WEBVTT - Josh Wolfe Discusses Innovative Investments (Podcast) 0:00:02.240 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.160 --> 0:00:10.920 This week on the podcast, I have an extra special guest. 0:00:11.080 --> 0:00:13.360 His name is Josh Wolfe, and this week is a 0:00:13.440 --> 0:00:17.920 tour to forced discussion on venture capital and technology and 0:00:18.079 --> 0:00:22.279 behavioral psychology in the world of deploying risk capital in 0:00:22.920 --> 0:00:27.080 the sciences. It's absolutely fascinating. If you are at all 0:00:27.200 --> 0:00:32.600 interested in the way venture capitalists think, uh, how new 0:00:32.640 --> 0:00:37.479 technologies are found and developed and exploited, and how they 0:00:37.479 --> 0:00:42.680 are adapted and eventually just become part of the everyday usage, 0:00:42.720 --> 0:00:46.159 and what the future might look like ten forty a 0:00:46.280 --> 0:00:48.800 hundred years off, then you're gonna find this to be 0:00:48.840 --> 0:00:53.080 an absolutely fascinating conversation. So, with no further ado, my 0:00:53.240 --> 0:00:59.920 interview with Josh Wolfe of Lux Capital. This is mess 0:01:00.040 --> 0:01:04.240 There's in Business with Barry Ridholts on Bloomberg Radio. My 0:01:04.400 --> 0:01:07.760 special guest today is Josh wolf He is the co 0:01:07.920 --> 0:01:12.320 founder and managing partner of Lux Capital, a venture capital 0:01:12.360 --> 0:01:17.280 firm that supports basic science and scientists and entrepreneurs who 0:01:17.280 --> 0:01:22.160 are pursuing counter conventional solutions to some of the world's 0:01:22.200 --> 0:01:26.240 most vexiting problems. He is a founding investor and board 0:01:26.280 --> 0:01:29.039 member with Bill Gates in Kai Metta. He is a 0:01:29.080 --> 0:01:32.280 co investor with folks such as Mark Andreson and Peter Thiel, 0:01:32.640 --> 0:01:35.920 and he's a director at firms such as Shapeways, Stratio, 0:01:36.040 --> 0:01:40.080 Scalio Control Labs, and Variant. Josh Wolf, Welcome to Bloomberg. 0:01:40.160 --> 0:01:42.360 Very great to be with you. So you have an 0:01:42.400 --> 0:01:46.600 unusual background. You're You're like a molecular biologist coming out 0:01:46.640 --> 0:01:50.600 of Cornell and your early work is on aids immuno 0:01:50.880 --> 0:01:54.960 pathology research. How does that translate to finance? And then 0:01:55.080 --> 0:01:58.320 venture capital? Venture capital is investing the people who are 0:01:58.320 --> 0:02:01.080 inventing the future, and people that are inventing the future 0:02:01.080 --> 0:02:03.640 tend to be technologists and engineers and scientists, and so 0:02:03.680 --> 0:02:05.680 you have to speak their language. But when I was 0:02:05.760 --> 0:02:07.360 growing up, I was going to be a doctor. I 0:02:07.400 --> 0:02:08.680 was gonna go get an m d and then an 0:02:08.720 --> 0:02:10.360 m d, pH d. And then I met people who 0:02:10.400 --> 0:02:13.200 were actually making money, and I got way more enamored 0:02:13.200 --> 0:02:16.080 with capital markets. And I remember doing my internships on 0:02:16.120 --> 0:02:18.640 Wall Street, and then I was at the Summer's doing 0:02:18.880 --> 0:02:23.120 uh scientific research, and my mentor was actually trading futures 0:02:23.120 --> 0:02:26.399 and options in the science lab, and I got so excited. 0:02:26.480 --> 0:02:27.840 I said, you know, what are you doing? And he 0:02:27.919 --> 0:02:30.440 explained and and so I got way more enamored with 0:02:30.480 --> 0:02:33.480 capital markets than than science itself. But venture capital was 0:02:33.520 --> 0:02:36.160 the perfect hybrid because you get to bet on scientists 0:02:36.520 --> 0:02:38.520 who are inventing the future, but you just gotta understand 0:02:38.520 --> 0:02:41.400 what they're doing. So how much of this being enamored 0:02:41.440 --> 0:02:43.919 on of finance comes from your background? You you grew 0:02:44.000 --> 0:02:48.160 up in in the hood in Brooklyn? Yeah, well, I 0:02:48.200 --> 0:02:49.760 have a buddy you grew up in c Gate. I 0:02:49.760 --> 0:02:53.120 know that area really well, Um, did that affect the 0:02:53.120 --> 