Okay, Computer 7/27/22: Fixing What Sucks with Lux Capital’s Josh Wolfe

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All right, welcome to OKAY Computer. I'm Dan Nathan. I am here with my co host Rick Heisman of firstmark Capital. And here is actually a pretty amazing flex here. We asked Josh Wolf of Lux Capital if he would come on this fine podcast and he was a pretty good flex. He was like, you know, let's do it for my fine offices here. So, Josh, you are hosting us for OK Computer. Thank you very much and thanks for joining us.

Thank you for having me.

I'm playing on a way game here.

Just a little bit.

So we'll know, we'll know if you.

Got the right jersey. We're all wearing black all the time.

My black T shirt. Because, like, looking at you, I always like every person that we interview, I always go look on their Twitter and you're basically, that's the uniform. That's your uniform. And I was wearing that same uniform, so I just thought I'd change it up a little bit.

New York VC uniform.

Yeah. Well, here's the thing. New York VC. So you guys both started VC firms 20 years ago in the kind of aftermath of the dot com. Talk to me a little bit about that. How did you guys get to know each other?

Rick?

Because this was, Josh was one of the first guys. You're like, we got to get Josh on the pod.

Definitely want to get Josh on the pod. As you think about it, you had to think a little bit contrarian to build a VC firm in New York 20 years ago. And Joshua, my favorite contrarian thinkers, independent, first principal thinker that stretches our minds a little bit. So thanks for coming on.

Great to be here and feeling is mutual. I mean, there are maybe, I don't know, half a dozen serious firms in New York that have both stayed the course and evolved as Venture has evolved. And First Mark has been one of them in a serious way. So good to be with you, man. Great.

All right, well, let's go back though. Let's turn the clock back because I heard you recently just get a sound.

Effect for the clock.

No, this is, it's not mad money, bro. So so but you said, I think it was on CNBC to Leslie Picker that you think there's going to be a massive culling. Okay, you just said there's about six serious firms here, VC firms in New York City. I know of about 20 people who have just launched VC firms in New York City in the last year, but.

Half of them gone in the next few years.

All right, so you basically said 50 to 70%. Just as this is, I'm assuming nationally, maybe globally, VC firms will be gone in two years. Is it just too much, too fast? And then we're have kind of an.

Overcorrection the other side, natural cyclicality. So go back 20 years, you had maybe five or 600 firms, 2000 boom bust opticalnetworking.com. all of a sudden that balloons up to like a thousand firms. And those firms varied. Right? You had some that were like massive multibillion dollar firms that were few and far between and you had a lot of funds that back then were sort of in the 100 to $250 million range. Within five years after they had been deployed, they either didn't get the upticks, you were in these range bound markets, they didn't have momentum. All of a sudden they, the firm start disappearing. They didn't invest in succession planning of junior people. They didn't have any hits to be able to raise LP money. Some of the LPs themselves had overextended and now they were not re upping into funds. And so you went from a thousand firms to maybe 5, 600. So either went back to what the core was or you had an incremental 20%. We were one and maybe you were as well, that basically entered and survived during that period. And so we were born in the sort of excess of the dot com boom. And we had started by saying look, even if we wanted to invest in this field, nobody's going to take Lux's money. Nobody knows who the heck Josh is or Peter is. My co founder Peter Aber, nobody knows who Lux is. And so we're only going to get adverse selection. And so the founding kernel was, hey, what's going to be the next wave? And when everybody else was chasing dot coms and optical networking, we said let's go after the physical material sciences with a bet that some of the stuff that was coming out of electrical engineering and chemistry and physics and materials science labs were going to be the next wave and that we might understand those sectors better than everybody else who was making a ton of money doing other stuff. That we never would have had a shot at investing. And that became the, the sort of origin of Lux.

And then as you think about that, how has that evolved over the last 20 years?

Well, when we first started we were investing in nanotech and advanced materials and sort of cutting edge, you know, material science related stuff. We started with three main areas which was energy, physics and industrial stuff. We did healthcare, which was everything from healthcare IT to biotech and then med devices and robotic surgery. And then we do what we call core technology which is typically defined by what we don't do. And most of the people in vc, particularly in IT VC were doing Internet, social media, mobile, ad tech, video games, all that kind of stuff. And we basically said places like first Mark. No, but like, but we, we had no edge in that stuff, right? So avoiding the adverse selection, we said let' go where other people aren't going. And we always say to this contrarian point, we want people to agree with us. Just later, after we've made our investment and you know, we've secured a stake and done something interesting. One of the key things that we've always done is start companies de novo from scratch. And so every VC says the same two cliched BS things, right? We're value add investors and we've got proprietary deal flow and most of the value add is picking up the phone and calling who you know and referencing what you know. And the proprietary deal flow is typically just trying to, you know, parlay access and social currency and trade chits with other firms. If you can originate companies de novo. So you actually are starting a company with an entrepreneur. And whenever we did that, all the founding stock, when we did that went to the LPs. We never took it personally. And it was an amazing phenomenon. We did it in biotech, we did it in nuclear waste, we did it in cutting edge genetics and microscopes and rockets and aerospace. And so that has been something that has been a consistent. Probably 15 or 20% of our portfolio construction is companies that we co found with entrepreneurs. Partnership grew over time. We opened a west coast office. We've always had what we call unum locks, one lock. So you study the venture firms and you look at also why did they fail? And they always failed because you had either geographic silo where the east coast and the west coast was like, you know, Biggie versus Tupac. But in VC they just hated each other. There was a coup. The east coast guys lost to the west coast guys who had the hot deals. The LPs were like, okay, that's where the money is. Or you had generalist firm that was commingled where you had healthcare guys and it guys and they hated each other because one was countercyclical and the other was bringing down the other ones carry. And then they go to the LPs and they say okay, we're going to bifurcate, we're going to split, we're going to keep to, you know, our thing. And so we basically study that and said let's build a firm structurally by design to avoid some of those things. Which means east coast guys are sitting on west coast boards and everybody is a generalist and we avoid these sector silos. And that kind of stuff makes a.

