Eclectic Convergence 2022: A Fireside Chat with Josh Wolfe '99, Co-Founder, Lux Capital

Josh Wolfe, thanks for being here. Good morning.

It's good to see all of you. Um, and, uh, And I think Zach said it right. I mean, there are— it seems like there are a lot of VCs in the world these days, especially. But Josh, you've always stood out to me as one of the most innovative VCs that's willing to go to the edge of what's next, someone I really look up to and a friend. So I have a bunch of questions. We'll also try to save some time for any questions from the crowd, if that's OK. So maybe give us a little bit of background to start with. I know you're from close by. Tell us a little bit of background of growing up and how you found your way to Cornell, and maybe what led to Lux Capital.

I grew up on a different island, which isn't actually a real island. It's Coney Island, which is South Brooklyn, not actually surrounded by water beyond the south. And I grew up with a chip on my shoulder. I did not grow up with money. My mother was a public school teacher, single mom. And we lived with her parents, my grandparents, 4 people in a 2-bedroom, 1-bath apartment. And when I got to Cornell, for me, it was eye-opening because I, for the first time, saw peers that actually had money and went on fancy vacations and had passports. And I didn't have any of that. And so that was, for me, a great motivating factor. And since that time, I think I was always drawn towards finding the underdog, finding somebody that had the chip on their shoulder. I always say that chips on shoulders put chips in pockets. And no matter how much money somebody makes or entrepreneurs achieve fame or mother, I find that they have this perennial fire inside that they just want to sort of prove other people wrong. So I actually like really disaffected, almost maladapted people. My best friends in college were people that were just a little messed up, you know, and came from broken families. And it's interesting because all I wanted in life was a stable family, which I now have, having met an amazing woman at Cornell who would never would have dated me. Like, she only dated 6-foot-3 jocks. I'm 5-foot-nothing. I grew up in Coney Island, only dated Latina girls. She wasn't. It was just super bizarre. But her name is Lauren Taylor Wolfe, and she runs a very successful fund. We've got 3 kids, and that to me is like the ultimate success. Lux for me started because when I was in high school, I had seen a movie called And the Band Played On. And this was a movie about the AIDS crisis. It was an all-star ensemble cast. And being sort of reasonably precocious and ambitious and totally naive, I said, I'm going to go cure AIDS. And I entered into the then-Westinghouse Science Talent Search. Westinghouse. I think would become Intel, and then Siemens, and maybe IBM. It was always predictive that whoever the corporate sponsor was of the Science Talent Search sort of presaged their imminent irrelevance as a company. It was like a curse. And—

CEOs on the golf course, basically.

Totally. It's just like a negative signal. And I met this guy Dominic Ossie at a lab at SUNY Downstate in Brooklyn at 450 Clarkson. And I wouldn't take no for an answer, because he's like, you're 13 years old. I can't let you work at a lab. And I ended up working there. And what was interesting is we'd be spinning down a centrifuge of AIDS blood working on this area of urokinase, a protein kinase inhibitor. And I was learning how to publish scientific papers and conduct assays. And he was making tens of thousands of dollars trading futures and options. And I didn't know anything about markets. I mean, I literally didn't know what the stock market was, how it worked. I didn't know about options. I didn't know the difference between a stock and a bond. I didn't know what a trader was, a banker, like none of that, you know. And he gave me this book, which was the sort of the giveaway book you get when you subscribe to The Wall Street Journal, just like back in the day when you subscribe to Sports Illustrated, you get the football phone or something. And it was like the Wall Street Journal Guide to Money and Investing. And it had pictures and, you know, talked about how stocks and bonds went up when interest rates— and I became obsessed. I became obsessed because I wanted to make money. And Cornell for me then became sort of this mix of science and finance. And then when I graduated, I went into investment banking. I stayed for 9 months. I wasn't even smart enough to collect my first-year bonus at Salomon— uh, Salomon Smith Barney. And, uh, I started Lux with, with another partner. And I got very lucky. I met a guy, Bill Conway, who's one of the three founders of the Carlyle Group. And I don't know the circumstances of what his morning was. I always say that randomness and optionality governed my life. And post facto, I can look back and connect all the dots. But we pitched him and said, we want to start a venture fund. We want to do it in an area that people are not looking at. And he said, I hope you make a billion. And he was just primed that morning. And it was one of the most important things in my life. There was no path that I could point to to say if I would have taken this class or I would have done this. Getting to him and then him saying yes was just amazing. The history of venture was every 10 or 15 years, there was some secular wave in technology. In the '70s, it was personal computing. In the '80s, it was biotech. In the '90s, it was TMT. And our working hypothesis was that the next wave would be the physical and material sciences. And so we said, let's go to the academic centers where you had Nobel Prize winners at Rice and Georgia Tech and Cornell and Michigan and other places that nobody was really paying attention to. And we started the firm on that.

And that was during— was it during a bust cycle that you started the firm?

