Investing in Innovation & Deeptech with Josh Wolfe | #𝐒𝐀𝐋𝐓𝐍𝐘

Josh, great to see you here at salt. I've been a long admirer of your work at Lux and happy to have you here with us today.

Great to be here, A.J. yeah.

So to kick things off, Josh, you recently raised a new fund. Congratulations. Earlier this year you announced a billion and a half dollars of fresh capital for luxury. And one of the many unique aspects of your firm is you have this thesis driven approach and I'd love to understand, you know what, what verticals will you be focusing on with this new capital?

Yeah, so we love to find directional arrows of progress. And the directional hours of progress are basically, it doesn't point to who the entrepreneur is or what specific company it is, but it tells you with a reasonably high level of confidence where things are headed. When you think about lighting, you know, lighting, we went from flames to incandescent bulbs to LEDs. And in computing, we went from mechanical disks that were moving to solid state storage and compute in automobiles. We went from horse drawn carriages to cars to electric vehicles to autonomous electric vehicles. We're not going back to sconces and offices with fires, we're not going back to horses on streets and we're not going back to spinning discs. So what are those directional arrows of progress? One definitive one is the control interfaces of how we compute. We went from when I was a kid, my mother would say turn the TV and I would have to get up and literally change from channel two to channel four. Then you get a remote control. Today you have neural brain machine interfaces that are wearable devices that will let you make a simple gesture to control the world around you without actually hitting control devices of button pads or remote controls. And that will be the same thing with our thermostats and basically any sort of smart thing inside of a home. So I think that's a directional arrow of progress where you're going to see a lot of entrepreneurs at the intersection of neurotech and design and consumer devices. Another one is resolution, and this is resolution of imaging in life sciences. The tools and techniques and instruments that let us see ever finer resolution of things to be able to make discoveries, whether it's for new materials or for drugs that save lives. I think that's a critical area. And then a third area where there's a clear directional hour of progress is space. And in space, it's everything from, you know, manufacturing to satellites and autonomous systems that, you know, are basically doing the dull, dirty, dangerous things that astronauts ought not be doing.

Sure, let's, let's go ahead and double click a Bit on that third piece, which is space.

Right.

You've been very active in this particular vector. There's actually a company here that is one of your portfolio companies called Varda, which you recently made an investment into. Amazing entrepreneurs, amazing entrepreneurs I'd love. You know, how are you thinking about that, that space? Pun intended. I've heard you use analogies of hey, it's almost like the railroad days, except we're building up. There's a lot of launch companies, many of them are actually here, including Astra. What other elements beyond just launch are you excited about?

Well, I think cliches like stereotypes have merit in elements of truth. And so that cliche, you know, that history doesn't repeat, but rhymes is true. And here if you look to the history of 19th century build out of the railroads, you know, first you had infrastructure and steel rails that got laid. Then you had competition of the locomotives and the kinds of engines that were powering these and the fuel systems from coal and steam. And then you had infrastructure that got set up around these. So it makes sense obviously that you had commerce, you had way stations, you had logistics and storage, you had home development and then you had communication which quite literally went along the rails. So now take those rails and flip them vertically 150 years later and that's what we're doing. Instead of having actual steel rails, we, we've got the rockets of SpaceX and Rocket Lab and others that are launching us. The beautiful thing about that is as there's more competition there, the cost per kilogram to get things up into space is decreasing and therefore the assets that we can launch is much greater. So those are assets today that are satellites, small satellites. Instead of a billion dollar ball aerospace satellite that might depreciate over 5 years with CAPEX, today you can launch dozens, if not hundreds of small sub $100,000 satellites. What do those satellites do? They're taking images of the earth thrice daily. In a company like ours called Planet, that's now public, you've got people that are then processing the imagery over time using AI and machine learning to look at longitudinal analysis. Whether that caravan in China is really going to productive facilities or whether it's going to ghost town residential, whether the shipbuilding is on track or it's delayed. And they've been able to document and discover all kinds of interesting things from human rights abuses to natural resource and natural disaster issues with refugees and so forth. Then you've got people that are like Varda that are saying, wait a second, we can actually manufacture things in space. Now that sounds absolutely crazy. And that's what we're in the business of investing in things that people think are generally crazy. And I love to find the intersection of something that is inevitable, that directional arrow of progress when everybody else in the market believes that it's impossible, because then ultimately you're paying a lower price than what the market consensus believes. The guys at Varda basically said there are certain materials, exotic materials and products that are going to make sense to develop in low or zero earth gravity. And then the key thing is to bring it back down in capsules to Earth. So if you sort of were to bifurcate the two billionaires that are taking us to space right now, of Musk, who has sort of more of an escapist vision, let's go to Mars and there'll be amazing things that come off of that. And Bezos, who is sort of like, you know, let's manufacture things off, off planet and bring it back so that the Earth can be cleaner. We're more in that latter camp.