Lot of sense to do some of the things that are similar. We have one office in New York so you know, we're not sector and fragmented but you know our history going back places I worked before had the big screens with the healthcare team from Mubai on one screen, medical devices from Boston on another screen, insurance software from South Carolina, another screen. And it was a terrible experience not only being an investor but for an entrepreneur totally. So to come through and have people who don't understand what you're doing can help you but definitely want to judge you is not the kind of firm we wanted to build and that's what was important. So as you think about now, so kind of born out of obviously a topsy turvy market where we think a lot of firms are going to go away. And I agree with you that you're going to see 50 to 70% of firms go away. And the interesting thing in the 0103 era it wasn't what you perceive as the worst 50 to 75% of firms, but probably like the top five firms in Boston all evaporate.

Well, in some of these cases people were calling in rich, right? And so they had made a ton of money and they were like wait a second, we just went through this amazing 5, 7, 10 year period from 96 to call it oh 2 and we just made a ton of money. I mean the guys that behind Akamai and you know, some of the networking infrastructure and so they're like do we really want to sit in these range bound markets and then have to wait another seven, eight years for another bubble and a generation that forgot the last one's lessons, like let's just hang it up, right? Some of the firms said we spent 20, 30 years like you look at battery or some of these other that became a little bit more institutional. They invested in the Institutionalization, hiring a series of people that went from analysts to associates to principals and partners. They had economics in the firm. And so I think again it's a question of are you a boutique partnership, do you have your name on the door? Or are you trying to build some institution that transcends you? And maybe you have some trailing economics over time. And I just think that the current market moment, you, you have a bifurcation, what I've called the minnows and the megas. The megas are what really began as like the soft banks and some of the very large crossover funds. But you've seen a natural evolution of people like Andreessen, nea, General Catalyst, General Atlantic that feel like, and in some cases now are evidenced to be following the playbooks of KKR, Apollo, Carlisle, Blackstone TBG, eventually getting 50 to 80 billion dollars plus under management so that they can sort of go public and they'll build lasting institutions. You know the thing, if you remember right pre crisis was all these things were becoming these financial supermarkets, you know, where they were doing credit and equity. And so, so some of these firms are going to emerge into that. The minnows at the complete other end are these individual sole gps, you know, that were at Pinterest or Twitter and they have super connected networks of entrepreneurs and engineers that are starting the next company and they've got access and they convince nlp, hey, give me some money. And so they sort of, you know, have a sole person, almost a large family office that's supplemented. Then you have smaller groups that you know, do the same sort of thing. We're seeing some of those people start to approach us and other firms saying, hey, can we join the platform? Because they're starting to look for cover, realizing that if they were Cedar Series A investors now, they're going to be in this valley death for a while, you know, hoping that the kindness of strangers that was in very rampant provision over the past few years is now drying up. And they're like, okay, you know, we got to make sure that we've got follow on capital.

To that point though, what's different, I guess 20 years on right now is the amount of capital, if you look at the percent of investable capital as it relates to alternatives is so much bigger right now, right? So you said 20 years ago is about 1,000 firms and it was probably like not a huge number being allocated towards VC or tech, VC in particular, right? So think about it. Now we have this situation where rates, no matter where they go in the next year or so they're still going to be abnormally low in historical terms or so. So you have all of this money and pension funds and all these other huge pools of capital that need to chase return. Is there a chance that it's kind of different this town, especially as you think about these companies institutionalizing, becoming the mega. They all want to go public, they've all changed their kind of bylaws so they can do all these different sor of things. I'm just curious whether that some of those massive trends are kind of here to stay in venture. And maybe it's just, I don't know, it's some kind of bastardization of what happened with crossover over the last 10 or so years.

Of course, you know, this time is different on the most dangerous words. But I do think that you will have a structural change in the size of the firms. I think there's a natural progression when they get larger. I mean your last fund was billion most recently raised. Our last year was a billion five Funds are sort of ranging in this larger scale. It was very rare 20 years ago that you would see billion dollar plus funds. So you have lots of billion dollar funds. You have some four or five, $6 billion funds, let alone, you know, the, the giant megas. So I still think that there's going to be this bifurcation and you're going to have a shrinking. Now today I think there is somewhere between 18 and 2200 new firms, you know, in total. And so to see that go to a thousand would still be a doubling of the number the n of firms that existed 20 years ago. I just think that consolidation in any time when you have rising rates, increasing scarcity of capital is going to be the name of the game.

So when do you think the first VC's firm goes public?

I think GA filed, General Atlantic filed. So if you count them, I mean that was originally really almost like Duty Free Capital that.

Yes, exactly.

Chuck Feeney that parlayed into.

I think There was only eight LPs until a couple of years ago.

Right. And you know, incredible group of people, Anton Levy and Ilford. I mean, and they build a great business and do really interesting and smart deals. So. So I think that there will be a wave over the next two years when people find that moment that they say, okay, you know, now's the time where people want some stability and you know, a large asset manager with predictable revenues and some participation in whatever economics they have. And I would put 60 to 70% odds that in the next three years, at least three of those firms that I named before are public.

We're agreeing too much. Very boring. Very boring pod, but I disagree.

It's going to be an exciting.

I think, I think you're going to see at least a couple of them. They're getting it out and are going to have more scale than anyone thought was imaginable five or six years ago. And they'll be, there'll be more VC, M&A than what you have ever expected.

That I definitely agree. So I remember when Lux was starting again, you know, go back to like 2000 time frame. I remember visiting Sand Hill, you know, and you go to visit all these places and you had the merger of Brentwood and ivp, Brentwood and IVP forming Red Point. Right. And so you have these dynamics where these people come together and they might say, okay, we're going to take the life science guys from this firm and that firm form this other firm. These guys are going to get together.

It's going to be LA and Menlo.

