A Conversation with Josh Wolfe: Macro, Mentors, Motivation

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“In everything I've done, I've tried to be interesting. I've tried to be interested in other people. And I've tried to seek out people who are excellent.”

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Josh Wolfe is an unusual venture capitalist and a skeptical contrarian at heart. Together with his co-founders, he bootstrapped Lux Capital when the dotcom boom was melting down. The early team at Lux had neither much venture pedigree nor a large fund to work with. Instead, the firm sought to differentiate itself, and generate cash flows, by starting adjacent businesses in research and publishing (for recent profiles, check out Barron’s and Institutional Investor).

“We sold [the report] for $4,750 bucks a copy, sold a few 100 of them and helped keep our little business alive. I got access to all these famous CEOs and VCs. Vinod Khosla was one of the first VCs to buy it. And I was like, Okay, I'll sell it to you, but only if I can come and meet you. So I went out to Sand Hill Road and I remember his office, I remember viscerally what it looked like, it was the first major billionaire VC I met.”

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Wolfe and Lux don’t shy away from bearish predictions (The ‘To the Moon’ Crash Is Coming, December 2021) and in their Q1 2022 letter outlined three strategies for navigating a challenging macro environment: de novo company creation (a Lux specialty), special situations such as spin-outs from large corporations, and consolidation (takeover of struggling competitors). Not quite what you’d expect on the agenda at most VC firms. 

In this conversation we talked about how Wolfe developed an early network of key mentors and supporters, how Lux was bootstrapped by selling research, how to create a strong and lasting partnership culture, how he became a better storyteller, how to evaluate “crazy” founders, the secret behind creating de novo companies, and how to balance work and family life.

You can find each question in the following table of contents.

“Anybody that doesn't believe in you, either you let that bring you down, or it becomes fuel. To this day, we like to say that we believe before others understand. Because there really is something powerful, just psychologically, of believing in somebody.”
‍‍“I would be on a run on a treadmill, and I'd be getting tired. And I would imagine some of these heroes cheering me on. ‘You can do it, come on.’ I have ghost images of these individuals to cheer me on. Peter and I would find strength in the people that didn't think we were going to make it and felt really motivated to prove correct the people who did.”

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Table of contents

• Why does a VC spend so much time on macro? “Ignorance of the macro is no virtue. … We're trying to get a palpable sense for what massive currents are shaping the environment. … The number one determinant of future returns is never the hockey stick curve that some consultant or bank or optimistic entrepreneur shows. It's how much capital is going into a sector when capital is abundant.”
• Lessons from living through two cycles. “There are lots of differences, but the market sentiment similarities make me think that we're in Q3 of 2000. You're going through the Kubler-Ross five stages of grief … Markets have to go through that, both individually as investors, and then collectively. That's our guiding playbook at the moment.”
• Bootstrapping Lux. “Almost every step of the way, there was some moment when we were running out of cash. I still remember the people that told me no for $250,000 checks or dragged me for six months doing diligence on data that didn't even exist to tell us that they were writing a $100k check. That was a formative thing because it shaped the kind of people that we want it to be when we pay it forward. You need struggle and you need people that doubt you so that you can prove them wrong.”
• Building a network across disciplines. “Do you think anybody else knows what you know in this particular field? I'm, like, No, I feel like I'm one of the best. He's like, so who's doing who the favor? It was a little bit of a mindset switch, even if you're slightly deceiving yourself to get over that absence of confidence.”
• Building a great partnership culture. “We studied why firms split. One of them was geographic and one of them was sector. … Avoid sector silos so you don't get a coup, which is what happened at firms like Greylock and Matrix and Venrock. One partner became the dominant player and said, okay, we're shutting down that other office. So everybody here is a generalist.”
• “I feel like presence is really important for the sustenance and sustainability of a culture. Like any system, things fall apart. Entropy is the norm. And you need to put energy into a system to prevent entropy. And that's true of human relationships.”
• ‍How to evaluate ‘crazy’ founders. “I don't mind if they say the crazy thing. I don't mind if they have an ambition that borders on delusions of grandeur. I just want them to be honest.”
• The BUD/S analogy for evaluating entrepreneurs. “The best entrepreneurs we see are the ones who are so obsessed to prove other people wrong who don't think this is possible. That to me feels honest. It feels petty, but it's real.”
• What is the secret behind creating de novo companies (and Lux’s latest investment in Shazam for smell). “I always say it's shining a spotlight on what's known, but at the edge of that circumference of the spotlight, there's darkness. And that's always unknown. As that spotlight grows with what we know, so too does the knowledge of what we don't know of what's missing from our knowledge.”
• Becoming a better storyteller. “If you take a technological view of this, language is a form of code, just like law is a form of code. And just like code and software can influence machines, I am influenced by language, I'm influenced by a beautiful quote. I'm influenced by a great scene of dialogue. I just wanted to be better at that.”
• Personal finance for a venture capitalist. “I'd say we're relatively conservative. I don't care about boats, or cars, or watches or material possessions. I like vacation indulgence and we invest a lot in our kids’ education. I really value time and moments and memories and experiences. Wherever money can help to create that, that's what we invest in.”
• ‍What about work life balance? “There are periods where I feel utterly overwhelmed. I have between 12 and 14 meetings a day. It's a lot. … But what I'm really saying is that I wish all these things that I don't have control over, I had control over and were going exactly as I want them. It's not like taking a break is going to help there now.”

