Investing in Innovation & Deeptech with Josh Wolfe, Co-Founder & Managing Partner, Lux Capital.
Moderated by AJ Scaramucci, Managing Director, The SALT Fund.
MODERATOR
SPEAKER
Josh Wolfe
Co-Founder & Managing Partner
Lux Capital
AJ Scaramucci
Founder & Managing Partner
SALT Fund
TIMESTAMPS
EPISODE TRANSCRIPT
AJ Scaramucci: (00:08)
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.
Josh Wolfe: (00:15)
Great to be here, AJ.
AJ Scaramucci: (00:16)
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 in fresh capital for Lux. And one of the many unique aspects of your firm is you have this thesis driven approach and I'd love to understand what verticals will you be focusing on with this new capital?
Josh Wolfe: (00:40)
Yeah, so we love to find directional arrows of progress and the directional arrows 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, we went from flames, to incandescent bulbs, to LEDs, and then computing, we went from mechanical disks that were moving to solid state storage and end compute, in automobiles we went from a 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 disks.
Josh Wolfe: (01:14)
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, and 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 or 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.
Josh Wolfe: (01:51)
Another one is resolution, and this is resolution of imaging in life sciences, the tools and techniques and instruments that let us see ever fine a resolution of things to be able to make discoveries, whether it's for new materials or for drugs that save lives, so I think that's a critical area.
Josh Wolfe: (02:05)
And then a third area where there's a clear directional arrow of progress is space, and in space it's everything from manufacturing to satellites and autonomous systems that are basically doing the dull, dirty, dangerous things that astronauts ought not be doing.
AJ Scaramucci: (02:19)
Sure, 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 basically recently made an investment into.
Josh Wolfe: (02:35)
Amazing entrepreneurs.
AJ Scaramucci: (02:36)
Amazing entrepreneurs, how are you thinking about 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?
Josh Wolfe: (02:56)
Well, I think cliches, like stereotypes, have merit in elements of truth, and so that cliche that history doesn't repeat but it rhymes is true. And here, if you look to the history of 19th century build out of the railroads, 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.
Josh Wolfe: (03:28)
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'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 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 five years with capex, today you can launch dozens, if not hundreds of small sub $100,000 satellites.
Josh Wolfe: (04:02)
Well, 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 ship building 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.
Josh Wolfe: (04:34)
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, 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.
Josh Wolfe: (04:56)
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, "Let's manufacture things off planet and bring it back so that the earth can be cleaner." We're more in that latter camp.
AJ Scaramucci: (05:25)
Got it, it makes a ton of sense. And sort of parlaying from space perhaps into defense because those two are very related or co-entangled together, Lux has worked very closely and cooperatively with the Department of Defense, you yourself have been an advocate for Silicon Valley's 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?
Josh Wolfe: (05:58)
Well, it starts with an appreciation that the roots of Silicon Valley and venture capital investing were not just Hewlett Packard in the garage with a bunch of groves in Silicon Valley, it really was electric warfare. When Lockheed Martin came to Sunnyvale, there were zero people. Pretty soon we have tens of thousands of people and they were developing pretty cutting edge technology that helped us in the cold war. So, I think there's a return to that ethos and zeitgeists after probably 20 years of people that have been saying, "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." And part of that is for political reasons, for geopolitical reasons, part of it is immigrants that have come that haven't felt that same appreciation that we had in the 1980s when people were escaping as immigrants from Russia really looking to come to the US.
Josh Wolfe: (06:42)
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 USSOCOM, 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."
Josh Wolfe: (07:08)
What sucks? Is usually the great question that an entrepreneur is asking to identify a market opportunity. And he said, "I want you to go and sit with these men and women and understand what sucks." And this is everything from Blue Dart Tracking. 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 a triple canopy.
Josh Wolfe: (07:33)
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 can be advantaged, particularly when we have peer adversaries in China and Russia that are completely intertwined in a military civil fusion.