Exactly. And so I think that there'll be a bunch of those and you again, it'll be sort of few and far between. But those things are reasonably predictable in the industry structure. The bigger thing to me is the LP allocation to venture. I remember Cambridge Associates was putting out pieces a few years ago and we value them as a partner. Saying upwards of 50% target for venture capital was interesting for people's portfolios. And you had very similar people like Jeremy Grantham also. Right. I mean generally a guy who you think of as a deep value investor who understands cycles and allocation across asset class was getting very long and bullish in venture. Right. And this was before things got bubbly. Now I think he's back down to let me hold gold and ag and productive farm yields. But I think that there's been a massive overall location. Now you'd think a guy like me who runs a venture firm would be talking his book and saying, no, it's a great time to invest in venture. But I actually do think that there's been an overallocation, the asset class compounded by denominator effect where LPs that. Let's say you had a 20% target to PE and you hit that all of a sudden. Let's just say average LP, maybe $1 billion, you know, small foundation, 200 million allocated to private equity. Let's just say 800 million simple plain vanilla book allocated to Publix. Publix is now down 30, 40, 50%. That 800 is now 400. The 200 out of 600 denominator effect. Now it's 33%. Now they're going to your IC, to your investment committee, and basically saying, you know, we really wanted to get access to these new managers. And they're like, look, we got to slow down our role here.

So the risk curve has materially changed.

Yes, yes.

I think that small manager. I was a solo lgp. I was at Facebook. I know all these other guys were at Facebook. They picked up someone that used to work with them at Facebook. They get two institutions, they raise $50 million. They think they're on their way to 500, but they're probably staying at 50.

Right. Or. Or they might say, you know what? This is like, we're not raising another fund.

We're going to go back. Yeah.

We don't.

Can't stand each other. We're going back to Facebook. I would have made more money if I went to Tesla instead.

Let's talk about this. What do you think of the mission, how that's changed over the last 20 years? You just said, Josh, you guys don't chase the shiniest, let's call it social or whatever object that's out there. And I definitely want to get into this kind of thought that you're investing in hard power and soft power technology. I read and barons, and it's really interesting. And these are clearly not shiny objects, but they're things that probably have, like, tremendously long tails that a lot of your competitors are not particularly focused on.

Well, at the risk of sounding arrogant, they are shiny objects to us. And so I like the fact that they are not shiny objects to others. So if you zoom out, you think about Lux itself, the etymology, the name Latin for light looking where other people aren't looking. Now, it's philosophically true that when you shine a spotlight on something, you light it up, and then what's on the circumference of that light is darkness. Right. And so the bigger that circumference gets of light, the more that you're lighting up, the more that you're investing in, the more you're expanding. So, too, is the circumference of your ignorance. Right. You're revealing all the stuff you don't know. What we find fascinating is that the stuff on the edge, which is the least well known stuff, is the stuff that in combination with each other, leads to the biggest breakthroughs. So AI was like in this nuclear winter, you know, people were not really interested in AI all of a sudden, out of nowhere, and you can actually trace it now. Causatively but it wasn't predictive. A priori. Nvidia comes up with this graphic processing unit and people are now using it for multiplayer games. People in mass are demanding better graphics for their PS4 and their Xboxes. They come up with this language on how to use this gpu. The graphic processing unit is a substitute for CPU called Cuda. And all of a sudden this thing takes off, right? A bunch of people go, as they often do, right? This is how Danny Kahneman won his Nobel Prize. You reach into the other guy's domain and you're like, hey, that's sort of interesting, I might use it in mine, right? So he was a psychologist who won the Nobel Prize in economics. He reached into the other domain. So a bunch of AI researchers reached in and said, wait a second, we don't need this crazy supercomputer. What if we were to use this Nvidia GPU with this massive parallel processing and all of a sudden that begot this new revolution in quote unquote deep learning. And you had these convolutional neural nets and people were able to do things like recognize images faster than humans could and start do natural language processing. I mean we all remember the early days of like natural language processing even for voice to you know, speech recognition like Dragon and you know, some of those guys were frauds, but learn how to.

Obviously nuance came nuance, but, but, but.

