204|Investing in Innovation and the Future ft. Josh Wolfe with Srivatsan Prakash

You're listening to Market Champions, a podcast on navigating the financial markets. Here's your host, Shrivasa Prakash.

Hey everyone. Welcome back to another episode of Market Champions. Today I've got Josh Wolfe, one of the co founders of Lux Capital. Josh, thank you so much for being on the podcast. It is awesome to have you here.

Great to be with you, man.

Awesome, Josh. So I guess just to get started, you've discussed your background before, but on the podcast you're going to discuss it one more time. So, you know, could you just talk a bit about, you know, your background, what drove you into the VC world and what really made you pick VC versus, you know, other paths in finance.

Part of it was ambition, part of it was curiosity. The ambition came from not having something which was money. I grew up reasonably poor, single mom, school teacher, lived with our her mom and my step grandpa who was really the grandpa I knew. So she was a teacher, grandma was a meter maid, like parking meter attendant and my grandfather was a new delivery man late at night. We all lived in a small two bedroom, one bath place in Coney Island, Brooklyn, where I grew up. And I wanted to one day have money. So that was one piece. And to me somebody that was wealthy was somebody that had a house. We lived in an apartment. But you know, I just look with admiration and jealousy and envy at, you know, people that had money. And then the second part of it was curiosity, which I was always very interested in lots of different things, science in particular, understanding how the world worked. And I had done a Westinghouse project which was interesting because whoever was the sponsor of these science talent searches always portended the decline of that particular company. And so it was like Westinghouse and then IBM, Intel, Siemens. So I don't know, there's something sort of always adverse selection and whoever the sponsor was, but I had done hiv, AIDS immunopathology research after seeing an HBO movie called in the Band played on, convinced with my arrogance and ambition that I was going to go be one of the people to help cure AIDS. I landed in this lab at 13 years old, then worked there for a few years, published research. And during the time in that lab while I was still in high school and then in college, my mentor was trading futures and options and making a ton of money. And I didn't know anything about markets at all. I didn't understand the difference between a stock or a bond, let alone options. And yeah, that to me was like the perfect introduction of what would become my, this mix hybrid between science and finance and science being the endless frontier itself, driven by human ambition and people wanting to prove other people wrong or achieve greatness and status by making some discovery that others didn't. And capital markets and just understanding what things are worth and why people believe that they're worth these things. And the perfect embodiment of that is venture capital.

Got it, got it, got it. And so you sort of, in a way distinguish between innovation versus what is full fledged invention and how that really shapes the way you think about investing and your investment framework. So could you just go a bit into that and sort of discuss, I guess, your overall investment framework before we get into talking through some development in various industries?

Some of it is a little bit semantic in just the words of innovation versus invention. But if you had to be a purist about it, you would say an innovation is something that exists and you're making it better. So you might look around and actually have a predetermined view that something sucks and that you want it to be better and that you think that there's a better way. So you're going to innovate, you're going to improve. And that might be, you know, by, you know, going deep in something or by coming across it by accident. Invention is often by accident. I always joke that sometimes the words that precede a great invention or discovery are, huh, that's funny. And, you know, a lot of times people are doing one thing and then they observe something else. And that's true from, you know, the discovery of penicillin to all kinds of happy accidents that have defined modernity. And so oftentimes with inventions, you see people that are either at the interstitial space between different disciplines or stumbled on something or an insight, you know, from, from somebody else's domain. Sometimes it is the combinatorial forces of putting two things together that historically never went together. And so, you know, you could look at, I was actually just talking with my kids about this, but the rolling suitcase, you know, you had suitcases and you had roller skates or rollerblades and forever these things were just not put together. So whether you call that an invention or an innovation, you know, carrying a suitcase sucked. You had this tool and technology in the form of wheels, and you were able to put these two things together. So a lot of invention is combining things that already exist in novel ways.

Got it. And so, you know, in Lux Capital's most recent newsletter, you guys talked about what's really called precision manufacturing. And, you know, that really matters both in the micro. So if you look at, if you go through the newspaper, you know, you would almost always see something related to semiconductors. And precision manufacturing is very important there. And also on a macro scale, you can see, for example, when it comes to launching satellites into space, you see that precision is absolutely paramount. And so, you know, could you talk a bit about, you know, Lux Capital? I know how you guys are viewing the position manufacturing industry and how that really develops going forward.

