The transcript from this week’s MIB: Josh Wolfe, Lux Capital, is below.
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MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra issue special guest, his name is Josh Wolfe and this week is a tour de force discussion on venture capital and technology and behavioral psychology in the world of deploying risk capital in the sciences. It’s absolutely fascinating.
If you are at all interested in the way venture capitalists think, how new technologies are found and developed and exploited and how they are adapted and eventually just become part of the everyday usage and what the future might look like 10, 40, a hundred years off, then you’re going to find this to be an absolutely fascinating conversation.
So, with no further ado, my interview with Josh Wolfe of Lux Capital.
MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest today is Josh Wolfe. He is the co-founder and managing partner of Lux Capital, a venture capital firm that supports basic science and scientists and entrepreneurs who are pursuing counter conventional solutions to some of the world’s most vexing problems.
He is a founding investor and board member with Bill Gates in Kymeta. He is a co-investor with folks such as Marc Andreesen and Peter Thiel and he’s a director at firms such as Shapeways, Strateos, Kallyope, CTRL-Labs and Variant. Josh Wolfe, welcome to Bloomberg.
JOSH WOLFE, CO-FOUNDER AND MANAGING PARTNER, LUX CAPITAL: Very great to be with you.
RITHOLTZ: So, you have an unusual background. You’re like a molecular biologist coming out of Cornell and your early work is on AIDS immunopathology research. How does that translate to finance and then venture capital?
WOLFE: Well, venture capital is investing in people who are inventing the future and the people that are inventing the future tend to be technologists and engineers and scientists and so you have to speak their language. But when I was growing up, I was going to be a doctor. I was going to go and get an M.D. and then M.D. PhD and then I met people who are actually making money and I got way more enamored with capital markets.
And I remember doing my internship on Wall Street and then I was at the summers doing scientific research. And my mentor was actually trading futures and options in the science lab and I got so excited. I said, what are you doing, and he explained.
And so, I got way more enamored with capital markets than science itself. But venture capital was the perfect hybrid because you get to bet on scientists who are inventing the future but you just got to understand what they’re doing.
RITHOLTZ: So, how much of this being enamored on finance comes from your background? You grow up in the hood, in Brooklyn in Coney Island.
WOLFE: Coney Island, Brooklyn.
RITHOLTZ: I have a buddy who grew up in Sea Gate. I know that area really well. Did that affect the way you look at the world of money and capital or was it just your upbringing?
WOLFE: Well, first of all, if you don’t you grow up with money, you want it. So, that’s always a virtuous thing. And I actually think that the best entrepreneurs are the kind of people that we back and we look for. If you can find the people that have the chip on their shoulder that they came from some sort of messed-up background, it’s almost always predictive that they’re going to be very ambitious.
RITHOLTZ: Hungry and ambitious. Sure.
WOLFE: Now, you want them to be ethical and ambitious because you also get a lot of hustlers and hucksters. Now, you grow up on Coney Island right by the seaside carnival and you are filled with hucksters.
So, I would say if anything, growing up in Coney Island made me super skeptical and cynical of human nature. I’m always fond of the Shakespearean quote that there is daggers in men’s smiles and you grow up with this distrusting, slightly squinty eyed, what this guy’s angle, what’s the agenda that he’s got.
RITHOLTZ: The boardwalk did that to you.
WOLFE: Yes. You’ve got — New York City, people talk about it’s diverse. But the reality is you’ve got Brennan Beach with Russians and you’ve got Coney Island that’s primarily African-American Latino and you’ve got Korean on clubs. But you go to Coney Island on the boardwalk and it is just the absolute melting pot of New York.
RITHOLTZ: That’s quite fascinating. So, you end up in finance, you worked your way through a couple of well-known firms. How did you end up pivoting to use the VC word into venture capital?
WOLFE: It’s funny because the word pivoting is totally banned at Lux. We only pirouette. We don’t pivot, we pirouette. I got very lucky and everything in my life I would describe as randomness and optionality and ex post facto. I can explain everything as just perfectly (in your chain, a priority) you never know. One that I …
RITHOLTZ: At least you recognize that. Most people are similarly situated but are somewhat oblivious to that fact.
WOLFE: Well, but, again, if you’re going to be skeptical about other people, then you have to be a little bit skeptical of yourself, too.
RITHOLTZ: One with them.
WOLFE: So, intellectual honesty I think is a good virtue but it’s hard. So, I got lucky and I met a guy named Bill Conway and Bill was one of three founders …
RITHOLTZ: Private equity?
WOLFE: Yes. Exactly. Carlyle Group founder. David Rubenstein, famous one, he raises the money. Bill, less famous by design and invests and he’s just an incredible human. He decided, and again, I don’t know the circumstances of the day or the 24 hours that preceded our meeting, but he was in a good mood.
And we pitched to him and I said, we want to build this great firm, and he said, I hope you make a billion, and he invested with us. Luckiest day in my life.
RITHOLTZ: Just like that.
WOLFE: There’s nothing that I could have pointed to in the path dependence of this internship or this job or going to Cornell or this class I took that would ever lead to that meeting. And so, I’m humbled by what I call randomness and optionality.
RITHOLTZ: That is truly, truly random, isn’t it? So, you and I met at a dinner not too long ago hosted by Annie Duke on an educational project that she’s working on. But I always kind of scanned the people who are going to be at these dinners and there was something in your bio that really makes me laugh and you described your venture background as having an interest in science fiction like technology. I love that descriptor but you’re going to have to explain what you mean by that.
WOLFE: OK. So, everything that is around us today was invented by somebody. Somebody came up with the idea and that idea started quite literally as a fiction. It did not exist. It was in somebody’s imagination.
Now, if you accept the premise that a lot of the inspiration for technology comes from other people who are inspired but didn’t invent it, they were the people who literally wrote the science fiction books.
WOLFE: They were the graphic novels. They were the comic books. They made the movie. They did the special effects and they imagine what could be. And it turns out, you fast forward and you look at the Lux portfolio today, a huge number of the companies that we’ve invested in, the ideas behind them, the technologies, the design even was modeled on things that happened 20, 30, 40 years ago in a science fiction.
And I’ve actually kept an archive of some of the sci-fi archives. So, if we went through this quickly, you’ve got the Motorola probably …
RITHOLTZ: The flip phone …
RITHOLTZ: … from “Star Trek.”
WOLFE: Exactly. Now, it was called the StarTAC phone.
WOLFE: That was one of the first things, right?
RITHOLTZ: Which is as close as you can get to seeing the word Star Trek and not invite a trademark dispute.
WOLFE: Exactly. OK. Now, you’ve got — today, you’ve got Siri and you look at the image and the thing for Siri, it’s just the silver version of HAL …
WOLFE: … from “Space Odyssey.” You’ve got Michael Douglas disclosure, he goes into this room and he 3D scanned himself and he enters this virtual reality world. This is around the same time as like “Lawnmower Man” if you remember that.
WOLFE: OK. Not a fan favorite but one of mine. And that sort of presage the virtual-reality landscape. You’ve got podracing from “Star Wars.” Today, that’s drone racing league.
You’ve got robotic surgery when Luke Skywalker’s hand is severed by Vader that begot both intuitive surgical and then Auris, which is one of our companies that we sold to Johnson & Johnson earlier this year for $6 billion plus.
RITHOLTZ: Not too bad.
WOLFE: Not too bad. And all of these things were born in somebody’s imagination. And if you think about really what venture capital is, it is believing before other people understand and what do you believe when you’re believing in somebody’s vision.
Now, the difference is you have to make sure that they’re not full of it …
WOLFE: … so that you don’t get a Theranos and you have to have …
RITHOLTZ: Literally just wrote down the word Theranos.
WOLFE: And that is it, right?
RITHOLTZ: That’s my next question.
WOLFE: Now, here’s the intellectually honest thing, you do not know at the moment of inception or conception of a company whether the person is malicious or delusional, whether they are intellectually honest or not.
And so, you put up a little money, it’s like an ante in a poker game. You’re trying to figure out, is this person for real, and you try to define what are the technological milestones that will tell me that this is for real and not BS.
And the biggest thing, if you walk into my firm and you sit in our Monday partners meeting, if you ask any of the partners, what is Josh going to ask about the technology or what is he thinking the second that somebody is pitching it, I’m thinking whether I say it publicly or I’m thinking it privately, is this a fraud.
RITHOLTZ: So, you raise Theranos. It’s such an interesting question because my read of that entire situation from the get-go is that it was both delusional and a fraud simultaneously.
She had zero medical background. She had — and it’s amazing how all the healthcare and medical device VCs past and everybody else who came in didn’t know better. But it appeared that she believed she could legitimately do this but with no basis in fact. So, at what point does delusion become fraud?
WOLFE: Well, when a technology doesn’t work. I had a friend who is at a very large deca billion investment fund that was doing crossover investments. They’re public market portfolio. They have $40 billion. They were making private investments. They were going to visit Theranos and they said, what’s the number one question that you would ask if you are us doing diligence, and I said, does it work.
WOLFE: And you’d be surprised how many people just want to believe the narrative, the story …
WOLFE: … going back to science fiction and not verifying if it’s science fact. Now, you had all these other telltale signs with her. The octogenarian boards which is …
RITHOLTZ: For sure.
WOLFE: … all signaling value. People that had great military or geopolitical and …
RITHOLTZ: George Shultz and …
RITHOLTZ: … Henry Kissinger and just a wholly inappropriate for medical technology.
WOLFE: But to your point, there was nobody there that really had any sophisticated biology or pharma (ph) experience.
WOLFE: Now, the truth is liquid biopsy, the ability to detect from a small drop of blood, analytes that are indicative of cancer or something else, will eventually, from someone, see the light of day. But you think about the scar that it has put on the industry, in the sector and how hard it is for a legitimate entrepreneur that’s developing legitimate technology today, they’ve raised the slope significantly.
RITHOLTZ: So, it’s not just that she was a fraud and her partners were frauds, they’ve literally set medical technology back because now everyone is going to be skeptical even of legitimate breakthroughs.