0:02:55.560 way you looked at the world of of money and 0:02:55.680 --> 0:02:58.240 capital or was it just your upgring Well, first of all, 0:02:58.280 --> 0:03:00.040 if you don't grow up with money, you want it. 0:03:00.120 --> 0:03:02.440 So that's always a virtuous thing. And I actually think 0:03:02.480 --> 0:03:04.320 that the best entrepreneurs the kind of people that we 0:03:04.440 --> 0:03:05.800 back and we look forward. If you can find the 0:03:05.800 --> 0:03:07.760 people that have the chip on their shoulder that they 0:03:07.800 --> 0:03:10.400 came from some sort of messed up background, it's almost 0:03:10.400 --> 0:03:13.639 always predictive that they're going to be very ambitious, hungary 0:03:13.680 --> 0:03:16.080 and ambitious. Now you want them to be ethical and 0:03:16.160 --> 0:03:19.000 ambitious because you also get a lot of hustlers and hucksters. Now, 0:03:19.000 --> 0:03:21.760 you grew up in Coney Island right by the seaside Carnival, 0:03:21.840 --> 0:03:24.040 and you are filled with hucksters. So I would say, 0:03:24.080 --> 0:03:26.480 if anything, growing up in Coney Island made me super 0:03:26.520 --> 0:03:29.440 skeptical and cynical of human nature. I'm always fond of 0:03:29.440 --> 0:03:33.280 the Shakespearean quote that there's daggers and men smiles, and 0:03:33.360 --> 0:03:36.440 you grow up with this distrusting, slightly squinty eyed. You know, 0:03:36.520 --> 0:03:38.760 what's this guy's angle? What's the agenda that he's got? 0:03:38.840 --> 0:03:41.640 The boardwalk? Did that to you? Yeah, you've got New 0:03:41.720 --> 0:03:44.120 York City people talk about is diverse, but the reality 0:03:44.200 --> 0:03:46.720 is you've got Brighton Beach with Russians, and you've got 0:03:46.760 --> 0:03:49.280 Coney Island that's primarily African American Latino, and you've got 0:03:49.360 --> 0:03:51.600 Korean on clothes. But you go to Coney Island on 0:03:51.640 --> 0:03:53.880 the boardwalk and it is just the absolute melting pot 0:03:53.880 --> 0:03:57.200 of New York. That's that's quite quite fascinating. So so 0:03:57.280 --> 0:03:59.920 you end up in finance, who work your way through 0:04:00.000 --> 0:04:02.560 a couple of well known firms. How did you end 0:04:02.680 --> 0:04:06.000 up pivoting to use the VC word into venture cap 0:04:06.040 --> 0:04:08.320 It's funny because the word pivoting is totally banded lux. 0:04:08.360 --> 0:04:12.600 We only pirouette. We don't pivot. We pirouett. I got 0:04:12.680 --> 0:04:15.040 very lucky, and everything in my life I was describes 0:04:15.120 --> 0:04:18.120 randomnessnoptionality and ex post factor. I can explain everything. Is 0:04:18.120 --> 0:04:21.320 this perfectly near chain a priority? You never know and 0:04:21.680 --> 0:04:25.120 you recognize that most people are similarly situated, but are 0:04:25.480 --> 0:04:27.560 somewhat oblivious to that fact. Well, but again, if you're 0:04:27.560 --> 0:04:29.040 gonna be skeptical about other people, then you have to 0:04:29.040 --> 0:04:31.839 be a little bit skeptical of yourself too. So intellectual honesty, 0:04:31.880 --> 0:04:33.520 I think is a is a good virtue, but it's hard. 0:04:33.800 --> 0:04:35.760 So I got lucky, and I met a guy named 0:04:35.800 --> 0:04:39.120 Bill Conway. And Bill is one of the three founders. Yeah, exactly, 0:04:39.160 --> 0:04:42.560 Carlisle Group founder David Rubinstein, famous one. He raises the 0:04:42.560 --> 0:04:45.760 money bill Less, famous by by design and invests it. 0:04:46.480 --> 0:04:49.640 And he's just an incredible human. He decided, And again 0:04:49.640 --> 0:04:51.600 I don't know the circumstances of the day or the 0:04:51.640 --> 0:04:54.120 twenty four hours that preceded our meeting, but he was 0:04:54.160 --> 0:04:57.360 in a good mood and we pitched him and I said, 0:04:57.400 --> 0:04:58.600 you know, we want to build this great firm, And 0:04:58.600 --> 0:05:00.160 he said, I hope you make a billion, and he 0:05:00.200 --> 0:05:02.880 invested with us. In my life, There's not nothing that 0:05:02.880 --> 0:05:05.080 I could have pointed to in the path dependence of 0:05:05.400 --> 0:05:07.760 this internship or this job, or going to Cornell or 0:05:07.800 --> 0:05:09.719 this class I took that would ever lead to that meeting. 