Josh Wolfe – The Tech Imperative - [Invest Like the Best, EP.130]

My guest this week is Josh Wolfe, co-founder and managing partner at Lux Capital. I had Josh on the podcast last year which was one of the most popular episodes in the shows history. This is a continuation of our ongoing conversation about investing in the frontiers of technology. My favorite thing about Josh and the way that he invests is the mosaic that he and his team at Lux are constantly building to understand the world and where new companies may fit in. We cover a crazy variety of topics from business model innovation, roles of a CEO, the military, the death of privacy, and arrows of human progress. Please enjoy round two with Josh Wolfe. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes 1:22 - (First Question) –Ability to tackle massive scale problems 4:05 – Key roles of leaders and his checklist for evaluating them 5:55 – Common traits among founders that make them incredible storytellers and leaders 10:22 – The concept of ill-liquidity 14:53 – Thoughts on the types of companies going public 16:41 – Most innovative business models 19:14 - Advice for LP’s 23:51 – Common devil 24:01 – The True Believer: Thoughts on the Nature of Mass Movements 25:09 – Big internal debates at his firm, starting with price discipline 28:45 – The value debate internally 33:34 – CRISPR from an investment standpoint 36:50 – Edge cases they are looking at 46:52 – How they target ideas in a single concept 50:01 – The Coast of Utopia: Voyage, Shipwreck, Salvage 51:04 – New theses that they chase 56:31 – Recent adventure with special operations guys Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

  I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai.

• 0:36Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Neal and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 0:57Speaker 02

  Patrick O'Neal is the CEO of O'Neal Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Neal Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Neal Asset Management may maintain positions in the securities discussed in this podcast.

• 1:22Patrick O'Shaughnessy?

  My guest this week is Josh Wolfe, co-founder and managing partner at Lux Capital. I had Josh on the podcast last year, which was one of the most popular episodes in the show's history. This is a continuation of our ongoing conversation about investing in the frontiers of technology. My favorite thing about Josh and the way that he invests is the mosaic that he and his team at Lux are constantly building to understand the world and where new companies may fit in. We cover a crazy variety of topics from business model innovation, roles of a CEO, the military, the death of privacy and arrows of human progress. Please enjoy round two with Josh Wolfe.

• 1:55Patrick O'Shaughnessy?

  One of the things that I'm fascinated about right now is just big coordination problems. You mentioned China specifically, which I think is part of the answer to this next question. I'm curious about your view on our ability, really as a species, to tackle massive scale problems versus incremental innovation, optimization, efficiency gains that you see in a lot of business today and certainly in a lot of startups. How do you think about that dichotomy of massive scale projects and our ability to tackle them? And what you want to fund?

• 2:25Speaker 03

  Well, on this, I'm the opposite of Robert Gordon. So I actually believe that it's just a failure of imagination worse than a failure of productivity or technology because we don't know what the thing is that's going to be 10 or 20 years sense. In terms of tackling huge, large-scale programs and projects, there's basically one overarching mechanism which exists at the moment, which is a low cost of capital. When you have a low cost of capital, I have equated it to a tractor beam for the future. And so you would take 20-year far out projects and basically pull them in Star Trek-like into these 20-month frenzied projects. Now, there's two ways to do that. One is state-driven. And as you alluded to, that is China. China decrees in a five-year plan, this is what we're going to do. And you see roads built overnight. You see bridges constructed while we lament that it took 11 or 12 years to build the Freedom Tower or rebuild the Freedom Tower.

• 3:08Speaker 03

  And so I think the ability to galvanize people, commandeer resources, in fact, command people to go do something is something that a state can do. On the other end of the spectrum, where you have free economies and democracies, you can't will people to do something here in the US per se. You can encourage, you can incent, you can disincent. But the kind of person that can is not a China-like leader, but somebody like Elon Musk. And with all I publicly criticize about Elon, the one great virtue is I think he is the paragon of somebody who has been able to paint a narrative and get people to believe in it, almost like a religious leader, and follow behind. And what flows from that is human capital, people wanting to work for that vision or that mission. Financial capital, people wanting to part with their dollars and support it. So you lower the cost of

• 3:50Speaker 03

  capital, you lower the slope for somebody to join onto a project. I think both of those things, whether it is state-directed or story-directed, it's human narrative. They're both powerful things. But I am hyper optimistic and confident, even though I'm generally a cynic. Our ability to do big, grand-scale things is greater than ever before in part because our communication tools are greater than ever before. To be able to use Twitter and convince people that something is possible, to be able to use the technologies and mediums to communicate, whether it's something like what you and I are doing right now, to be able to broadcast ideas or video. It's super powerful and 100 years ago, you never had that.

• 4:26Patrick O'Shaughnessy?

  The narrative one is so striking, something that's coming up more and more in my conversations, especially because just like capital is cheap, the cost to distribute a narrative is also cheap. It's easier than ever to do that if you've got a good narrative. It's a great bridge into this question that we had discussed a little bit ahead of time about some of the key roles of leaders, CEOs specifically, and that you sort of have an internal checklist of sort of the most important things that a CEO could be doing. So I'd love to explore that list because I know narrative is one of the key components.

• 4:52Speaker 03

  So there's a great checklist, which really captures the 90/10 of this and it's five main things. And I can concede that this is actually, it's a checklist, right? It's not a how to, but it also comes from a friend of our firm, Xander Lurie. And Xander was at GoPro, he now leads SurveyMonkey, incredible culture, incredible guy, super thoughtful. And he's like, look, there's basically five things. The first thing, nail down the strategy for the company. Decide what you're going to do, which also means deciding what you're not going to do. The second thing is deliver the capital to pursue that strategy. Now, there are really smart people, but they can't tell a story. And so if you can't tell a story, you can't persuade investors to join you, you can't deliver the capital. So having a clear cohesive strategy, being able to project it and sell it with confidence, I think is a critical thing for that second step. Third thing, building a team to execute. And this goes to what we were just talking about, recruiting people,

• 5:35Speaker 03

  convincing them to cross the country or cross the ocean and move with their family and drop what they were doing to join you on a mission, whether that was Shackleton back in the day, or that is a startup today, being able to tell a story and galvanize people into movement is a super powerful trait. Fourth thing, communicate the hell out of it. So be able to tell everybody internally and of course importantly externally. So that's telling your partners, telling your competitors, telling the media, telling the press, anybody that you can, just constantly communicating it. And the more consistent the message, the more powerful it is because it just redoubles. The best companies, you walk in and you ask a VP or a tertiary person below them, what's the strategy? And they give the same answer as a CEO. It's just a phenomenal measure of the effectiveness of the organization. And the last thing, hold people accountable.

• 6:18Speaker 03

  So you can come up with all the narratives you want, you recruit the people, you can set the strategy, you can raise the money. If people are not held accountable, you don't set clear goals and you don't hold them accountable, meaning that they're either getting promoted or fired in extremes, then you don't have an effective organization.

• 6:30Patrick O'Shaughnessy?

  It's just so interesting how much there is about both setting the strategy and then building the narrative around it. How much of it is storytelling? And that that's sort of something fundamental to what people are and do. Is there anything across, let's say, founders or even established CEOs that you think do this incredibly well? Is there any pattern across those people elsewhere in their lives or their background or their experience that makes this possible? Because it is one of these skills that when you see it, you sort of have to be in awe of the raw ability.

• 6:58Speaker 03

  You know, I was always a horrible storyteller growing up. In fact, my best friends, they literally used to make fun of me. They would literally say, beginning, middle, end. Okay, I would go on with all these details, you know, like a kid. And so some of it is making the point. But what makes a good story? It's memorable. It might have a surprise at the end. It's easy to repeat. It makes you feel smart because you can share it at a dinner conversation. And so the best stories convey meaning. They convey it in a clever way. They're memorable. They're unique. And I think that comes from reading a lot. It comes from watching a lot of movies. It comes from talking to a lot of people. And you pick up these stories. And some people are just great storytellers. And some of them want to leave people with an emotional reaction. Wow, that guy's really interesting. She's

• 7:42Speaker 03

  really smart. Other people, they want to impart with a meaning and a story that you are not going to forget. There is a great story, and I'll give you this real quick. There was a magician here that was in New York in Union Square. I'm trying to remember his last name, but it was called In and of Itself. He did this magic trick with this gold brick. And he's holding this gold brick, and you have no idea what the object is about. And he tells a story about how he's in his house, and he comes in with his best friend, and his mom is there, and she is making out with a girlfriend. And he finds out at 14 or 15 years old that his mom was a lesbian. And suddenly, it's like, okay, it's this emotional weight as he's telling the story. Well, okay. The next day, he's in the living room by the front window, eating breakfast, and somebody throws a brick through the window.