Well, if you think about everything that we use from the zoom software today that allows us to see each other and talk, and the microphones and the software that's recording in whatever app people be using to listen to this podcast, the amount of technology that is hidden from people, it's almost like judging a human on the surface by how they look and not knowing the complexity of the large macro organs inside of their body or the microbiology that is governing everything. I mean, it's just, it's insane amount of complexity. You know, I have a little picture frame here, which I don't know if this is going to be just audio or visual, but you know, this is an iPhone X, right? And the iPhone X has thousands of components and nobody has to know how any of them work. Almost in that old thought experiment of like I pencil. In fact, the vast majority of people that work on any one of these elements inside of Apple, if it's not sourced externally, don't know how the other parts work. You know, somebody might be an expert in the optics and the camera. Somebody might be an expert in the semiconductors or the electronics or the integration of the memory or the logic chip or the glass or the capacitive conductance for touch screens. But every one of those things is so complex that they have to be near perfect. You know, if not nine nines, particularly like, the smaller you get, you just can't have error. I mean, imagine if your iPhone just had flashing pixels. You know, the kind of thing that happens when you drop it and it just drive you insane. We take for granted the high resolution fidelity of a display and our touchscreens that we're able to swipe, you know, with ever increasing frequency. I mean, just, it's like magic. All of that is because of precision manufacturing. And the more precise our tools, the more fine resolution you can make. Features. So the history of computing and our technological progression that we know colloquially as Moore's law is because you're able to fit more and more transistors into a given area and over time you're able to drive your computing power for a given dollar Value of cost. And that has roughly been, you know, every 18 months or two years. And we go through different paradigms in computing. You went from large scale like vacuum tubes to electromechanical to transistors to solid state transistors and something else will next, whatever that is. We shifted from CPUs to GPUs that were originally primarily used for graphic rendering, that are now being used for cutting edge AI and ML. But the precision manufacturing piece, it just enables control over nature and an embodiment of the know how, which really, when you think about what technology is, it's, it's, you know, reducing our ignorance and having an understanding about the way that a system works and then embodying that knowledge into a physical device. It's astounding. And so the tools and the instruments, from semi cap equipment to very precision milling, to being able to do additive manufacturing where you can eliminate the need for six different parts that might fit together or be screwed or bolted, and instead have one sort of fusiform, uniform material. It changes the economics, it changes the weight bearing, changes the cost, changes the performance. And yeah, it's one of these things that I like to identify that I call these directional arrows of progress. And there's a very clear directional progress that we will have ever finer and finer precision that used to start with milling and CNC machines and now goes down to very high pico or blue lasers. And that is a trend that is not reverse. So the latest incarnation of this isn't a company we announced, I think in the past week called Hadrian. And Hadrian very interestingly identified something that sucks. We always like to understand from our entrepreneurs, like what sucks. You have a capacity shortage going back 50 or 60 years where the industrial base, particularly for aerospace, for making stuff that goes up into space rockets and parts for rockets and engines and components that are basically manufactured across a base of about 3,000 mom and pop shops. Some of those mom and pop shops literally make one part and have made that part for 40 or 50 or 60 years and no new capacity has really come on. So they have a monopoly or a logopoly on these parts. But you have an aging workforce. In many cases it's like they don't even have workers, they have family. We backed an entrepreneur who identified the growing number of startups, in part motivated by watching Elon and SpaceX. In many cases people that worked there when they were 25 and are now 30 and deciding to come out of SpaceX and start companies, investors like Lux and others that are funding this Emerging talent into doing all kinds of stuff, from launching satellites to manufacturing things in low earth orbit, and the demand to be able to forge and fabricate physical stuff. This isn't, you know, it's not software eating the world, as Marc Andreessen says. It's physical stuff that has to be made and built. And Chris Power, who's the founder of Hadrian, had this insight. We can build the machine that builds the machines. We can build a cutting edge factory that takes not only the best tools, but automates them, puts in software to help with the flow and can really help to accelerate the industry. A combination of precision manufacturing and reducing the reliance on this very fragmented old school industrial base. So we're really excited about that. And I think the existence of that in its growth will also allow more and more aerospace companies to launch literally and rapidly iterate the same way that software engineers do, like agile development, there will be agile aerospace.

Got it. And so you know, when you, when you, when you take the example of Hadrian and when you think through say rockets, aerospace engineering, you sort of realize that in a way, thinking through the process of precision engineering ends up being that, well, what's produced has to be precise, but also what's producing it also has to be precise. The machines have to be precise. And ensuring what goes into the machines have to be precise. So when it comes to this sort of chain, how do you decide what part of the chain is worth really looking into, both from an investment standpoint as well as just in general an opportunistic standpoint from someone who might be an entrepreneur?

Most of it comes from the entrepreneur who says there's this opportunity to do this better in a market. If you take Rick Fullop, who founded Desktop Metal and has got big long term ambitions, he saw an opportunity for additive manufacturing in metal that would take 3D printing away from trivial trinkets and plastic and into a whole suite of new materials. And it'll take time for that to really permeate into the world. But he felt in every aspect, from the discrete deposition of individual metal powders to the centering and every one of those devices, if they were lay or products, if they were laser inspected, has to be super precise. So the machines have to be super precise. It's sort of, you know, in a colloquial example of like having an old school dot matrix printer, you know, on Z fold paper is probably something you never experienced with the perforated tears on the end, to having very precision laser printing where you would increase the, the DPI the dots per inch that were, you know, being printed down. Again, directional hour of progress. Precision is only going to keep incre, and not just in manufacturing, but in biotechnology for both imaging and resolution and control. To be able to even put a very precise DNA sequence into a viral vector and deliver that to a cell as a potential therapy to being able to image things inside of cells. I mean, again, directional hour of progress. We're going to have more and more precision and fidelity and not going back the other way.