AJ Scaramucci: (07:50)
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 US, they're pouring hundreds and hundreds of billions of dollars into areas like AI, like biotech, quantum among other things. How does the US sort of navigate and not fall into this Thucydides Trap, if you will, while simultaneously keeping its competitive edge in technology?
Josh Wolfe: (08:29)
Well, the first thing is a qualitative and cultural one. 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 chess players and engineers and doctors and scientists. So, I think as a culture, we should be celebrating the people who were quite literally inventing the future, and those are our scientists and engineers. We should be attracting them from other parts of the world, they should be developing their degrees here and getting their doctorates and staying here and starting companies, that would be a beautiful thing that would give the US a competitive advantage.
Josh Wolfe: (08:58)
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 faddish 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 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.
AJ Scaramucci: (09:24)
Sure, and pivoting away from sort of this macro economic 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 [inaudible 00:09:48] you use to identify founders that have that resilience and grit to actually get it done, make these visions happen?
Josh Wolfe: (09:56)
It's one of the almost a heretical things to say, but a very popular thing in Silicon Valley and throughout the country at the moment is mindfulness and meditation and being at ease. And I actually think for the individual, that is a beautiful thing. For society, it is a horrible thing. You want disaffected, really unhappy, miserable, motivated people, because that is where all great progress and changes has occurred.
Josh Wolfe: (10:17)
And you look at what the great people that we've celebrated, whether it's Steve Jobs or Larry Ellison, Oprah Winfrey, you listen to the backstories of what these people endured, whether they were in... And 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 Texas football town. Whatever it is that makes you that outlier, it's a thin line where you could end up sort of in a malicious, 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.
AJ Scaramucci: (10:55)
Mm-hmm (affirmative), I love that. And perhaps, can you tie that back to some of your own story, your own origin story? I think that people would love to hear more about that.
Josh Wolfe: (11:05)
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 of 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 resources and advantages, and I resented that. 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... To be the man, you must beat the man mentality.
Josh Wolfe: (11:43)
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.
AJ Scaramucci: (12:03)
Yeah, 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, including nuclear waste, biotechnology, immunotherapies among other things, I'd love for you to talk a bit about that from an historical context at Lux, but also going forward, where are you looking to actually start businesses from scratch?
Josh Wolfe: (12:29)
So, it often starts with what is the consensus in the market, and then what's the variant 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? Do they have a smarter insight than us or have they missed something or overlooked something or are they experiencing and enjoying too much success over years so they're not motivated to look here?
Josh Wolfe: (12:46)
If you take nuclear, which was an interesting example, the entire venture world was going crazy about clean tech, green tech, alternative energy going back 10, 11 years, nobody was looking at nuclear. In a part, it wasn't an Al Gore's movie, Inconvenient Truth, so it just wasn't being celebrated in the sort of mega church about alternative energy. And we looked and said, "Nuclear is really interesting." And then 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 plan for a billion dollars, you can 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?
Josh Wolfe: (13:22)
So, we ended up saying, "Is there anybody that's doing high-tech waste treatment?" And as we've dug into this, there was this entire complex in the Department of Energy, about 25%, one in every $4 they spent was on clean.... It wasn't on clean and green and alternative energy, it was on nuclear waste cleanup at places like Hanford and Savannah River that nobody had ever heard of for pre and post Cold War bomb making.
Josh Wolfe: (13:38)
So, we ended up starting a company named after Madam Curie called Kurion, locked of the best talent, because there was this LIBOR arbitrage where all the smart people in nuclear sort of moratorium on new build, went into quant shops and hedge funds like Renaissance and in Two Sigma and D.E. 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 and plutonium. So, that was pretty crazy, it started as a brain fart of an idea, we pulled together a team in the Capitol and do that.