• 8:26Speaker 03

  And on it, it says, "A Mean Thing About Homosexuals." So he's broken because he knows it's his best friend, and his best friend's told other people. And he's totally shunned socially. And so he goes on and he just talks about how he bonded with his mother over this because suddenly he loved her even more because she found love and he didn't judge her. But this was a life-changing moment. And that brick through that window represented this very meaningful thing. So he does this magic trick and he builds this house of cards as he's telling the story around the brick. And of course, with this elegant sort of motion, he blows on the house of cards and they fall and the brick is gone. And he tells you, "Name a street." And somebody names a street. And he's like, "I promise you, when you leave this theater, if you go to that street in New York, you know, on Ludlow and Barak, or wherever it is, this brick will be there on the corner." But the beautiful thing about it is thousands of people will pass by this brick

• 9:11Speaker 03

  and have no idea what it is. They will think it's a piece of trash, but to you, it will have meaning. And that, to me, was super powerful. Putting meaning inside of stories, inside of objects like that is just, it's rare.

• 9:22Patrick O'Shaughnessy?

  Your point about the portability of these things, and everyone talks about memes, things that can be replicated quickly and propagate through the world. That seems like people that are talented at creating memes or their equivalents, portable stories or portable ideas, that seems to be a new superpower. And maybe you could talk about Trump or politicians that harness this. But you see leaders of all types starting to harness this ability. It's such a fascinating idea.

• 9:45Speaker 03

  But the ability, it isn't clear if it's coming from the individual or it's the fact that they have an assembled audience. And that audience ascribes to a bunch of shared values and they themselves are the messengers that are going out and spreading it. And so whether those are messages of love and optimism or of hate and negativity, I actually think it's how you aggregate your audience. And you have done a phenomenal job. Why? You start with really interesting people, really interesting content. You get an audience, the audience feedbacks that make suggestions. You listen to it, you engage with it. And so your influence and ability to shape a message and get it out there and also be an open receiver is rare.

• 10:20Patrick O'Shaughnessy?

  The idea of audience aggregation via niche exploration is also interesting. And I think this applies to companies too, where strangely, the more specific the episode, let's say of this, and the longer and the more wonky, the more listens it gets. So it's sort of the opposite of what you might expect.

• 10:35Speaker 03

  No, it's exactly what I would expect because it's novelty and it's narrow. I don't need to hear somebody else. You know, if you wanted to hear the hand waving nonsense, you go and put on cable TV and you know, you can predict what they're going to say. But hopefully, whatever we're going to talk about next, whoever's listening right now doesn't know the thing that we're going to talk about. And we're going to talk about it in a way that's going to be interesting. And so I just think narrow and novel creates interest.

• 10:57Patrick O'Shaughnessy?

  So speaking of narrow and novel, so the next thing we're going to talk about is this idea of illiquidity. I love this idea. I mean, again, this is my favorite thing about talking to you is this kind of smorgasbord of things that interconnect. So talk through this idea and why you've been thinking about it more recently. It kind of hearkens back to our conversations on macro things.

• 11:13Speaker 03

  So right now, there's an abundance of liquidity. Everybody would say, my God, money is sloshing around, looking at places. But part of that is going into very illiquid places. And the setup to me of illiquidity is almost like an enormous amount of leverage. If somebody is coming in and writing a $200 million check in a growth equity round, and they're doing it at $1 billion, but the last round was at $100 million. The existing investors have this huge paper write up. It looks great. But if there's a down round, the preference stack on that company is owned and dominated by the new investor. It's basically like having a 10%, 20% down round when you have a massive amount of debt. The creditors own the company. And so I think that this is happening writ large. I think SoftBank is a great example of this, and we could talk about that. But I think that the thing that will shock people and the current cycle where we will

• 11:58Speaker 03

  see a potential downturn is going to be about illiquidity. People that have all these paper marks, but they're not liquid. People that have done subsequent rounds of financing and are expecting the next one and it doesn't show up. LPs and endowments that are overextended. All my LPs that come in, they say, you know, who should we be investing with or whatever? Now, some of this is self-serving because I'm confident they're going to continue to invest with us. But I tell them, you should be looking at secondaries. You should not be allocating to venture. Now, Bill Gurley, who's a friend, Bill, for many years, has been talking money out of the system. He's been saying, stop investing because you're going to keep putting money in. You're going to raise valuations. You're going to ruin returns. And he's been appealing to fear, totally unsuccessfully. At the other end of the spectrum, Sequoia, who is absolutely incredible, in my view, was possibly appealing to greed. Look, all this money's going to be allocated.

• 12:40Speaker 03

  It's better in a zero-sum way that it goes to us as opposed to our competitors. So let's create a giant sponge and sop it up. And by the way, we have to do this because there is an 800-pound gorilla or Godzilla, depending on your view. And he is a five-foot-something guy named Masa, who has this $100 billion fund. And we have to control the fate of our own companies and we have to be able to write bigger and bigger checks. And so we're going to do that now. Either you believe that Sequoia was raising a very large fund because they can put it to work, which I do. Other cynical people will say, well, it's easier to write $100 or $150 million check from a pied-à-terre than to do a $5 million Series A. And both of those things are probably true. But I think the SoftBank thing is super dangerous because they're putting a lot of money in at very high prices. And I think the early investors are likely, or just as likely, to end up with zombie shares,

• 13:24Speaker 03

  with total illiquidity, paper marks that they never see to fruition. When they came into WeWork and then priced up their own round, the, again, tinfoil hat theory here is either, on the one hand, they are truly visionaries, you know, focusing on the singularity and trying to build the future. Or they are producing a portfolio of paper assets that serve as collateral against $150 billion-plus of indebtedness at the mother corp, which nobody really talks about. I'm hyper worried about the illiquidity that may come from that. Tesla, a poster child right now of a horrible balance sheet and illiquidity. Both of those, SoftBank and Tesla, represent the poster children of tech possibility and the future and the vision.

• 14:05Speaker 03

  You know, again, this idea of this tractor beam pulling, you know, 20 years' ideas forward into these 20-month frenzy projects. If one or both of those companies have liquidity crisis, my God, the narrative, the story, is shaken to its core. In the capital markets, we've of course seen over the past 10, 15, 20 years, a massive shift from active to passive. And you've got a lot of great insights and views on this and the quantitative piece of this. BlackRock is somebody that everybody thinks is safe. BlackRock with the ETF complex, they have a lot of leverage. There's a lot that's not discussed and you could see a situation where they might represent a low probability, high magnitude systemic risk to the financial system. Nobody's talking about that. So I look at this current cycle and I say, a lot of risk of illiquidity that causes a shock. And some of the evidence that starts me believing this is you see companies that go

• 14:50Speaker 03

  from a billion dollar valuation, not down 10 or 20%. There's a discontinuity in the pricing and they go to zero. These companies are going out of business and you're starting to see frauds that are being revealed. And almost in a pattern, they are being revealed one after the other. And so you have billion dollar whale and you've got the Fire Festival documentaries and you got Bad Blood and the movie about Theranos. And all these things are not things that you saw at the bottom of a market. And so you put all those pieces together in a mosaic and you say, geez, a lot of illiquidity, a lot of fraud starting to be revealed. I think there's going to be a lot more fraud that shocks the heck out of people. And I think it's going to all be around this idea of ill liquidity.

• 15:27Patrick O'Shaughnessy?

  One of the pieces in the middle of all this is for the first time now in a while, a lot of the big, famous private companies are filing S1s, going public and from the cheap seats and we don't traffic in IPOs and I don't have an opinion on these. I read them, I'm interested, but it certainly seems like there is sort of a two classes. There is the Uber and Lyft's of the world. Maybe Pinterest would belong in this bucket as well. And then there are the sort of Zooms of the world that seem to be really good. It's not going to be a $500 billion business, but it seems to be a really good, solid, profitable now business. Any thoughts on sort of the types of companies that are going public and how this might fit into this whole illiquidity thing?