That then evolved to suddenly, oh my God, actually like Siri and Alexa and Google now and all this stuff actually works and the AI to do speech recognition works. And so you had this boom in AI. So that's one of the things that's out on that circumference, which was sort dead at the other end. You have people in biotech who are doing, you know, everything that they're doing. All of a sudden you have a bunch of these AI researchers now that are saying, wait a second, we can not only use AI to search through text and pictures, but what if we do this to search through genetic code or search through scientific literature and start unearthing ideas that people hadn't had before. So whenever you get this combinatorial possibility at the edge for us, it's super exciting. So that's where we're always looking like what's the thing? We're really smart, sort of edgy, self motivated, out of ambition or greed or you know, to be the alpha male or female are pursuing in academia. And they're typically the leading light. So we're always looking in the scientific literature trying to Figure out what that is. Now, some of that led us to sensors, cutting edge acoustics, optics, AI. And some of that was related to a macro overlay, which was geopolitics. We love investing in areas where there are a reasonable probability. I always love this of Jeff Bezos. He would say, you know, I have no idea what technology is going to matter in five or 10 years, but I know that people are going to want more choice, lower prices, more convenience. So directionally I'm just going to invest in stuff like that. I know that the world over time is going to become as unpredictable, if not more so, as it is today. There's going to be more uncertainty, there's going to be greater demand for uncertainty and control over the world and people are going to want technologies for that. So you turn to defense. The world is getting more dangerous. I don't think it's getting more safe now. There's violence and other things may be on decline. I'm a big believer in Steven Pinker and the empirical evidence for that. But overall there's more probability of chaos. Revanchist countries rising. Russia, China, you're seeing it now. The nature of the threats change. We go from non state violent extremists and terrorists to state actors which we thought had died with the cold wars. And so we start looking around and we say, okay, you got these big giant incumbents, the Lockies and Raytheons and Boeings and baes, and there's nobody in technology that was really working on this stuff. People were doing one offs. The DOD and Pentagon were giving small sbirs sbir small business innovation research grants, which are basically nonsense. It's sort of like performative that the government actually cares about innovation. But all the money is going to the Beltway Bandits and these big giants. Along come five founders and they basically are like, we're going to take cutting edge Silicon Valley technology which is eclipsing what the military is making itself. We have this conception that the military has these secret labs like out of James Bond, you know where they. You got Q, that's coming up. Yeah, it doesn't exist. There's nothing like it. Right. We have national labs. Most of them are not unfortunately getting the very best people. They are not developing the very best technology. The smartest and most aggressive engineers that are working on these things like I was describing in AI or in biotech or in sensors are working at commercial companies. They are working or going to the places where they think that they can make a lot of money, be around their fellow nerds. And make a ton of status and acclaim. And that's typically at Facebook and Google and Netflix and Snap and all these other places. So if you could redirect that talent to a more important mission, what we like to say, sort of sanctimonious and righteously and matter that matters, then you could do a good virtuous thing. So these founders in particular at a company called Anduril decided, hey, we're going to take, take the most cutting edge technology that you can imagine and we're going to build a next gen prime. Now this starts with a guy, Palmer Luckey. Palmer is very controversial because at a young age he made FU money and he's got some FU views. I don't agree with his politics, but I absolutely agree he's a technological genius. Palmer was a founder of Oculus which begot virtual reality for the masses. He was acquired by Facebook for 4 billion made about a billion. Was fired from Facebook mostly for political reasons. He is a, you know, big Trump supporter. I don't like Trump. He's you know, hardcore right. His other founders are left center, left and it's just a good balance. They decide we are going to bring the cutting edge technology to the war fighter. Now around this time I start getting involved with the special operations community. In particular a guy, Tony Thomas, who came and visited me. He wanted to know what is in the Lux portfolio that can help us from drone technology to counter drone technology to AI to be able to detect imagery from drones or aircraft or space that's giving off so we can discriminate between a guy with a pickaxe or a guy with an AK47, you know, and be able to make that discrimination for a kill shot, help us find this stuff. He's supposed to come here for a half hour. We spend three hours together. He says, look, look, I want to take you out to the edge of the formation. I said, what does that mean? He says, I want to bring you into theater. And I said, okay, my wife is going to kill me. So anyway, I end up going for two weeks and in bed with operators. It was an absolutely incredible experience. And I got to see firsthand the very thing that I do on a day to day basis here at Lux, which is ask the question what sucks? And so I went around and basically looked at what sucks. You and I can pull up our iPhone and we could do simple blue dot tracking of our family, you know, find my friends. If you are under triple canopy in the Philippines and you're trying to track some terrorists, you can't do that. The technology just doesn't exist. If you are using satellite antennas, you have to put it on the back of a truck, go out to an open space. You're basically a sitting turkey, you know, waiting to be caught and shot. Instead, if you had very flat planar antennas that can communicate without needing these giant dishes, it would be a game changer. So we go and basically show them all these different technologies. Tony retires four star general head of SOCOM ends up joining here and just lights us up into this world of what sucked and what was needed. We become big investors in Anduril. Anduril now is actually a really important company, not only for, I think, the future of American defense, but as a theme for investors. It's what I call the consolidators. They now have over a billion dollars of cash on their balance sheet and they are starting to acquire companies and win contracts in a big way. So they represent one of the kernels of what you were talking about before, which is hard power. Air, land, sea, space, both hardware and software. How do you project power? Because truly if you want peace, you do it through strength. And I think increasingly we have ceded that to other countries where in, in the US for two generations, you know, we talked about the military industrial complex. This was a taboo thing that we were warned about. In China, they talk about military civil fusion. This is a government admonition. They're telling you, this is what we want. If you are working in technology, we want it and we're going to use it. So that's the hard power piece. The soft power piece is a realization that through history, countries competed with Hollywood, mtv, Netflix, or you know, movies, generally fashion in basically exporting culture. The other way they compete is by winning gold medals. Dream Team usa. Right? I mean it was like amazing. Like it was, you know, shining moments and, and in the Olympics. And then also by winning other kinds of medals like Nobel prizes, being able to show that you have the smartest people in the world in your country, right. One of the great losses when Germany during the Nazi era was ascendant was you had all of these incredible Jews that left Germany and came to the U.S. right? And that's why we were ended up getting the technology for the bomb. And so I think that there is a race for soft power, which is the prestige that comes from breakthroughs in science and the prestige that comes from breakthroughs in science comes from having tools and technologies that lets you discover something that the other guy can't.

And where is America right now on that curve.

I think increasingly we are leading in certain areas like biotech in semiconductors. We have a geopolitical structural disadvantage because of tsmc. We're making efforts for right now. It's a lot of jawboning, you know, chips act on all this stuff is a lot of paperwork, but we aren't actually building fabs here. But I do believe autonomous vehicles, biotech instrumentation. There's a reason that Covid vaccines, you know, were effectively discovered by the west and not by China. It's amazing that they still do not really have a super effective vaccine or that they haven't even stolen MRI vaccines like is actually quite shocking.

And I assume that's who you're thinking about, worried about. If you're thinking about if the super, if the great superpower is not the US it's belt and roads and the network that China's built.

To me, hands down, when you think about peer competitor, it isn't a question are we in a cold war or will we be in a cold war. We are in a cold war. China is our adversary. And I want to be specific that it isn't China. Chinese people are amazing. It is the ccp. It is the Chinese Communist Party. This is a fascist, totalitarian, suppressive and, and I understand by the way, it is also an effective government that can build stuff and, or efficiently and very efficiently. But, but this is our major threat. And I, and I, I had hoped that this was actually going to be a re galvanizing threat to make the United States united again and not untied. But it hasn't been effective yet. Russia to me at the moment is a sideshow. Russia feels like a Hail Mary pass of a guy who was losing power and needed to, you know, effectively throw something. There are major disruptions that come from energy of the geopolitics of natural gas and the absence of nuclear and decline in Germany of food supply chains, wheat, et cetera. But China is the real threat.

Where do you think that's played out? In what time frame is this played out in Africa over the rest of the century? Is this played out? Are people wanting access to those markets? Right, because China has some power today and it's attention. As they want access to our market, we want access to their market. We're relying on them for certain things. As that market power shifts to Africa, is that going to be the battleground?

Africa is still very poor, but Africa is very strategic and we can talk about that as a continent. I think if you look back again to the rise of the Cold War, 40s, 50s, 60s, 70s, up through you know, the late 80s and the fall. This was a, an ideological fight. It was really at root about totalitarian dictators and communism which was a failed experiment, a four decade long failed experiment and capitalism and democracy and we have imperfect capitalism and we have imperfect democracy here. But it's still a better system compared to the others. We have an ideological fight coming with China because it is a resurgence. I mean remember China, as many historians have said for 13 of the last 16 centuries ruled the world. They don't view this as a new thing, they view this as a. Yeah.

America was a bit, a little bit of a speed bump.