Josh Wolfe: (14:11)
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, what you eat and how it affects you and your gut and then so forth. And there were probably 40 companies at the time focusing on the microbiome. And one of our very smart partners, Adam Goulburn at Lux, who's a PhD stem cell biologist said, "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 Kallyope, brought in an incredible woman, Nancy Thornberry, who ran all of [inaudible 00:14:56] discovery programs and then just capitalized that today.
Josh Wolfe: (15:00)
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 decrease in gap between that which was once imagined by some sci-fi author and an entrepreneur who is making it science fact.
AJ Scaramucci: (15:19)
Sure.
Josh Wolfe: (15:20)
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 to, in a crowd, 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 phenotypes, some trait? And therefore there should be seven or eight people of these types walking around.
Josh Wolfe: (15:43)
And sure enough, we would go to people at Cold Spring Harbor and found these PhDs. 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 talk about this idea of mutans 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.
Josh Wolfe: (16:14)
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.
AJ Scaramucci: (16:24)
Sure.
Josh Wolfe: (16:25)
Now, if you could give that to the masses with a third of our country massively obese, 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.
AJ Scaramucci: (16:33)
Oh, for sure.
Josh Wolfe: (16:34)
You could save lives.
AJ Scaramucci: (16:35)
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.
Josh Wolfe: (16:49)
Mm-hmm (affirmative).
AJ Scaramucci: (16:51)
And 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?
Josh Wolfe: (17:04)
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 processing to understand texts and search where these worlds are combining.
Josh Wolfe: (17:40)
We have a public company in called Recursion that was taking computer vision and AI to be able to look at the typology 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.
Josh Wolfe: (17:57)
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.
AJ Scaramucci: (18:13)
In addition to biotechnology, another one of the mega trends 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 by-product of sort 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?
Josh Wolfe: (18:37)
We have thought that the arms dealers in this case, 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 proponent of that, their 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 listened 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.
AJ Scaramucci: (19:06)
Fair point, I think that's a great universal heuristic, candidly. So, in the last few minutes here, a few rapid fire questions for you. One is, right now, there is a massive abundance of capital, particularly in private markets, sloshing around and the late stage hedge funds are kind of coming down [inaudible 00:19:24] stage, as are 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?
Josh Wolfe: (19:40)
So, most of the crossover funds for us are partners, they are providers of later stage capital. And they're all very smart and they've been great partners. So, the [inaudible 00:19:47] is D1s, [inaudible 00:19:49], et cetera. Early stage, I think for us, the bread and butter is really, can you start to [inaudible 00:19:54] companies? Can you put entrepreneurs in business and be their very first day one check?
Josh Wolfe: (19:57)
Today, I don't know, there's 1800 venture firms, again, history doesn't repeat, it rhymes. You go back to the 2000 dot-com boom and bust, within a year and a half of that peak number, I think at that time it was about a thousand then 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 in 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 [inaudible 00:20:39] you can get disproportionate ownership early on for relatively low capital.
Josh Wolfe: (20:43)
But I think we're in a world for the next few years where the pools of capital formation very much feel like 1998, '99, 2000, where everybody is getting into the game, and eventually there'll be a massive shakeout, the distress guys will clean up. We've had probably eight or nine of our companies go through spats, we were telling all of them, "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." So, that's how we're sort of thinking about the next year.
AJ Scaramucci: (21:12)
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? And we'll wrap there.
Josh Wolfe: (21:25)
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 under hyped by others, and we build the portfolio, so I can talk about it pretty actively, is what I call the tech of science, the technologies and instruments that are enabling people both on the hardware side, we have a company called Eikon, Nobel Prize winning work of the 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.
Josh Wolfe: (22:09)
The reason that's important, and I know that macro is a big part of this conference assault, the geopolitical competition that we're having with China and others, historically on the stage you had hard power and US 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.
AJ Scaramucci: (22:37)
I love that. With that, Josh Wolfe.
Josh Wolfe: (22:39)
Thank you, AJ.