• 16:04Speaker 03

  Well, I do think it's the same phenomenon. Zoom does not need as big a story for people to buy in. It's is versus ought. It's making an observation versus a prediction. You can look and observe, this seems to be a good business. They seem to get good returns on incremental invested capital. You cannot make that case for Uber or Lyft. Now, I'm not saying that they couldn't be great businesses in the future, but certainly the prodigious amount of cash that they are burning on a regular basis depends on the kindness of strangers. It depends on investors parting with their cash to believe something. So I think that there will be this bifurcation between legitimately good businesses, almost like value tech, that are generating cash, generating profits, able to profitably invest in the future, and people who need to tell a better and better story so as to raise the expectations, so as to lower the cost of capital, to bring cash in to fund operations.

• 16:48Speaker 03

  So one of the things that I think also captures this whole thing in this illiquidity piece is this idea of the minnows and the megas. The minnows are the thousands now of small funds. Some of these guys are $50 million or less, they're doing C deals, they're competing for super early-stage stuff, and our view is be friends with them because they're a source of deal flow and some of them are going to go and turn into great funds. At the other end, you have the megas, which are SoftBank and Sequoia, and I think that that bifurcation between the minnows and the megas is setting up a lot of the structural risk in venture.

• 17:15Patrick O'Shaughnessy?

  The thing that I'm most interested in, looking at early-stage businesses, are ways in which those businesses are innovating, not just in terms of the value that they're creating, but also the business models, the distribution strategies, all the things that need to sort of come together for a real successful business to take hold. I'm curious if you think about the most interesting and innovative business models that you've seen, not just in venture, but just period through history, if you have any thoughts there, because I think this is an understudied topic.

• 17:39Speaker 03

  Well, I think, of course, some of the best business models are the ones where companies persist today and have for the past 40 years because it means that the business model actually holds, that there's some deep competitive advantage. I'll give you one that's outside of venture that I thought was pretty clever, and we actually used the same sort of strategy at one of our portfolio companies, and it has to do with sandwiches and soda. Okay? This is a company back in the day called Turbo Chef. It was a fast cook convection oven, so faster than a microwave, but toasty like a toaster. And the setup was, it was really expensive, you were not going to buy a $4,000 oven for your house, but management figured out, you know who needs this? Subway. Why does Subway need it? Because they had a competitor, Quiznos. Quiznos had their slow toasty sandwich, Subway had their nasty cold meat sitting there, iridescent, shining on the thing. So somebody came in and said, okay, let's sell these to Subway.

• 18:23Speaker 03

  But how are we going to get Subway, in their 20,000-plus locations, to spend $4,000 bucks a location, $80 million in a purchase order? They figured out, let's appeal to interest, not reason, and they got Coca-Cola. To fund the purchase of all of these things for Subway in exchange for the cola contract. This to me was a clever deal. This was a clever business model. It was a clever win-win-win. Subway won. They got a competitive counter threat to Quiznos. Turbo Chef got an $80 million purchase order and Coca-Cola got the cola contract away from Pepsi. So we looked at this and said, okay, we have a company called Latch Access. Latch, similarly, was not going to sell their door lock, which was operated remote by the cloud from your phone, to the average consumer. There were a lot of people that did this. They did direct-to-consumer. You had Amazon that just bought Ring, which wasn't a lock, but it was the doorbell, for a billion dollars. These guys were not going direct-to-consumer.

• 19:08Speaker 03

  They were going to new build and buildings. And right now, they're in one of every 10 new buildings that's being built in the U.S., which is amazing. They did a clever deal with Walmart. Walmart wants to compete with Amazon. Walmart outfits thousands of buildings with the Latch system. So Walmart wins in their division Jet. Latch wins and the consumer wins because the consumer now can order something online. They can have a trusted person documented by video, when they came in, how long they were there. And it was a win-win-win, the same kind of deal, where Walmart actually paid for the thing for the consumer and Jet paid for the thing for the consumer. Latch got this big purchase order and the consumer won. So I like these three-way deals that are sort of clever if you can figure out the appeal of the different interests.

• 19:48Patrick O'Shaughnessy?

  One thing I want to make sure that I don't lose the thread on in this idea of megas versus minnows is advice for LPs, right? So I asked before you came in, like, you know, how often are you talking to LPs? And I think that right now is a really important time to potentially differentiate yourself as an LP by pursuing good strategies, different kinds of diligence on managers. And so I'm curious what advice you would give to an LP. Maybe this is venture-specific, but I'm even talking more broadly, just as a GP that's dealt with LPs. Advice that you would have for firms evaluating managers like Alux, like some of these other firms that we've mentioned. What do you think matters, maybe that is underexplored by investors?

• 20:25Speaker 03

  I think this is a classic process versus outcome. And so there are going to be some firms that get lucky and they parlay that luck into the greatest success. And we have had our great share of luck. And I will point to any number of our companies and be like, you know what? In the end, being intellectually honest, we were really lucky. Maybe we were even wrong in our process. But I think being able to go into a firm and double click and say, what was the process here? And where did you get lucky? Where were you smart? How did you actually add value to the company? What was it about your network or your decision-making process? What was it about the price you paid or the way that you structured a deal that in the end it benefited you and the investors and your founders? So that's one thing which is sort of observable and diligenceable. The other thing is reputational network because in venture, more than in hedge funds, I always joke that if my wife finds a discrepancy between price and intrinsic value, she's a public market hedge fund activist investor, the market doesn't come back and say, hey, here's another one. In venture, they do, right?

• 21:08Speaker 03

  People come back and say, hey, here's another one because I want to work with you again. I enjoyed our partnership. And so you get this path-dependent positive feedback effect in venture, which is also observable. How many of the entrepreneurs in their portfolio have been repeat entrepreneurs? And there are some famous VCs, I can tell you, where the entrepreneurs have made money. They will never work with that person again. They think they're a horrible human being. There's a network and people know who's good people and who's not. The other is the team. Now, there are sole GPs and there are teams. And there are very large teams that are hyper competitive and there are very small teams where they have total equal partnership and economics. There's everything in between and all kinds of different flavors. And so I think this comes down to a portfolio approach where an LP is looking and saying, I want a mix. I want people that are doing super early stage and they have an advantage at being the first money into a company. And I'm convinced that their reputation is going to lead to a low probability of having

• 21:53Speaker 03

  high financing risk. Somebody else is going to follow them because of their signal value. There's other people who are really good at looking at the metrics or the actual fundamentals of business and making good investments as growth investors. There's other people who have carved out a niche in a particular subsector. So maybe somebody's in fintech or maybe somebody's in crypto or maybe somebody's in med devices or biotech. When people invest with us or if people haven't historically wanted to invest with us, it's for the same reason. It's like, these guys are a little weird, right? They do funky stuff. And so we like that. The other thing that I think is observable is a team. How does the team interact? There are four or five different kinds of tribes that you can observe, whether it's inside of an investment firm or inside of a company or even in humanity, you know, across the world. And I think that are really interesting because they're universal. And each one is dominated by a mantra. And this is a mental model that comes from Phil Jackson,

• 22:37Speaker 03

  Eleven Rings, who in turn got it from tribal leadership. The first mantra is life sucks. These are people who feel like they're victims. And it's like 2% of the population, basically homeless people and people that are in gangs or in jail. The next, which is about 20 or 30% of the population, are people that are basically like, my life sucks. They're victims, but they show up every day at work. They have no institutional loyalty. They can't wait to come home and crack a beer and basically put their feet up on the couch, be with their family and just go to sleep. The next is they like what they do, but they have a mindset of I'm great, you're not. They're internally competitive with their teammates. They silo information. They're fighting over status and resources and money and fame and network. And they have no institutional loyalty. They will leave like a free agent the first opportunity they have. The next, which I think is where we are roughly as a firm at Lux, is we're great, they're not.

• 23:21Speaker 03

  You are dominated and defined in part by some external competitor. And you can look at like Robbers Cave, this sort of classic psychological experiment of this. But how do you get people to bond with a common enemy? Now, that enemy could be a goal. It could be a mission, but oftentimes it's a competitor, somebody that wrongs you or somebody that zero some way takes an allocation from you or game theoretically screws you over. And so the ultimate one is life is great. So not I'm great, you're not, not we're great, they're not, but life is great, mission driven. And you could argue that the early days of Google or Facebook maybe had that. And it's not clear if it is a cause or an effect of making a lot of money. But when you're making a lot of money, generally you think life is great. Then it starts to devolve. Do you know an example of a life is great investment firm? I would almost say Berkshire Hathaway.