Got it makes. It makes a ton of sense and sort of parlaying from, from space perhaps into defense, because those two are very, very related or coentangled together. Lux has worked very closely and cooperatively with the Department of Defense. You yourself have been an advocate for Silicon Valley sort of merging or collaborating with the military industrial complex. I'd love to understand how you're thinking about that, how Lux is positioning itself to invest in defense.

Well, it starts with an appreciation that the, the roots of Silicon Valley and venture capital investing were not, you know, just Hewitt and Packard in the garage with a bunch of, you know, groves in Silicon Valley. It really was like electronic warfare. You know, when Lockheed Martin came to Sunnyvale, there were zero people. Pretty soon we had, you know, tens of thousands of people. And, you know, they were developing pretty cutting edge technology that helped us in the Cold War. So I think there's a return to that ethos in zeitgeist after probably 20 years of people that have been saying, you know, beware going back to Eisenhower of the military industrial complex. And you've had an aversion from some of the brilliant entrepreneurs and engineers that have gone to the Valley to say, we want to work with government. Now. Part of that is for political reasons, from geopolitical reasons. Part of it is immigrants that have come that haven't felt that same appreciation that you had in the 1980s when people were escaping as emigres from Russia, you know, really looking to come to the U.S. i think that's starting to change. You have people that are patriotic, that believe in what the US stands for, that most importantly want to develop cutting edge technology, both hardware and software for the men and women who are on the front lines. About three years ago, then head of US Special operations, Tony Thomas, who has subsequently become a partner at Lux four star general, ran all of us. SOCOM sent me out to the Far east with some of the people at the edge of the spear and said, I want you to do what you do on a daily basis, which is identify things that suck. What sucks is usually the great question that an entrepreneur is asking to identify a market opportunity. He said, I want you to go and sit with these men and women and understand what sucks. And this is everything from blue dot tracking. You know, if you're tracking your family members on an Apple iPhone, that's something that some of these guys in triple canopy conditions in the Philippines chasing terrorists are not able to do for a variety of technical reasons. The ability to have satellite communication with no moving parts that can send very high bandwidth also under triple canopy. So, so we looked at this and said there's amazing technological things that are happening outside of DOD and Pentagon that are happening in the commercial world and it's time for those things to come back so that we could be advantage particularly when we have peer adversaries in China and Russia that are completely intertwined in a military civil fusion.

Yeah, that's another perfect segue. So in China, obviously over the last few decades, they have risen as a preeminent economic as well as technological superpower. And today, based on my knowledge, they're graduating five times more software engineers than we are in the U.S. they're pouring hundreds and hundreds of billions of dollars into areas like AI, like biotech, quantum, among other things. How do you, how does the US sort of navigate, not fall into this Thucydides trap, if you will, while simultaneously keeping its competitive edge in technology?

Well, the first thing is a qualitative and cultural one. You know, as a culture you get what you celebrate. So you have a culture that is celebrating scientists and engineers. Also go back to the, again, Cold War. In Russia you had brilliant, you know, chess players and engineers and doctors and scientists. So I think as a culture we should be celebrating the people who are quite literally inventing the future. And those are our scientists, engineers. We should be attracting them from other parts of the world. They should be developing their engineers, their degrees here, getting their doctorates and staying here and starting companies. That would be a beautiful thing, that would Give the US a competitive advantage. I think that China is a very formidable foe in every one of the things that you named. While quantum is an area that I'm a little bit more skeptical about. I think that there's going to be a lot of frauds and a bit of a factor baddish element, certainly in AI and biotech in particular, and the ability for them to use mass surveillance to be able to collect troves of data that, you know, we have civil liberties that in many cases prevent. But I really believe it starts with a cultural thing. And then I think it happens from capitalists that are willing to fund these cutting edge technologies and then work with the government. Sure.