Yeah, no, I mean we're a startup, right. And 250 year startup. So I believe that this is going to be playing out over decades. I think you want the commercial engagement, you want to find ways of collaboration to have a detente, you know, against some of this. You'd like to have productive conversations around things that we agree on. Whether people think that that's climate China will be the greenest economy over the next 20 or 30 years. Why? Because they're building a ton of nuclear while we've got Greta and other people that are influencing and saying, you know, shut down nuclear and they're basically anti progress. You know, then we're restarting coal and nat gas and other stuff.

You sound like a macro strategist here. And so I'm just curious what you think about this through this, this private tech investment lens. What do the exits look like? Is it M and A or are you investing in the next, you know, Raytheon or Lockheed? And do you think that's even possible to see one of these companies kind of turn into one of these huge defense players?

I do think that they will turn into mega deca billion dollar defense company. So you know Anduril today is high single digit billions in valuation but I easily see a path where they're 50, 60, $70 billion and it's part of like capital stays where it's welcome or goes where it's welcome and stays where it's well treated. As Walter Wriston said. Said same thing with talent. If you're a cutting edge MIT or Stanford engineer, do you want to go work at Lockheed? You know, probably not, right? I mean we actually manage money for Lockheed. They're great but it's just, it's not the place that you want to go if you really want to build a career and make an impact. So I think that the primes are going to have threat from Inside. And I think that that's a good thing. Competition is one of the great American virtues and it's something that we should use to be able to beat our adversaries on the outside. So exits on the defense side I think will be publicly traded list, publicly listed companies. And in some cases it'll be consolidation and M and A. And hopefully you have the right leadership. That doesn't kill innovation. But the idea that you have an F35 Joint Strike Fighter that is in 300 congressional districts and most of these guys, their business model is cost plus. They go to the government, they pitch, they get 5, 6%. What Andrew and some others are doing are basically saying, no, no, no, we're going to use equity dollars, we're going to fund this ourselves, we're going to build the product and you're going to buy it and you're going to give us 50 to 60% margins. So you could see an emergence of a new defense company that's actually trading not at like, you know, few single digit times, but at 20, 30 times like a traditional tech.

Are you pitching a SpaceX?

No, no. But SpaceX, interestingly, versus Tesla, which of course you've heard me, is a reasonably well run company by Gwynne Shotwell. And what they're doing is really admirable. And they've taken on, if you actually look at this, they've taken on a great competitor. Their competitor is NASA and NASA is huge. But it's also bureaucratic.

It's the same framework you outlined of take on a great competitor who is run by the government, get reasonable margins, have great people, do things for equity and see what happens.

Totally.

And that makes sense.

Yes, SpaceX, I'm reasonable, we're not stakeholders in it. But you've got a $2 billion a year TAM for launch capabilities. Starlink expands that TAM in terms of comms. There'll be other stuff. It's nationally important. I'm recently confident that SpaceX will do just fine.

Let's hit this. Because when you think about your geopolitical worldview, we got to take a step back here and just talk about how disruptive the last couple of years. You know, you said we have an imperfect democracy, we have an imperfect capitalistic system here a little bit. And we're seeing kind of the reverberations of just kind of a black swan event, which was obviously the pandemic. And now, you know, like, look at this period that we're in right now with all of these massive trends just smashing into each other, right so the whole idea, all of us are kind of too young to remember what inflation feels like or stagflation or whatever. So when you think about what's going on here in the US this week alone, we're likely to get a GDP print for Q2 that basically by traditional definition signals that we're in a recession. What does that mean? Well, that means maybe like we're starting to see this. I see your Twitter, I see your Twitter. We're already starting to see some of the advice that you guys have been giving your portfolio companies for quarters now, maybe that some of these large publicly traded companies, especially in tech, have halted hiring, slow hiring, you know, firing people, rationalizing costs, all that sort of stuff. So the likelihood that this gets worse before it gets better, you know, with interest rates continually going higher a bit, maybe fed funds tops out at and a half percent or something like that, I do think it's fascinating right now. So we have this Fed meeting tomorrow. By the time the listener is getting this, likely to raise 75 basis points. Yet the 10 year US treasury yield is trading at 275. So we have this inverted yield curve, right? We have risk assets that are rolling over stock market, housing. There's other things that, you know, like if you look at commodities across the board, the thing that they were fighting was inflation. Yet we've seen Most commodities, industrial, ag, all that stuff come in about 30% from their highs. And then you say to yourself, all right, what the hell's going on here? Because we could find ourselves in a really hard return environment. The last piece of this whole economic picture that we haven't seen. One of the reasons why a lot of people think we are not in a recession right now is we have not seen unemployment tick up. We are at pre pandemic lows, which were 40 year lows at 3.6%. I suspect that's coming to a theory near you, Josh. Curious how you think we get out of this economic period because it really feels like we are in a stagflationary environment.

Okay, so my, my best stab at this is a few things. One, a few quarterly letters ago we called it biflation. And it was a basic neologism to basically say that we're going to have a bifurcation of inflation. All of the consumer discretionary stuff, all of the upper middle class stuff, everything that was pulled forward from three or four years where people basically turn their home into a three or four star hotel, all that stuff is going to see massive inventory builds at the sellers Even if they think that it was an aberrant, you know, uptick on a secular demand line, they over order on inventory. You're going to see liquidations over time. And you start to see that with Peloton, with Nike, with Under Armour.

You're saying with, with Walmart, with Target. It wasn't just the niche provider totally.