“Being with my kids is just the great salve. … Family stuff for me is very cathartic. Whatever is going on, I could be negotiating a big financing. And my little guy who's six is like, Dad, I can't get the screw into this thing and that is more important. Getting the screw into the little toy is more important at that moment. That to me is a big thing.”

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The following is an edited transcript of our conversation with Josh Wolfe of Lux Capital.

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Frederik Gieschen: I want to start off with macro. Last year, you wrote about an excess in excess, now it's the entropic apex. Why does a venture capitalist spend so much time on macro?

Josh Wolfe: Three things. One, the vast majority of other venture investors who primarily are focused on the quality of the entrepreneur or technology or end market, which are the main three risks that most people are focused on, are not focused on [the macro]. So it should give us an advantage if we are.

The second thing is the mantra of the Department of Defense, and specifically DARPA, their mission is to create and prevent strategic surprise. For a variety of personal psychological reasons, I don't like being negatively surprised. If you think about the process of investing as a venture investor, and if you were to say that it really is security selection, or entrepreneur selection, the most micro level is like picking the best dish on a menu. Having picked the best restaurant in a neighborhood, having picked the best neighborhood, having picked the best city amongst all available options in the best state and country, and so on. And you're about to now eat that delicious morsel of food having made that bottom-up selection. And then Godzilla comes and just steps on the city and crushes you. Ignorance of the macro is no virtue.

It doesn't mean that we're looking at currency rates and the cost of capital in third world countries and indebtedness in China. But it does mean that we're broadly trying to get a feel, a palpable sense for what massive currents are shaping the micro environment that people may not realize. The easiest one over the past two decades was just the cost of capital artificially set by our own Politburo in the form of the Fed. But internationally, just looking at the forces, be it Japan or China, foreign bond buying suppressing treasury yields. The purported risk free rate, which Jim Grant has called it the rate free risk. Looking at up until recently 16 and a half trillion of negative yielding debt, and the distortions that that had on being able to really value businesses. Looking at the flows of capital into assets. Because the number one determinant of future returns is never the hockey stick curve that some consultant or bank or optimistic entrepreneur shows. It's always how much capital is going into a sector when capital is abundant. The present future returns are scarce. And when capital is scarce in the present then future returns can be abundant if you're right. So that's why I care about the macro.

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Frederik Gieschen: You've lived through two cycles, the dotcom bust and 2008. When you think about this cycle, do you jump to those recent reference points? Or do you think everything's different?

Josh Wolfe. That's very kindly put to say, man, you're old. People were arguing with me on Twitter, ‘No, we've seen a downturn in March of 2020 when equity prices dropped.’ That wasn't a downturn. That was a quick blip before you had massive fiscal and monetary intervention. Arguably that was the right thing to do. We can talk about where the Fed maybe acted too late to correct that and now maybe is acting too harshly in the hopes of Powell taking acclaim from Volcker on fighting inflation, but I think it's gonna push us headlong into a much darker recession.

The cliches hold, right? If history doesn't repeat, it rhymes. What's the closest analogy that you can find? All new things come from combinations of old. We are learning primates. You look at what you personally viscerally emotionally experienced, and how it shaped your risk appetite. Depending on what people have read or been exposed to, or the heroes that they've followed or studied. When Lux was started, it was on the cusp of the dotcom boom and bust. And we had already had the disposition to say we're gonna focus on something else that other people weren't focused on. So instead of going after optical networking and dotcoms, let's look at chemistry and physics, material science and all this crazy cutting edge stuff. But I do feel a palpable sense of younger people,like I was then, with a sense of ignorance when older people were like, “this is crazy, this is insane”. The younger people were like, “you don't get it this time is different,” which are always those dangerous words. And so that has repeated.