• 24:05Speaker 03

  And maybe I'm giving it too much of a mythology, but I generally think that it is a positive, small culture driven by very simple principles. I know that there's a lot of people that would say, well, there's a lot of mythology around that. And neither of them are individually that likable or. But that's the first one that comes to mind. You guys seem like a life is great.

• 24:24Patrick O'Shaughnessy?

  We're a happy bunch, for sure. It's an interesting paradigm. Your point about enemies or villains or common devil is really fascinating because back to narrative, again, if you read like Eric Hoffer, the mass movements, the true believer, that is the thing. The galvanizing thing is the devil. And without a devil, you don't have a mass movement at global scale. And so you wonder, I mean, is the potential scale the highest for level four? Maybe because you need a common enemy. I don't know.

• 24:50Speaker 03

  Sometimes you invent them, right? Sometimes they're not necessarily anthropomorphized or an embodiment of a person. Sometimes it is something like big oil or like another government or one day it'll be the Martians. It's some exogenous threat.

• 25:03Patrick O'Shaughnessy?

  I think also maybe if you abstract the devil a little bit, there's an ambition that comes at level four that maybe doesn't exist at level five. The complacency, it sounds like, could exist at level five, maybe not.

• 25:13Speaker 03

  Yeah, because visually you think of it as we're still climbing the mountain and we're doing it together. We have something to solve. We have a goal to reach, right? It's again, going back to the shackleton, it's like we're going there. If you're already there, you're like, well, you're right. There's a complacent self satisfaction.

• 25:25Patrick O'Shaughnessy?

  I love the list and maybe level four with noble devil of some sort, you know, some noble task to be tackling is the perfect psychological state for a business. It's amazing, right? Like to try to, for people that lead businesses out there, to try to cultivate up this ladder. It seems like a very good goal and it fits back to the five roles of the CEO that you talked about earlier. I mean, a really, really powerful idea. I'm curious now with that in mind, specifically within Lux. Last time I was here, we talked about the relative merits of having consensus type investments versus single person pounding the table and even having a structure around that so that you make sure that certain people can be the champion of a deal without any consensus. I'm curious what the big internal debates here are today. So a year plus after we first talked, what are the big things that your partners are considering and maybe have opposing views on?

• 26:10Speaker 03

  One is a judgment based one and one is values based one. So the judgment one is about price. It's should we be super disciplined about this on price? And there is a persistent and pernicious pricing discussion that was really set by Mark Andreessen, who said, you know, it doesn't really matter what price you pay because there's only 10 companies that matter in any given year and you want to be in those companies. That is true. But the problem, the fallacy of that is you don't know which ones of the thousands that you're going to come. So either you spray and pray and you just pay any price for what you believe to be the best children that are going to emerge, or you'd be discriminating. Now, I think it has led to a very dangerous thing of FOMO and people willing to pay any price because they say, you know what, it wouldn't have mattered if we invested in Facebook at $5 billion or $10 billion or LinkedIn at $3 billion. And everybody saw that LinkedIn

• 26:54Speaker 03

  deal, by the way, when Greylock did it, $3 billion. But people thought it was a crazy price. Well, in hindsight, it was prescient. So I think that that's a debate internally when we see things where somebody comes and raises, geez, we're raising money at $100 million. But we say, that's crazy. We're very price disciplined about a company called Cruise. I'm not sure if we talked about this in the past, but we offered them $20 million at a 40 million pre, so 60 million post. Another firm came in and offered them 20 at an 80, you know, effectively double the price. During the course of diligence, we introduced Cruise to GM to say, you know, is this something that you'd be interested in? GM, 11 minutes later, we lost the deal on price because we were too disciplined, paid 11x, about $1 billion. Now, error of omission or error of commission, we look back and say, geez, that was a lost opportunity. We could have made 11 times our money in a year. But as a process, and maybe this is a post facto thing I tell myself to comfort

• 27:39Speaker 03

  myself, but we actually believe that was the right thing to do. But we get into those debates all the time and then you get these reference points. Well, is this another Cruise? Should we just do this deal? And I think that once you lose the discipline and start doing that, you have lost all process and you're throwing darts.

• 27:53Patrick O'Shaughnessy?

  Talk more about that discipline. So when I think of price, I always think of anchoring it in the public markets. I've got the luxury of deep, long fundamentals, cash flows, et cetera. In your market, I think sometimes that's true. But what is the anchor for price? Against what are you measuring price to be disciplined?

• 28:07Speaker 03

  Well, this is where the debates come in because we basically say like, look, do we think we're going to have another bite at the apple? Now, in the public markets, you will have another bite at the apple. It's just a function of price. In the private markets, if you turn somebody down, 90% chance they are not coming back to you, right? You rejected them. Now they're successful. They're not coming back and be like, yes, please invest in me now at a higher price after you rejected me, right? No, more often than not, they send you an email reminding you that you passed and telling you about the great new round that they raised and how you could have basically made 10x, right? I mean, that's just like human nature. I get it. So avoiding that, it's really a function of human judgment about humans. Do we think that this person is going to execute? Can they raise money? Can they recruit amazing people? And it's really at that point, will they, with the money that we and others are investing, accomplish enough that other investors, a

• 28:52Speaker 03

  year or two hence, are going to want to invest? Are they going to get paid? Are we going to get paid for taking the risk of funding them? And if we're passing on somebody, what we're really saying is, We're not really convinced that we are going to get paid for the money that we're going to put at risk here. And so that really comes down to a judgment, a judgment about the person, a judgment about the uniqueness of the technology, about the market, about the product market fit, about their ability to recruit a team, about the financing risk, all those things that we generally think about as risks. And if it's not there, then we just generally feel like this is maybe for somebody else.

• 29:19Patrick O'Shaughnessy?

  The second of the two internal debates. So you mentioned price is the first, what's the second?

• 29:23Speaker 03

  The values one is an interesting one, and it's one that is beyond lux itself. I think it's an observable zeitgeist. And this is around the morality of what you are funding. Now, we have a big view about the technology of humanity and the humanity of technology. And I generally think that the existence of a technology, the mere existence of a new technology, is almost like Shakespeare, it is nothing either good or bad, but thinking makes it so. I think it's just one basis point over 50% that the existence of it creates an option and that is a virtuous thing, because somebody can use that. And the history of technology you can find is often rooted in doing good things for people with disabilities, and we've talked about this in the past. But military is a really provocative topic right now. Should we be developing technology that has potential use for the military, whether it's ours or somebody else's? We funded a company called Anduril.

• 30:07Speaker 03

  These are some guys that came out of Palantir, and they're friends, and they're super smart. But it is a super controversial investment internally. Why? Because most of my team is immigrant. We have Kashmiri, Iranian, Pakistani, Israeli, Australian, Brazilian. And one of the first technologies that Anduril was focused on was an alternative to a physical wall, a virtual wall, something for homeland defense. And this was super controversial. It hit emotional hot buttons like I've never seen before internally and completely understandable. We have other companies that are developing drones, that are involved in Project Maven, that are doing AI for image recognition. Now, I would say it's a virtuous thing. If you can save a man's life who is carrying a pickaxe or a shovel and is a dad coming home from work than if it's somebody who's carrying an AK-47.

• 30:51Speaker 03

  But those are moral decisions that technology plays a role in. Autonomous vehicles. You can make the argument, on the one hand, that funding an autonomous vehicle might reduce road deaths. 50,000-plus people die a year. Somebody else might say, "Well, wait a second. What about all the organ donors and people that are on these transplant lists?" And so there's very complicated pros and cons. And what we have come out with is you have to have a nuanced view of this. And you have to see who's affected and when. But the military piece, to me, is a really complicated one. And why? Because in technology and Silicon Valley, the history and the roots of Silicon Valley were not this orchard where it suddenly sprung Hewlett and Packard in a garage developing calculators. The history of Silicon Valley is in radar and electronic warfare and semiconductors for missile intercepts.