WOLFE: Yes. And realistically, just to set back, one year, two years or three years, has it raised the cost of capital for the firm …
RITHOLTZ: How many people will die over the course of that setback? So, you can argue that there is blood on our hands literally.
WOLFE: Well, yes. OK.
RITHOLTZ: I’m not a fan in case you can’t tell.
WOLFE: I’m with you and, look, it’s easy for all of us to say back then and I believe by the way because I know that you are a fellow skeptic that was a fraud. It’s harder today both socially to come out and say, I think that another company is specific fraud.
Now, there’s an entire realm of quantum computing today that I think is going to be wrought with frauds. It has all of the criteria for a fraught. People don’t understand it. They have FOMO, fear of missing out. They think that it’s going to be something really big.
They don’t want to feel stupid because they don’t understand it. And so, people are parting with money and I think that you’re going to see at least one and maybe as many as five public frauds related to quantum computing.
RITHOLTZ: The tragedy of the comments finds its way even to venture capital. Tell us a little bit about your team at Lux. Who are your partners and what does everybody do?
WOLFE: Let’s start with my founder — my co-founder who’s Peter Hebert. Peter is my dispositional opposite, which I think if you’re going to have a firm, it’s a critical thing.
Now, it’s interesting because in hedge funds, you typically have one PM and they make all the decisions. In private equity, you tend to have teams. So, Peter and I are the cofounders and the reason that it’s important is he is the optimist, I am the pessimist.
I’m sitting before you and I’m wearing all dark. I wear all black and it’s just my disposition. I expect the worst. It helps …
RITHOLTZ: And yet the shoes are not pessimistic but for the skulls all over them.
WOLFE: Correct. Pete, you will catch him in Nantucket Reds, in pastel colors.
WOLFE: He is much more like my wife who happens to be an activist hedge fund manager. She’s more perma-smile.
WOLFE: Me as they say, I’ve got RBF, resting B face. So, I expect the worst, he expects the best. And if you had an entire firm that was like me, we would be a bunch of cynical short-sellers …
WOLFE: … just trying to spot the frauds and doubting everybody.
WOLFE: If you had a firm entirely like him, we would be limning growth investors just paying any price and going off the cliff.
WOLFE: The balance that we’ve had as friends for 25 years and as partners for 20 has made culturally the firm what it is. Now, from us it flows everybody else. And, so, you’ve got 10 other investment professionals and everybody is intellectually and ethnically a gender diverse,
Now, what does that mean for me? We’ve got people that are Kashmiri, Pakistani, Iranian, Brazilian, Australian. You’ve got a bunch of white New York Jews.
But the intellectual mix of people is so different. You’ve got electrical engineer PhDs. You’ve got people that have stem cell PhDs. People with material science PhDs. People that have no technical background and are excellent at capital raising and marketing.
And when we descend upon a company, the entire — and it’s funny because I use this analogy the other day and people had no idea what Voltron was and I feel like I’m a young guy but geez it dated me. But it’s like Voltron coming together. You get all the robots come together into this Megatron.
And it’s just a diverse group of people that all think differently. I would say that I have two people think the same, one of them is unnecessary.
WOLFE: And it’s a lot of fun.
RITHOLTZ: So, you’re concern that your cultural references are out of date and you’re like what, almost 40?
RITHOLTZ: OK. Wait until in your 50s and you’ll drop a Monty Python or a “Caddyshack” reference and the whole table of millennials look at you like …
WOLFE: What’s “Caddyshack”?
RITHOLTZ: There you go. Perfect. So, you focus a lot on basic science to some degrees. Tell us the sort of companies Lux invests in.
WOLFE: So, it really is something that’s in the cutting edge of an area that we think that other people haven’t found. Now, the reason we do that is we want really high scientific and technical complexity not because we want to tackle things that are really hard, it’s because we don’t want competition.
It is way easier in venture capital to go find the next company that is developing an app for the smart phone or some social media software or something that is relatively easy. But the problem with funding easy things is you get hundreds of competitors.
RITHOLTZ: Talk about random outcomes. Of those hundred, who really is good to know which is the next Snapchat or Instagram or whatever practically in random.
WOLFE: Now, I know that you’re a student of skill versus luck and a great question always I think in this domain is can you fail on purpose. So, there Michael Mauboussin has …
RITHOLTZ: That’s right.
WOLFE: And in picking amongst a field of 500 competitors in software, you’ve got let’s say equal probability one in 500 chance. If you can find something where there’s only three or four or five competitors, you can look a lot smarter because now maybe you have a 20 percent chance, assuming all things equal, of picking the winner.
RITHOLTZ: Can you invest in all five or two out of the five or anything like that?
WOLFE: You’re typically conflicted but sometimes depending on the state of things, you might invest in one and then later on when something else comes along and you might invest in it.
But because you know that it should really be part of the first thing that you invest in and by being able to influence that outcome and say, you know what, don’t split the baby, don’t try to split and recruit competing talent, don’t try to go to customers and confuse them. Be part of one enterprise and it’s better to own something smaller of something much bigger than to try to compete head to head.
So, sometimes, we will influence those outcomes. But by and large, the stuff that we’re investing is at the cutting edge of science and technology. It’s hard. There’s barriers to entry. There’s intellectual property that imposes a negative right on people so that you have a moat. Again, all things that — and I’m psychotic about competitive advantage, give the company that you’re investing in a better chance than just pure luck.
RITHOLTZ: Makes a lot of sense. When I think about batting averages for the typical VC funds, usually, and I’m going back to the John Doerrs of the world, the ’80s and ’90s VCs, they tend to spread a lot of money around, most of which did not generate a positive yield, and then there’s a handful of not just winners but giant outsize winners, hundred X. Think about eBay and Apple and Amazon going down the list.
Given this area and the more basic science that you’re focusing on, is it a similar distribution or how does the number shakeout? You’re looking for one homerun to subsidize the next 50 or is it the distribution difference?
WOLFE: So, let’s look at the macro on venture. You’ve got two extremes. One of which we say is spray and pray. Exactly what you’re …
RITHOLTZ: Spray and pray.
WOLFE: Exactly what you’re describing. Just bet a lot of lottery tickets. You have intellectual honesty or total naïveté. You don’t know what’s going to work.
RITHOLTZ: And it rhymed so you know it’s true.
WOLFE: Exactly. The other extreme, stick with rhyming, wait and pay, OK? So, you wait until a winner emerges, you pay a very high price for the higher chance of being correct but obviously the higher the price you pay, the lower your expected return.
So, in one case, you’re saying, well, let’s bet in 50 or 100 or 200 companies and make small investment in buying lottery tickets and the other you say, we’re going to load up into the ones that are winners but we’re going to do it at such a high price and maybe we’re only going to get it at double.
Now, for successful venture fund, you’re looking for 3X or 4X cash on cash …
WOLFE: … over the ten-year period that you’ve got locked up money. Now, I would say the great advantage that we have as venture capitalist let’s say over peers in other alternatives like hedge funds, hedge funds might have quarterly, monthly, maybe annual liquidity redemptions and that’s a hard thing because it creates an institutional imperative where the managers focused on the short term.
We get to focus on five, six, seven years because our investors’ capital is patiently locked up for a decade. OK. If everything goes well, you might get three to 4X cash-on-cash. Now, some funds, you might have a 10X fund and some you might have a two.
But on average, that’s what you’re aiming for. There’s two ways to cut it. First is you assume that one or two of your companies return the entire fund, all the capital that you’ve raised, one time over. Our newest fund $500 million, we got to pair them, it’s recently close to billion dollars. But the $500 million, you might have one company where you own 10 percent of it and it sells for $5 billion, you got $500 million back in gross proceeds, just return the fund one time over.
Your next five companies in aggregate proceeds return the fund another time over. And in our case where you build the portfolio of about 25 companies, then the ensuing 15 or 20 companies will turn it another time and you end up with that 3X cash-on-cash.
The other way to think about it and, again, simple math, a third of your companies are total zeros. You lose everything.
WOLFE: A third, you make back give or take a dollar and the third you make 10X and you end up with a 3X cash-on-cash. The problem is you don’t know which companies when you invest are going to be.
RITHOLTZ: If you did, you can only invest in the 3X. I’m only going to put the money in the 10X.
WOLFE: Correct. Now, of course, what we do, wherever your confidence and your conviction is high, you upsize portfolio allocation, you put more money in the things that you think are going to be great, you try to put less money in — but so much of this is reputational.
WOLFE: And so, you mentioned John Doerr before and some of the great venture capitalists of the past and it was their reputation in backing a winner that begot them the next deal. It’s very much like when you said in the movie theater and they say from the director that brought you or from the producers of and it’s that signal, it’s the same signal of why elite universities attract elite performers and you get this path positive feedback effect.
RITHOLTZ: Right. Right.
WOLFE: But so much of our business if you’re intellectually honest is luck.
RITHOLTZ: There can be no doubt about that.
WOLFE: Although if you go with this, can you fail on purpose? I can guarantee you that I can fail on purpose. I can pick the absolute worst entrepreneurs that cannot raise money. I can absolutely pick fraudulent companies and I can absolutely pick teams that can never deliver and I could fail on purpose.
RITHOLTZ: Well, but that just says that there is a skill component that doesn’t by itself eliminate the luck component.
WOLFE: Hundred percent.
RITHOLTZ: So, the threshold for having a half decent venture fund is, hey, if you can eliminate a lot of that fraud, that’s how you end up with the three or 4X as opposed to one and a half or a 2X.
WOLFE: Well, and really the best is can you develop the reputation and can you actually be able to help companies so that you get the best entrepreneurs. Because the truth is what we do in the end of the day is a security selection and a little bit of competitive intelligence gathering and some smart capital allocation.
But the most important thing that we can do is attract the best founders because they are the people who do everything. At the end of the day, limited partners give us money and they allocate to us and we in turn give it to the entrepreneur and the entrepreneur in turn decides who they’re going to hire and who they’re going to fire and what technologies they’re going to prioritize and how they’re going to sell.