Yeah, that makes sense. And when it comes to just in general space flight, how do you think the US and overall the world is doing in terms of commercial spaceflight?

Well, I think the stuff that you see being done by Virgin or Blue Origin is maybe a little bit inspiring, almost to the point where people will sort of shrug it off. They're like, oh, okay, cool. I think the bigger stuff is the reps that are being done in some of those launches to lower the cost and some of the ancillary technologies that will allow for lots and lots of launches. So historically you had Antares rockets launched out of Kazakhstan. Forgetting about even current geopolitics that have sort of eliminated the Russian supply of being able to launch. There is Rocket Lab. Rocket Lab was really inspired, I think, by the presence of SpaceX. I'm very critical, as many people know about Elon, as it relates specifically to the truth telling around and accounting around Tesla. But SpaceX, I'm actually very. I think it's praiseworthy and I think it's inspired a lot of people. But the launch capabilities are growing. The dollar per kilogram to launch stuff into space is on a very clear Moore's curve. Things are getting cheaper and cheaper with every subsequent rocket to be able to launch things more cheaply, which means more stuff is going to get launched. So I'm quite optimistic that in part because of the presence of foreign competition, in part because of the historic absence of capacity for launch, in part because of the growing demand of companies that want to launch assets into space of whatever those things might be. Again, Earth imagery, manufacturing, scientific research, whatever it is, I think that I'm long term bullish about that base being built. I would say in the same way that there was a Sputnik moment that launched us into the space race, there is a new space race underway. You're seeing a fracturing of some of the geopolitical alliances that were healthy. U.S. and Russia teamed in the International Space Station. You still saw some cordiality in the current launch and return. But US approached Russia and said, even though you're pulling out of the ISS in the coming years, let's do a lunar base together. And Russia said, no, thank you, we're going to do it with China. And so, you know, there is a new race for space dominance that's going to feel very much like Star wars and science fiction, complete with people using lasers and other kinetic capability to blow satellites up from space and from the ground to space. That has already been demonstrated respectively by China and Russia.

And so on that topic of geopolitics, just with the Russia, Ukraine situation right now, there's just been a lot of discussion about how if we do get a third world war, we're likely going to see cyber warfare, hacking, et cetera, play an increasingly important role when it comes to warfare versus this general on ground warfare. And recently you guys announced your investment in Cloaked, which is a, which is a company that focuses on the threat to, I guess, identity and how you can actually protect yourself, how you can actually protect your identity. So how do you think about the changes to privacy, how that affects both society and thinking through the evolution of cybersecurity?

So there's two aspects. Cybersecurity, when you think about the risks, there's a nefarious malicious actor who was trying to sabotage or influence the way that a system works. And there have been lots of successful actions and attempts that, some of which have been reported, whether that's hacking into a hospital system and holding them hostage for cryptocurrency, whether that was state sanctioned or rogue actors, somebody else will figure out whether that is being able to tap into and either monitor or disrupt or send a signal that you're capable of disrupting activity or control systems for our electric grid, for food production, for transportation. As more and more of our economy is digitized, connected, networked with in some cases, centralized control, as manufacturing facilities and plants have centralized SCADA operations that can be infiltrated in the same way that us, Israel and other allies may have infected with stuxnet Iranian centrifuges to do something as mechanically simple as tell the machines to rotate faster than they were supposed to be so as to destroy them for preventing enrichment of uranium towards a nuclear bomb. This is something that's not going to be coming. It's already here. Recent news, I think, has been publicly reported now of US intervention quietly in the first few weeks of the Russian invasion of Ukraine to remove bots that were effectively the equivalent of like latent viruses in our body that Russia had planted and companies and countries around the world. And I Believe that's now come out saying that, you know, we had a very quiet campaign between the NSA and DOJ and FBI to alert people of this existence and remove these. So. So that's the piece on the cyber which is disrupting the way that systems work with intent. The piece of privacy is a little bit different in that the enemy is less about foreigners. Although there have been other examples here where there was domestic concern about China owning the parent company of Grindr, which was the sort of gay Tinder. And you can imagine a situation where prominent people of power influence that have either used that or might be gay, but closeted could be outed in sort of blackmail and Kompromat in a sense. And so there's examples where you could see foreign entities, agents, countries, proxies for them and doing those kinds of things. But the bigger thing about privacy, and this is interesting because it is a timeless aspect, I'm talking to you and I've got a window here I'm looking outside of. Obviously windows allow you to see out, they allow people to see in. People get tinted windows for their cars or their homes to protect and add some privacy. And what I've come to accept is that increasingly privacy has been trending towards being dead. The things, if you go back to our natural state, you know, we were small groups of hunters and gatherers and we had tribes and you knew, you know, something around Dunbar's number, but 100 ish people or 140 people and, you know, you didn't really have a right to privacy. You might go over there and have a tryst quietly or, you know, you might want some solitude. But, you know, animal kingdom, you don't really see privacy other than people burrowing coals and, you know, dens and caves and that kind of stuff. We feel this entitlement to privacy. And I think that most people want privacy for preservation of what other people think of them. Meaning you want to preserve dignity. So you want privacy in the bathroom, you want, or maybe the bedroom. And then you want privacy, privacy so that people cannot reveal your status that may be better or worse, lest that somehow impact the way that people are going to treat you. So there are very, very wealthy people that want to hide their wealth so that they are not targets and they're very, very poor people who will want to signal that they have more resources or money or status materially than they actually do. And I've accepted that. Other than the bedroom, the bathroom and your bank account, the very, very wealthy tend to signal their wealth. They put Their names on buildings, they buy ostentatious art that has no value other than sort of a vimlin good signaling status. The very poor will often bond in commiseration to be like, I'm dead ass broke, I have no money. And it's the people in the middle, which are the masses who might make $200,000, but they want you to think that they're making half a million dollars or they might make $30,000 and they want you to think they're making $100,000 or they might make a million and they want you to think they're making 10. And they don't want that kind of stuff revealed. And so that's very interesting. The other aspect of this, of course, is the business models of contemporary technology companies, which, as has been said, either you buy the product or you are the product. And in the cases where you are the product you are being sold, you are maybe a de identified or anonymized number in the case of, say, clinical trials. But in the case of Facebook and social media that's based on advertising, they are very specifically trying to target you. And so something like cloaked exists to say if you want to remain private and you don't want to give that or you want it to be permissioned, you can take back your identity. And so whether that's for payments, credit cards, identities, for logging into websites, to the extent that you want to be cloaked and you should have that right.