0:05:10.320 --> 0:05:13.599 And so I'm humbled by what I call randomness. That 0:05:13.680 --> 0:05:16.599 is truly truly random, isn't it. So you and I 0:05:16.640 --> 0:05:18.560 met at a dinner not too long ago, hosted by 0:05:18.560 --> 0:05:23.520 any Duke on an educational um project that she's working on. 0:05:24.120 --> 0:05:26.000 But I always kind of scan the people who are 0:05:26.000 --> 0:05:28.760 going to be at these dinners, and there was something 0:05:28.800 --> 0:05:32.800 in your bio that really made me laugh. And you 0:05:32.920 --> 0:05:37.440 describe your venture background as having an interest in science 0:05:37.480 --> 0:05:42.680 fiction like technology. I love that descriptor. But you're gonna 0:05:42.720 --> 0:05:44.720 have to explain what you mean by that, okay. So, 0:05:44.720 --> 0:05:48.279 so everything that is around us today was invented by somebody. 0:05:48.520 --> 0:05:51.719 Somebody came up with the idea, and that idea started 0:05:51.800 --> 0:05:53.960 quite literally as a fiction. It did not exist. It 0:05:54.040 --> 0:05:57.040 was in somebody's imagination. Now, if you accept the premise 0:05:57.160 --> 0:06:00.440 that a lot of the inspiration for technology from other 0:06:00.440 --> 0:06:02.920 people who were inspired but didn't invent it, they were 0:06:02.920 --> 0:06:05.680 the people who literally wrote the science fiction books, they 0:06:05.680 --> 0:06:07.479 wrote the graphic novels, they wrote the comic books, they 0:06:07.520 --> 0:06:09.720 made the movie, they did the special effects, and they 0:06:09.760 --> 0:06:12.120 imagined what could be. And it turns out you fast 0:06:12.160 --> 0:06:14.719 forward and you look at the Luxe portfolio today, a 0:06:14.839 --> 0:06:17.320 huge number of the companies that we've invested in the 0:06:17.520 --> 0:06:21.520 ideas behind them, the technologies, the design even was modeled 0:06:21.520 --> 0:06:23.800 on things that happened twenty four years ago in science fiction. 0:06:24.160 --> 0:06:26.960 And I've actually kept a archive of some of the 0:06:27.000 --> 0:06:29.239 sci fi archives, so if we went through these quickly. 0:06:29.240 --> 0:06:33.520 You've got the motorola, probably from Star Trek. It was 0:06:33.560 --> 0:06:35.520 called the star tack phone, right, that was one of 0:06:35.520 --> 0:06:37.280 the first things. Right then in the rotors you can 0:06:37.320 --> 0:06:39.800 get to sing the word Star Trek and not invite 0:06:39.880 --> 0:06:43.880 a trademark dispute exactly. Okay, Now you've got today, you've 0:06:43.920 --> 0:06:46.000 got Siri, and you look at the image and the 0:06:46.600 --> 0:06:48.560 thing for Siri, it's just a silver version of how 0:06:49.320 --> 0:06:53.600 from Space Odyssey. You've got Michael Douglas disclosure. He goes 0:06:53.600 --> 0:06:56.719 into this room and he three D scans himself and 0:06:56.720 --> 0:06:59.360 he enters this virtual reality world. This was around the 0:06:59.360 --> 0:07:01.159 same time as like on More Man. If you remember 0:07:01.200 --> 0:07:03.760 that okay, not not a fan favorite, but one of mine, 0:07:04.240 --> 0:07:08.200 and that sort of presaged the virtual reality landscape. You've 0:07:08.240 --> 0:07:11.880 got pod racing from Star Wars today. That's drone racing Lee. 0:07:11.920 --> 0:07:14.960 You've got robotic surgery when Luke Skywalker's hand is severed 0:07:14.960 --> 0:07:18.000 by Vader. That we got both Intuitive Surgical and then Orse, 0:07:18.080 --> 0:07:19.880 which was one of our companies that we sold to 0:07:19.960 --> 0:07:23.960 Johnson Johnson earlier this year for six billion dollars plus, 0:07:23.960 --> 0:07:26.720 not too bad. And and all of these things were 0:07:26.800 --> 0:07:29.880 born in somebody's imagination. And if you think about really 0:07:29.880 --> 0:07:33.240 what venture capital is, it is believing before other people understand. 0:07:33.680 --> 0:07:35.679 And what are you believing? You're believing in somebody's vision. 