• 31:34Speaker 03

  It was about defense and warfighting. Today, over the past 20 years, you have Silicon Valley increasingly dominated by people that have come from outside the country, much like my team: Indian, Pakistani, Israeli, Chinese. You've seen three presidents, one of which, in Bush too, was jingoistic and fought two wars. You could argue one was just, one was unjust. You had Obama, that was sort of a one-policy president, focused on Al Qaeda, Bin Laden. You had drone strikes killing innocent people. You have Trump, and politics notwithstanding, none of us here at Lux are fans, but you've got people that are like, "I don't want to develop technology for this administration. I don't want them to be used. This is a hateful, negative administration." And so I can understand why people at Google are saying, "We don't want to be involved in those programs." And inside the Lux portfolio, I just did an event at the Council on Foreign Relations,

• 32:19Speaker 03

  one of my company's control labs, which we may talk about, where the CEO had to read a position statement, and he did, honorably, for his employees, who said, "We want to protest the panel that you're speaking on." And he read a beautiful thing that they wrote. Seated next to him on my other side was Nick Kortowski from Drone Racing League. Drone Racing League is a fun league. It's literally a racing league for drones. But they are also working with special operations and the military and developing drones that can go 80 to 100 miles an hour in half a second and doing autonomous drones and interesting things. And they feel a patriotic duty. They say, "Look, there is no great American drone. The best-selling drone in the world is a DJI drone, which comes from China, has a Russian Galone S chip in it, and is now prohibited by the military. And we have a moral duty to defend the very people that are defending our democracy." And that has been the position that Microsoft took.

• 33:04Speaker 03

  Google has taken the opposite position. They have said, we're going to support anybody that is basically protesting and we're going to absolve ourselves of these situations. Now, that has benefited some of Lox's companies. We have companies that are involved in Project Maven for the AI identification of people that are coming from drone and satellite footage that we have won in part because Google has lost. But these are very complicated moral issues. And I don't think that you can be black and white about them. I think you have to be nuanced about them, but they're real. And I actually think they are going to play a bigger, bigger role on the geopolitical stage because China has no wall between the technology industry and the government. It is a pipeline, you know, to and fro. And here, I think it's going to be very complicated. And I think there's going to be decisive advantage over time. In fact, even in biotech,

• 33:45Speaker 03

  I talk about how China lacks something that we have. And because of that, because China lacks it, they will be absolutely ascendant in things like CRISPR, et cetera. And that is that we have a regulatory and ethics apparatus that slows things down. We have the moral discussions. And there, they don't have it. And so that's why you see a researcher, quote unquote, being slapped on the wrist for doing a CRISPR baby, right? I mean, that was absolutely with government decree.

• 34:09Patrick O'Shaughnessy?

  The barriers to entry for experimentation are really interesting when you talk about regulatory frameworks. I'm curious how you think about CRISPR specifically. I don't think you and I have ever talked about this. Whether or not that's something, the broad category of gene editing, let's say, or gene manipulation that you see companies in and sort of what the viability is from an investment standpoint?

• 34:27Speaker 03

  You know, there's been two or three companies that have raised a lot of money and some have gone and will go public. And I view it mostly as a tool. There's been big IP fights on both of these sides between West Coast and the Broad. And I view it as a tool, but I think that the real value is ultimately going to become from the drug developments, the novel targets that people find. But this is sort of like, and maybe I'm trivializing it a bit unfairly, but it's sort of like somebody inventing the cut and paste feature on Microsoft Word. The real value wasn't ultimately the feature. It was what it led to and the platforms. So we talked, I think, a year plus ago about this idea of X-Men. There's a few themes, right? So the gap between sci-fi and sci-fact is one that is always shrinking. And this idea that X-Men, you know, Professor X puts on Cerebro and he could spot the mutants and these are people shooting lasers out of their eyes

• 35:10Speaker 03

  and fire from their fingers. But this is something that we actually started. So the company is now called Variant. We started with two Cold Spring Harbor PhDs who quit their jobs and said, oh, my God, this is all I've ever wanted to do my entire life. And then another amazing business leader that we met back from Council for Foreign Relations, who left her biotech company to join. We put this founding team together and they have recruited the creme de la creme, from Nobel laureates to scientists to the former head and CEO of Illumina. And they are going after All the rare populations in the world who have fascinating phenotypes, meaning fascinating traits that have some genetic basis. 23 in me, Regeneron, most of those people have sequenced. Pale male, stale, white Europeans. People that look more like us. Why? Because that's where the money is. Nobody is going to Senegal. Nobody is going to New Zealand to sequence the Maoris. Nobody is going to Tanzania. Nobody is going to the weird parts of South America where you have interesting populations.

• 35:55Speaker 03

  And I'll share one story. I won't tell you where they are, who these people are. But there is a population that they found. There are nine families that remain. So I love this. Why? Because you know I love scarcity, right? Super rare. Nine families, 1,000 individuals. These are people who, because of where they are, in the middle of the night, their metabolic rate goes up because the temperature goes down. So they have some gene that coats for some protein, and that protein, almost like a heat shock protein equivalent, raises the body temperature. Now, think about this. Why do I care? Because there are however many, I don't know, a third of the population, half the population is obese in the US. Could you imagine if that was a monogenic condition, which means that it might be a druggable target, that you could produce a pill that people could take at night, that they would be able to basically raise their metabolic rate and burn energy and fat while they sleep?

• 36:40Speaker 03

  That would be a $10 billion drug. Now, whether or not that actually happens, I can't even handicap that, but I'd say very low. But those are the kinds of populations that they are looking for. Where are the mutants that are out in the world that nobody is going to find right now? Let's understand their phenotypes. And most importantly, to this team's credit, talk about the morality of technology. The fourth person that they hired was a computational geneticist. The second and third person that they hired was a cultural anthropologist and an ethicist. Because they want to get it right when they go to these different populations. One of their first was going to the Maoris in New Zealand. They don't want to continue what some people call biocolonialism, the idea of exploitation. These people should participate in the economics of what they're doing in the same way that Yao Ming gets scouted by an NBA scout and joins the NBA and his family and his local community, and everybody else benefits.

• 37:24Patrick O'Shaughnessy?

  So in addition to the debates, I'm always interested in the frontiers of theses inside of Lux as well. You already mentioned this closing gap between sci-fi and sci-fact. I know that's part of it. Talk about sort of the other interesting ideas that describe the edge cases of what you're looking at.

• 37:39Speaker 03

  Sci-fi and sci-fact is amazing because you can look at the annals of this, right? You've got the tricorder that begot the StarTech phone. You've got Hal that begot Siri when Steve Jobs showed off FaceTime for the first time. It was literally like the video conferencing from 2001 Space Odyssey. You've got pod racing from Star Wars that begot drone racing. So you've got this ever shrinking gap and either our scientists are becoming more creative or our sci-fi authors are becoming less creative, but the gap is shrinking. And Auras, okay? This was Star Wars. You've got robotic surgery that heals Luke Skywalker's hand after Vader cuts it off. We funded this company, Auras, and this is interesting, not only because it's sci-fi, sci-fact, but also because it fits another theme that we call the most four or five most powerful words in investing. People always say that the most dangerous words in investing are "it's different this time." The most valuable words are "it will

• 38:24Speaker 03

  rot your brain." Whenever "it will rot your brain," those words are uttered by a parent. It basically presages the next $10 billion industry. And so you had rock and roll in the 50s, you had TV in the 60s and 70s, you had chat rooms in the late 80s and 90s, the internet, then you had video games. The video game couch potatoes of yesteryear are today's drone pilots and robotic surgeons. Okay, so fast forward. Robotic surgery, Star Wars, it'll rot your brain. We find these engineers that are starting this company called Auras with this guy Fred Moll. Fred was the founder of Intuitive Surgical. So Intuitive, $50 billion plus publicly traded company, battleground for longs and shorts. And we say, this is sort of interesting. Now, we did no top-down analysis. There was no white space analysis of margins. We weren't looking at segment growth. We weren't looking at

• 39:09Speaker 03

  channels of distribution. We basically just bet on the two-legged mammal. We said, this guy is a doer. He's going to recruit people. He's going to raise money. And we originally invested, I forget if it was $10 or $20 million, but I'll tell you this, we looked at the investment thesis memo. We forecast, we were doing a, I think, an $8 million investment at roughly a $20 million valuation. We forecast that they would need $60 million of total paid in capital. We forecast five years hence that they would do 90 million of revenue and that they might get bought for five times revenue. So $450 million. To show you how intellectually honest we are and/or how wrong we are, every one of those things was off by an order of magnitude. This robotic surgery company ended up raising not 60 million but 600 million plus of equity. We originally came in 20 million, we brought Peter Thiel around 100, we brought Viking

• 39:53Speaker 03

  in at about 600, we bought COTU and others in around a billion, J&J invested around that price, J&J ended up buying them for just under $6 billion. And it's incredible outcome for everybody. We made 63 times our early money. It will return over half a billion dollars to our investors and we've already returned over half a billion dollars to our investors over the past year and a half. People are ecstatic. But our entire process was totally flawed. We thought it would raise 60, they raised 600. We thought it would do 90 million, they did less than 10. Might get bought for five times revenue, it got bought for $6 billion. So it just reminds me of the constant truism, which is nobody knows nothing, including us. So Oris is a great example though of sci-fi, sci-fact and this idea of it'll rot your brain. And by the way, drone racing league, the same thing, pod racing and video gamers who are now not only competing globally but also doing effectively military tours.