And it wasn't even to the high end providers. Now it's starting to tick down exactly as you said to Walmart and Target at all. So that is deflationary. Right. You are dumping inventory. Okay, the inflationary stuff, it is difficult to tell how much of this is geopolitics, how much of this is supply chain, how much of it is actually just Fed policy, which is food and fuel in particular. But the poorest are getting hardest hit, the worst. Now I have heard from folks that were Fed governors that are friends with Powell, that the number one thing that he wants to do is basically be seen as Volcker. He wants to slay inflation. Now inflation is an abstract thing. It is poorly measured. We've got statistics and numbers that tell us what it is most people are feeling in their wallet, but particularly poor people. And so there is this sort of double edged sword of do you kill inflation and do you kill poor people? Because people that had 400 or $600 or less in their bank account that everybody knows they can't afford basic medical bills, suddenly are seeing doubling or tripling of their mortgages, their interest payments, cable bills, everything else is increasing. And so suddenly they're being squeezed really hard, hard. Middle class I think is going to be bifurcated even more where the super rich are going to be just fine. You're going to have more ire against them just like you did in Occupy Wall street, you know, 15 years ago. But I think there's going to be an element of middle class that is over indebted, overspent and just going to start to be part of the lower class. So there's going to be sort of a further skewing of the middle class. Housing is another area where you've got now an abundance of housings that have been built over but, but record low in affordability with rising rates. And so all of this to me just, just speaks to chaos. If I was the Fed, I think that they were too late to act and now I think they're actually acting too intensely. That sounds like somebody that's talking their book hoping for a bubble. You had absolute inflation for at least 5, 6, 7 years in assets, but now you're going to have the reverse wealth effect because so many people were induced into the market, so many retail people, whether that was meme stocks, crypto ARC all the ETFs, all that capital is gone. And if you're young, if you're under 37 years old, the last crisis you experienced 15 years ago at 22, graduating college was the credit crisis. Most people, unless you're I'm 44, they, you know, didn't experience the dot com crisis in 2002.

He was looking at you.

But I just think that people are in for a world of hurt and.

That how long does it last?

I think, I think the Fed reverses. I mean look, I, I thought that they were not going to go as aggressive as they have on raising. When I heard that, you know, he's really, that Powell is really caught with the idea that he's going to be this eras Volcker, you know, and slay inflation and that what he really wants to see is whatever the headline statistical numbers are, inflation start to trend down in the same way that Volcker did.

Did.

I think he's going to push us, he's pushed us into a recession. I think we're starting to see the signs for it. But I think whether it gets very severe and poor people really start, you know, taking to the pickaxes kind of thing, then the question becomes what happens there? Now you had strange bedfellows 15 years ago in Zuccotti park where you had the Tea Party, right? And you had the anarchist left, right, chanting against the banksters, you know, and that became Occupy Wall Street. I actually think that we could get an Occupy Fed movement. The Fed is abstract enough. It's got the symbols of power, it's called maga. But, but you need the left here is basically like this guy screwed our bank accounts and screwed our crypto and screwed our meme stocks. And so you get the apes and the amplification of social media which didn't exist 15 years ago like it does today. And I actually think that you have people that go Occupy Fed. And it ends up being bullish for two things in the next two years. One is crypto for the Neo people, right? And one is gold for the old gold bugs. And I think you have this bifurcation that against a strengthening dollar today sees people basically rallying for crypto of some kind.

And, and well that's the only, that's only pillar of the bull case left for crypto right now is that the Fed pivots and starts to devalue again. I mean, that's pretty simple. You know, it's interesting that Bill Ackman of Pershing Square had a tweet thread today on Tuesday saying almost exactly what you just said is that notion that is becoming, I think, kind of somewhat prevalent among market participants is that the Fed will pivot at some point. Fed Fund futures is already pricing in cuts next year. And so that very notion that everyone's comfortable with a pivot that's going to happen in 2023 where fed fund tops out just below 3.5% is the thing that doesn't slay inflation. Because if you know what's going to come around the corner and all you have to do is look at a chart on Factsetter Bloomberg of the 10 year U.S. treasury yield or Fed funds 30 years out, it's upper left, bottom right. And just because we've come off of the zero bound, which no one thought we ever were going to do, we stuck our head above it. We're going back below there because all of the sovereign debt that's been accumulated, all the debt all over the place that's been accumulated during this funky period, including the consumer and the savings rates going down for, I mean rates can't go meaningfully higher. And you will have that chaos if we did have interest rates anywhere near what our parents were dealing with in the 70s, that sort of thing of the mortgages that they had. So again, it's one of the reasons why, to your point, it's maybe more subtle than a movement in Zuccotti park or something like that. It's this, they continue with these dovish folks, you know what I mean? The other thing I'll just say about inflation is that before the situation, it's not a black swan. We could all see it coming. Russia's invasion of Ukraine in the situation as it relates to, let's say, natural gas and Europe's reliance on it. I know that you've been very voc about, you know, kind of the mistakes that were made with, with Europe as it relates to nuclear, okay. But also with wheat before that invasion, all of that stuff was going to revert to the meat. As far as the post pandemic thing, if you think about how far we overshot, you know, during 2020, early 2021, we overshot late 2021, into 2022. It was all going to come back. Do you. Is that full?

I mean, are you basically saying that the Fed overreacted because there were so many knobs and dials that they just, just like every Other reaction is an overreaction.

Josh said they were super late.

Yeah, too late.

Dogmatic.

Too, too blunt. The thing that we've talked about before, Josh, I think it's interesting, is one element of this employment and what is, what does this mean for Gen Z? What does this mean for if you're in your late 20s or 30s and pushing this forward?

What is.

Maybe the employment world look differently in 23 than it looked different in 21?

Well, before I give you my view, let me take sort of a Charlie Munger approach and be able to argue the counterview. Okay, so the counterview is we are in a new, new normal. And anybody can work from anywhere, work from home, remote access. The young person that is untied does not need to own a home. You know, they can use Airbnbs. They don't need to own a car. They can use Ubers and ride shares. You know, they can travel around the world. Sort of a global traveler, you know, and they could work from anywhere. You had one of our peer firms, Andreessen Harwitz, declare that their new headquarters is in the cloud right now. Now. Now, how much of that is because Mark just wants to work from Hawaii or whatever, you know, Melbourne, who knows? Or Malibu.

Right.

But I will now take the counter, which is in a downturn. I believe that there's a few things that you need. Number one is camaraderie amongst people, and camaraderie is just stronger. If we were on a zoom right now, the nature of this conversation is very different. Our ability to read, our body language, interrupt each other. The absence of latency technology is great, and zoom has changed a lot of things. And it's great. It's great for the environment, it's great for productivity, but it's not great for human connection. It just isn't number two. Number two is signaling. People still do many things in life to signal. Of course, we virtue signal, but we also signal status, whether it's what you're wearing or where you are employed or what you believe in or your haircut or your clothes or whatever. And today, if you are a techie or a crypto guy or like, you know, whatever, you can wear whatever you want and nobody really cares. Right? You're gainfully employed. Nobody knows if you're a billionaire, then.