0:07:35.800 --> 0:07:37.560 Now the differences, you have to make sure that they're 0:07:37.560 --> 0:07:40.320 not full of it, that you don't get a theo nos. 0:07:40.600 --> 0:07:43.240 And you have to have literally literally just wrote down 0:07:43.240 --> 0:07:45.840 the word there and and and that is now. Now 0:07:45.840 --> 0:07:48.080 here's the intellectually honest thing. You do not know at 0:07:48.120 --> 0:07:50.760 the moment of inception or conception of a company, whether 0:07:50.840 --> 0:07:55.680 the person is malicious or delusional, whether they are intellectually 0:07:55.680 --> 0:07:57.440 honest or not. And so you put up a little money. 0:07:57.440 --> 0:07:59.400 It's like an anti in a poker game. You're trying 0:07:59.440 --> 0:08:01.360 to figure out is this person for real? And you 0:08:01.440 --> 0:08:03.840 try to find what are the technological milestones that will 0:08:03.840 --> 0:08:06.240 tell me that this is for real and not BS. 0:08:06.400 --> 0:08:08.360 And the biggest thing if you walk into my firm 0:08:08.400 --> 0:08:10.120 and you sit in our Monday partners meeting, if you 0:08:10.160 --> 0:08:12.120 asked any of the partners, what is Josh going to 0:08:12.160 --> 0:08:13.960 ask about the technology or what is he thinking? The 0:08:13.960 --> 0:08:16.440 second that somebody is pitching it, I am thinking, whether 0:08:16.480 --> 0:08:18.760 I say publicly or in thinking it privately, is this 0:08:18.840 --> 0:08:22.480 a fraud? So you raised Sarah nos It's such an 0:08:22.480 --> 0:08:28.440 interesting question because my read of that entire situation from 0:08:28.560 --> 0:08:33.559 the get go is that it was both delusional and 0:08:33.720 --> 0:08:38.120 a fraud simultaneously. She had zero medical background. She had 0:08:38.160 --> 0:08:41.440 and it's amazing how all the healthcare and medical device 0:08:41.760 --> 0:08:44.760 vcs passed and everybody else came in didn't know better. 0:08:45.080 --> 0:08:49.760 But it appeared that she believed she could legitimately do this, 0:08:51.160 --> 0:08:53.640 but with no basis in fact. So at what point 0:08:53.679 --> 0:08:57.040 does delusion become fraud? Well, when the technology doesn't work. 0:08:57.080 --> 0:08:59.000 I had a friend who is at a very large 0:08:59.200 --> 0:09:02.280 deck a billion investment fund that was doing crossover investments 0:09:02.280 --> 0:09:04.680 to their public market portfolio. They have forty billion dollars. 0:09:04.720 --> 0:09:06.720 They were making private investments. They were going to visit 0:09:06.800 --> 0:09:08.839 there on us and they said, what's the number one 0:09:08.880 --> 0:09:11.760 question that you would ask if you were us doing diligence? 0:09:11.800 --> 0:09:14.960 And I said, does it work? And you'd be surprised 0:09:14.960 --> 0:09:16.839 how many people just want to believe the narrative of 0:09:16.840 --> 0:09:19.400 the story goes back to science fiction and not verifying 0:09:19.440 --> 0:09:21.120 if it's science fact. Now, you had all these other 0:09:21.120 --> 0:09:24.360 telltale signs with her, Uh, the octygen are in boards, 0:09:24.440 --> 0:09:28.000 which all signaling value people that had you know, great 0:09:28.040 --> 0:09:35.920 military or geopolitical and and just tolly inappropriate from medical technology. 0:09:36.080 --> 0:09:38.160 But to your point, there was nobody there that really 0:09:38.160 --> 0:09:41.079 had any sophisticated biotype perform and experience. Now, the truth 0:09:41.160 --> 0:09:44.560 is liquid biopsy, the ability to detect from a small 0:09:44.640 --> 0:09:48.319 drop of blood analytes that are indicative of cancer or 0:09:48.360 --> 0:09:51.760 something else will eventually from someone see the light of day. 0:09:51.800 --> 0:09:53.839 But you think about the scar that it has put 0:09:53.920 --> 0:09:55.880 on the industry in the sector and how hard it 0:09:55.960 --> 0:09:59.120 is for a legitimate entrepreneur that's developing legitimate technology. Today 0:09:59.320 --> 0:10:01.880 they've raised this significantly, So it's not just that she 0:10:02.080 --> 0:10:05.440 was a fraud, and her partners were frauds. They've literally 0:10:05.520 --> 0:10:09.679 set medical technology back because now everyone's gonna be skeptical 0:10:10.200 --> 0:10:14.000 even of legitimate breakthroughs. And now, realistically, is it set 0:10:14.040 --> 0:10:15.679 back one year or two years or three years, or 0:10:15.800 --> 0:10:17.400 has it raised the cost of capital for that? How 0:10:17.400 --> 0:10:19.600 many people will die over the course of that setback. 