Got it, got it, got it. And so, and you know, and you.

Know, that's very fair.

And when you spoke to, when you spoke to Mike Green back in October, you sort of talked about the dynamic of how there is a system. There's always going to be people who try to exploit that system and there's always going to be people who successfully do exploit it and find a way around it. And they're just looking at the system and trying to find the way to exploit it. And on the other hand, you've got the people trying to make a better system. And really what Lux Capital is focusing on here is the people who are trying to create a better system.

We think so. One of the things you don't always know is the problem that you're solving or think you're solving is of course going to create future problems and it may have unintended consequences. But certainly the intention we have when we fund something is that there's some problem that's being solved that is going to and sort of our base morality across our companies, whether you're funding a therapeutic or diagnostic for a cancer condition or drug, or you're funding a defense technology is are we reducing human suffering? And I think that that's some base morality that we sort of put our investments through that lens to say, you know, is this something that is going to reduce human suffering? And we may find in the future that something that we funded, you know, ended up increasing. I mean, social media, I think is good. Social media based on advertising, as my friend Thomas Reardon says, is bad. TikTok, I thought was okay because you weren't just consuming content, you were able to produce it. But the addictive nature because of advertising is bad. And so the unintended consequences of many of these things is hard to see before you fund them.

Yeah, got it. And moving on. Another key industry that Lux Capital focuses on is life sciences, and more specifically, life or biological sciences. And just within that industry, two things. So, one, what are the most exciting development that you see that you believe have hope or have hope or promise to actually be successful? And to what are the biggest regulatory barriers that you see to a lot of these ideas becoming successful?