And the single best trait of an entrepreneur is somebody that can tell a story. Somebody that has that narrative power going back to science fiction and just being able to back those individuals. They are the people that recruit talent. They are the people that raise money. They are the people that garner attention and win deals and that is what makes the venture capital business.
RITHOLTZ: Quite fascinating. Earlier, we were talking about science fiction and how that led to your interest in venture capital but you’ve developed a philosophy that I think is somewhat atypical from some of those other VCs and businesspeople I’ve mentioned.
One of the things in your bio stood out to me, E.O. Wilson. You said he might be the person that had the single greatest impact on humanity. Explain that.
WOLFE: Well, totally biased view but he had the biggest impact on me. Intellectually, this was modern Renaissance thinking. The book “Consilience” which I probably read in ’98, ’99, 2000 thereabout, so, over 20 years ago, was this idea in science that turned me on in turn to Charlie Munger.
These two people are compatriots. Charlie’s view of Renaissance thinking and worldly mental models and E.O. Wilson’s view of the unity of the hard sciences and the soft sciences between psychology and physics, between economics and geology and finding patterns lets you identify some universal truths.
And so, if you can continue to find those first principle universal truths, I think it sets you on a good path for making good decisions.
RITHOLTZ: Quite interesting. I assume you’ve worked your way through “Poor Charlie’s Almanack” already.
WOLFE: I’ve given so many copies of that away. I’ve created more doorstops and coffee-table book gifts and …
RITHOLTZ: He’s one of my — well, if you can get around to introducing us, I would love to set things (ph).
WOLFE: You know what, I have a funny story. My wife and I went, years ago, to Berkshire annual meeting and we were at the — I forget if it was the Days or the Marriott, whatever the hotel was, and before I actually had invested with Bill Gates, there was a dinner and it was Bill Gates, it was Buffett and it was Munger.
I picked my wife up from the airport because I arrived earlier and we go out to grab her bag and the car was broken in two.
RITHOLTZ: Your car.
WOLFE: Our car was broken in two and everything was stolen, the laptop and everything was gone in Omaha. We go to the front desk and while we’re going to front desk, who was settling the bill for their private dinner restaurant, Charlie Munger.
And here I am, my wife is really upset, our stuff was just stolen from the car and there’s Charlie Munger at the front and she looks at me and she’s like, go ahead. She knew that Charlie was going to Trump.
RITHOLTZ: Right. And you had a conversation.
WOLFE: I did.
RITHOLTZ: And it’s a highlight that you have great memories of.
WOLFE: Well, he’s not a very loquacious person.
WOLFE: Nothing to add. But I think that his rigor in being — I remember there was a story that somebody asked him what is the single thing that you would attribute your success to and he said being rational.
RITHOLTZ: Fair enough. Right.
WOLFE: And that’s it. If you can try to be as rational as possible, which means identifying all the points where you are irrational, and mindful, we were at dinner together with Annie Duke and Danny Kahneman.
RITHOLTZ: Right. And Kahneman’s partner’s wife, famous Tversky’s wife Barbara.
WOLFE: Correct, who also just wrote an amazing book. And it’s really interesting because Danny has identified all of the mental biases, the cognitive biases that we have and it doesn’t matter because even being aware of them, you still — he will still fall victim to them.
RITHOLTZ: It’s called the bias bias that even knowing your own awareness of these cognitive issues, it’s not sufficient to defeat them.
WOLFE: Looking at an illusion, even knowing it is an illusion, it still works on you.
RITHOLTZ: It’s how you wired.
RITHOLTZ: We were very well designed to adapt to the savanna. But these more complex capital risking ventures where risk is out there but the dangle of reward, our brains just go on the fritz when that’s presented to us. At least our instinctual brains getting past that, you have some shot but it’s not easy.
WOLFE: It is interesting because we respond to the bustle in the hedgerow, right? The little sound is there and is that a tiger or it’s just a wind? In my world, I have to respond to that with heightened sensitivity, is that a little signal over there, is that entrepreneur into something big?
And so, we’re constantly overacting in part because it is so zero-sum. I do not have the opportunity to invest in the public markets where I can say, you know what I really like that is up 10 percent or is down 10 percent, there is a zero-sum nature where I am racing to beat everybody else to the big scientific technological breakthrough and own it before everybody else can.
RITHOLTZ: I like that answer and kudos on the Zeppelin reference. I appreciate that. There’s another part of you that I like, you refer to things as minnows and megas. Explain what that means.
WOLFE: This is a phenomenon right now, the minnows and the megas in venture capital. Historically, you had lots of firms that existed and maybe they were $200, $400, $500 million firms.
What you’ve had in the past few years is a phenomenon that has created a barbell of capital allocation to very small funds and many of them what I call them minnows. These are people who have raised 10 or 20 or 50 or hundred million dollars. They are a single or, in some cases, a duo GP, general partner …
RITHOLTZ: And this is a spray and pray approach to VC?
WOLFE: In some cases, they are but more importantly they’re very — it’s like the institutionalization of angel investing.
RITHOLTZ: OK. That’s fair.
WOLFE: Now, why is this happening? In part because there is a junior person at a major fund who found the hot deal that made the fund a lot of money. But the problem is that person is not part of the succession of the partnership. They don’t have economics. They’re not going to get paid.
So, the limited partners recognize, you know what, Jane Smith or Joe Smith, they were really the dealmaker here. Let’s put them in business because they are the future venture capital and the LPs are thinking how do I get a big allocation in the next Kleiner Perkins or Sequoia and how do I get that early.
So, that has created what is intelligent to do on a small basis with a handful of these people but again a priority you don’t know which ones are going to be really successful.
RITHOLTZ: Right. Right.
WOLFE: Hundreds and hundreds of minnows. Now, the way that we look at that as a firm is these people are our friends. They’re source of deal flow. We can be a source of capital to them. Some of them are going to turn into great franchises. Nearly impossible to predict which ones.
At the other extreme, you have the megas. The megas are the people that are raising billions of dollars. Now, the 800-pound gorilla or Godzilla, depending on your view, is SoftBank.
WOLFE: SoftBank is coming …
RITHOLTZ: Sufficient fund is just — it’s $100 billion gorilla.
WOLFE: Well, it is a complex beast and I would call it Godzilla and it has completely changed the undulating landscape. Why? Because, again, in public markets, you have relative efficiency at times.
Of course, you have massive inefficiencies at times but there is no market more inefficient than venture capital. Where in the private markets, a single price setter can come and just decide what the price of something is. They create the market clearing price.
There is no short-selling. There is no counteroffers. There is very little liquidity. So, SoftBank has come and created all of these unicorns and decacorns.
And what’s crazy is the money that they’re putting to work in some cases, they are pricing up their own investments. Now, put on the tinfoil hat for a moment, I have a more slightly nefarious view that a reason that Softbank is doing this, understanding the motive is that they are doing this to be able to create paper assets and increases in paper valuations that can serve as collateral against indebtedness that is north of 140, $150 billion.
So, by being able to invest in, we work at $10 billion and then pricing it up to 20. You just showed that you had 100 percent gain in your billion dollar or two billion-dollar investment. And if you look at their earnings over the past one or two or three quarters, a significant portion of the profits that are reported is from these paper gains, illiquid.
And then when one of this companies actually exits and you have liquidity like in Uber or (Garden), they take those proceeds and instead of distributing to the investors, they say, you know what, we’re going to borrow against this, we’re going to issue debt and sell it to retail.
So, I think the entire complex, which is really run by a bunch of Deutsche Bank X credit structure credit guys …
RITHOLTZ: And Deutsche Bank is the most straight-up bank there is.
WOLFE: Of course. I mean, there’s no risk there that you have total collapse. And so, I think that this is, for venture-capital, systemic risk and one of the poster children of illiquidity. I think that the narrative about singularity and the future, all of that is great for society because it funds all kinds of experiments. But for the SoftBank and SoftBank investors, I would be very, very nervous.
RITHOLTZ: So, SoftBank is a “Ponzi scheme” quote-unquote, says Josh Wolfe. I’m going to put that down and put those words in your mouth. The minnow and mega model by the way very much reminds me of one of the smartest things that one of the smartest banks does which is Goldman Sachs.
Are you familiar — when Goldman Sachs has a hot trader or they have a manager who’s killing it, rather than have that person slip out and launch their own, they’ll tap and say, hey, have you ever thought of starting a hedge fund? We’ll help fund you. We’ll give you first billion dollars. We’ll help you raise capital owned by the way with your prime broker and we’re going to have a piece of the GP.
But go out and a thousand minnows have spawned and that’s how you end up with, where were we, 12,000 hedge funds these days? Most of which barely earn their keep, including fees, beyond fees. It’s not necessarily a moneymaker. But that description of VC funding minnows is what Goldman has been doing for, I don’t know, 20 years?
WOLFE: It’s actually very interesting because on the hedge fund side between Citadel and Millennium and Balyasny and SCC, you’ve seen that phenomenon, right, where they say, OK, we’re going to do risk management at the top, we’re going to have a lot of people, we’ll blow them out if they lose 10 percent or whatever the …
RITHOLTZ: Sachs was notorious for that.
WOLFE: In venture capital, first of all, the timeframe to know if somebody has made money …
RITHOLTZ: So long.
WOLFE: … is so long.
WOLFE: But you haven’t had that kind of institutional complex because the time that it takes to find out if somebody is right or wrong, the payee schemes, all this, it’s just — it’s very complicated.
But you do have this bifurcation in many, many investors that are making small bets and that is good for the angel investor, the person that’s starting up. It is easier than ever if you want to start a business to find capital. And that has an important footnote.
RITHOLTZ: Which is?
WOLFE: The beneficiary of that over the past few years has been WeWork because every …
RITHOLTZ: I see. I thought you’re going to say the public. Why we — because the public gets subsidized Uber rides.
WOLFE: The public is always the beneficiary in the end even during bubbles, right?
WOLFE: I mean, of course, pensioners and retirees lose money. But the reality is we continue progress, right, and James Surowiecki had a great quote many years ago in the New York where he said, in greed and avarice lies the hope of progress.