Exactly. And yeah, so basically, Basically, dot-com bubble had bust. And people had the bumper stickers, please, God, let there be another bubble, just to sort of let the phenomenon persist. And yeah, we were born in that. And it's very instructive to what I think the current moment is in venture. Maybe we could talk about that. And we spent the first few years basically building a platform to be able to access the best companies. And people were like, who the hell are Josh Wolfe and Peter Thiel? And what is Luxx? And so we needed to create some stuff around us. To be able to win deals. And we ultimately did that. And we started with a pledge fund that was under $10 million from Bill Conway. And then we tried to raise a $100 million first institutional fund. And we failed. We got $92.1 million. And I say $0.1 million because I remember every single person that ever invested with us. And more importantly, because of my nature, I remember every single person that ever said no. And that was a huge driving force. And to this day, I remember— and sometimes I see these people, and I wave. So that, for me, is a great motivator. But today, we're $4 billion. We're 30 people in New York in Menlo Park. We've got 200+ companies, and we do everything from aerospace to robotic surgery to cutting-edge AI and ML and Nobel Prize-winning microscopy and biotech. And I just get to have a lot of fun with—

Well, we'll get to some of the stuff you guys are doing and also some of the views you're taking. I'm curious, just, you know, we're all kind of in this market now wondering what's up and what's down. And obviously, you know, it's often said the best firms and also a lot of the best companies start in periods like this. But maybe you could give us a sense of what your take is on the current kind of capital environment, market environment, and also what are the implications for entrepreneurs in the room?

Well, uh, we've had a decade where capital was abundant and it was relatively low cost, and valuations therefore were very high, and that is all reversing. Uh, the cost of capital is very high. I believe psychologically people will go through basically denial, anger, bargaining, depression, acceptance, and those will be reflected in the terms. And I'm already seeing that, um, in the terms that we're giving companies, or in some cases part of our syndicates are, are in trying to invoke on us, and I'll describe what that is. Q3 of 2000, to me, is the closest analog or proxy. Between March and sort of December of 2000, the market had broken. Stocks were down 50%, 60%, 70%. It was sort of like a ball that was bouncing until you had lots of volatility directionally down, and then eventually, people sort of gave up. And then you had about 5 years where you had the rise of long-short hedge funds, people that were able to identify and actually read balance sheets and income statements and 10-Qs and 10-Ks. And you had long investors that were finding compounders, and you had great short sellers that were finding these terminal zeros, and fads, and frauds that had been funded with the excess capital. And that same environment exists right now with a market structure that went from active investors to passive, huge amounts of indexation in both public and private markets. Sort of Cathie Wood ARK is the poster child of the public markets, and Tiger and others in the private markets just sort of buying the entire sector. And so now that has cracked. People always ask, you know, is it better when you have abundant capital or scarce capital, when interest rates are high or low, for innovation? And the answer is it doesn't matter, because if you are working on something that is truly cutting edge, you will get funded. During markets where there's tons of cash, everything gets funded, and your failure rate is much higher. 90% of those companies might fail. A lot less ends up sticking to the wall. When capital is scarce, very fewer things get funded, but really the best things end up getting funded. It's more rare that you see the thing in which today you might look at and be like, really, you need 6 15-minute on-demand delivery services? Which, by the way, I want to exist because as a customer, they're great, just not as an investor. So that's the environment. Talent got dispersed amongst many companies that were getting funded. The cost of talent was rising as everybody was competing, and that is all abating. And so, you know, I think that's sort of retrenching. My most contrarian take of the current moment is that we're going to see very significant layoffs that are rolling. You had sort of 15-20% cuts. I think those are going to go much deeper with growing social proof as other companies do it and it becomes the rigor and norm. And then I think you end up in Midtown, not only are offices back, but people end up going back to suits and ties. It's going to be a signal. And I say it like half-jokingly, but if you were at home in, you know, I don't know, Merrick, Long Island, and you care about your community and what people are thinking about you, and suddenly, you know, the spouses start talking and they're like, is he working? Was he laid off? Is he working from home? And so suddenly you start signaling and saying, no, no, no, he's going I'm working.

I'm wearing a tie, of course I'm working.

I don't know, you know, Joseph A. Banks or something.

Yeah, I mean, I think that's a great point. I feel like, you know, if one of the secrets of the best companies is sticking together long enough to figure it out, the lack of whoring headlines and headhunters every day calling all of your people, I mean, these are probably all positive factors in great companies being built right now.

Totally.

So, every time you and your team do an investment, Josh, I'm always excited because it's always It's always something bold. How does that work? Give us a little sense of the investment areas of interest, how those areas change over time, and how you as a team sort of determine what's an interesting space.