0:10:19.679 --> 0:10:22.800 So you can argue that there's blood on our Yeah, 0:10:23.120 --> 0:10:25.280 I'm not a fan. In case you can't tell, I'm 0:10:25.320 --> 0:10:28.200 with you. And look, it's easy for all of us 0:10:28.240 --> 0:10:29.960 to say back then, and I believe, by the way, 0:10:30.000 --> 0:10:32.280 because I know that you are a fellow skeptic that 0:10:32.360 --> 0:10:35.679 was a fraud. It's harder today both socially to come 0:10:35.679 --> 0:10:37.240 out and say I think that another company is a 0:10:37.240 --> 0:10:40.920 specific fraud. Now there's an entire realm of quantum computing 0:10:40.960 --> 0:10:44.760 today that I think is going to be wrought with frauds. 0:10:44.320 --> 0:10:47.640 It has all of the criteria for a fraud. People 0:10:47.640 --> 0:10:50.600 don't understand it. They have fomo if you're missing out, 0:10:50.640 --> 0:10:52.480 they think that it's gonna be something really big. They 0:10:52.480 --> 0:10:54.640 don't want to feel stupid because they don't understand it. 0:10:54.679 --> 0:10:57.240 And so people are parting with money and I think 0:10:57.240 --> 0:10:59.960 that you're going to see at least one and maybe 0:11:00.040 --> 0:11:04.000 as many as five public frauds related to quantum computing. 0:11:04.080 --> 0:11:06.640 The tragedy of the comments finds its way even to 0:11:06.720 --> 0:11:09.439 venture capital. Tell us a little bit about your team 0:11:09.640 --> 0:11:13.120 at LUX, who are your partners and what what does 0:11:13.160 --> 0:11:16.080 everybody do? Well, let's start with my founder, my co founder, 0:11:16.080 --> 0:11:19.199 who's Peter Abert. Peter is my dispositional opposite, which I 0:11:19.240 --> 0:11:20.520 think if you are going to have a firm as 0:11:20.520 --> 0:11:23.559 a critical thing. Now it's interesting because in hedge funds 0:11:23.559 --> 0:11:25.840 you typically have one PM and they make all the decisions. 0:11:26.000 --> 0:11:28.920 In private equity you tend to have teams. So Peter 0:11:29.000 --> 0:11:30.320 and I are the co founders. And the reason that 0:11:30.360 --> 0:11:33.960 it's important is he is the optimist. I am the pessimist. 0:11:33.960 --> 0:11:35.920 I'm sitting before you, and I am wearing all dark. 0:11:36.000 --> 0:11:38.240 I wear all black, and it's just my disposition. I 0:11:38.240 --> 0:11:42.360 expect the worst. It helps pessimistic. But for the skulls 0:11:42.400 --> 0:11:45.319 all over them. Correct Pete. You will catch him in 0:11:45.400 --> 0:11:48.680 nantucket reds, in pastel colors. He is much more like 0:11:48.760 --> 0:11:50.720 my wife, who happens to be an activist hedge fund manager. 0:11:50.760 --> 0:11:53.199 She's more perma smile me as they say you know, 0:11:53.240 --> 0:11:57.560 I've got RB you know, resting be face, so so 0:11:58.800 --> 0:12:00.920 I expect the worst. He expects the best. And if 0:12:00.960 --> 0:12:02.880 you had an entire firm that was like me, we 0:12:02.880 --> 0:12:05.360 would be a bunch of cynical short sellers just trying 0:12:05.400 --> 0:12:08.200 to spot the frauds and doubting everybody. If you had 0:12:08.200 --> 0:12:11.119 a firm entirely like him, we would be lemming growth investors, 0:12:11.160 --> 0:12:13.200 just paying any price and going off the cliff. The 0:12:13.240 --> 0:12:15.199 balance that we've had as friends for twenty five years 0:12:15.240 --> 0:12:17.920 and his partners for twenty has made culturally the firm 0:12:17.960 --> 0:12:20.680 what it is now. From us flows everybody else. And 0:12:20.720 --> 0:12:24.160 so you've got ten other investment professionals, and everybody is 0:12:24.440 --> 0:12:28.880 intellectually and ethnically and gender