Well, the regulatory barriers are FDA approval, which means it costs a lot of money and you have to do clinical trials, and that's to prevent people from dying. I was actually just with a CEO of a company which was the first ever FDA approved just a few years ago, gene therapy for curing blindness in a rare condition of blindness. But the history of gene therapy was fraught with both failures and death. You had scientists out of UPenn who gave gene therapy to a patient. The patient died in 1999, and it basically completely iced gene therapy for several years. At the time when the human genome was being sequenced, and Craig Venter and Francis Collins were sort of in the competitive dynamic of doing that. And it would take about a decade for things to revitalize. Now, in the annals of human history, that's just a blip. It's nothing. And so it's still pretty amazing. But that gene therapy is very interesting because you go back, I mean, it's only like you look at the arc of humanity. My God. To go back to the 1950s, when Rosalind Franklin and Watson and Crick were able to use X ray crystallography, a new technique, a new tool to be able to come up with a helical structure of DNA and to hypothesize that these nucleotides and genes had a role in heredity and traits. I mean, it's just. It's mind blowing. We Take that for granted. And then to be able to develop the technology over time to sequence individual base pairs and to understand that those genes code for proteins and those proteins have effects. And you take something like cystic fibrosis. Cystic fibrosis. This little tiny channel at the edge of a cell basically has a protein and it either works or it doesn't. And it's just because of the shape, Something happened in the genetic sequence that this protein is supposed to fold like this and it falls like this. And the result of that is that chloride ions inside the cell can pass through. And so you get a buildup and water isn't flowing and mucus grows and bacteria grow on the mucus, all because of this little tiny gene error. And then scientists, through decades of research and work and toiling and a little bit of luck, discover a small molecule that you can introduce into the cell that suddenly opens up this channel, allows the chloride ions to flow, and is saving lives. I mean, that to me is just mind boggling, right? I mean, you're talking about something like hundreds of nanometers in width. We need the microscopes and the tools to be able to detect these things because they're below the visible wavelength of what we can see with our naked eye. So the entire area of biotech, which is fraught with failures and in many cases frauds, in part because there are so many people that are suffering, that the willingness to part with your capital to fund something because your mother died of cancer or Alzheimer's or your child is suffering from some horrible rare disease is what propels people to want to fund these things and in some cases propels scientists to want to go into them. But it is just absolutely inspiring. And when you hear about the complexity of how this stuff works, the most exciting thing I have to say is one of our companies called Ikon. Ikon E I K O N was the Nobel prize winning work of a guy, Eric Betzig, who was looking out into outer space, found a resolution technique to be able to see inside of cells and those cells. Interestingly, for the first time you could see what happens when you introduce a drug into the cell. And the analogy that I like to give is if you were a 711 manager and all you had was a snapshot at 7am and 7pm and all you saw was that in the 7pm photo, the store had been ransacked and there was a dead body on the floor, and you have no idea what happened or who did it. Okay, that's basically what we do with cells. You have a cell, a picture of it before you introduce a drug you see afterwards and you sort of look at it and try to detect the chemicals. But if you could actually see, which you now can, thanks to this company icon, how it is metabolizing and what is happening inside of the cell, it just unleashes the ability to understand what are the mechanisms of action, how does this drug actually work on a cell? Which is mind blowing. So we were the founding investors in this company, and then very shortly after, we recruited incredible person, a CEO who's Roger Perlmutter, who previously ran Merck and Amgen, and his ambitions are very big. And he said, I don't know, when he came in, Maybe we raise 100, $200 million in the next round, which is big. And he said, no, I'm going to raise 500 million and we're going to do it at a $2.5 billion valuation. And he did it and he did it quickly. And I think he's going to end up not only with one of the most important technological tools for deciding what drugs might work, but he might end up with the lowest capital in biotech at a time when many companies are trading with less than a year or two of cash, and there may be some really interesting consolidation transactions that occur. So that's one area in biotech, both on the instrumentation and the drug discovery side. Another which is absolutely mind blowing, is a researcher out of University of Utah, Jason shepherd, who, he's a cool guy. He's got tattoos, he's Australian, he's got a cool accent. And he's studying this gene, this protein called arc. Arc. And he's looking at this thing and he's like, it sort of looks like a virus and it looks like hiv. And he's like, okay. Well, he looks at how it actually works, and it turns out, you all know, everybody knows that you read a little bit of pop neuroscience, you know that you have a neuron and another neuron, there's a synapse which is a gap between them, and they send neurotransmitters between each other, right? What we never knew is that there's actually inside of one neuron, this virus that basically takes messenger rna. So some of the software of our cells puts it in a little envelope in a little capsid and sends it physically like a package to the next neuron. And it basically tells that next neuron, hey, whatever just happened is important. Grow proteins so that you have more receptors. And the theory is that that's how memories are Formed, which is just mind blowing that it came from a virus, the same technique and tool that must have infected people and been co opted by our own biology. So that area is just absolutely wild for neuroscience. And it turns out we partnered with Feng Zeng who was one of the co discoverers of crispr. One of the problems with CRISPR is you can edit genes and do copy paste like Control C, control V, but you can't target it to a direct cell or an organ in the body. You need a delivery mechanism. And this ARC gene, this ARC protein may be the answer to how you do precise delivery of crispr, which is also just mind blowing. So you know, a lot of these things won't work, but they're as you can tell, you know, they're very exciting. It is the frontier of, of, of biology and science.

Absolutely. No, these are, these are absolutely awesome. They're absolutely amazing. And you know, just just to be on that topic for another, another minute, you know, what do you view as the most viable intersection between software and biology?

I think historically it has been informatics in genetics, taking all the data that off of these systems, Illumina machines and others, and then being able to process them and find interesting sequences. But I think increasingly it's using the techniques that are coming from AI and machine learning and even natural language processing to interrogate biological data using software that historically was used for say image analysis or search. And I just think that making biology sort of machine readable is going to unlock a lot of capabilities that came from this other domain of software and is applying algorithms that work in all kinds of other software domains and turning it to biology. The flip side of that is a lot of people talk about biology almost like as synthetic biology or gene circuits. And it's true that there are pathways and there are circuits that effectively on, off and regulate and have logic elements to them. But it's an often misplaced analogy because biology is just way more complex than the linear aspects of predictable circuits. But I do think that we are in a moment these past few years, in the next few years where the degree and the amount of software techniques and algorithms that are applied to biology is going to be unprecedented. And it's going to, it's going to, it's unleashing a talent pool that never touched this stuff before. You know, you had chemists and biologists and people that were experts in fluidics, but only recently are you having software people pour into biology. And I just think it's going to unlock a lot of cool secrets, going.