The two main ways are either we find some amazing entrepreneur who is telling us, this is the way that the world ought to look. And sometimes people would consider that arrogance of the highest order, and we just are inspired by it. The other time is that we identify what is the consensus view in a market, and then we try to find the variant perception. What is the thing that other people are missing. And so that to me, because of my own personality and disposition, is something I'm primed for. You know, whether it's in art or music, I'm always looking for like, what's the thing that other people aren't talking about? If it's a scientific area or technology area, I read 5 papers in the mornings. I read USA Today so I can understand what the masses were getting, you know, when they wake up in a Marriott. I read the New York Times, the FT, the Wall Street Journal, Daily News, New York Post, and I'm just constantly trying to ingest information to understand like, what is everybody talking about? And then what's the thing that nobody is talking about? If it's on page A1, it's not relevant to me. It's like everybody knows about it. If it's on like C22 and the editors have said like, this is not important, but then I have a variant view that this is actually really important, it's a signal for me. And then the same thing in scientific literature. I read Chemical Engineering News and Proceedings of the National Academies of Science and Science and Nature. And I'm basically looking for like the weak signals that other people haven't yet discovered yet. And so there's certain directional arrows of progress I become obsessed with. And that's just zooming out and saying, okay, where has something trended through history? And those arrows do not point to the specific entrepreneur or the specific company, but they give me a reasonably high conviction that that's the way that things are going. So examples of that, lighting, we went from fire to incandescent bulb to LED. We're not going back to offices with sconces and torches. Transportation, we went from walking to riding horses to horse-drawn carriages to cars to electric cars to autonomous electric cars. We're not going back to horses and shit in the streets. Semiconductors and compute, we went from mechanical gears to solid-state everything in both memory and processing logic. You went from CPUs to GPUs and this sort of trend of the adjacent possible of technology that was being used for gaming that is now being used for AI and ML processing at scale. And so there's certain directional arrows. One of the big ones that I got very excited about was something— and I always come up with narrative constructs internally because we're storytelling mammals. And the story that I told our partnership was this idea of the half-life of technology intimacy. And I just looked back and I observed, okay, 50 years ago, I'm going to give you every half-life here. 50 years ago, we had a giant ENIAC computer, probably 3 times the size of the stage. A man was standing and pulling plugs and levers, but physically interacting with this monolithic behemoth. 25 years, the first half-life, you now have a desktop computer, which was the dominant form in the '80s and early '90s. You're tickling the keys. You have a mouse under your palm. You press the beige box of the monitor. You flip the switch on the back. Next half-life, 12 and a quarter years. Now you have a laptop. It's physically touching your thighs. Your mouse gives way to a trackpad. You're still tickling the keys. Then you have an iPhone separated by your body by a thin film of fabric. Then you have an iWatch, 3 and a half years ago, AirPods with compute and AI and ML. The directional trend, undeniably, was that technology was becoming more intimate with you and more humane, more human, more natural, less of you hunched over a QWERTY keyboard. So the two obvious things were how we are communicating now. I'm gesticulating. And voice. And so voice was already dominated by Amazon with Alexa and Google and Siri and Apple. But gesture was interesting because gesture was really limited to fixed cameras from depth-sensing perception cameras for Just Dance or Dance Dance Revolution that my kids would use. And I ended up sharing this thesis and a Columbia professor, Charles Zooker, said, you got to meet this guy, Thomas Reardon. And Reardon invented Internet Explorer, was Bill Gates' right-hand guy through the '90s at Microsoft. And then at the age of 33, basically retired and did what anybody normally at 33 that was rich and technologically renowned would do. He went and finally got a college degree. And he got an undergrad degree at Columbia and then went in classics and Latin and then spent 8 years getting a PhD in neuroscience. And he studied the myoelectric response, which was basically how do you detect the 14,000 neurons that innervate the roughly 15 muscles that let us type at 100 words a minute and play piano and gesture and whatever. And so, I saw this and I was like, holy shit, this is the future. He is able to control the machines around him by just gesturing. By going like this, he could turn on Spotify and go like this, he could change the song. And going like this with a gesture, he could raise the volume and he could turn off the lights. So I became obsessed. And that was an example of something where I had a macro thesis of the way that something was going. I had no idea that Rearden existed, that this technology was a thing. We became their lead investor. And then we fought off one entreaty from Zuck and Facebook/Meta and then ultimately sold for just under $1 billion 2 years ago that is now the sort of kernel of Meta's approach to getting around Apple and Google.

It's interesting that there are these trends in technology that everyone suddenly starts to talk about. I mean, I know audio interfaces is one of them, and everyone was convinced that every single experience in our life would have an audio interface. Didn't play out necessarily. And you alluded to that. More recently, the whole notion of everything becoming decentralized, and every single part of the economy and every marketplace is gonna be a Web3 reincarnation. How do you, so when you start to see one of these mass trends, right, even in our little world of technology, you have to ask yourself, is this just a train everyone's getting on and no one's asking the right questions? And sometimes it is a trend and sometimes it isn't. Talk a little bit just about the process your team goes through. Is it really anchored in kind of psychology more so? Or, you know, and are you, and you're just, it sounds like you're pushing yourselves to take a contrarian take just for the exercise as well.

Yeah, and we don't want to be contrarian for the sake of being contrarian. We actually say that we want people to agree with us, just later.

Right.

And so, so take an area like, you know, you pioneered sort of the democratization of people being able to design and promote their work and create an entire economy about that. You were responsible for one of the historic acquisitions now with Figma and Adobe, you know, $20 billion. And, you know, I mean, incredible, right? And sort of eye-opening. That is concurrent with a movement that is happening right now around generative design, computational creativity, something that you've really helped to push forward in a variety of very important products. And so that is an area where my team right now is looking and saying, okay, what does everybody know? Well, everybody is following DALL·E and Midjourney and Stability AI, Stable Diffusion. These are the diffusers that are able to ingest basically every art image, photography, bit of architecture ever produced, and then be able to generate those with simple text prompts. And the quality of that is amazing in part because it is an open source movement. And so we're looking at that and saying, okay, what are the different levers and what have people now figured out? So, you know, a ton of companies are raising money right now as sort of the front end of that. You've got the big giants, which are basically Amazon with AWS, Microsoft with Azure, and Google with GCP. That are benefiting from the demand on the cycles of the GPUs that they have in their server centers to generate these things if you're not running the algos locally. You have the NVIDIA chips, which are still dominating. But we're trying to figure out where does this go next that people are not looking at? And so what started with static images, we have a company RunwayML here in the city that is doing this for video. It's—

Great team, by the way.