• 40:38Speaker 03

  The third thing that I think is really interesting, and this is the timeless one, directional arrows of progress. When you can spot a directional arrow of progress, it does not tell you who the entrepreneurs or what the company is, but it increases the probability that you're going to be right about the subsector. So, we know that in lighting, we went from a burning flame to a filament bulb to a light emitting diode. We are not going back to torches in the office. We know that we went from spinning mechanical disks to solid state memory or hard drives. We are not going back to mechanical disks, flash memory and you've got solid state drives. Same thing with energy, that's what led to our thesis around nuclear. You went from carbohydrates to hydrocarbons to uranium, the trend was undeniably more and more energy density per unit of raw material. You're not going back to an agrarian economy.

• 41:21Speaker 03

  And so when you find these arrows of progress, you just ride them. So we had this crazy thesis that I call the half-life of technology intimacy. And I shared this with one of our entrepreneurs. This particular entrepreneur I shared it with is Charles Zucker. Charles is a seductive, silver-tongued scientist. He's actually a Chilean scientist. He's like one of the highest-paid professors at Columbia. He's a genius, started multiple biotech companies. We met him and he was hacking your sense of taste. He was able to take a mouse that was sitting there lapping up a sugary water drink and wince with disgusted it and then go over to this broccoli water that was bitter and disgusting and lick it up like it was ice cream. And we were like, this is amazing. And then he was able to take a mouse that was totally water-sated and not thirsty and make it drink until its body weight was filled about 50% with water.

• 42:06Speaker 03

  So we said, we need to be in business with this guy. He's doing magic tricks. This is science. This is amazing. And so we end up funding him in this company called Caliope. What Caliope was focused on is while everybody in the world was focused on the microbiome, all the bacteria in and on and around your guts, he said, no, no, no, we're going to focus on something nobody's focused on, which is the gut-brain axis. Everything from the sense of satiety when you feel full, or if you have friends that drink Diet Coke, they drink a ton of it. Why? Because it tricks your sugar receptors on your tongue, but not the sugar receptors in your gut. The sense of, I have butterflies in my stomach, or I have a gut feeling. There's a physiological truth to that. We incubate the company here. We did a $45 million Series A, brought in two other investors, and then we did a $60 million Series B, and we brought in Jim Simons from Renaissance and Two Sigma, both of whom cared about the data. And then I brought in Bill Gates, who put in another 15 or 20 million dollars.

• 42:50Speaker 03

  And these guys did their first deal with Novo, focused on CNS disorders, because a lot of people are trying to get a drug to the brain by making a small molecule. And these guys said, wait a second, what if we can get to the brain through the gut? And we can create a gut-restricted molecule that just sits in the gut, but actually does something in the brain? It's crazy. So Charles is this brilliant guy. I tell that backstory because I share with Charles the thesis that I'm going to share now, which is this half-life of technology intimacy. 50 years ago, you had a giant ENIAC computer. It sat there in the corner of the wall. You physically stood up and you went over to it. You pulled some plugs, you flipped some switches. First half-life, 25 years ago. You have a personal computer on your desktop. You are tickling the keys. You have a mouse under your palm. Gets a little bit closer. 12 and a half years ago, you have a laptop. Now you have the same keys, you have a trackpad instead of a mouse, and now it's touching your thighs. Six and a quarter years ago, now it's your phone.

• 43:33Speaker 03

  First thing you touch in the morning, last thing you touch at night, cradling it, swiping it, pinching it, zooming it. And only thing separating you from your body is a thin film of fabric in your pants pocket. Three and a half years ago, now you've got this, the Apple Watch, constant contact with my skin 24 hours a day. AirPods, a year and a half ago. The undeniable directional arrow of progress is that technology is becoming more intimate with you. So I shared this with Zucker. He says, you have to talk to Reardon. I said, who's Riordan? He introduces me to this guy, Thomas Riordan. Now, Thomas Riordan, like any good sci-fi character.

• 44:00Patrick O'Shaughnessy?

  What a great name.

• 44:01Speaker 03

  No, he goes by Riordan. It's like Ripley out of Aliens or, you know. So I go meet Riordan and I fell in love. I fell in love with his technological genius, his philosophical genius, what he was accomplishing and how unique and rare it was. And this was one of those, I think I've called this, last time we spoke, the Pampers effect. You're basically trying to contain yourself while you're talking to this person to not signal how badly you want to fund them. So I meet Riordan and what is he doing? He is looking at every control device around us and saying, I can get rid of that. A remote control, a dial on a thermostat, buttons on a clock, the touchpad on a phone or on an ATM, a keyboard. He can get rid of that because here's his story. He's 17 years old, 1990, one of 18 children, 10 biological and eight adopted.

• 44:45Speaker 03

  He's a math and science prodigy and he's taking classes at MIT in science and math. And this guy named Bill Gates, who we've started a bunch of companies with, goes and taps him and says, I want you to come work with me. And so he goes to Microsoft and for the next decade, he's Bill's right-hand guy and he single-handedly helps to launch the Internet Explorer program. He also is Bill's right-hand guy through the Department of Justice monopoly trial against Andreessen and Netscape. Makes a ton of money, technologically renowned. Now it's 2000, does another company, sells that. Now it's 2003 and he does what anybody that's now rich and renowned would do. He decides to go to college and actually get a degree. And he gets a degree in Classics and Latin. He's just a polymath. He's interested. He's a sponge. He wants to learn. And then he does that and then he goes for the next eight years and gets a PhD in neuroscience. Okay? So you've got to think about the kind of mind of somebody to go do this.

• 45:29Speaker 03

  After all that success and everything he's done, he goes and gets a PhD in neuroscience. Who is his thesis advisor? Charles Zucker, who we end up funding originally in Caliope, who directs us to Riordan. So I meet Riordan and this was the epitome of the Arthur C. Clarke, any sufficiently advanced technology is indistinguishable from magic. It was just magic. You put on a, effectively a wrist strap and it is able to detect of the 15 billion-plus neurons that innervate, the roughly 15,000 neurons that in turn innervate the roughly 15 muscles in your hand. It can detect every single one of those 15,000 neurons. And why does that matter? Because it can perfectly model everything that my hand is doing as I type or as I turn a switch or flip a button. But what's crazy is without me actually moving my fingers, just by thinking about moving, it can control it.

• 46:14Speaker 03

  Which means that I can sit here and just think about turning the thermostat or think about typing and it will basically form the action. And I said, this is going to be the universal controller. If I would have told you 10 years ago, you're going to get rid of your keyboard and you're going to be typing on a piece of glass. You'd be like, that's crazy, but I have works. And I'm telling you now that in the next 10 years, the control system that you interface with, just like the mouse is basically gone. You will be pointing at a device and basically turning and controlling it. You will gesture with your fingers to change the song on Spotify. You'll gesture up to raise the volume and lower the volume. And his big insight was, we don't have an input problem. You can look at Bloomberg screens and you can look at tons of information. You can see everything. We have an output problem. You and I are having a conversation. People are listening to it, but I'm speaking word after word after word. You type, you type, letter after letter, word after word.

• 46:59Speaker 03

  It's very linear, but the ability to communicate multiple surfaces, multiple objects, multiple robots around you is never before been possible. And so what he's doing is absolutely magical. We led a $30 million Series Z. Google and Amazon also just invested another $30 million. I did not sleep for three days trying to get into this company. When Lauren finally met Riordan, she was like, ew, you know? And now my biggest stress is making sure that he doesn't sell before we realize maximum value, because I am convinced that this could be a $10 billion business.