To Be a big, it's going to be a big shift. And now speaking of shifts, moving on from specific industries, just getting your broader thoughts. So do public market valuations. And Marcel, how do public market valuations affect VC or PE valuations at the moment? And over the last 10 years we've seen a proliferation in the number of SaaS startups, software as a service. And over the next decade or so, do you think Web 3.0 startups are going to be the quote, unquote next big thing?

Say the last part, what is going to be the next thing?

So over the last decade we've seen A proliferation in SaaS startups of software as a service. So do you think Web 3.0 startups are going to be the next big thing after this SaaS era?

Okay, so valuations first venture, private valuations, lagged public market valuations on the way up and they will lag them on the way down. Public market, you have at times efficient, mostly inefficient markets, but you have a lot more people that are buying and selling for whatever their motives. And obviously when you have a diversity of buyers, you could have momentum people and growth people, you could have deep value people. But the diversity of buyers helps to create some sort of equilibrium or browbet. One is wanting liquidity, one is providing liquidity. Somebody is bearish, somebody is bullish. And so the increasing interactions are exchanges of information and expectations against whatever the company underlying fundamentals will be. Private markets are way more inefficient. You do not have short sellers. The incremental buyer of a private company is the price setter. That price may or may not be a fair price. It might be excessively high. It might have been driven by behavioral finance of winner's curse of somebody trying to win a zero sum dynamic. If you wanted to buy Microsoft and I wanted to buy Microsoft, we can both buy Microsoft. If you wanted to buy Icon, you can't. And so there's a zero sum aspect that makes these markets relatively inefficient. Now they become more efficient when companies are running out of cash. Because when companies are running out of cash, they need to go back to market to raise money in the private markets. And if there's not a lot of investors or some of the investors that were the top ticking price setters, the crossover funds, some of the large growth equity investors, if those guys are getting killed on their prior investments because maybe they were over really optimistic or allocated too quickly, then you're going to see price discovery happen at lower and lower prices. It is still a function of supply and demand, but I think that the supply of funds for some of these companies is going to crush prices. Now the second thing is we are not mark to market on a daily basis. And so whether you're quarterly reconciliation and FAS 157 or you are doing your annual reports, you market whatever the last round valuation was. Some people do some sort of option pricing, some people look at public comps, but these things are all over the place. And if you look at five different people in the same private company, they might be holding the company at five different valuations. And so eventually that will change. There might be rules or regulations or transparency through technology and self reporting and certain systems that everybody is on that changes that. Right now you're likely to see the private market valuations come down as some of the crossover investors like the fidelities and Morgan Stanley's and T Rowe's write their stuff down, part because they might manage $100 billion and a billion is in privates. And they write these things down because it just doesn't matter. And they're being more truthful and honest. And then you can't have an LP that might be invested in T. Rowe and an LP that's invested in whoever venture fund and be like, wait a second, these guys are holding this. Just wrote it down 75%. How are you still holding this at cost or at a prior write up? So the reconciliation of marks of valuations across different firms is something that I think will happen. It just happens more slowly in the private markets. In terms of SaaS, you've had things that went from a multiple of revenue, forgetting about even earnings to like 100 times revenue. And these things just sort of went insane. There was something to be said about the growth of some of these companies, but a lot of that has come back down to earth. And basic unit economics and fundamentals matter and margins and growth rates and how much cash a company has and how fast or slow it's burning it. All of that people just were not paying attention to because the availability of cash to continue to fund these companies into a narrative of growth really mattered. I've always loved Demodoron's shift, I think, and Shiller did this too, which was from pure fundamental analysis and discounted cash flows to incorporate narratives into some of the analyses. Anyway, I think that you're going to see a shift from overweighting narratives back towards fundamentals and going from passive indexation in markets where a dollar in meant buy and a dollar out means indiscriminately sell to a return of actual stock pickers. Which also requires belief because somebody comes up with a fundamental thesis and can disambiguate the fundamentals of a company from the expectations of the market or what expectations are implied. And other people can be like, oh, that person's right. You saw that historically, whether it was Dave Einhorn or Bill Miller or classic sort of value investors that were like, yes, there's an intrinsic value here that is observable and this thing is trading at 10% free cash flow yield and this thing's trading at 2 and the 10 is cheaper. It's just objective. You don't have to subjectively believe something. In terms of the next wave, the honest, intellectually honest answers, I have no idea. I internally have been advocating for us to call this sort of network systems or next gen compute and infrastructure. I don't like the buzzword Faddishness of Crypto Web 3. There are elements in the infrastructure piece of this that are clearly different. In some cases being reinvented. Some of that reinvention around systems are happening because of having studied history. In other cases the reinvention is happening with total naivete towards history. And they're just sort of reinventing things and coming across, you know, almost like the Chesterton fence, like, wait, why do we do. Oh wait, there's a reason that people did that. Right. And so they come back. So we're going to go through a phase of a lot of iteration and then you will have winners emerge. The obvious winners to me are not the level one crypto assets in Web three, as I like to say, compute infrastructure. It is going to be the custodians and the people that are solving real problems. So you've had Coinbase on the retail side, we have a company called Anchorage. On the institutional side. There are protocols that, not because of belief, intersubjective belief, but because the math or the performance or the computation of whatever they are doing to either analyze a blockchain or cross blockchains is just superior. And it's empirically superior in the same way that a computer chip or a memory would be empirically superior regardless of what you believe in. So I'm internally at Lux, more of a proponent that none of the investments that we're making should really depend upon the belief of other people. It should be objectively better and not like a brand or an NFT where it has value because other people believe that other people believe ad infinitum. Yeah, but I will say a ton of talent and really smart talent attracted maybe to narrative, maybe because they've seen people that frankly are not as impressive or intelligent as them. Making a lot of money has flooded into this sector and I see a bifurcation between what I consider true mathematician, computer science, infrastructure people and then like druggie burning man people that got rich because some friends gave them bitcoin and are just like talking, you know, making nonsense. They both coexist in this weird moment, but the former group are the ones that you want to bet on, right?