Maybe you buy them for $20 billion. Is stunning creative work that is taking the work of a video production designer that might have spent, you know, 3 weeks on something and can do something literally in 30 seconds by just saying, make a movie that looks like Wes Anderson with, you know, a chicken crossing the road or whatever. And it's just like, it pops up and you're like, holy shit, that's amazing. So as the old quote that any sufficiently advanced technology is indistinguishable from magic, this feels like magic. But then I say, okay, where can this capability of ingesting large amounts of data and being able to generate stuff go next. And I think in biology, it's really interesting. So for drug design, for being able to design a protein that can fit into a pocket of a drug, of a target, that's an area that we're spending a lot of time where the hype hasn't yet come, but I know it will.

Yeah. I mean, it's interesting you bring up generative AI. So this week, we were doing all of our product launches out in LA. And one of the top questions I was getting from customers, but also from journalists, was really around the ethics of all this. You know, this, it's, it's almost like we were all for the last, you know, couple decades sharing all of our content and images and illustrations and everyone's putting everything online and immaculately tagging it and organizing it so that these, you know, the billions of images and, and, and metadata could be scraped and then used to train models that are now potentially putting these creatives themselves out of business. And so the question is, should, you know, is that okay? Is it not okay? You know, and, and when is it okay? And, and, and also of course companies like Adobe are thinking, well, what are our policies around this? Do there need to be certain types of clean models or should we just kind of lean in and say this is just the new world? When you're looking at investments that are transformational in this way, I mean, you've done stuff that certainly has implications from a geopolitical perspective, from a biohacking perspective, from, you know, all sorts of angles at the edge of tech. How do you navigate some of the ethical implications and, you know, how the net benefit is to society as you make those decisions?

So there is a key question that we ask, and it's created a lot of internal debate because one of my partners has said you can twist yourself in a pretzel sort of justifying anything that we do. And I'll give you some examples. On that specific one that you were just describing on the ethics of sort of artistic expression, putting it out into the public domain, people, you know, being able to profit off of it or not, My view there, and sort of at a meta level, code used to be very siloed inside of companies. And then this open source movement, that's really a two-decade-long thing, you know, starting with the Cathedral and the Bazaar. That was a book that sort of talked about Red Hat and Linux and the rise of this. That enabled basically this open source art movement. And I think that it's a net positive because it is democratizing access. I can't draw.

Yeah.

I mean, if you said, Josh Wolfe, draw a picture of your family, you'd see a bunch of sausage people that look like a 5-year-old drawing. Like, my 6-year-old can draw better than I can. I can't do vector graphics. But these tools have democratized my ability with a very detailed text prompt to generate and communicate something. And I think that that is a sort of net positive for humanity. I agree. So to me, the moral thing there is like, is it somehow, and this is the baseline that we use for everything, is it reducing human suffering? Now, is producing art reducing human suffering? I don't know. But certainly it's freeing and democratizing the ability to express yourself using a tool. The question of who profits from this, how do you capture value, is a harder one. Because just like Wikipedia, which is a net social good, but certainly killed World Book and—

Britannica and whatever, yeah.

And Carta. Those things will just evolve over time. And people will sort of be drawn towards new models where they can exploit these things. And sometimes, the currency is not financial. It might be social status. It might be stars on GitHub, so that kind of stuff. Now, on the more serious stuff that we fund in defense, we are in companies where the CEO, CTO sat us down before we funded, a company called Anduril, and said, are you comfortable with this technology being used in a kill chain? That is very different than AI that's generating art. And our view was, in many of these technologies, whether it's AI for aerial surveillance or drones or satellites or things that we do in aerospace, if you can disambiguate, if you can distinguish between a farmer that has a pickaxe on his shoulder and is going home to his kids and a guy with an AK-47 that's going to a school That is a virtuous discrimination. Um, and there was a movement that started, I don't know, 10 years ago, maybe less, that was really rejecting the idea of technology working with DOD, Pentagon, U.S., and our allies. And, and I think that that's very misplaced. I think that there is a moral obligation for the women and men that are on the front lines to have defensive technologies, deterrent technologies, superior technologies to peer adversaries that, as we see with Russia and Ukraine, legitimately want to do bad things. And And these are all domains. So it's air, land, sea, space, and in some cases, disinformation, information, being able to detect that. And we have no less than 6 or 7 companies that are involved in global conflict right now that I think are doing, you know, I'm an atheist, but proverbial God's work.

Do you, so one of my favorite conferences I ever went to was this Mars conference, the one that Jeff Bezos hosted years ago, where half the participants were people in tech, and then half of them were science fiction writers. And my takeaway was really that science fiction is the prototype of the future. And when you see these folks who have no— they're not afraid of the laws of physics, and they have no concerns about the cost of developing technology. And so they truly imagine what's possible. And then you have everyone else in the room being like, how is that possible? And you start thinking about it. But maybe you could talk a little bit about the role of science fiction from an investor's perspective. Also, if you could, share a little bit about this, the investment that you made around the Shazam for smell and the implications of that. I thought that was really cool.