WOLFE: And it’s true because that’s what happens, right? Everybody funds something. They overdue in the short term. They underestimated the long term. But in that greed and avarice, lots of stuff gets laid out.
RITHOLTZ: The book that best sums up that Surowiecki quote is “PopRITHOLTZ:: Why Bubbles Are Great For The Economy” …
WOLFE: Yes. That was a great one.
RITHOLTZ: … by Daniel Gross.
RITHOLTZ: So, you look at railroads and televisions and cars and computers and fiber optics, every — with the exception of financial bubbles like the great financial crisis just leaves behind debt but every other bubble — so you probably remember Global Crossing and Metromedia fiber and all the fiber-optic companies that were laying unlit cable at something like $2,000 a mile and it end — they’ll all go bankrupt and it gets bought the next generation for pennies a mile and that’s what makes YouTube and Facebook and Netflix and all these other bandwidth-intensive applications viable because some losing investment basically made the broadband available …
WOLFE: For free. So, you hit it on. I think two really important things and hundred percent right, right? Late ’90s, you had a narrative promulgated by George Gilder who happens to be a friend …
WOLFE: Yes. But George …
RITHOLTZ: God, Gilder used to literally say, I worked with a guy who use to get the Gilder telecast newsletter.
RITHOLTZ: And I would read and I would always come away with, what is this I don’t do price nonsense, price is what matters …
RITHOLTZ: … in the public markets. How can you not do price?
WOLFE: George was directionally right about technology, OK, and there’s certain direct …
RITHOLTZ: That’s a tough call to make. Hey, the default position of human technological advancement is up. I could save you $2,000 a year in a newsletter, right …
WOLFE: There you go.
RITHOLTZ: … and you got one line.
WOLFE: Now, but you have that Gilder affect, right, where he would come out and because everybody else was looking at it, it was big bold letter, whatever the public company, the thing would be up 50, 80 percent …
RITHOLTZ: I remember Nortel he got behind, it exploded and go down the list of all of the …
WOLFE: JDS Uniphase, all of these guys. OK. But you’re right, Gary Winnick and Global Crossing.
WOLFE: Now, hype got high, cost of capital got low, like you said, hundreds of miles of dark fiber optic outlaid and the winner from all of that was the third world who got connected to the Internet for free.
WOLFE: The losers were the growth investors, the public growth investors. The winners were the distressed equity guys who came and picked up all the asset’s percent on the dollar.
WOLFE: Now, you go back almost a decade in venture capital. The same thing was happening with solar and alternative energy. Everybody was funning solar and you don’t have to be a genius to predict this. You just had a little bit of history going back 10 or 15 years which was optical networking was going to be — if history doesn’t repeat its rhymes, it was going to be the same thing as solar.
And so, in solar, we said sit out the ride, don’t invest, you’re going to have massive hype, it’s going to lower the cost of capital, people are going to do uneconomic things and the winner will be the Third World that gets connected.
Now, my anticipation at that time was that the private equity guys would come and scoop up these assets for cents and the dollars and I was wrong.
WOLFE: Because the people that scooped up the assets for cents and a dollar were the Chinese.
RITHOLTZ: And they now dominate the solar industry.
RITHOLTZ: Quite fascinating. Let’s talk about some of the technologies that are out there and how they’re doing. When 3D printing first came out, what is it, almost 15 years ago, is that right?
WOLFE: Yes, 155 to 20 years. Sure.
RITHOLTZ: So, the promise was we’d all have these $200 3D printers. I need a part, you can print just about anything. We’d be printing heart valves. We’ve been reprinted all the stuff and did we get our hopes up too high? Is that still somewhere off in the future or has 3D printing really been an overhyped bust?
WOLFE: Yes, yes, and yes.
RITHOLTZ: I wasn’t expecting that.
WOLFE: It has been an overhyped bust but this is predictive. If you know your history technology which you do, you’d look at Carlota Perez and the diffusion of technology …
WOLFE: … through history. You go through an installation phase where everybody guessed the thing and people are tinkering. For the past 20 years — and those are typically near a generational long thing, maybe it’s three quarters of a generation but between 20 and 25 years.
So, for the past 20 years, you had the installation phase where people are getting lots of different 3D printers. You have desktop ones that do cost a few thousand dollars but they really don’t do very much. They print plastics and it’s good for schools and universities and tinkerers and this kind of stuff.
But then you had the domain of prototyping and so that’s also been another early …
RITHOLTZ: That’s a big cost saving, the $2,000 or — the bigger units that you could design apart and say, let’s see what it looks like in three days.
WOLFE: Yes. But it’s still modest. It isn’t the boom that we’ve all been …
WOLFE: … looking for 3D printing. Now, I do think that over the past three or four years, we’ve been entering this deployment phase as you go from installation, which is just 20 years, to now deployment.
We invested in a company called Desktop Metal and when we invested, it was about three and a half years ago. The industry for spare parts and end-use parts was maybe $5 billion. Today, it’s nine.
So, rapid growth in the industry. It’s probably going to 90 over the next decade. So …
RITHOLTZ: 10X over 10 years.
WOLFE: 10X over 10 years.
RITHOLTZ: That’s big.
WOLFE: Now, why? If you look at most of the economics of manufacturing, it is spent on tooling. But the vast majority of the value are in end-use parts and the spare parts.
If you can change the economics of how you make this stuff, historically, you ship them and you ship it three ways, sea, air or land. But there’s a fourth way to ship a part.
RITHOLTZ: And so, eventually, my mechanic is going to tell me my turbocharger needs a new fan and he’ll be able to print it and slap it in instead of waiting six weeks for it to show up from Germany.
WOLFE: And in fact, Desktop Metal is working with I think seven different automotive companies for exactly this, the small bespoke parts or water impeller …
WOLFE: … something as part of a motor where it does not make sense to spend the fixed cost to tool and dye a part where you’re not going to make 10,000 or 100,000 or a million of them. You just need one or two of these parts.
So, I think that that is going to be a big trend and particularly, if you look at a company like Desktop Metal, this is a Boston-based company, it has grown very significantly. You got BMW and GE and Saudi Aramco and a whole slew of strategic investors alongside us.
But the other piece of this is …
RITHOLTZ: Wait a second, you say Saudi Aramco, sorry to interrupt. So, what you’re — that you just made me think of is you have some accrue out at an offshore oil rig …
WOLFE: That needs a part.
RITHOLTZ: .., and something breaks and to get something flown out to them could take a week and they lose a week of production or they have a machine, they manufacture the part and they’re down for four hours and that’s it.
WOLFE: Correct. Now, maybe it’s not four hours, maybe it’s a day and a half but yes. Because the installation phase where you had a bunch of these printers, we’re doing plastic, there’s no way that industrial …
WOLFE: … company was going to be able to use that. Now, when you have a sophisticated laser sintering metal 3D printers, it’s real. It’s real pieces. It’s real technology for real applications.
So, that’s one. And you’re seeing this in jet engines, in automotive. You are seeing it. If you get a knee implant, if you get a hearing aid, it is a good chance, over 70 percent, that that is 3D printed product.
RITHOLTZ: Now, this is not a biological product. This is still some form of plastics and/or.
WOLFE: No. It could be titanium for your knee.
RITHOLTZ: What I mean by bio, it’s not an organic product.
RITHOLTZ: It’s a metal or plastic.
WOLFE: Correct. Correct.
RITHOLTZ: So, how far off is the, hey, I need a new aortic heart valve and I don’t want one from a cow …
WOLFE: All of this stuff is still structural. When you start thinking about the other component which is function, you’re really far off. There’s a guy I think Wake Forest’s Tony Atala who’s doing 3D printing of organs.
RITHOLTZ: That’s the sort of vision I’m thinking.
WOLFE: Now, I think the best …
RITHOLTZ: I need a kidney, print me one.
WOLFE: They can’t do kidney. But the best that they’ve done is a bladder because it’s basically just structural, right? It’s hold liquid, hold fluid.
WOLFE: So, we …
RITHOLTZ: In other words, it doesn’t have the mechanical functions. Even if you’re working with stem cells, you can’t …
WOLFE: Maybe in a lab but today like being honest as an investor, we are far, far away from being able to introduce structure into that.
RITHOLTZ: All right.
WOLFE: So, we then …
RITHOLTZ: I’ll give you hundred years to get that done.
WOLFE: Hundred years I think is possible.
WOLFE: I would say high probability in a hundred years. I think it’s more likely rather than printing that we’re probably going to harvest them.
RITHOLTZ: We’re going to grow them instead of printing.
WOLFE: But, no, no, we’re going to grow them inside of animals. Now, there’s going to be ethics about that but today if you wanted to get …
RITHOLTZ: There are no ethics about growing kidneys inside of animals.
WOLFE: If you want it to take it from a pig.
RITHOLTZ: We eat animals.
WOLFE: Yes. But they’re …
RITHOLTZ: There’s a nicer life for a pig or — who we’re very similar biologically to humans or a chimp. It’s a nicer life for them than they becoming bacon.
WOLFE: Yes. But it’s — there’s ethical debate.
RITHOLTZ: All right. OK. Let’s take care of that ethical debate. You’re going to save millions and millions of lives and inconvenience of few chimps. How is that debate going to go much further than that?
WOLFE: I think that if you can appeal to the default morality of are you reducing suffering, then you have an entire camp of people that increasingly — this is observable, it’s not speculative that more and more people are embracing animal rights and saying, you know what, it sentient, it’s suffering.
Look, there’s nothing more I love — actually, this is not fully true, nothing more I love than bacon. The only thing I love more than bacon is peanut butter and bacon, which I know sounds disgusting but it’s delicious.
RITHOLTZ: That does sound disgusting.
WOLFE: But it is amazing. OK.
RITHOLTZ: I have a friend who’s a vegan who eats bacon and I’m like, you know this comes from a pig, right, and the answer is, but it’s so delicious.
WOLFE: It is delicious.
RITHOLTZ: And by the way, pigs are actually much smarter than dogs or horses and that hasn’t slowed down the human onslaught of pork.