You get the black T shirt.

He's still wearing black, though. It works. It looks good. So. So I actually believe this is my contrarian view for the fall 2022.

Fall 20.

So six weeks away, making a call. Okay. Suits, suits are Back. This is the fall trend. People are wearing suits and ties. Why? Because you are signaling you are gainfully employed. Because I do think going to the employment question, you're going to see mass layoffs. And I actually think the layoffs are going to hit the middle class the hardest. I think if you are a lower class, if you're a blue collar worker, I actually think demand is going to be really high for you.

The demand has been fantastic for any kind of service industry, manufacturing, necessary.

And it sucks because they're also the people that are getting hit hardest with food and fuel. Okay. And indebtedness. But I think that other people that were like living fat and bought their second vacation home and spent all this money and build out their home, all of a sudden they're like, I'm now losing my job. Or there's a pay cut. And they are actually increasingly happy to keep their job. Now you're hearing all and seeing all the headlines about job freezes and then you're going to start to see layoffs. And this is the same thing in our world. Going back to venture capital for a second, the first thing that happens is a company does an extension to around. They add a little bit more, more money. The next thing that they do is they add some preference or structure for existing investors to induce them positively. Then you have a pay to play to punish the people that aren't participating. Then you have a down round and then you end up with a recapitalization. Okay, Translate that to human nature. First thing you do is, you know what? I'm going to come into the office a few days a week and then you start dressing a little bit more proper to show the reverence for the appreciation that you are not one of the ones that are being laid off. Then you start seeing you're part of the tribe. Yeah, exactly. And, and so I, I actually think that this is just natural, natural social, primate, human evolution. You are going to see people respect for the jobs that they have, grateful that they haven't been let go or fired out of an. Out of just a logical necessity of some of these companies to save money. And you're going to see the return of suits. So you know that old SNL skit of like Joseph A. Banks where they were using the suits by the dozen to clean up messes. Whatever. Joseph A. Banks.

All right, before you kick us out of here, because it is him kicking us out of here, it is his room here. I want to get your take on the stock market really quickly here because you Know, Rick and I have been talking about this.

I'm long the stock market, it's going to be around for time, a long, long time.

Fair enough.

Yes.

Hot take right here. Josh Wolf said it, Listen, but you know, we've been talking about these, these kind of pockets of over exuberance, whether they were crypto, whether it was spacs, whether it was meme stocks. I mean the list goes on and on. And all of us who've been around a couple cycles could see very clearly that this was a bubble, it was going to burst. No one knew when or how. But you could identify how the things started to kind of stack up to make its way into. Listen, the S and P still closed at an all time high last year, right. As there was, there was, you know, dozens, if not hundreds of stocks that were down 30, 40%. Now a lot of those stocks that have been correcting or a lot of these sectors are down 60, 70, 80%. Okay. And these again are things that we can look back 20 years from now. But it took almost two years from the highs in March of 2000 in the NASDAQ to the lows in late 2002. And that was actually excruciating if you think about it. So we've had this crash under the hood and a lot of high valuation, high growth, you know, kind of interesting things if you're putting your VC hat on, I, I guess a little bit. But taking it out 10 years from maybe your seed investment, they're just lights out. They're never going back to those highs for all intents and purposes. Now I'm finding some really interesting value right now and I think it's like really interesting period to dollar cost average into a snap that's down 80% or a Shopify that's down 80% or something like that. Curious your thoughts here because we still have the Nasdaq's only down 25% from its highs. The S and P is only down about 16 or 17%. It doesn't seem like those two major indices really encapsulate all problems that we've just talked about for the last hour.

So, so remember, a Stock that's down 80% could still be down. It goes from 10 to 8, still go down.

Was down 40% in a day last Friday.

No doubt about your stats. March, March 10, 2000 NASDAQ hits a high 5132 by October 2002. Losses compound daily 78% to 1108 took 12 years. 12 years. I mean people think, oh, maybe it'll come back. You know, all people have known is BTFD, right? For the past. But by the dip took 12 years till November 2014 for the index to recover to the March 2000 levels, including dividends adjusted for inflation. That recovery took 17 years. So you went from 2000, 2002 to 2017. I mean that's just insane, right? And I mean that's an entire generation of, of lost capital, lost wealth. I think that what is going to happen is you're going to have a range bound market for the next two years. You're going to then have the resurgence of stock pickers and those famous stock pickers. When you think back 2002 to 2007, so literally 20 years to 15 years ago, respectively, you had long hedge fund investors that were basically, basically Buffett acolytes or Klarman acolytes that truly understand great compounding businesses. They also were great at shorting terminal zeros. They were able to identify the frauds, the fads, the technological obsolescence. You will start seeing headlines in this market when everybody is feeling pain and suffering about this guy or this girl or whoever it was that made 30%, 80%, 90% of money will float into them. Why? Because they were short. And intelligently so. There's a reason why you see certain tiger cubs that are super long growth in religious this way getting crushed. And you see Philippe Lafont and Cotu, you know, actually doing on a comparable basis quite well. He knows how to short. So I actually think that we still have a ways to go. You need some signs. What are those signs? They're going to be qualitative things. Okay. In 2000 you had the Putnams and the Amerindos. And who's the guy? Alberto Valar, who ended up, you know, in prison, maybe committed suicide, I can't remember. But he was one of the big tech investors, right? That's like this generation's Cathie Wood. Okay. She's still getting in inflows even though it's down, right?

She's an afterthought. It's Elon Musk.

Well, but she owns.

I'm telling you, I'm telling you.

When Elon Musk only hold but really quickly.

I mean I've never seen a cult leader or cult story in the public markets in the 25 years that I've been in it not blow up.

And somebody that's listening, okay? And I feel like one of those like cliches, like I have Mormon friends. Joseph Smith, whether he was real or not, you know, died, whatever. Mormons continue. And they are one of the fastest growing religions. Tesla is a religion. Religion. I can believe that it is. That there's accounting fraud, that there's shady shenanigans, that there are definitions of working capital, that the spin. Elon is undeniably the greatest carnival barker, the greatest capital market fundraiser in the history.

But you didn't say a genius. Okay? Because I hear this all the time. People say, well, he's a genius. Like, is he a genius? He's all those things that you just said. But that doesn't make him a genius. And I want to make one other point.