So I have a view that sci-fi and sci-fact basically are shrinking. The gap between that which was once imagined by a kid, a sci-fi writer, an author, a novelist, a graphic novelist, a movie maker, and a scientist keeps shrinking. And oftentimes when we talk to the engineers and founders, the scientific ones especially, and you say like, what inspired you to do this? They will say literally like, I saw this in Star Wars or Star Trek and I wanted to make that. Whether it was the replicator or it was robotic surgery when Luke Skywalker's hands cut off off by Vader, we ended up funding a company called Auris Surgical Robotics that literally looks like those same kind of robots. We sold it to J&J for $6 billion. And the founding scientist would literally say, like, this is what I wanted to create. So it's crystallized imagination. Somebody has an idea, and then they want to make it so. And if it obeys the laws of physics, there's no reason that it can't exist. And so anything that somebody can imagine that can obey the laws of physics, the only gap, the only reason that there's a gap is we don't yet have the knowledge. We have ignorance about how to make that. Or maybe it's too expensive. But that's our job, and that's society's job, is to basically solve the problems of how you do that. Now, often the solutions come from like weird adjacent areas that you don't expect. Like, nobody thought that, you know, making high-end processors for PS4 and Xbox were going to lead to this revolution in AI and ML. It just was never, you know, on the roadmap. This is another directional arrow of progress, the idea of digital olfaction, capturing smell. And it's one of those things where I just look at my phone and I'm like, this thing can capture two of my major senses. It can capture my sight and it can capture sound, but it can't capture smell. It turns out that, you know, when you investigate that problem, sight is basically 3 vectors, it's RGB. You can do very high resolution, you can do multiple frames, you can do slow motion. And we've solved that over time. But recording, you know, effectively sight gave Kodak a monopoly for nearly a century. Then you wanna be able to play it back as well. Same thing for sound, which is really a two-dimensional. You have a frequency and amplitude wavelength. But smell is a lot harder. It is between 40 and 400 different dimensions. And most of it that we've seen, and I've been looking at this for 10 years, just imagining what if you could record a smell? What if you could walk into a room and capture the smell of a meal, a wine, the nostalgia of a loved one, the smell of a shampoo, something that sort of in the Proustian sense of the madeleine takes you back to In Search of Lost Time. And there's no reason that physically that couldn't exist. We know that dogs can detect COVID and cancer and Parkinson's, early signals of epilepsy, and we can't, and machines haven't been given that sense of smell. So there were two vectors of approach. One is a hardware approach, looking at how do you take mass spectrometry, which basically is a destructive way of looking at a molecule, and how do you do ion mobilizers, which if you go in New York City subways, they're sampling the air, sometimes for, you know, environmental, sometimes for bomb. And is that going to continue to shrink? And the answer was yes. But the big breakthrough, and this will be announced publicly in about a month, was a large tech company. Somebody, as I shared this, pointed me to a researcher. And that researcher had been an entrepreneur and went back into academia, very Reardon-like. And I approached him and I said, I want to spin this group out. And there was 11 people and they had key IP and it was mostly on the ML and AI side, the ability to go from a structure, a molecular structure in silico in a computer and predict what it would smell like if it had never even been synthesized. So he can make something and say, like, this is going to smell like dog poop and vanilla. And then you could actually synthesize it. And a French chemist at Givaudan Ferme-Niche IFF would be like, it smells like dog poop and vanilla. And so I thought that was wild. And then so we structured a deal and a founding round. I synthesized a $60 million Series A that'll be announced in a few weeks. And the company will be called Osmo. Greed for smell. And yeah, I think it'll be historic.

I feel a lot of technologists and artists will be really creative with that because smell conjures up memories. I mean, there's so many implications to the sense that—

And I have no idea, right? I always love the Kevin Kelly quote that the key question to ask is not what happens when one person has a capability, but what happens when everybody has it.

To the point about democratizing creativity and what is the benefit for society. Uh, so I remember understanding 3 primary parts to the Lux Investment Playbook. There's the protective bubble, the anti-bubble, and consolidation. Can you walk us through just what those mean?