• 47:27Patrick O'Shaughnessy?

  Well, it's like that incredible example. The arrow of progress, I love this half-life of intimacy. It makes you think, okay, great thesis. Go find other firms that might be touching or adjacent to the same idea. So you mentioned AirPods. What's the next step there? Implants? Somehow your body charges an implant that's just in there forever? How much do you try to really round out a thesis like that? And go fill the portfolio up with companies all on that same directional arrow of progress? Or is it rather, we just know that's there. So when we see a company that is on it, you see what I mean? Like which way the direction goes in your activities?

• 48:01Speaker 03

  Sometimes we let the founder lead us. And so you could see that arrow of progress and you knew that gesture and voice were going to be the next thing because they were both roughly invisible. The technology in all of those cases is getting more sophisticated, but they're getting more invisible. So you have Alexa, you have Siri, you have Google now on voice. You can roughly do things like ask for the weather, change a song. You know, we talked about this, like what do you actually use this for, right? Gesture today relies on a fixed 3D depth sensing camera. Basically the kind of stuff that comes off Microsoft Xbox or PS4. Your kids are playing Just Dance or Dance Dance Revolution. But for me to have gesture always on and with me was something that never existed. You've got Elon Musk talking about Neuralink, where you're actually going to put something in your brain. And I'm like, come on, this is ridiculous, right? So you want to pair that directional line of progress also with Occam's razor. And what something like Neuralink underestimates is actually how sophisticated technology is

• 48:46Speaker 03

  that you never need to do that. You do not need to go and implant something into somebody's brain because you can read not only the neurons inside their arm, but their intention to move. That is crazy. And that's only possible now, which is another great question to ask, why now as opposed to five years ago? Five years ago, you did not have the GPUs, the machine learning algorithms, the data, the ability to detect the sensors. All of those things come together and all new things come from combinations of old. It is the combination of all of those things in the past that now make that setup possible.

• 49:12Patrick O'Shaughnessy?

  It's such an interesting field of increased intimacy is fascinating to me. And I think we talked about this last time about to what end? What do we ultimately? I always love that juxtaposition of Orwell and Huxley, like which one was right? Is it Huxley that we're just sort of all taking soma and amusing ourselves to death, so to speak? Or are we moving towards something higher order of well-being for people? But it seems undeniable that something like that has just insane broad applications, even without knowing like where it will manifest first.

• 49:37Speaker 03

  I actually believe that there is a moral imperative to invent technology. The moral imperative comes because imagine a world in which person X existed and technology Y didn't. Imagine a world in which Mozart exists, but the harpsichord doesn't, in which Hendrix exists, but the electric guitar doesn't, in which Spielberg exists, but the 8mm camera doesn't, Bill Gates exists, but the PC didn't. Every one of these things was an instrument for them to express a form of genius. And there is somebody, whether it's your son, or my kids, or somebody that's out there now that is going to encounter technology in 10 years that doesn't exist today, that they will play as their instrument to the world and the world will be better off because of it. We are better off because Wynton Marsalis discovered the instrument that he did. We are better off because somebody with an incredible voice, Adele or whoever, found the microphone.

• 50:21Speaker 03

  And so I'm just absolutely convinced that there's a moral imperative to invent technology. And one of the interesting things, even when like you think about technology and family and people saying, you know, well, we're becoming less human, I'm really caught by the idea from Tom Stoppard. In The Coast of Utopia, he was basically saying, "We're losing touch with our humanity." And he has this great quote that I love. He says, "Where is the song after it's sung? Where's the dance after it's danced?" Now, in his world, it disappears into the ether or into your memory. In my world, because I document everything and I upload it to the cloud, it is basically caught forever. And I have fidelity, whereas memory is this very infidelidous technology. And so I love that technology, I think,

• 51:05Speaker 03

  increases our humanity. If you could do two moral things, hit that moral imperative to invent so people can find their genius and then find ways to reduce human suffering.

• 51:14Patrick O'Shaughnessy?

  Do you think that there's enough, given this opinion of venture investors, early-stage investors focused on real technology frontiers versus some of the more traditional, let's say, like consumer-type categories or something like this?

• 51:27Speaker 03

  Is versus ought? Is, no. Ought, I hope not. I don't want a lot of competition.

• 51:32Patrick O'Shaughnessy?

  Fair enough. Well, I don't know. That somewhat conflicts with your moral imperative, but I understand the self-serving part. Couple of closing ideas and then a story. So the first would be a couple new theses around here that we talked about, one being scarcity voracity and then the second being death of privacy.

• 51:48Speaker 03

  I'll add one to that, too, which I'll share very quickly, which is this idea that if you can spot things, you know, I've talked about in the past, like what sucks? That's a great opportunity, right? Because anything that sucks, somebody's motivated to want to change. Another one is when you discover something where you're like, "Wait, what?" And if you can find those "wait what" moments, it's like a secret piece of information that is staring right in front of you, but just the turds of attention have not turned to. And so, right now, for example, 100 million mice in cages and people that are doing drug trials, you literally have a guy with a clipboard that comes and sees, is the mouse alive or dead? And we looked and said, "Okay, wait a second. There's an opportunity for a technology company that can go and basically automate that, put sensors and cameras and watch these things 24 hours a day and spot the anomalous activity, because maybe the drug that you're intending to do X might actually have some side effect that is actually the really valuable thing." So that's a crazy example. If you look at document storage, that's another "wait what", where you have a company like Iron Mountain,

• 52:32Speaker 03

  started with mushroom storage and then went to atomic storage against the nuclear in the Cold War and now became a REIT because they were making so much money storing documents. And so now they're basically a real estate company. But all the banker boxes that we have, thousands and thousands of documents, all the unstructured data, perfect thing for robots and technology to come and scan all that information so it's accessible. Iron Mountain can't do that. And you're like, "Wait, what? That's what they actually do? It's sort of crazy." So on the new theses, death of privacy, this relates to sort of that idea of memory. I have a partner who, I call it the entropy of information. He tries to protect his privacy in every possible way. Piece of tape over the camera, default opt out of GPS, won't sign in and post anything on social media. He is an absolute ghost. So, almost like Sandra Bullock in The Net, he has erased himself.

• 53:16Speaker 03

  I have given myself over to the information gods. The worst thing that has happened in my life is when our third was being born and Amazon knew that it was boy somehow, they sent us like Thomas the Train Diapers, okay? Instead of Axe body spray because they know I'm not a single guy. But by and large, I find that I get way more, and again, this is my philosophy of life, a randomness and optionality, I get way more optionality exposing myself to the world. But I do believe that is observable, that there is a death of privacy. Anything that can be surveilled will be surveilled. You may have private last vestiges of privacy in your bedroom, in your bathroom, but by and large, we have speakers that are recording everything, we have cameras that are seeing everything, you have people that are listening and over. So, everything around you is basically a surveillance device. Now, whether it's doing it with malice or intended to make your life easier, this is also the perennial trade-off between convenience and privacy.

• 54:01Speaker 03

  I have opted for convenience. And I've lived a life which is almost like an interesting way, you used to have gods that you appeal to for your morality and just assume you're always being watched. Front page of the New York Times, you're constantly under surveillance, we've met the enemy and he is us. I think it's almost an interesting prescription for morality. By the way, science fiction, science fact, there's a great graphic novelist, Brian K. Vaughan, who did Why the Last Man and a new one called Saga, and he did this side one called The Private Eye where he imagined a world where basically everything is being surveilled. And it changes the fashion of people in the world because everybody's going out into the streets and they all look like carnival, they were wearing masks and hiding their identity so that they're able to maintain some anonymity. So, death of privacy is one where I think that is a losing battle. I think the death of privacy is a losing battle where you are going to spend more

• 54:44Speaker 03

  and more energy trying to fight the inevitable directional arrow that we are basically going to be constantly surveilled, and I think younger and younger generations are going to be comfortable with that. Evidence for this, 15 years ago, don't post on Facebook, you at the party drinking. Now, nobody cares. Why? Because everybody's done it. It is now so socially diluted, it's irrelevant. How does that manifest investing-wise? I've seen a bunch of companies that are actually focused on, we're going to increase your privacy and your security, and to me is like, we've basically taken a stance. You want security for industrial operations, you want for SCADA systems and control systems where you're manufacturing something, you don't want that kind of stuff to be hacked, but like, personal privacy, I just think it's a losing battle. So, privacy is one. In the late 90s and early 2000s, you had an abundance of what? Content. And the scarce thing...