You had this bifurcation between the NGMIs, not going to make it, in crypto and the meme space. And, ‘okay, boomer,’ was like a quick retort. It does feel like the visceral memory of late 2000. Rates then were higher, we had a much less globally integrated economy, China was not as ascendant as it was, you didn't have the dominance of the tech players that were actually profitable and cash flow generating. There are, of course, lots of differences, but the market sentiment similarities, make me think that we're in Q3 of 2000. That you're going through the Kubler-Ross five stages of grief: denial, anger, bargaining, depression, acceptance, which always evokes from you actually that quick montage in The Simpsons, when he finds out that he's gonna die. Markets have to go through that, both individually as investors, and then collectively, as the old quote goes, people lose their mind collectively and then regain one by one (“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.” Charles MacKay). That has to happen.

I would posit that what's probable is that the next five years see two years of range-bound markets, in part because people are burned and spurned and they just don't want to do it. They have grown tired of speculating, it isn't working. “Buy the dip,” which did work for so many people for so long, isn't working anymore. There's a fatigue that shifts behavior to say, ”okay, I'm just going to get out of the market. I've lost money, I've lost a job. I've had to give up assets. Maybe I was levered.” And so that's one piece of the behavior. Some of the prior strategies that worked, algos that were looking at momentum, which also were far more prevalent in recent years than they were 20 years ago, don't work anymore.

There's a narrative shift from growth to value, and this happened in the 2000-2002 period, where it went from eyeballs and ridiculous non-accounting non-cash flow non-value derived entities, basically narrative-driven, to cash is king, path to profitability. What followed was 2000 to 2007, you had five years of following range bound markets. Long-short stock pickers were really getting celebrated. You saw the rise of famous short sellers who were betting against terminal zeros. And you saw the rise of great business analysts who really understood what made a great business and were able to invest in the compounders.

Towards the tail end of that, you saw some of the most brilliant people at Columbia Business School and HBS, people that were pushing into the value investing program. The most brilliant investors were value investors, they were acolytes and students of Buffett. They also really understood things like ROIIC, return on incremental invested capital and, and the real drivers of business. That in turn parlayed into private equity, which saw a huge boom, picking up some of the distressed assets on the one hand, and then just mortgaging many businesses. That ultimately led to the financial crisis. And then when rates dropped, we saw this decade-long push for growth and yield when there was none. Yes, I think we’re late 2000, and probably see a 2000 to 2007 phenomenon, that's our guiding playbook at the moment. And we have three different strategies to attack that.

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Frederik Gieschen: You've talked about the origins of Lux a number of times. It was a small fund, you had the research business, you were basically bootstrapping the firm in a very difficult environment. Were there any make or break moments? Any times when you had your conviction really tested?

Josh Wolfe: Keep in mind that we are imperfect and unreliable narrators. Even though I attempt to be intellectually honest, and try to have part of my identity be about this pursuit of truth and intellectual honesty, I'm still human and fallible and vainglorious and ego driven. My recollections are going to be imperfect. I have a chip on my shoulder. I like being right when other people are wrong. Everybody was going after dot coms. And we wanted to go after something different.

The two areas that I was most fascinated by were on the cusp of science fiction, but they were real. There were credible people. I was in rooms with Nobel laureates on the one side and Sci-Fi fringe freaks on the other. The two areas were artificial intelligence and Nanotech. Nanotech had this weird fringe group of people, extreme extropians and transhumanists. I could tell they were totally unscientific. But then you had Rick Smalley, who won the Nobel Prize for discovering the carbon 60 Bucky Ball, ushering in this material science revolution. That was an interesting period and a speculative one.

We ended up writing a report to gain credibility which was inspired by Chris Depuis, a Morgan Stanley analyst working for Mary Meeker. He wrote the Internet Report and I had dinner with him. He was like, you should write the nanotech report. And sure enough, we did. We sold it for $4,750 bucks a copy, sold a few hundred of them and helped keep our little business alive. I got access to all these famous CEOs and VCs. Vinod Khosla was one of the first VCs to buy it. And I was like, Okay, I'll sell it to you, but only if I can come and meet you. So I went out to Sand Hill Road and I remember his office, I remember viscerally what it looked like, it was the first major billionaire VC I met. 