And you know, pivoting away from sort of your, this macroeconomic piece or the investment piece or the space piece back to the actual founders that you invest in. One of the quotes that I've heard from you, which I've used as well, is chips on your shoulder, put chips in your pockets. And I'd love for you to expound on that as it relates to how you think about the heuristic you use to identify founders, founders that have that resilience and grit to actually get it.

Done, make these visions happen. You know, it's one of the almost heretical things to say, but a very popular thing in Silicon Valley and for throughout the country at the moment is mindfulness and meditation and being at ease and finding. And I actually think for the individual, that is a beautiful thing for society, it is a horrible thing. You want disaffected, really unhappily miserable, motivated people, because that is where all great progress and changes has occurred. And you look at, you know, the great people that we've celebrated, whether Steve Jobs or Larry Ellison, you know, Oprah Winfrey, you listen to the backstories of what these people endured, whether they were in Bezos as well, whether they were adopted, whether they were abandoned, whether they were abused. You might be the only African American or black person in a mostly white neighborhood. You might be the overweight person in a very skinny area. You might be the person that's the nerd in a Friday night Lights, you know, Texas football town, whatever it is that makes you that outlier, you know, it's a thin line, you know, where you could end up sort of in a, you know, a malicious, you know, bad path. Or you can be incredibly motivated to have that chip on your shoulder. There is nothing more powerful than the words I'll show them.

I love that. And perhaps can you tie that back to some of Your, your own story, your own origin story. I think that people would love to.

Hear more about that. For me, my mom, I grew up in Coney Island, Brooklyn. She's a special ed teacher, public school teacher. My parents split when I was very young. For me, my father's absence was more the presence of what I wanted to be as a husband and a father. But all I ever wanted was a strong nuclear family. But I saw people that grew up with, know, resources and advantages and, and I resented that. Right. And I was still born a white kid in New York to a mom that was very loving. And so in many ways I'm like absolutely privileged. But I think when I saw wealth that was inherited from people and I felt like I was more intelligent than them, I've always been psychotically competitive about that, wanting to sort of, you know, to be the man, you must beat the man mentality. And I just love people that are absolutely psychotically driven and that it comes from some. No matter how much money they make or achievement that they achieve, there will always be this sort of hole in them. And I believe that that is the great source of human progress. So in founders, certainly in myself, I just, I love finding that in people that chip on their shoulder.

I love that. And it's not enough at Lux for you guys to invest. You also very regularly incubate businesses across a wide smattering of different fields and including nuclear waste, biotechnology, immunotherapies, among other things. Love for you to talk a bit about that from a historical context at Lux, but also going forward, where are you looking to actually start businesses from scratch?