• 55:28Speaker 03

  Became search, the ability to look through all that content and decide what's valuable. Ergo, in hindsight, of course, Google. Now, of course, in the late 90s, picking Google amongst AltaVista and Lycos and Yahoo and all these others was really hard, but in hindsight, the scarce thing became search. Today, you have more tools than ever before, in abundance, of being able to make fake things. Photoshop was the first thing for photos, but now you see videos where you cannot tell the veracity of the video. These were the techniques that were once the domain of $50 million-plus Hollywood movie blockbusters, like Terminator. Today, you need a webcam and some algos and software on your computer, and the average person can do this. I believe that being able to detect veracity in digital content is going to have value. And so, we're looking at different. Now, the question is, is this going to be a feature or standalone product?

• 56:12Speaker 03

  But I think as the techniques become more and more sophisticated, the ability to detect artifacts and find out whether you're looking at something that is real or fake is going to be valuable.

• 56:20Patrick O'Shaughnessy?

  Sounds like a blockchain potential application, where you could sign with a private key. You're a politician or something, you put a video out, and there's some signing that's independently distributed. Seems like maybe finally an interesting use case for blockchain.

• 56:32Speaker 03

  The most clever veracity that I've seen in the past six months, call it, is not blockchain. It's not some crazy crypto thing. It was Banksy, who's got this clever technique where he's got a private store. It's like the ultimate cryptographic thing, but it's analog. He rips a banknote. The banknote is stored. If you have a banknote, you take a picture and you show it so that you know if the one that is attached to the Banksy thing actually matches up with this, and only he knows. And so, it's a very clever way of basically confirming the authenticity and veracity of something, but it's so analog, which makes it so clever. So, those are two theses that I'm spending a lot of time on.

• 57:05Patrick O'Shaughnessy?

  So, I thought it would be a fun place to close with your recent adventure with Special Operations guys. I know you were with them for a week or something, some really cool, it seemed like from afar, really cool trips. I'd love to hear about the experience.

• 57:15Speaker 03

  So, let me tell you how this starts. It was about two weeks in February this year. In November of last year, I'm in a meeting, and Bebe, who runs my life, and Bebe knocks on the door, and I'm in a meeting, and I sort of wave her off because, you know, I need to finish the meeting, and she persists with some urgency, which is unusual. And so, I come out, and she pulls me aside and says, "Josh, there are three federal agents downstairs that are coming upstairs and asking for you." And my face goes white, and I'm thinking, "What the heck did I do?" And she says, what do you want me to do? And I say, well, let them up. And not that she had a choice, but you know, our elevator opens to an open plan here. And I go to the front and I'm just racking my brain like, what could I possibly been involved in that three federal agents are coming upstairs? And I go to the front and these guys get out and sure enough, they're federal agents.

• 58:00Speaker 03

  And they say, we're here for Josh Wolfe. And I say, that's me. And they say, we are General Tony Thomas's advance team. And I let out the biggest breath exhale of relief. I'm like, oh my God. Then they say, what did you think you did? Well, they were here two days before and unannounced when I was to meet with four-star General Tony Thomas, who is the head of USOCOM, which oversees the SEALs and Delta Force and Rangers and a variety of other operators. And we have this amazing meeting and a bunch of our existing Lux companies serve SOF, the Special Operations Forces, as we've talked about, everything from drones to satellite imagery to AI to communication systems. And at the end of this meeting, he says, I'd like to take you out to the edge of the formations. And I said, okay. And the idea was actually on January 2nd of this year, I was supposed to travel with him to Afghanistan, Syria, Iraq, Jordan, Lebanon.

• 58:45Speaker 03

  And on December 2060 calls and says, the president's announced that we're pulling out of Syria and we are not actually exactly pulling out of Syria, but the tone and tenor of my trip has changed and I need to go and reassure allies. And so I can't physically take you with me, but in three weeks, we're going to Asia and I'd like you to come there. And so we ended up going to Asia and we went to Philippines, Thailand, Malaysia, Singapore, Japan, Hawaii. And it was everything from direct action, the kind of stuff that you see in movies, training, coalition forces, snipers, subsea SEALs, some of the most cutting edge technologies I've ever seen. And some of it is eye opening in that you're able to look at things that have the ability to do a laser pointed target on the ground in five seconds. But yet on the other end of the spectrum, it takes them five minutes to save an email.

• 59:29Speaker 03

  There is a problem of over classification. People are complaining about the kind of technologies. And I was basically there to do what I do in my daily venture life, which is to look around the world and say, what sucks? And from the panoply of portfolio companies that we have, what could help these operators who are quite literally at the edge of the formation, the tip of the spear? And I was so humbled. The intellect, the intensity, the ferocity, the historic grounding. I felt super proud to be there. I felt super proud that our company's involved and super inspired by some of the threats and the opportunities. There's a big focus on Asia and the Pacific. We were down in Western Mindanao in the Philippines, where there's a lot of human trafficking and drug trade. About a week after the Hollo bombing, which was the biggest bombing in their history. It was Muslim insurgents that are coming up from Indonesia.

• 1:00:14Speaker 03

  And the scope of the opportunity and for these people who are basically dedicating their lives to the most well-intentioned, to that earlier morality of reduce human suffering. It pales in contrast to what I came back and I was like, whatever my biggest stress is. You know, my day-to-day stress, like, come on, you know? And I was with one guy, Mark Ballong. He's a 27-year SEAL retiring at the end of this year. And he accompanied us through most of our trip and helped keep us safe. But he was a guy that trained Chris Kyle and Jaco and all these guys that gone on for some personal fame. But it was absolutely eye-opening and life-changing.

• 1:00:45Patrick O'Shaughnessy?

  Any thoughts on the personality types of the people that you met? And I ask that question because my best friend from growing up was Green Beret for a long time. And there's a very funny picture of me in his wedding, where I'm the only non-Green Beret in the wedding. So it's like me in a skinny suit and all the other guys in full regalia with the swords. It's about as small as I've ever felt. But spending time with that group of people every time I do is stunningly eye-opening. And I don't want to lose the opportunity to hear a bit more about maybe your impressions of the personality types.

• 1:01:16Speaker 03

  Well, first of all, this is a person that is drawn to some of what we talked about earlier, which is a narrative. It's a powerful narrative. It's a narrative about a country. You could argue that's an intersubjective belief, right? About whether the US itself actually exists, but for the fact that we believe in it. But it's something where they've decided that character and honor and integrity and sacrifice are things that I think the world would do better to have more of. What's interesting is if you talk to people that do BUDs and SEALs training, they will almost uniformly say, they cannot tell who will make it through, but they can tell who won't. And the people who won't are almost invariably the ones that are muscular, jacked, have lots of tattoos, all the optical signaling to say, I'm a tough guy. And the people that do are the ones that might be like me, like smaller, scrawnier, you know? But they have the mental toughness or they have the team camaraderie

• 1:02:01Speaker 03

  or they have something that just psychologically gets them through. And when you meet some of the operators and you see this, you're like, this is a warrior.

• 1:02:08Patrick O'Shaughnessy?

  There's a quietness that I always kind of think about with this group that I'm more familiar with, which is remarkable. And I'm lucky, I get to talk to all sorts of fascinating, smart, talented, successful people. But they tend not to be quiet people. And these people are stunning in their work ethic and their commitment and their talent without commensurate loudness. It's inspiring. So I'm glad to get to experience it.

• 1:02:32Speaker 03

  It is a stoic intensity. And it is true, because you do not see braggadocio people. Maybe they tell stories 10 years later, right after they're out. But the stoic intensity is admirable.

• 1:02:42Patrick O'Shaughnessy?

  This was maybe even more fun than the first conversation, really down into the weeds on a bunch of stuff. Always love spending time with you. So thanks for the time.

• 1:02:49Speaker 03

  Patrick, always a pleasure.

• 1:02:52Patrick O'Shaughnessy?

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away, and then three to four suggestions of new books every month. You can also follow me on Twitter, @Patrick_OShag. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.