Stan Druckenmiller say something along the lines of "Pay attention to what the kids are doing." What are the smartest young minds choosing to work on today? That’s where breakthrough technology will appear tomorrow.
A decade ago, the brightest kids were starting software companies in swanky San Francisco offices with meditation pods. Today’s kids are picking the hardest problems to solve—hypersonic, AI drone swarms, autonomous subs.
This is real stuff that matters and can change the world, rather than social media dopamine loops. Forget the cliché of Gen Z as screen-addicted slackers. These kids are rockstars!
If you want to see this revolution in the flesh, book a flight to LAX. Then drive about two miles south to a sun-bleached refinery town called El Segundo. It’s ground zero for America’s defense renaissance. Think DARPA meets DIY.
Five years from now, people will talk about missing El Segundo the way they talk about missing Bitcoin or Amazon. It’s obvious that El Segundo is the new Silicon Valley, if you're paying attention.
At the Rational Optimist Society, we’re building the Innovator's League. Think of it as a living Rolodex of the most exciting startups reshaping America.
We started in Austin with Aalo Atomics. Next week Dan and I are heading to El Segundo to meet with a dozen founders literally reshaping the future of warfare. Stay tuned.
America draws its strength from what venture capitalist Marc Andreessen calls "the triangle." Technology superiority, economic dominance, and military power.
Our technological edge drives economic growth, which funds military capabilities, which in turn protect our technological and economic interests. When all three corners are strong, America is unbeatable. It's how we defeated the Soviets. They simply couldn't keep up with our innovation engine.
Unfortunately, the military side of this triangle has corroded. The US military remains the most powerful fighting force on earth. But under the hood is a serious case of technological rot. Our defense industrial base has calcified into a slow-moving oligopoly.
Today, just five companies capture over 80% of defense dollars: Lockheed Martin, Boeing, General Dynamics, Raytheon, and Northrop Grumman. Half of all defense contracts face zero competition. Zero competition means zero innovation.
One example: Lockheed's F-35 fighter jet. It was conceived before the first iPhone and still isn't fully operational yet. At $2 trillion in total lifecycle cost, it’s the most expensive weapons program in history. And it’s not an outlier. It now takes America 20+ years to develop a new military aircraft. China’s loving this. And I would argue drones have already made the F-35 obsolete.
Imagine if Amazon suddenly started taking two weeks to deliver your packages, while losing half your orders and tripling prices. That's basically what's happening in our defense industry. Change suppliers! But there’s been nowhere else to shop.
The Big 5 defense contractors aren’t just dinosaurs. They’re vampires, sucking dollars from taxpayers through cost-plus contracts. Defense contractors are guaranteed their costs, plus a fixed percentage fee on top. The more a project costs and the longer it takes, the more money they make.
One of my contacts at Palantir told me the real mess is on the buyer side. The Army, Navy, and Air Force used to compete fiercely, each building their own planes and systems, racing to outdo each other. That rivalry sparked rapid innovation.
Then the Pentagon consolidated into one giant buyer. A monopsony. Stagnation followed.
I'm Irish but I joke I'm an adopted American. I love what America stands for and refuse to accept that its defense industry is doomed. A decade ago, the US had to beg Russia for rides to space. Embarrassing! SpaceX single-handedly made America the No.1 space superpower again.
Anduril builds weapons like a tech company builds apps. It knows small, unmanned, affordable swarms beat big, manned, overpriced relics. It developed Roadrunner in two years for less than $250 million. Lockheed's equivalent took 14 years and $70 billion. Choose your fighter.
This is creative destruction at its finest, the kind Rational Optimists should celebrate. The Big 5 must die so the arsenal of innovation can be born again.
These defense tech startups are truly a breath of fresh air. Look at Palmer Luckey. Mullet, Hawaiian shirt, sandals. He’s the anti-CEO.
Can you imagine the CEO of Boeing dressing like this?
Anduril is silly and ultra-serious at the same time. It named its anti-drone interceptor "Roadrunner" because it competes with Raytheon's "Coyote" system.
Many of these founders only graduated high school, proving once again you don’t need a prestigious degree to build real things that matter.
This is the rebirth of American innovation in its most authentic form. Nonconforming, ambitious people made this country a technological superpower in the first place.
Can you name the world’s most valuable private company? It’s Space X, valued at $350 billion. Elon Musk started SpaceX in a warehouse in El Segundo. It’s now worth more than Bank of America or Coca-Cola.
I think defense tech is the next market "zeitgeist." The next major investment theme that will capture imaginations and mint fortunes.
My friend Louis Gave of Gavekal first showed me this table in 2017. I’ve been obsessed with it ever since. It shows the 10 most valuable companies by decade.
Each decade has a dominant theme. The ’80s were all about oil companies. Japan dominated the ’90s. Tech rose in the 2000s. Oil companies made a comeback in the 2010s... then, a new breed of tech stocks dominated by 2020.
By 2030, I think aerospace and defense tech businesses will appear on this list. SpaceX and Palantir are just the vanguard. Anduril, still private, will hit a $100+ billion valuation.
Tomorrow's defense tech giants will go "back to the future," returning to an era when America's industrial might served both military and civilian needs.
During WWII Ford wasn’t just churning out Model Ts. It pumped out a B-24 Liberator bomber every hour. General Mills made Cheerios for breakfast and precision bombsights for soldiers.
SpaceX’s Starlink satellites deliver high-speed internet to millions of people around the world. SpaceX also launches classified spy satellites for the US military.
Palantir software helped Wendy’s optimize its supply chain. Its software also reportedly helped catch Osama Bin Laden. See where this is going?
Pay attention to these companies because they'll become the most valuable businesses on earth in the coming years.
Shouldn't Rational Optimists focus on life-affirming technologies rather than killing machines?
We hate war. The dramatic decline in armed conflict deaths over the past 75 years is one of humanity’s greatest achievements.
But we're Rational Optimists, not blind ones. Bad actors will always exist. I see four reasons to cheer for defense tech.
1: Chaos breeds creation. Imagine your life without the internet, GPS, or antibiotics. These world-changing technologies, and many others, emerged from military labs.
The internet began as a Pentagon project designed to maintain communications during a nuclear attack. GPS was built to guide missiles and troops. Penicillin mass production was perfected to save wounded soldiers.
Even the humble can of soup in your pantry exists because Napoleon needed to feed armies across continents.
Military innovation is often the expressway to civilian progress. Castelion’s next project after building hypersonic weapons could be jets that take you from NYC to London in 90 minutes. Shield AI’s drones may swarm the battlefield today and deliver your Amazon haul tomorrow.
As an aside, everyone is sleeping on drones. The last technology with this much potential to reshape our physical world was cars.
2: Peace through strength. The best way to avoid war is to be overwhelmingly prepared for it. When it takes us 20 years to build a new fighter jet while off-the-shelf drones dominate modern battlefields, we invite aggression.
3: The alternative is worse. If America doesn't maintain technological superiority in defense, who will? Europe?
Most likely, it’ll be a country with far less concern for human rights. The choice isn't between weapons and no weapons. It's between weapons built by people with Western values, versus not.
4: The high-tech solution. Defense tech startups are in the business of making war obsolete through technological superiority so overwhelming that conflict becomes unthinkable. They're building peace machines disguised as war machines.
We’re visiting El Segundo next week to meet with many of these founders. As a Rational Optimist Society member, you have a front-row seat to the transformation of American innovation.
Stay tuned.