This is a playbook we have for the current market moment. Um, each one of these is basically how do we allocate capital and build a portfolio. And there are 3 different strategies. And my view is that in this current market moment where capital is scarce, you have an entire generation— I'm 44 years old, but there are people that are basically 37 and under who have become VCs— that arguably 15 years ago, which was the last crisis, '08-'09, it was a debt collateral liquidity crisis. It wasn't really an equity bubble burst. And then people say, well, we experienced an equity bubble burst in March 2020, and that wasn't— that was massive fiscal and monetary intervention that created the most speculative fervor we've seen since 2000. So if you're sort of under 37, unless you're a great student of history, you never viscerally felt down rounds, riffs, reductions in force, recapitalizations, people being laid off, watching people go back to the office in suits, like that kind of stuff. And I think that that's coming. And I might be wrong, but we're primed to expect that it's going to get really bad for the next 2 years. I think we're going to have a very deep recession. I think that the Fed will not blink until inflation is on paper, you know, sub-4%, 3.9% or something. I think unemployment is going to hit 6.5%, 7%, 7.5%. And I think that companies which have had peak earnings for a very long time are going to be laying off a lot of people. So pain is my view of what's going to happen for the next few years. Against that backdrop, the 3 strategies that we've sort of prescribed internally— and anybody can apply them, but I think we're sort of uniquely good at this— is bubble, anti-bubble, and consolidation. Bubble is not hoping for that bubble like that bumper sticker, please God, let there be another bubble. It's saying, let's put companies in a protective bubble for 2.5 years, 30 months of cash. So like that company Osmo that we're spinning out of a big tech company, they can withstand, because they're in a protective bubble, the volatility and vicissitudes of the market, geopolitical chaos, Putin, Ukraine, China, Taiwan, resurgence of Trump, domestic chaos, whatever is happening, they will be well-funded and can basically in a bubble and then come out of that at the end of 2 and a half years. And whoever's on the other end of that, it's not going to be SoftBank and Tiger as the growth investors. It'll be a new class of investors. They will look and say, oh my God, these guys have created magic, right? They are the only game in town that has done this incredible technological thing. And that could be in detection of smell. It could be some breakthrough biotech, some new cancer detection, whatever is, but like it should be magical. Second piece is anti-bubble, which is now that the bubble has burst, even if people are not fully seeing it, you have great companies with great talent and great fundamentals and really impaired cap tables, meaning their investors might be overextended, they might be under-reserved, they might have been putting money out very fast thinking that they're going to go back and raise more money. But I can tell you, LPs are being flooded by GPs that are coming back and saying, we want to raise our next fund. And people are saying, well, Well, your marks are on paper and we've got 20 funds and we're already overallocated for the entire year. And so can you come back in 6 months? And so the availability of limited partner capital is going to start to shrink. And so we are looking not only for companies, but looking through the companies at their balance sheets and saying, okay, how are the balance sheets? Are they good? They need to raise money, even though sales and everything else look fundamentally directionally good. What about the cap table? Who's on there? And when they need to go do another financing round, Are they going to participate? Chances are a significant number of good companies have really bad cap tables. And so we're looking at this and saying, OK, we're going to come in, go back to the denial, anger, bargaining, depression, acceptance, the 5 stages of grieving. Companies will go from, hey, we need to raise some more money, so we'll do it in extension to the last round. No thanks. Next, we'll do some sort of positive inducement. Scott, why don't you come in as an investor? We'll give you preferences, liquidation preference, so you get your money out on top. You're senior in the capital structure, and we'll give you some warrants as an inducement, as a carrot. And you might say, no thanks, because you know you can get a better deal. And then you start looking and saying, there's people that have been in this company for 6, 7 years. And it's great that they got in at a really low price, but I'm not carrying their weight. So now you put in negative terms and pay-to-play, which basically says, if you don't pay, all your preferred stock's getting converted to common. And that will start probably at a 1-to-1 or 2-to-1 ratio, and then end up at 20 or 40-to-1, where people are getting totally crammed down and washed out. So I think that there's going to be a lot of restructuring. And this anti-bubble strategy is basically find great companies that are more mature, later stage, but at early stage prices. The last piece is consolidation, which is basically I'm always looking for— and it sounds sort of scientifically hand-wavy, but like, to me, the most important thing in life aside from like a good nuclear family is entropy and fighting entropy. It's what keeps us alive. You look at it in relationships and companies, you have to constantly put energy in. Any time there's a gradient, gradient. Some system is existing to basically destroy that gradient. And so I look for where is there an abundance of something and a scarcity of something? Where is there going to be this sort of stock and flow where something's going to come in and disrupt that? And right now, there is an abundance of companies that are going to need cash and a scarcity of cash. So if you have a company that has a lot of cash on the balance sheet, the logical thing for them to do is consolidate their sector— buy talent, buy teams, buy channels to market, buy technology. Take that dispersion of 20 companies that went into a sector and reconsolidate it so that there's 2 or 3. So Anduril, a defense company, has $1.8 billion of cash on their balance sheet. That's a lot of money. And they've already done 3 acquisitions. We sent them one company called Dive Technologies that was an autonomous sub. They acquired them in Q1 of this year. 60 days later, Australia gave them a $100 million contract because they're an island nation that cares about freedom of commerce and, and seas. And that'll probably end up being a billion-dollar contract over time. Um, we have another company called Eikon, E-I-K-O-N, based on Nobel Prize-winning work of a guy, Eric Betzig, who invented a crazy microscope that lets you see inside of cells in real time. Guy Roger Perlmutter, who ran Merck and Amgen Research, is the head of that. He raised $500 million in a few weeks, is out raising another half a billion to a billion dollars. And that's at a time where you have 800 publicly traded biotech companies Half of them have less than 2 years of cash. 75% of them are below $250 million market cap, and a quarter of them are trading at negative enterprise value, below their cash. He's going to go in systematically and say, OK, you've got 10 programs. Your board is telling you, you've got to cleave 8 of them and focus on your 1 or 2. And he'll be able to systematically consolidate the entire biotech sector. So those are the 3 strategies of bubble, protect them for 30 months, anti-bubble, late-stage business, early-stage price consolidation, strong war chest balance sheets. Are going to beat weak cap tables.

Yeah, it kind of goes to the being greedy when others are fearful, I guess. So what do you think, what would you say is something that you truly believe is overhyped right now and one thing that you truly believe is underhyped, like no one's talking about it, but we all should?