WOLFE: Yes. But it doesn’t make it right.
RITHOLTZ: OK. But you can you the — we’re digressing but the ethical argument that it’s wrong, we can intellectually agree with it. But in the marketplace, that is a giant losing argument. It is my point.
WOLFE: Today, and you are seeing both as evidence, if you look back in the arc of history, I think that what we’re saying with beyond meat you will see this Tilray-like phenomenon, I think this is a company that ends up …
RITHOLTZ: That’s weed.
WOLFE: … dropped in value 80 or 90 percent.
WOLFE: Yes. But …
RITHOLTZ: After it ran up 5X or 10X.
WOLFE: But the market is saying something, right? Now, maybe got algos and maybe you got momentum investors, maybe you got people but there’s demand and interest in this and it’s — if you believe that markets tell you something, right, markets are there to serve you and not to tell you, but if you believe that there’s something in the ascendancy of beyond meat, a signal …
WOLFE: … in the same way that the ascendancy of Global Crossing and these other things going back to that part, the ascendancy of these things tells you that there’s something there and I do think that we’re going to see …
RITHOLTZ: There are rounding error in the world of food. Let’s you and I make a bet right now, when is the first year in our lifetime when the annual pork consumption short of a worldwide disease phenomenon like bovine …
WOLFE: Won’t happen around.
RITHOLTZ: All right. How about on a per capita basis? What about per capita even?
WOLFE: It won’t happen in our lifetime.
RITHOLTZ: OK. So, now that we’ve taken care of the ethical issue, which is an interesting debate with no real market thing, which brings us back to, I don’t even know how we got this question …
WOLFE: 3D printing.
RITHOLTZ: … to 3D printing. So, if it’s not the organs …
WOLFE: Yes. It’s not the organs but it is the parts inside the body, it is the parts inside the aircraft, it is the parts inside the ship or the — and it’s really interesting because the — you change the economics of manufacturing and has geopolitical implications.
If you’re just sipping a CAD file instead of having spare parts in inventory sitting in a port of which there are trillions of dollars sitting in the ports …
RITHOLTZ: Right. Right.
WOLFE: … there’s interesting implications. Same thing …
RITHOLTZ: You’re saving on storage, you’re saving on transportation, it’s a greener approach for sure. Even whatever energy consumed by the printer, it’s better than manufacturing and storing and shipping or whatever. It sounds like it’s a no-brainer if it can successfully penetrate that market.
WOLFE: I think the no-brainer is going to come when it’s economics because …
WOLFE: … we have another company here in New York and half of the operations are here in New York, half are in Eindhoven in the Netherlands, they have made 12 million unique parts over 1 million users and customers, 130 countries. They’ll print 2 million parts this year, unique parts, individual unique things.
If you are a small business and you have a room that’s not similar from the room that we’re sitting in, no matter, a few hundred square feet or whatever it is, that’s filled with inventory and you think about the cash conversion cycle …
WOLFE: … and how much is locked up in that, if you can free that by instead of having the inventories and just uploading that as a CAD file and printing it and shipping it on demand, it will unlock capital. Any time you unlock capital, I think you create value.
RITHOLTZ: Sure. For sure. So, let’s talk about some of the other things, some of the other areas that you focus on and I have not mentioned the company that you — one of your early investments that was in nuclear waste remediation.
Let’s talk about that and then I’ll have to ask you about thorium. Tell us about what you guys did with nuclear waste remediation at a time when everybody else was looking at green alternative energy.
WOLFE: Yes. So, if you listen to — and they were very smart guys and very successful older venture capitalists but John Doerr and Vinod Khosla, they were the legends and they were writing the op-eds and they were crying on TED stages and they were really promoting the idea with Al Gore and others that the most important thing you could find were solar, wind, biofuels, ethanol, battery, electric cars, OK?
The problem was everybody agreed with that and the number one thing that is predictive of returns is not whether there’s a hockey stick growth curve that Gartner tells you this is going to be a big industry but how much money is going into the industry. More money that floods in, the higher the price of the assets, it will be great for consumers, lower returns.
WOLFE: So, we said, where is nobody looking and that’s the thing that I love to do. I love to understand where is the consensus and where is the varying perception. What’s the thing that nobody else is looking at?
Nobody was talking about nuclear. You watched Al Gore’s movie back then “Inconvenient Truth” it doesn’t even mention the word nuclear because it was taboo. It was politically taboo.
So, we look at nuclear, we spent a year and a half looking at every part of the fuel cycle. We started with the uranium miners. Maybe there’s something there. It turns out they’re all hucksters and fraudsters in New Mexico and Nevada.
WOLFE: So, the Coney Island in me said, you know what, stay away.
RITHOLTZ: You and I have had the Mark Twain quote but — my favorite discussion, but the all-time greatest Mark Twain quote is “What is mine? It’s a hole in the ground with a liar standing there.”
WOLFE: Exactly. Exactly. So, that was the same thing, right? And by the way, uranium mining, if it took, uranium itself was such a small portion of the cost of operating a nuclear plan. It was relatively inconsequential whereas the marginal cost of nat gas and oil was permanently driven by the underlying material, the commodity.
So, we said no to uranium miners. Then we looked at modular reactors. This is a good idea.
RITHOLTZ: Smaller reactors that could be moved easily and …
WOLFE: And build incrementally. So, instead of building a billion-dollar gigawatt power plant for — to serve a million people, you will build an array of say 30-megawatt plant.
WOLFE: So, each one maybe cost you a hundred million dollars and you build it over time. Now, the problem with that is it’s really for the domain, a very long tenure investors, may be sovereigns, billionaires, people that could wait 20, 25 years.
WOLFE: Not for the technology developed but because the regulatory …
WOLFE: OK. So, we said no to that. But then you look around and you say, geez, the biggest unsolved problem with nuclear is not the political, it’s what you do to waste.
RITHOLTZ: Right. It’s disposal. Absolutely.
WOLFE: And so, you’ve got this whole push for Yucca Mountain which would be a geological repository. We have spent tens of billions of dollars on Yucca Mountain. Do you know how much waste it’s gone in?
WOLFE: Zero. So, we look at that and said, OK, that’s sort of interesting. Now, what about the way that you store nuclear waste on site and it turns out that there are basically two companies, one that makes a vertical cask like almost like a casket to put the rods in …
WOLFE: … and one that makes a horizontal one. So, you can make a vertical one or you can make a horizontal one but that was basically …
RITHOLTZ: That’s some innovation right there.
WOLFE: That’s the innovation. Now, what happens is these rods inside the reactor, they go through nuclear chain reaction.
WOLFE: They heat the water, the water turns turbines that save nuclear power. Then when you’re cooling them, they sit in a pool of water for five years and then they’re pulled out and they’re put into these little caskets.
RITHOLTZ: Five years just to cool down.
RITHOLTZ: No additional reaction that’s just a very low-level background.
WOLFE: Water is a natural neutron observer and — but there’s all this low-level waste that is sitting there. So, everything from worker dose radiation to parts and and there’s a big market for that.
But the bigger market, and this was the thing that really got us, if you actually sit and I promise you this is not scintillating reading but it was insightful because nobody was looking at it, if you read the DOE budget, $25 billion a year, 6 billion of it is spent on nuclear waste cleanup.
RITHOLTZ: Have you read “The Fifth Risk” by Michael Lewis?
RITHOLTZ: It’s a whole — that last third of the book is all about what the people think the Department of Energy is about energy. It’s not. It’s about nuclear weapon cleanup and some nuclear energy.
WOLFE: Now, that book was written well after this. So, this is 2009, 2010, Hanford, Savannah River, Idaho National Lab …
RITHOLTZ: Savannah River is giant.
RITHOLTZ: People are unaware of how much nuclear material …
WOLFE: There’s an entire city in Hanford, Washington, in the State of Washington, you fly in there, there’s an airport dedicated to this.
WOLFE: There’s one bar, it’s called the 3 Eyed Fish Bar like the Simpsons …
WOLFE: … and the entire thing is a community and a complex dedicated to nuclear waste cleanup. Now, the people that are making all the money in it, when I tell you they make money, it’s billions of dollars a year, basically shoveling waste from one side to the other and this will be going on for decades, it’s URS, it’s CH2M Hill, its floor, it’s a big engineering primes (ph).
So, we looked at this and said, not only you have this in the U.S. but you have this in the U.K. with a site called Sellafield, you have this in France with La Hague. Is there an opportunity for high-tech solution that could win contracts by doing this faster and cheaper? We looked around. We couldn’t find anything.
RITHOLTZ: Nobody else is in that space.
WOLFE: Nobody was in the space and I got to tell you going around for a year to nuclear waste conferences, I was certainly the only person under 50 years old and I was certainly the only venture capitalist there.
So, we go and we find the best technologist that we get and we find the best people that were under the age of 60 because they weren’t that entrepreneurial in this space and to be honest, we found people that are like 58 or 59. And we end up blocking them the best technologies which were combination of material, science and chemistry and physics, materials that could grab the worst radioactive elements like cesium, strontium …
WOLFE: … uranium, plutonium and then we had a second technology called vitrification, which in layman’s terms is glassmaking.
WOLFE: Take the stuff, lock it up into a glass …
RITHOLTZ: You’re embedding it in silicon or some other …
WOLFE: Silicon is glass.
WOLFE: But you’re heating it at 1700 degrees, it turns into this molten form, it can’t leak into the environment.
RITHOLTZ: So, it’s still radioactive …
WOLFE: Still radioactive.
RITHOLTZ: … it’s just not cranking out.
WOLFE: We haven’t transmutated it. That doesn’t really exist but …
RITHOLTZ: Well, if you did, you can turn it into gold and we know that that’s what we want.
WOLFE: Exactly and then we’ll start a mining company and take to public.
RITHOLTZ: Right. With a liar.
WOLFE: Exactly. So, we ended up starting company. We named in Kurion after Madame Curie and in part because …
RITHOLTZ: With a K.