Genius at the things that he just said.

Yeah, but it's a technological genius because that's the only way that you are right. Billion doll market cap to Tesla.

No, you assign an $800 billion market cap because it is the word of credit crede. Credulity. It is belief. People believe and they want to believe. And he has done a great job at convincing people, like a religion that he is leading them to the promised land. Now, you and I will look at this and be like, I think the guy's full of it. You know, I mean, you know, a carny barker when you see one, it's like Monorail man on the Simpsons, you know, it drives me crazy in the same way when I watch Joel Osteen or one of these other Sunday morning preachers, you know, preaching the prosperity gospel. I feel like people are being snookered in. But so far it has worked for anybody that has believed. So it doesn't matter what I say about their calculations of working capital, doesn't say what about warranty reserves? About any of the accounting. By the way, on Twitter, one of the most amazing things. This was a great phenomenon. One of the most widely followed tweets that I saw trending the other day, it literally said, and I thought it was a joke, what is ebitda and why does it matter? Okay. And so you're going to have an entire generation of people that are learning basic accounting. And I remember that happened. By the way, the best book that you could buy between 2000, 2002 was like financial Shenanigans or Graham and Dodd, or, you know, all the stuff that was Buffett and Munger esque. And so you'll go through the same phenomenon. Elon has built a cult, he has built a belief. Some of it are using tactics of promise. The future, it is identity building. People have associated, they are branding themselves, they're getting tattoos, and he has created a Brilliant. Us versus them. The us versus them of the upstart, David versus the Goliath of the automakers. Big auto or big oil. It is the ups, downs and start, you know, stock promoter versus or you know, CEO versus the short sellers that want to kill us. And every time you create an us versus them, you can solidify your base. Trump has done it. Elon has done it. To me, well, it's really important.

Trump, Trump lost the White House. He lost the House, he lost the Senate, got impeached twice, and he started a violent insurrection on our Capitol. And I will just say this. I think he's the big loser other than what he's been able to raise. Okay, now I will say this. The Elon's.

Wait, wait.

Right turn.

By what I mean, as far as I know, I think Trump is making something like $200 million this year. Suckers to pay taxes.

And that's how he's keeping score.

Yeah, right.

Yeah. But I just say this, I just think that there's a couple things going here. This alt right turn by him, he voted for this woman, Myra Flores in Texas in the special congressional election. He said he's going to vote for Desantis. The people who buy Tesla cars don't vote that way. They don't think that way. They don't believe in climate change for the most part. Okay. And now that he's in this battle with Donald Trump, okay. I just don't think it's going to end well, particularly for him at any moment. And then the other thing, one question for both of you, then we can get out of here maybe, because I'll give you guys the last word. You know, you guys have been in business, you for 25 years, me for 25 years. You're a little less than that, Josh, a little younger than us. Every single absolute scumbag that I've known in their private life have absolutely been scumbags in their, in their professional life, just matter of factly. And this guy, and this guy seems to take the cake with the news this week.

Thoughts? I, I think the news every week is. Look, you had the pedo thing you. Years ago. I mean, that to me was like, are you kidding me? You had the SEC and the fake.

Bio, you know, which is going to trial in October.

Yeah, Twitter things going, the Solar City thing. I mean, he faked a product literally out of monorail from Simpsons. Like so far, like the Teflon Don, it has been Teflon Elon. And to me, they are, they are symptomatic. Of a moment. I'd like to believe that the purge that we saw of art imitating life imitating art, where you saw we work and we crashed, you saw Theranos with bad blood that became the dropout. And then you saw Uber which was more, you know, bad management, not absolute fraud or anything like that.

Super pumped. I love that.

I, I, I think that that was a marking of a moment and it marked the end of an era that arguably began with social network, with Facebook right before their IPO. So you had a 10 year period that Aaron Sorkin started with a social network and that ended with Jared Leto's incredible performance, you know, of Adam Newman as in which worked. I'd like to think that the last two shoes to drop and to me they are giant clown shoes are Elon and Trump. But I don't know how much longer we have for that now. You know, will they last a generation? No. But you know, could it go another few years?

Hopefully not. I've taken the under in two years that he's the CEO of Tesla. I think he's going to be out probably within a year.

I think he's trying to get out of being CEO for Tesla for a long time. And I think that this move with Twitter to, you know, dump eight and a half billion dollars of stock stock was a stroke of evil genius. I mean it was a stroke of evil genius. It'll be interesting how the courts, by the way, my prediction here, Delaware Chancery, they will say he's, they've got two cases up against, you know, for the judge, she's going to say he's absolutely allowed to be paid whatever shareholders voted for. He can get hundreds of billions of dollars and he's got to spend $44 billion to buy Twitter. I think, I think he, he wins on compensation, I think he loses on Twitter.

So six months from now he owns Twitter and how many of SpaceX, Tesla and Twitter. What's the over under on the number of CEO positions he holds?

I don't know, at least one I'm.

Confident saying one is there's no way he actually closes on the Twitter deal. And that's the thing that bounces him from Tesla as CEO and the board because if you're that board and he's not going to to basically he's got this judgment against him to do this thing. And I also think there's tons of risk to Tesla shareholders. The only way he can get it done, the banks are not going to want to provide the debt or the equity at that point, when you look at Snap has got a $16 billion enterprise.

He is the key to the entire complex. I mean, all of it, right? And he has been, again, to his credit, an incredible fundraiser. If he's not there to raise the capital or for whatever reason, people stop believing in him. That's when the house of cards breaks. But until he, as long as he can continue to fill the tents and get people to tithe as true believers and give money, and so far, they have been rewarded for that. It doesn't matter what the truth is, what reality is, what the fundamentals are. And for those of us that look with scrutiny or see somebody being duped, it feels frustrating. I've come to accept that the masses are not that bright, and I think Elon has just exploited it in a Machiavellian, immoral way. The rest of us hopefully podcast through this, maybe educated a few people.

There you go. All right, well, listen, Josh, thanks for hosting us. Thanks for coming on. Ok, Computer. It's really fun to have you guys together. You guys are two NYCVCOGs.

That was a lot of.

New York City love. We'll be back. That's the next version.

All right, thanks, guys.

You got it.