We struggled to raise money. People don't believe in you. To this day, Peter and I viscerally remember when people were like, Oh, you guys are so cute, we're in our early 20s, you should go back to business school. Very patronizing, condescending. I always say that chips on shoulders put chips in pockets. And my chips come from things related to the absence of my father and growing up in Coney Island, Brooklyn, and being around scammers and being lied to. I'm skeptical in a positive way, cynical at times in a negative way. But anybody that doesn't believe in you, either you let that bring you down, or it becomes fuel and fodder to get to the point where you are feeling, I'll show them. For us, that was a big thing. To this day, we like to say that we believe before others understand. Because there really is something powerful, just psychologically, of believing in somebody.

I remember when Bill Conway, co-founder of Carlyle Group, invested with us. He believed in us. Maybe he was in a good mood, maybe he was just speculating, but for us, it was so meaningful psychologically. I haven't even shared this publicly. And some of this is an absence of my own father and looking for father figures in life, but I would be on a run on a treadmill, and I'd be getting tired. And I would imagine some of these heroes cheering me on. ‘You can do it, come on.’ I have ghost images of these individuals, Bill Conway was always one of them, to cheer me on. Peter and I would find power and strength in the people that we could feel didn't think we were going to make it and felt really motivated to prove correct the people who did it.

All along the way, we were trying to gain credibility. We were young guys. I remember wearing the same suit and tie over and over to the point where it was fraying. Trying to act older and more serious. Over the years, you get more confident and you can let all that stuff go and just be who you are, because you feel people like your ideas or your values or your ethics. But almost every step of the way, there was some moment when we were running out of cash.

Even our first fund, it was a pledge fund from Bill Conway, we couldn't go out and raise money. Then when we went out and tried to raise money, our structure was all screwed up. It was not right for a venture fund. We tried to correct that. We tried to raise $100 million, we couldn't hit that target, we’re at $92.1. I remember every single pitch of that. Today, we're 4 billion under management. And we have giant foundations and wonderful philanthropies that we manage money for, but I still remember the people that told me no for $250,000 checks, or dragged me for six months doing diligence on data that didn't even exist to tell us that they were writing a $100k check. That was a formative thing because it shaped the kind of people that we want it to be in the future when we pay it forward. You need struggle and you need people that doubt you so that you can prove them wrong.

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‍Frederik Gieschen: I was struck by how you connect with people in different areas, including scientists, value investors, even traders. For example, in 2009, you went to the Berkshire Hathaway annual meeting. How did you go about this when you were younger?

Josh Wolfe: Tom Kane, a friend and former roommate, he's a money manager, very smart guy in Chicago, gave me this advice. I remember I wanted to get in touch with some famous investor. I was like, You'd be doing me the biggest favor if you can introduce me to him. And he was like, stop, right there, stop. I thought I insulted him. Maybe this ask crossed the line? And he's like, Do you believe in yourself and what you're doing? And I was like, Yeah. And he's like, Do you think anybody else knows what you know in this particular field? I'm, like, No, I feel like I'm one of the best. He's like, so who's doing who the favor? It was a little bit of a mindset switch, even if you're slightly deceiving yourself to get over that absence of confidence. And the same way that when there's a task that you don't want to do, thinking, I get to do this, because you could be dying tomorrow, versus I have to do it. That was a real confidence booster. Not arrogance but, I'm doing these people a favor by both showing interest and wanting to connect. But also because I have something of value.

I had an experience in a similar way that really shaped me and furthered that confidence, which was a chance meeting with Jim Watson. I went to his house in the towers by the United Nations and we had tea. He had this amazing line, which was ‘avoid boring people.’ It was this admonition with this double entendre. Don't be around boring people, because life will be less interesting when you're around ordinary mediocre people. And avoid being boring to people, avoid boring people as a verb, be interesting. In everything I've done, I've tried to be interesting. I've tried to be interested in other people. And I've tried to seek out people who are excellent. And I found that there are people that are just way better than me at everything we do. Even with Peter Hébert, my partner, I admire, I respect, I trust Peter, but there are things that he is way better at than I am. And I admire that. I like being around people who are excellent. He is exceptional at understanding and reading a room and finding the social situations and being able to ameliorate when there's dissonance between people and he’s a peace broker and a diplomat. And I'm the opposite. I come into a room and I say something stupid and drop the bomb. So it's a bit yin and yang.