diverse. Now what is it? 0:12:28.880 --> 0:12:30.760 What does that mean for me? We've got people that 0:12:30.800 --> 0:12:34.800 are Kashmiri, Pakistani, Iranian, Brazilian, Australian, You've got a bunch 0:12:34.840 --> 0:12:37.880 of white New York Jews. But the intellectual mix of 0:12:37.920 --> 0:12:41.400 people is so different. You've got electrical engineer PhDs. You've 0:12:41.400 --> 0:12:43.960 got people that have stem cell PhDs, people in material 0:12:44.040 --> 0:12:46.640 science PhDs, people that have no technical background and are 0:12:46.720 --> 0:12:50.920 excellent at capital raising and marketing. And when we descend 0:12:51.000 --> 0:12:53.400 upon a company the entire And it's funny because I 0:12:53.440 --> 0:12:55.160 used this analogy the other day and people had no 0:12:55.240 --> 0:12:58.040 idea what Vultron was. And I feel like I'm a 0:12:58.040 --> 0:13:00.480 young guy, but jeez, it dated me. But it's like 0:13:00.520 --> 0:13:02.440 Vultron coming together. You get all the robots come together 0:13:02.440 --> 0:13:05.840 into this Megatron and uh, it's just, uh, you know, 0:13:06.040 --> 0:13:08.000 a diverse group of people that all think differently. I 0:13:08.040 --> 0:13:10.520 always say that if two people think the same, one 0:13:10.520 --> 0:13:14.520 of them is unnecessary, and uh, it's it's a lot 0:13:14.559 --> 0:13:18.160 of fun. So you're concerned that your cultural references are 0:13:18.200 --> 0:13:21.800 out of date, and you're like, what almost fort Okay, 0:13:21.840 --> 0:13:24.640 wait until you're in your fifties and you'll drop a 0:13:24.679 --> 0:13:27.760 Monty Python or a Caddy check reference in the whole 0:13:27.760 --> 0:13:33.240 table of millennials look at you like perfect um. So 0:13:33.240 --> 0:13:37.480 so you focus a lot on um. Basic science to 0:13:37.559 --> 0:13:41.920 some degrees tell us the sort of companies luxe investment. 0:13:42.160 --> 0:13:44.640 So it really is something that's in the cutting edge 0:13:44.679 --> 0:13:47.679 of an area that we think that other people haven't found. Now, 0:13:47.679 --> 0:13:49.280 the reason we do that is we want really high 0:13:49.320 --> 0:13:52.199 scientific technical complexity, not because we want to tackle things 0:13:52.280 --> 0:13:54.720 that are really hard. It's because we don't want competition. 0:13:55.280 --> 0:13:57.160 It is way easier in venture capital to go find 0:13:57.160 --> 0:13:59.160 the next company that is developing an app for the 0:13:59.240 --> 0:14:02.960 smartphone or some social media software or something that is 0:14:03.000 --> 0:14:06.040 relatively easy. But the problem with funding easy things is 0:14:06.040 --> 0:14:08.920 you get hundreds of competitors, talk about random outcomes. Of 0:14:09.000 --> 0:14:11.080 those hundreds, who really is going to know which is 0:14:11.080 --> 0:14:14.719 the next Snapchat or Instagram or whatever. It's practically in random. Now, 0:14:14.760 --> 0:14:17.280 I know that you're a student of skill verse lock, 0:14:17.760 --> 0:14:19.800 and the great question always, I think in this domain 0:14:19.920 --> 0:14:22.200 is can you fail on purpose? Something that Michael Mobison 0:14:22.240 --> 0:14:27.240 has and and in in in picking amongst a field 0:14:27.280 --> 0:14:30.960 of five hundred competitors in software, you know you've got 0:14:31.040 --> 0:14:34.400 let's say, equal probability one chance. If you can find 0:14:34.440 --> 0:14:37.280 something where there's only three or four or five competitors, 0:14:37.600 --> 0:14:39.600 you can look a lot smarter because now maybe you 0:14:39.640 --> 0:14:42.200 have a twenty chance, assuming all things equal, of picking 0:14:42.280 --> 0:14:44.960 the winner. Can you can you invest in all five 0:14:45.120 --> 0:14:47.720 or two out of the five or anything? You're typically conflicted, 0:14:47.800 --> 0:14:49.520 but sometimes depending on the stage of things, you might 0:14:49.520 --> 0:14:51.880 invest in one and then later on something else comes 0:14:51.880 --> 0:14:53.600 along and you might invest in it, but because you 0:14:53.640 --> 0:14:55.240 know that