Overhyped for me definitively is quantum computing, fusion, anything that the government basically says is important. They're just always wrong. And I think quantum computing is fraught with fraud. It's what I call ignorance arbitrage that people are basically exploiting, that nobody wants to not admit they don't really understand what somebody is talking about. But I've just seen really nothing useful come in that space. You know, AI has a, has a ton of hype, but there's some merit to it. And it's more interesting. It's like, where is it trickling into ecosystems where it hasn't touched yet? And so in biotech and tech bio, inside of labs, drug discovery processes, there's just a lot of interesting talent where computer scientists are coming into biology. Probably the most underhyped thing where we're deploying capital is in what I call the tech of science, which are the instruments, the tools, the microscope. Some of that is hard asset stuff. So even in an inflationary environment, it's actually a good place to be. But labs will be entirely automated. It will start with sub-50 basis points of global experiments. It'll be a tiny fraction. 99.5% will still be done by humans operating machines. But we have one company called Stradios. That's based in San Diego in the Valley, and it's just amazing. It's like, so here's a perfect analogy, okay? If you were a musician, you used to have to go to a studio and you needed to rent time in the studio and you needed your equipment and your guitar and your microphone and your bandmates and your drums and whatever. Now you pull up, you know, Logic Pro Tools, GarageBand on your iPad while you're on the beach in the Bahamas and you can write a song. Yep. You can't do that with science. Yet, but increasingly the scientific environment will become virtualized and automated so that we can be on the beach in the Bahamas and dial up an experiment and the robots and all kinds of liquid handlers and everything else can perform those experiments. And then the data that's coming off of that, and this is where I truly believe the future is going, will, in the same way that we are producing prompts to these AIs in text to say, you know, make me an image of Scott and Josh, you know, Cornell doing whatever, they will prompt scientists with hypothesis generation and basically say, based on this data, plus looking at the annals of scientific literature, you know, have you thought about doing this experiment?

Right.

And I think that that's going to be the future of science and it's going to unleash productivity in the scientific realm. So the tools, instruments, software, hardware going into that is, I think, underhyped today.

So we're kind of reducing the entry cost and helping, you know, in some ways scientists should just constantly be disproving things. And be disproving things that are being presented to them based on the data. And, you know, and also the dots being connected as opposed to all these experiments going on in parallel that no one, you know, each other don't know about. You know, those efficiencies brought to the system could be transformative.

Yeah, and you want systems to be relatively inefficient. You want competition among scientists doing redundant things. And scientists truly are like the most brilliant people, but the most vainglorious thing. Like the best thing about the scientific process is that if you come up with a breakthrough, there is somebody that is like, screw that guy, I'm going to prove him wrong. And in the attempt to do that, you generate conjecture, I generate criticism, and then we get closer to the asymptote of truth.

Science. OK, we have 5 minutes for questions.

Questions, absolutely. Raise your hands.

Yes, Mike.

I promise I'll speak slower. I just wanted to know how you actually gain knowledge in multiple different sectors. Like, how did you diversify your knowledge? I want to understand where the process starts. And how you can actually streamline that process. I am very intellectually competitive. And so if I meet somebody, even today, I'm sure I'm going to meet somebody and they're going to be like, oh, have you heard about this? And I'm like, no, I'll be intellectually honest. And then I will immediately go home and be like, I need to know more than that person about that thing. And so it's like, you know, my— and by the way, it's all born from insecurities. And like my— and I'm aware of those insecurities, but I'm very motivated to like be smarter than the next person about some area. And so We've done stuff in nuclear waste or in digital olfaction. I didn't know anything about those spaces. I start talking to people. I learn enough from one scientist and then I take that and I can sort of parrot it to the next scientist. They're like, "How do you know about that?" And then I learned something, but now I've learned two things that the first guy didn't know. And so I'm just very insatiably curious. Knowledge is always expanding. So there's always this— even lux is Latin for light. There's a circumference of light. On the edge of that is ignorance and it's just never going to end. So hopefully I get to do what I do until they wheel me out of here with senility. But yeah, I'm just sort of intellectually very competitive. And when I find somebody that's smarter than me, if I can't fund them, which is the best thing, then I just sort of want to beat them. It's interesting because the ability to absorb all that knowledge, I think, is just absolutely incredible that you have. I mean, you're rare. Absorb all that knowledge. There's a lot of— you don't think yourself as rare.

You gotta keep the chips on the shoulders. This is important for Josh and for the world.

One of the things also is reasoning by analogies. And so you've probably heard me use a bunch of analogies. And they're literally stories I tell myself, right? And I'm like, oh, it sort of looks like this thing. And they're imperfect analogies. But I think that— I forget who the researcher was, but the idea of reasoning by far analogies. And I think it gives you an advantage. And so rather than being in this narrow silo, you're like, it's sort of like that thing and that thing and that thing.

Hi, Josh Wolfe. Ken Colangelo. Thank you for the presentation. One of the things that has come up in the news lately has been this emphasis on environmental social governance, ESG investing, and some governors have made it illegal for certain pension funds to take that into consideration. How does Lux Capital view ESG and are there recommendations for incorporation as like a B Corp or these alternative sort of nonprofit PPP options for vehicles?