Absolutely. And you know, making a different point about infrastructure, there's just rather, you know, there's, we've just seen the growth of drones, self driving, etc. And you know, again, going back to the, going back to the point about regulation, you know, how do you view the regulation environment around the infrastructure and self driving drones? And on a broader note, just startups in general, what do you think are the biggest barriers to a lot of startups today and their success?

Government is always going to be a little bit reactive and there's two ways I see this. So first of all, drones versus autonomous vehicles to me very different in the sense that I don't really get the drone thing for delivery. We have a bunch of drone investments. But the idea of doing point to point things for drones, it just doesn't feel efficient. You know, autonomous vehicles feel efficient in that there's already known infrastructure, there are routing problems and I see in certain cities a very high likelihood of what I consider to be an infrastructure of almost a Cisco like router inside of the city. But instead of doing bits, doing physical goods, I think it'll be an Amazon like company that will be doing right hand turn lanes, just making right hand turns, you know, through the city and running routes to deliver things 24 7. And that could be your groceries, that could be packages, that could be people. But I see constant infrastructure running in right hand turn lanes that almost look like a bike lane for delivery of goods, services, inventory restocking throughout the day and the night. In some cases you still will need humans to load and unload. Eventually you'll be able to solve some of those edge problems, but they're too diverse at the moment in heterogeneous situations, but that I'm quite bullish on. When you look at something like Uber, Uber was just a better system, not a better company, not a better morality of how it was run, but it required the irreverence of a guy like Travis to push through and almost not care about the rules and regulations and Be willing to fight government or be sued or sue. And customers wanted it. Right? You don't want to stand on the street and raise your hand and wait for a taxi. You wanted to just pull up your remote control and press a button and conjure a car to wherever you were. And so I think that there's a lot of regulatory capture that seeks to prevent the disruptions that those kinds of things enable. And it's just a better system. And so, you know, long term, I'm quite optimistic that either the will of the entrepreneur who's willing to be irreverent or the will of the people in the demand that they have for a product is going to trump those regulations. And more so than ever these days.

Yeah, got it, got it. And when it comes to founders of startups, you know, how do you go about, I guess, picking, you know, picking the right founders or identifying founders who are going to be successful? What are the traits do you look for and how do you know what founders to back?