WOLFE: With a K to be cute. And in part because I read the article about the Department of Energy and it said that there’s billions and billions of curies which is the measure of radiation …
WOLFE: … and that was the inspiration. So, we started the company and with very little money and I had — two of our LPs who are prominent hedge fund managers and us and we put a total of $3 million into it.
I put a million and a half from our fund at that time and we own 35 percent of the business. We stake these guys, they go off to work. In the first year, they did about a million in revenue. Second year, black swan, you had a negative event which was the seismic event that led to the earthquake, that led to the tsunami, that led to the Fukushima disaster.
WOLFE: And lo and behold, the only company picked in the U.S. for this cleanup was this little company Kurion. So, we went from a million dollars in revenue to 40 then 80 then 120, 160 million revenue.
RITHOLTZ: Are they still working that now?
WOLFE: They still are and they actually sold to Veolia which is a French giant. We sold for $400 million, we own a third of the business. We made an excess of 40 times, our early money return in the entirety of that fund, and it was gratifying because we like to sound — say as sanctimonious as it sounds that we like to invest in matter that matters.
It was meaningful because you actually did something to reduce all the radiation from this disaster side …
WOLFE: … and we got to make our investors a lot of money.
RITHOLTZ: We have been speaking with Josh Wolfe. He is the co-founder and managing partner of Lux Capital. If you enjoy this conversation, well, be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things technology and venture related.
You can find that at iTunes, Overcast, Spotify, Google Podcast, Bloomberg wherever you’ll find our podcasts are sold. We love your comments, feedback and suggestions. Write to us at MIBpodcast@Bloomberg.net. Check out my weekly column on Bloomberg.com. Sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
Welcome to the podcast. Josh, thank you so much for doing this. I’ve been looking forward to this for a while since you and I sat at what was a fascinating dinner and I hope something comes out of it. Really interesting idea than any duke is working on.
You mentioned my friend Michael Mauboussin who was also there. It was really a murderous rogue of people there. Quite a gallery of intellect. I don’t know what’s going to of it but I thought it was fascinating and I thought what you discussed was really interesting.
I have no idea what it was but it led me to say I should have him come. He’s an interesting guy to sit and chat with. So, what — do you recall what your big idea was in that meeting?
WOLFE: I actually think at least one of the ideas was as they were thinking about how do you get more broad distribution about the decision-making for young people …
RITHOLTZ: Right. How to train people to make better decisions …
WOLFE: And there was …
RITHOLTZ: … while they’re in the junior high school level.
WOLFE: And the first principles approach that you would want take to this is, well, how do you reach to those people. And the old school thinking is let’s put it into the curriculum of the schools …
WOLFE: … and every time that you try that it’s typically failed. And so, go where these people are. So, if you got young …
RITHOLTZ: Social media.
WOLFE: Yes. If you got young kids that’s on Roblox, have gamified so that young people can be on Roblox and playing decision-making games and looking at things, maybe even starting to learn to think of probabilities or just like the older generation, it’s podcast or it’s …
RITHOLTZ: This is now old school media? I used to think this was so cutting edge. You tell me this is now old goat.
WOLFE: Look, people that are listening here know Voltron, they know “Caddyshack”. Younger people maybe not.
RITHOLTZ: That’s — I’ve had a number of MBA professors tell me they assigned various episodes of this as homework. So, there’s some …
WOLFE: Why not, right? It’s content. You have amazing access to amazing people. Why not? It’s quite insane. Talk about dumb luck.
RITHOLTZ: That will have a longer conversation about that at another time. We were just talking about a nuclear waste remediation and I have to ask you about the concept of thorium-powered reactors. I don’t know how many years ago this was.
There’s a huge article in “Wired” magazine, I don’t know if recall “Wired” about all the advantages of thorium and how productive it is and how low grade the waste is and yet nothing’s ever seem to happen with that.
WOLFE: I’ll give you a probability into timeframe. There’s a 50 percent chance that we see something in the next 50 years and a 10 percent chance that you see something in the next 10 years and if you do, over 70 percent chance it comes from China.
RITHOLTZ: Really? Wow.
WOLFE: The Motorola family has been backers of an effort on the East Coast. I think it was called thorium power. We looked at a bunch of effort. The problem is it is very long, very expensive, regulatory fraud. It’s just going to take too long.
WOLFE: The virtues of thorium are great.
RITHOLTZ: It’s cheap.
WOLFE: Cheaper, lower probability.
RITHOLTZ: Cheaper than uranium or any of the other …
WOLFE: And lower — the biggest virtue of it is you have less probability of a proliferation because one of the outputs of traditional nuclear is plutonium.
RITHOLTZ: Right. No plutonium on thorium …
RITHOLTZ: …. which is really interesting. And let’s talk about — there’s a few tech subjects we didn’t get to I have to ask you about. Chronobiology.
RITHOLTZ: So, let’s talk a little bit about — and my understanding of this is, hey, we could take the RNA sequencing clip-off the ends which tells people — tells other cells when they’re supposed to die and theoretically, we have an infinite lifespan.
WOLFE: There’s many different dimensions of this idea of chronobiology and the biggest one is that different cells in your body are different ages and there are markers on those cells that can tell how old it is. So, the Purkinje cells in your brain are probably 25 years old.
RITHOLTZ: Mine are much older than that. They feel it anyway.
WOLFE: The gut and skin cells you have are maybe days, at most, weeks old. So, different parts of your body are basically regenerating and growing and dying at different times. You’re not like — there’s not one battery, right? You’re made up of lots of different things at different ages.
And so, being able to do a body clock to understand those different things is important. Second, it turns out, of course, we have circadian rhythms, right? You get tired at night. You have different levels of hormones at different times of the day. Different people might be night owls. People might be — but there’s something to that physiologically throughout the day.
The third is that there is now evidence and scientific papers are coming out showing that if you give chemo at certain times of the day to certain types of people that it might be more effective than others.
WOLFE: So, there’s something in the body about when you’re being reactive. Look, you I’m sure have a time when you feel that you are your most alert. When caffeine works on you whereas you might after lunch go into your food coma at 3 o’clock or something and caffeine just doesn’t work as well as it does say at 9:30 when your hormones and metabolites are spiking at a different rate.
So, the idea of chronobiology is within the cells, between the cells and even between people is there something about the dimension of time that plays relevance for medicine in the body.
RITHOLTZ: That’s quite fascinating. What else? Autonomous driving, GPU gaming to your concept of intelligent machine goes from GPU from gaming to power artificial intelligence to machine learning. What’s next? Is this what’s going to drive fully autonomous driving, autonomous military vehicles? Where does this go and explain what GPU is.
WOLFE: So, GPU is graphic processing units. This is the ability to do large-scale multidimensional processing of polygons. So, back in the day, if you had a Nintendo 64, it was this big revolution of you playing James Bond back in the da. It was like wow like three-dimensional simulation …
RITHOLTZ: Ten commands, I remember that game.
WOLFE: Yes. And that was two-dimensional. But you can see …
RITHOLTZ: Well, there’s all three-dimensional polygons and that’s how they created a sense of depth and the illusion of space.
WOLFE: Exactly. But over time, you can see this clear progression almost like a Moore’s law of visualization. But we went from CPUs, the central processing units, which were primarily dominated by Intel to GPUs which were primarily dominated by NVIDIA.
Now, the narrative in public markets around NVIDIA was this is tightly coupled to PlayStations, PS4, and Xboxs.
WOLFE: But suddenly, something happened a few years ago, about seven years ago, where they invented a language called CUDA, C-U-D-A, and put it in the hands of academics and researchers who suddenly said, wait a second, instead of using CPUs or high throughput computing, we can instead use GPUs to do this processing. And they started doing the processing for neural networks to be able to do artificial intelligence and machine learning.
And so, you saw shift where GPUs were primarily coupled to the consoles and gaming …
WOLFE: … to suddenly being the soul of the new machine inside of things like autonomous vehicles and drones and simulations. This is an area when you say like what’s next in terms of autonomous vehicles.
Increasingly, the technology stack is maturing. You have LIDAR. You have solid-state LIDAR. But the really valuable thing is the simulation and this is a fascinating phenomenon because it is affecting many different industries, the gap between reality and that which is simulated.
So, the ability to render reality in physics engines is leading everything from you can place simulator on something like drone racing league and you can actually fly a drone and it’s indistinguishable. You can actually simulate something inside the human body using a CT scan of the body and have a GPS-guided experience using a surgical robot.
You can actually have a simulation of a street and then have an autonomous vehicle that is learning on the simulation as opposed to actually learning driving in the road and it’s increasingly indistinguishable.
RITHOLTZ: So, typically, that takes place on a screen. I know you’re a sci-fi guy. When do we get the “Star Trek” hologram room, the holodeck?
WOLFE: Well, you’ve got — we have a company called Looking Glass that’s doing volumetric display. But we’re not …
RITHOLTZ: Meaning three dimensional without a screen.
WOLFE: Three dimensional, you have screen but you have no VRRA or glasses.
WOLFE: So, it’s an optical trick like holograms are. But the future there is that you’ll be looking at something akin to a pitch on a soccer field and it’s in three-dimensional like a fish tank and you’re watching the game right there.
RITHOLTZ: So, one last “Star Trek” thing I have to ask you about. You’ve talked about transporter technology, right, and we’re not talking about spooky connections at a distance or anything on a subatomic level, you’re literally talking about the ability to send the matter from here to there. Explain that.
WOLFE: Well, I don’t think you can do — I mean, that is science fiction. What you can do is I can take a picture, I’m looking at a coffee cup on our desk here, I can 3D capture a simulacrum of that cup, I can now work on its CAD design.
WOLFE: I can turn the atoms into a representation in bits and I can send those bits as a CAD file digitally to a 3D printer and I can print a version of that. But I am not actually transporting the individual atoms …
RITHOLTZ: Which is …
WOLFE: … I’ve copied it.
RITHOLTZ: Which is why I will never step foot on a transporter because people don’t realize the transporter kills you and create an exact duplicate of you wherever it goes. And I was always surprised at “Star Trek” how that never came up other than the doc not wanting to do it but every time you step on the transporter, if you want to make a device to execute people …
WOLFE: And this would be it.