So it often starts with what is the consensus in a market and then what's the varying perception? What's the thing that everybody else is talking about and what's the thing that nobody is talking about and why are they not talking about it? You know, do they have a smarter insight than us or have they missed something or overlooked something, or they experiencing and enjoying too much success over here? So they're not motivated to look here. If you take nuclear, which was an interesting example, the entire venture world was going crazy about clean tech, green tech, alternative energy. You know, going back 10, 11 years, nobody was looking at nuclear and a part it wasn't in Al Gore's movie and Convenient Truth. So it just wasn't being celebrated in the sort of megachurch about alternative energy. And we looked and said nuclear is really interesting. And we looked at every part of the fuel cycle from the uranium miners, who were mostly hucksters and fraudsters. In New Mexico and Nevada. So we said no to that. The modular reactors, which were really the domain of billionaires or sovereigns that wanted to arrive, instead of building a gigawatt power plant for $1 billion, you build 30, 30 megawatt arrays. That was interesting. But the biggest unsolved problem, going back to that earlier quote of what sucks is what do you do with the waste? Sure. So we ended up saying, is there anybody that's doing high tech waste treatment? And as we dug into this, there was this entire complex in the Department of energy, about 25%. One in every four dollars they spent was on clean, wasn't on clean and green and alternative energy was on nuclear waste cleanup places like Hanford and Savannah river that nobody had ever heard of for pre and post Cold war bond making. So we ended up starting a company named after Madame Curie called Curion. Locked up the best talent because there was this Libra arbitrage where all the smart people in nuclear sort of moratorium and new build, you know, went into quant shops and, and hedge funds like Renaissance and, and two Sigma and Shaw. And we locked up the best people, started this business in, licensed a whole bunch of technology, and then frankly got very lucky when Japan got very unlucky. And this little company called Kurion was the only game in town when the Fukushima disaster happened to clean up the radioactive cesium, strontium, technetium, uranium, plutonium. So that was pretty crazy. It started as a brain fart of an idea. We pulled together the team in the capital and did that. Another area where we've done this, and then I'll give you one that I'm super excited about, was the world was going crazy about the microbiome. So, you know, what you eat and how it affects you and your gut and so forth. And There were probably 40 companies at the time focused on the microbiome. And one of our very smart partners, Adam Goldberg at luxury, who's a PhD stem cell biologist, said, you know, what about the gut brain access? So forgetting about your nutritional health, could you go into the brain for everything from the sense of satiety when you are full, for metabolic diseases and obesity, or for psychosocial disorders. When you say, I have butterflies in my stomach or I have a gut feeling, there is a physiological truth to that. And so we started a company around a bunch of Nobel laureates and Howard Hughes medical investigators out of Columbia called Calio Bay. Brought in an incredible woman named Nancy Thornberry, who ran all Merck's discovery programs and Then just capitalized that. Today the thing that I'm most excited about really started and I love the intersection between science fiction and science fact. It started as a sci fi idea and a lot of the things that Lux funds, you can find these examples, whether it's in the literature or graphic novels or in movies that show the decreasing gap between that which was once imagined by some sci fi author and an entrepreneur who is making it science fact. Sure, X Men. I'm sure you've seen the movies or read the comic books, but Professor X puts on this helmet, Cerebro, and he's able in a crowd to spot mutants. And those mutants have ridiculous powers like lasers out of their eyes and conjuring fire from their fingers. But it got us thinking. With seven and a half billion people on Earth, could there be a one in a billion chance of somebody with some crazy phenotype, some trait, and therefore there should be seven or eight people of these types walking around. And sure enough we would go to people at Cold Spring harbor and found these PhDs and, and they said, oh my God, this is all I've ever wanted to do my entire life. So we started a company called variant about two years ago that went out and now has 14 partnerships globally. They hate when I, you know, talk about this idea of mutants because it's not really that it's outlier people. Two years ago that went out and now has 14 partnerships globally. They hate when I, you know, talk about this idea of mutants because it's not really that it's outlier people in outlier parts of the world who may possess the secrets in human genetics for the rest of the masses. There's a population in South America because of where they are. There's nine families that remain when the temperature drops late at night. They have a heat shock protein that the body produces to raise their metabolism. Sure. Now if you could give that to the masses, with a third of our country massively overbeast and they were able to take something like a pill that would raise their metabolic activity while they slept. I mean that is a $50 billion drug that could save lives.

Yeah, it's fascinating on that point we at salt sort of think of programmable biology or the intersection of software and biotech through the lens of evolution from natural selection to intelligent direction. I think that's sort of what you're alluding to here. How do you think about that on a long term time horizon? 20, 50 and beyond.

If you could opine on that.

Where are we going to go?

There the intellectually honest answer of 20 years out, I really have no idea. And what I do is try to find the brilliant people who are quite literally inventing the future that are doing that. What you touched on, though, is dead on, which is the intersection between tech and biotech. And so specifically the metaphors that we use in programmability of cells. Even when people are explaining something like CRISPR gene editing technique, they talk about almost like copy paste, control C, control V, like we would in Microsoft Word. But I think it's really the use of artificial intelligence, machine learning to be able to look at cells and understand what is going on, to be able to understand from genetic sequences, the same way that you might use natural language, process processing, to understand texts and search. Where these worlds are combining. We have a public company called Recursion that was taking computer vision and AI to be able to look at the topology of cells, to understand what happens when you introduce a drug, to be able to improve the effect on a whole variety of populations where you could do tens of thousands of these things in silico at the same time. So I think the intersection between biotech and AI is going to be absolutely explosive. And it's really at the interstices between these two disciplines, where you classically had biotech investors in one domain, you had software and AI investors in the other. But where those two are meeting is going to unleash a lot of opportunity.