it should really be part of the first 0:14:55.280 --> 0:14:57.120 thing that you invest in, and by being able to 0:14:57.120 --> 0:14:59.360 influence that outcome and say, you know what, don't split 0:14:59.400 --> 0:15:02.240 the baby, don't try to split and and and recruit 0:15:02.520 --> 0:15:05.760 competing talent, don't try to go to customers and and 0:15:06.880 --> 0:15:09.720 confuse them. Be part of one enterprise. And it's better 0:15:09.760 --> 0:15:12.680 owned something smaller, of something much bigger than to try to, 0:15:12.800 --> 0:15:14.520 you know, compete head to head. So sometimes we will 0:15:14.560 --> 0:15:16.840 influence those outcomes, but by and large, the stuff that 0:15:16.840 --> 0:15:19.000 we're investing is that the cutting edge of science and technology. 0:15:19.040 --> 0:15:22.160 It's hard, there's barriers to entry, there's intellectual property that 0:15:22.200 --> 0:15:24.280 imposes a negative right on people, so that you have 0:15:24.320 --> 0:15:27.480 a moat. Again, all things that and I am psychotic 0:15:27.520 --> 0:15:30.280 about competitive advantage give the company that you're investing in 0:15:30.320 --> 0:15:33.480 a better chance than just pure luck. It makes a 0:15:33.560 --> 0:15:37.280 lot of sense, uh, when I think about batting averages 0:15:37.720 --> 0:15:41.400 for the typical VC funds, usually, and I'm going back 0:15:41.440 --> 0:15:44.880 to the you know, the John Dwarves of the world, um, 0:15:45.080 --> 0:15:48.360 the eighties and nineties vcs they tend to spread spread 0:15:48.400 --> 0:15:51.280 a lot of money around, most of which did not 0:15:51.600 --> 0:15:55.080 generate a positive yield. And then there's a handful of 0:15:55.200 --> 0:15:59.400 not just winners, but giant outside winners, hundred cks. You know, 0:15:59.480 --> 0:16:02.560 think about eBay and Apple and and Amazon going down 0:16:02.640 --> 0:16:08.080 the list. Given this area and and the more basic 0:16:08.120 --> 0:16:11.760 science that you're focusing on, is it a similar distribution 0:16:12.080 --> 0:16:14.720 or how do the numbers shake out? You're looking for 0:16:15.080 --> 0:16:17.960 one home run to subsidize the next fifty or is 0:16:18.000 --> 0:16:20.280 it the distribution different? So let's let's look at the 0:16:20.320 --> 0:16:23.000 macro on venture. You've got two extremes, one of which 0:16:23.080 --> 0:16:26.280 we say is spray and pray exactly what you're exactly 0:16:26.280 --> 0:16:28.840 what you're describing, Just bet a lot of lottery tickets. 0:16:28.960 --> 0:16:31.520 You have intellectual honesty or told naiveta you don't know 0:16:31.560 --> 0:16:33.320 what's gonna work, and in rhymes, so you know it's 0:16:33.320 --> 0:16:37.200 true exactly. The the other extreme stick with rhyming, wait 0:16:37.440 --> 0:16:40.360 and pay. Okay, so you wait until a winner emerges. 0:16:40.640 --> 0:16:42.680 You pay a very high price for the higher chance 0:16:42.720 --> 0:16:44.920 of being correct. But obviously the higher the price you pay, 0:16:45.080 --> 0:16:48.200 the lower you're expected return. So in one case you're saying, well, 0:16:48.240 --> 0:16:50.440 let's bet in fifty or a hundred or two hundred 0:16:50.440 --> 0:16:52.600 companies and make small investments buying lottery tickets, and the 0:16:52.600 --> 0:16:54.360 other you say we're gonna load up into the ones 0:16:54.400 --> 0:16:55.640 that are winners, but we're gonna do it at such 0:16:55.640 --> 0:16:58.320 a high price, then maybe we're only gonna get a double. Now, 0:16:58.480 --> 0:17:00.840 for a successful venture fund, your look for three x 0:17:01.080 --> 0:17:03.600 or four x cash on cash over the ten year 0:17:03.640 --> 0:17:06.119 period that you've got locked up money. Now, I always 0:17:06.160 --> 0:17:09.200 say the great advantage that we have as venture capitalist, 0:17:09.240 --> 0:17:11.840 let's say, over peers and other alternatives like hedge funds. 