RITHOLTZ: Right. You basically take people and disassemble them on a molecule and atom and by atom basis. Now, the fact that you have the ability to reassemble them elsewhere, that doesn’t mean they’re not dead. This is just an exact duplicate. But I just thought that was uninteresting.
WOLFE: But …
RITHOLTZ: So, you’re talking about …
WOLFE: Teleporters are not an investable thing. It’s philosophical idea.
RITHOLTZ: You’re talking about basically the variation of 3D printing using — at a distance using a full 3D …
RITHOLTZ: … scanning.
WOLFE: And 3D scanning, the resolution has increased exponentially over the past few years and so that’s going to continue. And I think that you can capture very discrete elements.
This is another area where actually I’m very excited about biology which is the imaging and microscopy tools that are coming out to be able to capture things in real time at a near atomic scale inside of cells. But the idea of teleportation is today’s science fiction, 3D scanners coupled with 3D printers will closely approximated but it’s still a trick.
RITHOLTZ: And at a molecular level, let’s — we must really talk a little bit about CRISPR in genome editing. Are you describing building these things from scratch or are you talking about growing these things? Designing — redesigning the genes and growing them or doing a scan and reproducing them?
WOLFE: Well, there — no, no. So, in biology, there are people that have gene libraries. They are trying to assemble nucleotides. There people who are editing them, using the technique of CRISPR.
CRISPR is really — I don’t want to say an overhyped technique but it is a very hyped technique that was a fundamental breakthrough and the fundamental breakthrough was effectively control C, control V in computing. It was copy and paste.
You can actually use this technique to be able to transpose codons or nucleotides from one part to another. And so, that allows you to literally edit like a Microsoft Word with precision.
But we are still so far way from being able to deliver. There’s been no CRISPR in a human. There’s been no technique where you’d say, gees, Barry has got a genetic defect here and let’s edit that out. It’s just — it’s so far away from practical reality. That is still a lot of hype.
RITHOLTZ: But when you say so far away, a thousand years?
WOLFE: No way. I mean …
RITHOLTZ: A hundred years, 10 years?
WOLFE: Impossible to predict because you could have a breakthrough. And so, intellectual …
RITHOLTZ: But realistically, 50 years from now, you will be able to edit — not you but …
WOLFE: You can today edit embryos. You can — and China is doing this. China — and this is something I would say that China lacked something that we have and because they lack it, they will be ascendant. And the thing that they lack is the ethics and regulatory apparatus that slows things down here in the U.S.
RITHOLTZ: Well, the way to — let me rephrase what you just said. China prioritizes the group over the individual. In America, our priorities are the individual over the group and that’s the difference between individual rights or a society that’s lasted 5,000 years.
WOLFE: Totally. And the result of that I think is that many of the advances in biotech will actually, in the near future, occur in China particularly around CNS disorders, Parkinson’s and Alzheimer’s.
RITHOLTZ: CNS meaning neural …
WOLFE: Central nervous system.
WOLFE: And the reason I say that is, first of all, with the growing demographic population we have that are going to get older here in the U.S. and suffer from things like Alzheimer’s and Parkinson’s and neurodegenerative diseases …
RITHOLTZ: An inevitability statistically.
WOLFE: … that is a huge market. We have shifted much of our primate research outside the U.S. because of ethics reasons. China does not have any such.
WOLFE: Ethics reasons (ph).
RITHOLTZ: They do work on prisoners that even Americans would be aghast at.
WOLFE: That may be so but they are definitively doing work on primates and I think what’s going to end up happening is we will import from China the drugs much in the way that the U.S. exports Hollywood to the rest of the world. I think China will be exporting drugs and hopefully it’s well tested close to FDA-approved apparatus so that we’re not importing crazy stuff. But …
RITHOLTZ: So, what’s the difference between doing the research? This is where the ethical/economic discussion we had earlier comes to fore. Is there a difference between doing the research or purchasing the end result of that research?
To me, it’s the same. Effectively, the research was done. You may not like it but you’re eating the pork or you’re buying this product. How are you not as responsible for the research as if it was done here? Isn’t it hypocritical to pretend otherwise? And this goes to whether we’re talking about food or what have you.
WOLFE: Well, look, as a U.S. citizen, your tax money goes to the university research and you might fund some research whether you agree with that or not. I mean, that’s the allocation …
RITHOLTZ: Or the ward department or this, I mean …
WOLFE: Which itself is another ethic (ph) we should touch on …
WOLFE: … because military technology I think is going to be an absolute boon in venture capital. I think it’s one of the most exciting and important areas in the next five years in part because the vast number of big tech companies from Google going down are issuing wanting to do work with military.
They have such pressure from the HR and IR departments that people are saying, I don’t want to work on this stuff. It is creating a giant …
RITHOLTZ: Void. Yes
WOLFE: A void where there is a tremendous opportunity for some of the smartest technology, some of the smartest scientists and engineers to work on these wicked thorny problems in defense.
RITHOLTZ: Your pal Peter Thiel is …
WOLFE: We are co-invested in a company called (Anderal). I think it is going to be one of the greatest companies in defense. If you look at the new entrants …
RITHOLTZ: Let me get my …
WOLFE: If you look at the new entrants in defense, you’ve got Lockheed, you’ve got Raytheon, you’ve got BAE, you’ve got General Dynamics. There hasn’t been anybody over the past 25 years …
RITHOLTZ: They’ve all conglomerate ties over the past 30 years. There used to be 50 companies in that space. They’re seven now.
WOLFE: And in some cases, you have people that are doing amazing things but it takes a very long time and they’re working on huge multibillion projects like the F-35 joint strike fighter. In other cases, you have many, many small beltway bandits who are just getting these cost-plus contracts because they know somebody that know somebody.
WOLFE: But true innovation, the thing that I think gave American military might which in turn gave our economy the ability to project power across the globe and control two oceans and all the geographic plus military advantage we have, it has to be supported by continuous technological advantage and that is something …
RITHOLTZ: A hundred percent.
WOLFE: … that over the past 20 years I think has slipped away. I think very few engineers want to really work on these problems and I think the smartest ones that do are normally going to make a fortune but they’re going to do a tremendous patriotic duty.
RITHOLTZ: Quite interesting. There’s a fascinating story about how a bunch of engineers tried to get the Navy to take radar in the new book “Loonshots.” It’s just astonishing that this was an old technology by the time it was put to work in World War II. Nobody could get the war department, which as it was called back then, to recognize the military value of this. I going to think there’s a million things like that.
WOLFE: It’s always. I mean, even Jim Woolsey who’s a former CIA …
WOLFE: … was a venture partner to our firm for many years.
WOLFE: He tells story of Amber which was — he traded a bunch of alpaca blankets to some people over in Eastern Europe to be able to get a runway and then actually fly a drone. He was looking at Milosevic and that early drone was predator by this really entrepreneur Abe Karem.
At that time. Woolsey went to the DoD and said, I need a drone, I want to be able to have unmanned pilot that could — pilot vehicle that could give me eyes on the ground, and they said it will cost $500 million and take six years.
And he was able to go to this entrepreneur and in $5 million in six months, they were able to create this.
RITHOLTZ: Wow. Astonishing. And whatever happened with the company behind the predator of drone? Did Boeing acquire …
WOLFE: General Atomics.
RITHOLTZ: General Atomics. OK. That’s a — General Dynamics or General …
RITHOLTZ: That’s a great name, General Atomics.
RITHOLTZ: So, I only have you for a finite amount of time. Let’s jump to our speed round, our favorite questions. These are what we asked all of our guests. First car you even owned, year make and model.
WOLFE: 1994 Ford Explorer. It was a hunter green and I think I had it for a year before it spun out on the highway and I never drove it again.
RITHOLTZ: By the way, this is my test question because eventually someone is going to say what’s a car, I don’t know what you’re talking about.
RITHOLTZ: Tells us the most important thing people don’t know about Josh Wolfe.
WOLFE: There’s so much that I don’t even know about Josh Wolfe, right? So, just being intellectually honest. But personal side of me, I love heavy metal and hardcore. I grew up going to a mosh pit in Brooklyn, a place called The (Moores) and Life of Agony.
And I like skateboarding and I like people that just have this sort of gritty rebel side to that sort. Heavy metal, hip-hop …
RITHOLTZ: When you say heavy metal — like my hip-hop, following ends at Paul’s Boutique with the Beastie Boys but …
WOLFE: Yes. That’s too commercial like Black Moon on the hip-hop side.
RITHOLTZ: Like too commercial is 311 or …
WOLFE: Yes. And on the heavy metal side, it would have been Deftones, Life of Agony, Biohazard.
RITHOLTZ: You’re a hardcore heavy metal…
RITHOLTZ: Like to me, heavy metal is Black Sabbath and …
RITHOLTZ: Like when I was coming up — you say that today but when Black Sabbath came out, people were like what is this devil music.
RITHOLTZ: I think it was hilarious.
RITHOLTZ: Tell us about some of your early mentors. You obviously have a few who helped shape your career.
WOLFE: Well, it’s interesting, there used to be this placard outside of our old office around 41st Park in Madison that was down in Broadway 20th, 21st and said that reading great books is like having conversations with the best minds of history.
And so, many of my …
RITHOLTZ: Embedded in the ground.
RITHOLTZ: So, my office is 40th off Bryant Park …
WOLFE: Yes. Right there.
RITHOLTZ: So, that — right. They’re fabulous. They’re all over and I don’t know who did that but it’s genius.
WOLFE: I love it. And you’re looking down and you’re looking at your computer, you’re looking at your phone or whatever and you notice these things. But that one always hit me because so many of my mentors in that sense are people that I never met that are dead, right? They’re just alive in the pulp (ph) and the ideas.
But the one human mentor that I really feel owe my career and the intellectual honesty is Bill Conway, the founder of Carlyle who is just — his ethics, his integrity, it doesn’t matter what the deal docs say, it doesn’t matter what the contract says, you just do the right thing.
The kinds of questions he asks. The way that he speaks without saying things. It’s …
RITHOLTZ: What do you mean by speaks without saying things?