A few quick answers. My wife, Lauren Taylor Wolfe, who runs Impactive Capital, a $2.5 billion-plus activist hedge fund, is really the expert on this. And what I really like about the way that she takes an approach is she's like, most of the people that talk about ESG are sort of greenwashing and full of shit. And like, here are the ways that it's actually tied to economics. So from a business investor standpoint, You know, you want to sort of do no harm. For us, it's reduce human suffering. But our job is to make the endowments and foundations and families and so forth that give us capital a lot more money. And we do it with considerations, but it has to be tied to some economic consideration. And so I agree with Lauren very much on that. On the B Corp stuff, we have at least 4 companies where we didn't advise them to do B Corp. In fact, I had personal resistance about any negative signal value it might give. Like, hey, are you going to reduce— are you going to increase your financing risk because because later-stage investors are going to think that you're not in this to make a lot of money. And it hasn't affected it at all. Etsy, I think, was one of the first to go public as a B Corp. We've got at least 4 companies where the founders decided this was something that was important to them. In fact, Osmo, the smell company, the founder's like, this is really important to me. I want it to be a B Corp. And we didn't have an objection. Otherwise, the definitional stuff of this obviously can get very political. Political, and the motives can get very political. But I feel very strongly that two things that are absent from the conversation really should be the centerpieces of ESG. One of those is something I've called elemental power, which is the rebranding of nuclear. And I think it's a shame that Europe in particular was captive by a religious mindset around climate that rejected nuclear and has now— and if you look at— if you care about the environment, the destruction that has been wrought because of Europe's dependence, and Germany in particular, on Russia, natural gas. It's tragic. So I'm very bullish on zero-carbon baseload power in nuclear, which I rebranded Elemental Energy. And then the second thing, which is fascinating, is people are now talking about defense as ESG, again, because of revanchist Russia and Putin's actions. So these things are complicated. There's a lot of virtue signaling and a lot of sort of greenwashing. But I think that there's a preponderance of people with their heart in the right place trying to actually solve real problems. By the way, that's one thing. When an entrepreneur comes in and is like, I just want to save the world, I generally think they're full of shit. If somebody's like, you know, I grew up as like the only minority in a mostly white neighborhood, I've got a list, but you know, like if I can find their affliction and they're like, I just really want to prove people wrong, they might save the world in the process, but like it's not the thing that they say that they want to do. Yeah. Okay, one more.

Hey, thank you very much. My name is Bas Wismil. I just have a question on, you know, our time is the most valuable scarce resource we have. So I'm just wondering how What type of deal screening and validation process do you have in place to be able to deal prospect? How are you getting those leads? And I'm just curious about your due diligence process and then going through those validation stages, right? Because I'm sure you're getting thousands of deals every week. So how are you then deciding when to engage and what projects warrant more time to investigate? So just deal prospecting and screening.

Multivariate. Process. Uh, you're 100% right, by the way. Like, we can always raise more money, you know, you make money, you lose money, but time is just, you know, a constant decay. Uh, and it is the most important thing. And making meaning in moments, I think, is also really important. Doing things that you think are important. I— for me, ultimate success is my kids being like, my dad did that, right? Like, that's really meaningful to me, um, that they feel proud of me. Um, uh, we do it a variety of ways. Um, some of it is some social proof from our existing entrepreneurs, you know, so like If somebody that I like and trust is referring something to me, like, that is a high signal. Uh, we get all kinds of random inbounds, and, you know, generally those don't get as much attention or time. Some of it is competitive dynamics, like we hear that somebody else is looking or that they might get an imminent term sheet, and so that it might catalyze us to move a lot quicker to really bear hug the entrepreneur, surround them with all the Lux family and everybody to, you know, try to win their attention and also deserve the right to partner with them. Uh, and then sometimes individual partners get leash and license to go and pursue something. So I might spend a year going deep in some crazy area because I've become obsessed with it. And then I have a partnership that keeps me intellectually honest and prevents me from going down the rabbit hole. Maybe they find disconfirming evidence. The smell thing has been 10 years.

Yeah.

And, you know, finally, and I kissed a lot of frogs that smelled really bad and, you know, finally found the guy. So.

But it seems like you've always trusted your curiosity, which I think is a great lesson.

Totally. And then a lot of it is, you know, storytelling again, is the power of narrative to convince my partnership that there's something here, that there's evidence to back up back the story. But yeah, I always found it's a little cliché, but passion is the best predictor of success. I mean, Scott as an entrepreneur is proof of that. You know, the people that he's backed, acquired, invested in as an angel investor, the best entrepreneurs we have, they're just like really passionate about it. It's infectious. So yeah, that's a big thing about how we spend our time is like who's really obsessed about something because you just want to be. The best advice I got was— I don't know where you end. Yeah, Jim Watson, who's, you know, Crazy, but co-discoverer of DNA with Rosalind Franklin and Francis Crick, had this admonishment, which is 3 words, double entendre, "Avoid boring people." Don't be boring to people and avoid people who are boring. And I would say that when I think about my orientation of time, it's generally like I want to be around interesting people. You don't always know who's interesting, but I definitely, I have 12 meetings a day and I'm just spending time with everybody. You never know. And then somebody's sister or brother-in-law or wife is like, this amazing person. And so sort of kinetic curiosity.

Awesome. Well, listen, this was not boring. Really awesome. Uh, thank you, Josh Wolfe. Thanks so much.