0:17:12.000 --> 0:17:16.000 Hedge funds might have quarterly, monthly, maybe annual liquidity redemptions, 0:17:16.080 --> 0:17:18.160 and that's a hard thing because it creates an institutional 0:17:18.160 --> 0:17:20.800 imperative where the manager is focused on the short term. 0:17:20.880 --> 0:17:23.520 We get to focus on five, six, seven years because 0:17:23.560 --> 0:17:27.639 our investors capital is patiently locked up for a decade. Okay, 0:17:28.119 --> 0:17:30.200 if everything goes well, you might get three to four 0:17:30.280 --> 0:17:32.240 x cash on cash. Now some funds you might have 0:17:32.240 --> 0:17:33.760 a ten x fund, and some of you might have 0:17:33.800 --> 0:17:36.240 a too, But on average, that's what you're gaming for. 0:17:36.600 --> 0:17:38.720 There's two ways to cut it. First is you assume 0:17:38.800 --> 0:17:41.720 that one or two of your companies return the entire fund, 0:17:42.000 --> 0:17:44.560 all the capital that you've raised one time. Over our 0:17:44.560 --> 0:17:46.800 newest fund five million dollars, we've got a pair of them. 0:17:46.800 --> 0:17:49.399 It's it's we recently closed a billion dollars, but the 0:17:49.680 --> 0:17:52.399 five million dollars. You might have one company where you 0:17:52.440 --> 0:17:54.720 own ten percent of it and it sells for five 0:17:54.760 --> 0:17:57.560 billion dollars. You've got five hundred million dollars back and 0:17:57.600 --> 0:17:59.880 growth proceeds. It's returning the fund one time over. You're 0:18:00.080 --> 0:18:03.920 next five companies in aggregate proceeds, return the fund another 0:18:03.960 --> 0:18:05.600 time over. And in our case where you build a 0:18:05.640 --> 0:18:09.640 portfolio about companies, then the ensuing fifteen or twenty companies 0:18:09.840 --> 0:18:11.679 will turn it another time and you end up with 0:18:11.680 --> 0:18:13.520 that three x cash on cash. The other way to 0:18:13.560 --> 0:18:15.760 think about it, and again simple math. A third of 0:18:15.800 --> 0:18:18.680 your companies are total zeros. You lose everything, a third 0:18:18.760 --> 0:18:20.760 you make back give or take a dollar, and the 0:18:20.800 --> 0:18:22.399 third you make ten x, and you end up with 0:18:22.440 --> 0:18:24.760 a three x cash on cash. The problem is you 0:18:24.800 --> 0:18:27.080 don't know which companies when you invest, are gonna be. 0:18:27.840 --> 0:18:29.760 If you did, you can only invest in the three 0:18:30.280 --> 0:18:31.560 I'm only going to put the money in the ten 0:18:31.720 --> 0:18:34.200 x correct. Now, of course, what we do wherever your 0:18:34.200 --> 0:18:37.040 confidence in your conviction is high, you upsize, and you 0:18:37.240 --> 0:18:39.680 know portfolio allocation, You put more money in the things 0:18:39.720 --> 0:18:41.080 that you think are going to be great, you try 0:18:41.080 --> 0:18:43.320 to put less money and but put so much of 0:18:43.359 --> 0:18:46.160 this is reputational. And so you mentioned John Doer before 0:18:46.240 --> 0:18:48.280 and some of the great venture capitalists of the past, 0:18:48.800 --> 0:18:52.080 and it was their reputation in backing a winner that 0:18:52.119 --> 0:18:54.360 begot them the next deal. It's very much like when 0:18:54.359 --> 0:18:56.560 you sit in a movie theater and they say from 0:18:56.600 --> 0:18:58.720 the director that brought you you know, or from the 0:18:58.760 --> 0:19:02.200 producers of and it's that signal. It's the same signal 0:19:02.280 --> 0:19:05.800 of why elite you know, universities attract elite performers and 0:19:05.840 --> 0:19:09.040 you get this path positive feedback effect. But so much 0:19:09.040 --> 0:19:11.800 of our business, if you are intellectually honest, is luck. 0:19:12.640 --> 0:19:16.000 There can be no doubt about that. Um. Although if 0:19:16.160 --> 0:19:17.760 you go with this, can you fail on purpose? I 0:19:17.800 --> 0:19:20.399 can guarantee you that I can fail on purpose. I 0:19:20.400 --> 0:19:23.200 can pick the absolute worst entrepreneurs that cannot raise money. 0:19:23.200 --> 0:19:26.359 I can absolutely pick fraudulent companies, and I can absolutely 0:19:26.400 --> 0:19:29.160 pick teams that can never deliver. And I could fail 0:19:29.200 --> 0:19:32.520 on purpose. Well, but that just says that there is 0:19:32.560 --> 0:19:36.800