In addition to biotechnology, another one of the megatrends here at SALT this year is crypto and blockchain. I know Lux has been thinking and investing in this area. There's a lot of froth as an emergent byproduct of sort of of the crazy liquidity in the area. But how are you filtering through the noise and what opportunities are you seeing that you think will have real staying power?

We have thought that the arms dealers in this case, you know, while we're not in Coinbase, we have an incredible company called Anchorage, which is the main custodian for a lot of crypto assets. When Visa announced that they had bought this nft, it was Anchorage that was the main component of that or supplier for the infrastructure. So I think we're in a speculative mode right now. There are frauds, there are fads, there are promoters. Generally, my view here would be, listen to the things that you don't hear. In other words, the people that are making a ton of money are the ones that are not really speaking that much. The ones that are constantly pumping and promoting are the ones to be more wary of fair point, I think that's.

A great universal heuristic, candidly. So in the last few minutes here, few rapid fire questions for you. One is right now there is a massive abundance of capital, particularly in private markets, flashing around at the late stage. Hedge funds are kind of coming down at the earlier stage as our sovereign wealth pension. I mean, it really is crazy what's going on. How does Lux in this abundance of capital differentiate? What are the key differentiators relative to other venture firms, whether it be in Silicon Valley or hedge funds here in New York?

So most of the crossover funds for us are partners. They're providers of later stage capital and they're all very smart and they've been great partners. So the CO2D1s, dragon ears, tigers, etc. Early stage, I think for us the bread and butter is really can you start de novo companies? Can you put entrepreneurs in business and be their very first day? One check today, I don't know, there's 1800 venture firms again. History doesn't repeat, it rhymes. You go Back to the 2000.com boom and bust within a year and a half of that peak number. I think at that time it was about 1,000. It got cut down to about 400. So the difference here is you also have the rise of solo GPS where individuals are basically raising SPVs and large multi hundred million dollar funds. Capital is abundant. What happens when capital return gets scarce? Why do returns get scarce? Because you're paying a high price for a cheery consensus, as Buffett says. So you want to invest where capital is scarce and that means more esoteric areas. Things that people might think are impossible, things that people might think are going to take longer, things that people think are more capital intensive than they actually are and try to have that varying perception. And then if you can form new cos, you can get disproportionate ownership early on for relatively low capital. But I think we're in a, in a world for the next few years where the cap, the pools of capital formations very much feel like 1998, 99, 2000, where everybody is getting into the game and eventually there'll be a massive shakeout, the distressed guys will clean up. We've had probably eight or nine of our companies, you know, go through SPACs. We are telling all of them, you know, husband your cash, be really smart about this. Because when the downturn happens, the amount of cash that's been delivered to the balance sheet of many of these companies is an arsenal, is a war chest to do consolidation in certain industry sectors. Yeah. So that's how we're sort of thinking about the next year.

And as our final question, love a hot take from you, give us sort of what in the deep tech landscape is severely overrated and perhaps what's severely.

Underrated we'll wrap there. Overrated for me, I would say, is quantum. I think it's an area that preys upon people's ignorance. And anytime there's ignorance arbitrage, you get frauds and you get people making all kinds of crazy claims. Part of that is fomo, part of that is people not wanting to admit that they don't understand it. But I'm very skeptical about vast majority of things in quantum computing. The thing that I'm most excited about, that I think is underhyped by others and we're building the portfolio so I can talk about it pretty actively, is what I call the tech of science. The technologies and the instruments that are enabling people both. On the hardware side, we have a company called Icon, Nobel Prize winning work of a guy Eric Betzig, that is able to look inside of a cell in real time and image what is happening when you introduce a drug. And then you've got a company like Benchling that is doing that on the software side to automate labs and science. The reason that's important, and I know that Macro is a big part of this conference at salt, the geopolitical competition that we're having with China and others. Historically on the stage you had hard power and you had soft power. And soft power was a combination of winning Olympic medals and exporting MTV and music and movies and so forth and winning Nobel prizes. And I think that the race for scientific prestige is going to see a big tailwind, whether that's in space or down in the scientific labs and the instruments and tools and hardware and software to fuel that is going to be a really big deal. Love that.

With that Josh Wolf.

Thank you, AJ.