WOLFE: He has a diplomatic way of saying things and sometimes, the messages and what he doesn’t say and I find that there is a handful of people I can communicate that way where you sort of into it what they mean without them actually being explicit.
RITHOLTZ: Quite interesting. Talk about investors be it VC or otherwise who influence your approach to the world of risking capital.
WOLFE: Well, I think I’ve read every bio and every article that I could about the early venture investors. So, Tom Perkins and General Doriot and all the early venture capitalists. And so many of these lessons are basically irrelevant because you have this path depends. There’s an idiosyncratic moment.
WOLFE: I remember there is a guy from a firm who’s legendary investor back in the day, Ben Rosen from Sevin Rosen. He was early investor in Compaq which was once a significant technology investment and Ben said, you just need one.
WOLFE: You just need one because you get one hit and then that hit begets reputation and repetition begets more hits and so on. So, on the venture capital side, it was a handful of individuals.
The person who I have the most respect for venture capital hands down is Bill Gurley. I think he’s a true investor. I think he came from the sell side on Wall Street and he understood how to be an analyst first. He understands businesses. He understands human nature.
I think he happens to be a towering giant because he’s very tall and I’m very short. We’re both on the board at Santa Fe Institute and I …
RITHOLTZ: With Michael Mauboussin.
WOLFE: Exactly. And Michael chairs it. And so, I’m very fond of Bill. But there’s — Bill Janeway is another guy who I think …
RITHOLTZ: Really interesting guy.
WOLFE: … super smart guy and the way that he always thought about risk and technology was an influence. There’s an older guy Chris Brody was at Warburg Pincus who I spent a lot of time with. I’d probably learned how to be a good board member from watching Chris hold people accountable.
So, a lot of individual lessons. But from an investing philosophy, I mean, hands down, it’s like the value investors because they were just rational and they wouldn’t touch venture capital. Charlie Munger and Buffett and everything that I can read that they’ve ever written or said and all the acolytes that followed from them I think are just — it gives you a grounding sense of a true business and markets and human psychology.
And so, I think even as a venture capitalist, if you haven’t studied those greats, you get a massive deficit.
RITHOLTZ: Let’s talk about books. We’ve mention a few over the course of our conversation. What are some of your favorite books be they fiction, nonfiction, technology?
WOLFE: I’m a voracious reader. So, fiction, nonfiction, so, “Consilience” E.O. Wilson was great, “How the Mind Works” Steven Pinker. I love “The Operator” about David Geffen and I like reading biology — sorry, biographies. “Why Zebras Don’t Get Ulcers.”
RITHOLTZ: Sure. At Stanford. What’s his name?
RITHOLTZ: Sapolsky. Right.
WOLFE: Yes. Sapolsky. Robert Sapolsky. He’s a primatologist, right, but at the end of the day, we’re …
RITHOLTZ: He’s really a behaviorist if you think about it.
WOLFE: But we are two primates sitting here talking, right, and related to that, there’s a great book that Robin Hanson wrote in the past one or two years called “The Elephant in the Brain”…
WOLFE: … about signaling and if you understand why people, the motives behind why people do things, I think it’s really interesting. Let’s see, the — on the fiction side, it’s interesting, my wife really got me into fiction, I don’t know, going back 15 years or something like that with “The Magus” and it was sort of a psychological profile …
RITHOLTZ: Who wrote that?
WOLFE: I can’t remember the author’s name but it was …
RITHOLTZ: Spell it.
WOLFE: M-A-G-U-S. This guy has got this like Greek island and he has this teacher professor who takes this little sojourn there and it is just like all these mind games that he plays with him.
RITHOLTZ: John Fowles.
WOLFE: Yes. It was dark and cool and psychologically. That turned me onto a British writer Rachel Cusk whose writing like every sentence. I mentioned before I love the line that there’s daggers in men’s smiles from Shakespeare.
And so, just her use of language in the psychologically astute prose that she has is great.
RITHOLTZ: She is a trilogy that seems to be …
WOLFE: “Outline” is the first and then “Transit” was the second and “Kudos” I think is the third. Fiction recently “Overstory” by Richard Powers. Just brilliant prose and I really got turned onto fiction because I think that you can tell more in a paragraph by an amazing fiction author who understands human psychology than you can read in an entire textbook in psychology.
RITHOLTZ: So, I’m surprised there isn’t a science fiction title in the list because you talk so much previously about sci-fi.
WOLFE: Neal Stephenson, I mean, by far, the depth, the rigor, the foresight. “The Diamond Age” for me probably around the time that we were starting Lux which is such an inspiration.
RITHOLTZ: “Diamond Age.”
WOLFE: Yes. And …
RITHOLTZ: I don’t know that one. Didn’t he do “Seven Moons”?
WOLFE: “Seveneves.” Yes.
RITHOLTZ: “Seveneves.” Right.
WOLFE: And then TV writers like your David Milch in “Deadwood” and the current writers on “Westworld.” I just — I think it’s absolutely brilliant scintillating soliloquies that they put forth and philosophically everyday really interesting.
RITHOLTZ: We are in the golden age of television.
WOLFE: I think so.
RITHOLTZ: Tell us about a time you failed and what you learn from the experience.
WOLFE: Well, there’s business failures and there’s personal failures. The business failures, you lose some money, right? You made a bad decision. So, if you’re …
RITHOLTZ: Well, losing money is you’re not going to hit homerun every time you have bat. It may not be a failure, it’s within the expected distribution of returns.
WOLFE: We look at it as process for outcome, right?
WOLFE: So, there are times where we actually make money but we consider it a failure because we had the wrong process. So, what I mean by that is maybe our thesis was we’re going to make a certain amount of money or it’s going to work for this reason and we ended up making money but we’re totally wrong, we consider that a process failing.
But being — I don’t want to sound like, I don’t know, too clichéd here but like the biggest failures for me are the things that have the permanence of regret. So, choices I made or relationships that I under invested in or people that I didn’t spend enough time with who passed. Like those to me are the biggest failures.
And if there’s like a — if there is a younger Josh that I can go back to, it would be some of the relationships that I wish I could have fixed or people like I said who passed that I could have spent more time with. Those to me are the biggest failures because you can never fix them.
You lose money in an investment, no big deal. You’ll make money in another one.
WOLFE: But you lose a person or a friendship or relationship, I think those are the biggest failures.
RITHOLTZ: So, afterwards, I’ll give you the secret of time travel and tell you how you could solve those issues. And I’m not kidding. What do you do for fun? What do you do when you’re not reading or at work?
WOLFE: My kids are just — it’s an amazing adventure. We have three of them. Now, they’re nine, six and three, two girls and a boy, and you get to just see the world through their eyes and make all kinds of new mistakes over.
So, I love my kids, I love my family. I was the only child. All I ever won was a big nuclear family and my parents flew when I was young. So, this is sort of the chance I’ve had to make it right.
Love reading, skateboarding, basketball …
RITHOLTZ: You’re still skateboarding now?
WOLFE: Yes. Still skate. In fact, there’s a Sunday morning crew of dads that are sort of between 40 and 45 and we go out in Tribeca, the skate park and …
RITHOLTZ: Right. You got to keep the orthopedics busy.
WOLFE: Exactly. Exactly.
RITHOLTZ: And you turn a living also. Tell us what you’re most optimistic about today and what do you most pessimistic about.
WOLFE: I think this is a constant. I’m always optimistic about scientists and the incremental discoveries and the big breakthroughs that they’re going to make because I think it’s an inevitability. I was talking about the sort of directional arrow of progress and I think there’s an absolute inevitability just driven by human greed, pursuit of status that we are going to continue to discover incredible things that by definition nobody ever anticipated.
So, I’m optimistic about science itself as a process. I am generally pessimistic about human nature. I mean, the best in reports (ph) and the worst things that I think happen in the world are not because of inanimate things, it’s because of animated things. It’s about people. Two-legged mammals who are filled with too much greed or too much fear, too much hate or too much ignorance. And so, I’m generally pessimistic about human nature and that classic daggers in men’s smiles.
RITHOLTZ: And our final two and most favored questions, what sort of advice would you give to a millennial or recent college graduate who came to you and said, hey, I’m interested in a career either as a technology entrepreneur or venture capital.
WOLFE: Yes. I think the single most important thing for anybody is to build your brand, be differentiated, be indispensable, stay close to the money, find where the capital is flowing and stay close to it. That was one of the great early advices that I got from somebody.
And be voracious in your reading. I think you have to be exposed to so many things so that you can sort of develop your passion and then from your passion, develop an expertise and be able to stand out. So, all these things are in a linked.
And the best advice that I probably give again with regret to my older self is I think you need to find a balance between having a chip on your shoulder and the ambition and then being mindful that every relationship you have and every person that at some point in the future they’re going to be a call option and you don’t want that to expire. So, be good to people.
RITHOLTZ: That works for me. And our final question, what is it that you know about the world of venture capital investing today that you wish you knew 20 or so years ago when you were first getting started?
WOLFE: I wish that I would have known, and this is going to sound a bit cynical, how rigged the game is. I think every system at every point is rigged and if you can figure out that little mechanical torque in the machine that’s pulling the con, I think …
RITHOLTZ: Now, explain that a little bit.
WOLFE: Well, every year, ’98, 99, 2000, people thought you’re just going to pick the winners whatever but the system is rigged. IPOs were rigged. The distribution of IPOs was rigged. Housing market, CDOs, there’s always a game being played and there is a secret that the people who are making the most money basically keep. They won’t acknowledge publicly until after the fact.
And so, I think at any point in time in some domain, it’s happening and whether it’s central bankers today or whether it’s the housing crisis or whether it’s the SoftBank stuff today or that there’s always some game that’s being played that is totally unfair and rigged and to sort of appreciate that and look for it. Try to figure out where is the system rigged because it’s always there somewhere.
RITHOLTZ: Quite cynical and fascinating. We have been speaking with Josh — I almost called you Josh Lux, Josh Wolfe, managing partner and co-founder of Lux Capital.
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