There's three traits that I really like, one, which is a psychological condition, and I've talked about this publicly, but I like to say that chips on shoulders put chips in pockets. People that have something to prove tend to have this resilience and this fire in their belly that it doesn't matter how much money they make or what they achieve, they're just not going to stop and they're going to encounter some adversity or some discomfort and they're going to power through it. And that is just something you can observe in people. I can see even in amongst I've got three kids and I can see which ones dispositionally and genetically almost are a little bit more resilient than the others when they can have sort of comfort with discomfort, the others that are a little bit less so. And then there are life situations that just, you know, you ha. You handle or deal with something and other things in life just pale in comparison. And so the examples that I've chronicled of people that I've seen common characteristic across diverse personal experiences, you might be the only minority in a mostly white neighborhood. You might have a learning disability or a lisp. You might have some physical deformity. You might be an obese kid in a Friday Night Lights kind of Texas town. It's something that casts you as an outlier. And then learning to deal psychologically with that on the one hand, and then not to become immune to it, but to become powered by it with this feeling of, I'll show them that you'll prove the haters wrong, that you'll prove the doubters wrong. I just think it's the revenge of the nerds that was probably started with gates and jobs 40 years ago. But I'm very long the people that have something to prove, you know, broken families, tragedy, adversity at a young age. And I've chronicled a lot of these people from, you know, Oprah to Alex Hunold, the climber. You know, there's something that's sort of broken inside them and for society's benefit, you don't want it fixed. So that's, that's one aspect of the chips on shoulders, put chips in pockets. The second is there's a lot of people that have that, but they're not persuasive. And if I push, you know, my coffee mug or technology doesn't push back. But people have their own agendas, desires. People are vainglorious and petty. They're jealous, they're sycophants or they're independent. You need leaders. You need people as founders of companies especially, that can galvanize and persuade people when something doesn't yet exist, that this is where we're going, come along for the ride. Sort of that Jerry Maguire moment without the cheesiness of it. But who's coming with me? And to get somebody to come with you, they've got to have their own stuff and confidence and risk tolerance, but they also have to really have conviction and belief and faith that somebody's going to lead them. And in a sense, a degree of irrational confidence, you know, is that quote goes, you know, all progress depends on the unreasonable man. And so you need people that are sort of unreasonable. And a lot of that is charisma. The women and men who can, you know, persuade people. So chip on shoulder, being very charismatic and being a great narrative storyteller. And the third thing is the sort of fundamental piece which is, do you know something or is there some secret that you have, or is there some technological capability that you have that gives you a true competitive advantage? Not just that you can bluff, but that you have some insight or some know how that somebody else does not have, that an equally competitive person would look at you and be like, oh, that's not fair. Like, I can't believe that they got that. They discovered it, they found that. And so those three things, I think are a really powerful cocktail combination of the grit to power through the ability to sell and tell a story and then actually having something for real.

Yeah. So chip and shoulder persuasion and a slight Edge. You know, Josh, you know, you're sort of very well known for your role as co founder of Flux Capital. You're lesser known as the trustee of Santa Fe Institute. So could you talk a bit about, you know, what cool things are going on with the Santa Fe Institute.

You know, they have been at the forefront of complexity science for decades. I was very fortunate through Michael Mauboussin, who chaired the Institute for a very long time, and Bill Miller. And I was really inspired by how people that were investors or investment strategists, who I admired and respected a lot, were finding insights in the foraging behavior of ants or the power law distribution of natural events like earthquakes that might be applied to the markets or the life cycle and evolutionary consistent laws that apply to small organisms or large organisms that could tell you about how long a small company versus a large company might live. There's all these sort of natural laws and phenomenon that exist that weren't being applied towards other domains. And that for me was very inspiring. And then you have these emergent phenomenon that are against everything that you learn in economics in college and high school about equilibrium dynamics, that many systems are non equilibrium. One of my favorite stories comes from Brian Arthur, who's a longtime Santa Fe researcher and fellow. And it's the El Farol problem where you are at this. There's a bar in Santa Fe called El Farol, and basically the thought experiment is you want to go, but you don't want to go when it's too crowded and you also don't want to go when it's too empty. Now if a sufficient number of people think that it's going to be crowded, then second derivative thinking tells you, okay, they're not going to go, which means that it'll actually be empty. Conversely, if everybody thinks that it's going to be empty, then you might actually go. But if it's critical mass of people actually believe that same thing, then they're all going to go and it's going to be crowded. And so this is in part a coordination problem. When you don't know what the other side is thinking. It's something that is a key attribute of markets. You don't know if you're buying from somebody, are they selling because they know something that you don't know? And how many derivatives of that do you go through? Almost like the Keynesian beauty contest. So these things tend to be non equilibrium. And I think their study of non equilibrium systems across everything from the communication of birds at different stratospheres of a forest or triple canopy jungle to the coordination of resources inside of our body and the implication of how the scale seems to be invariant and almost fractal from your aorta in your heart all the way down to the end effectors at your capillaries in your body that you can almost find a perfect mirror to of electricity coming from a large power plant, all the way down to the consistent end effectors that we know as wall plugs or the distribution of goods through a city or information through the Internet. Again, going back to networks and architecture, it's just this endless querying of natural systems and non equilibrium systems and identifying where complexity may exist and then making some larger extrapolations from it that end up, I think from a handful of practitioners being applicable. So it's a super inspiring place and I feel very lucky to be a trustee there.

Flexisense is absolutely super important. It's super exciting, super interesting. Anyway, to wrap up the podcast, Josh, any closing thoughts?

No, I just. I am so impressed with you. You are? How old are you now?

I'm now 18.

It's just incredible. I mean you are destined for just amazing things and from your grasp on public markets and investing, which presumably comes from a personal obsession to understanding what I think is probably the most important thing, which is what's BS and what's real. And there's so many people that waste so many years being lured into some area and then only to discover years later that oh my God, that's total nonsense. But I think you've had a great nose for intelligent, rational, almost scientific, empirical thought, whether it's in markets or human nature. And I'm very long you so that's my parting thought.

Thank you so much. That means a lot coming from you. And you know, thank you so much for being on the podcast, Josh.

My pleasure. Good to see you. Thank you for listening to Market Champions to Never miss an episode. Make sure to subscribe and we'll see you next time.