I remember reading the book The Operator. There's maybe things to like and things not to like, but I really admired David Geffen. I thought he was ambitious, psychotically driven, very competitive. I admired Buffett and Munger for their rationality. I admire the people who followed them and added their own tinge to it. I admired elite athletes because of the intensity. By the way, I wouldn't want my kids to be these people. They're all so screwed up. By definition, they're not normal. They're not average, they're outliers. I would never want my kid to be a Tiger Woods or Jordan or Kobe. LeBron seems a little bit more balanced. But they're all psychotically competitive, they want to be the best in their field, they want to beat others.

Those are the attributes that I liked. Because when I'm on my deathbed I want to be surrounded by my kids who look at me and are, this may be selfish, but distraught with love and appreciation of my absence. They will really miss me. Because I've seen other people who’ve been buried, where their kids literally throw dirt on their grave and walk away. That would be the number one thing. And then the number two thing is just to be celebrated and admired, which is this weird paradox, right? Because when you die, you're not there to experience it, so why should you really care?

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Frederik Gieschen: You once mentioned that you studied every venture capitalist whose story you could find and you found mostly path dependency, that you couldn't model their success. However, I'm sure it must have influenced the way you've thought about building an enduring partnership and culture. Lux had offices on both coasts. You were distributed before it was en vogue for everybody to work from home and run into cultural issues as they scale a business.

Josh Wolfe: It's a great question. Peter, and I spend a lot of time thinking about this. We have gotten it wrong a lot. I think it's true of biographies, too, everybody's path is so idiosyncratic. Everybody's projectile has a different slope. They're not replicable. The conditions are not replicable. The circumstances, the people, the market environment and time are not replicable. They can inform but they're very hard to copy. This is something where I disagree with Peter Thiel. He likes to study successes and I like to study failures. I think that failures are more repeatable, you can see errors that are made over and over and again, that end up with the same bad outcome. Success, I think, has much more luck in it. Failure involves bad luck. But I think that there's more agency and bad decision-making. There's way more examples by definition, than there are great examples of great decision makers, although there of course are many.

One of the things that we studied was why firms split. One of them was geographic and one of them was sector. Within geographies, you had an East Coast firm and a West Coast firm. They were separated by offices, they had different cultures, they had a different cadence. A New York firm might be walking around the city, a West Coast firm’s driving between meetings, they might be in the office together less frequently. There might be a bias towards semiconductors or software on one and life science or biotech or healthcare because of proximity to hospital systems on the other. So what we decided was that we were going to be Unum Lux, one Lux. That came from a letter that Bill Conway at Carlyle had written in the early days which was ‘One Carlyle’. We just added a Latin flavor to it. We said this is a logical thing, you should be one firm. There's no Lux East and Lux West. By design, we're going to thread some real connective tissue so that East Coast partners who live in New York are going to be on West Coast boards and West Coast partners who live in Menlo Park are going to be on Boston, Texas and East Coast boards so that we don't get siloed in a geography.

The second thing was avoiding sector silos so that you don't get a coup, which is what happened at firms like Greylock and Matrix and Venrock, where one partner became the dominant player and said, okay, we're shutting down that other office. So everybody here is a generalist. Of course people have passion projects. And it makes logical sense that a single person, having gained experience in a sector like biotech, or drones, or defense or electronic warfare or systems biology, the incremental investment we see in that should go to them. We put two people on every company. One, there's redundancy, but two so that we don't get an internal dynamic where people are pointing fingers and saying, Oh, your deals are failing and mine are doing great. I always knew this biotech stuff was crap, or your tech stuff’s out of favor. At any given point, some sector might have more tailwind behind it. We wanted to avoid the fracturing that comes from siloed groups where people are like, we're spinning out the biotech group or something like that. Pete and I are responsible for the overall allocation of our time and resources and attention, money, and people. But we have lots of non-overlapping people focused on different sectors.

Scott Bessent, who now runs Key Square but was CIO at Soros. We had originally met through a short seller crew that Jim Chanos had put together. Scott is just a beautiful human and great mind and intellect.He shared this book, I don't think either of us really cared about management books, but there was this principle from this book, Tribal Leadership.

The book was mentioned in Phil Jackson’s 11 Rings, about winning with the Bulls and Lakers. The basic idea of tribal leadership was that there's five kinds of tribes. The first is dominated by everyday people. Their life legitimately is observably, objectively miserable. And maybe that's like 2% of the population on a bell curve. And those are people that might be homeless or in jail, but their mantra is, life sucks. The next rung up from that is people who feel victims, and they're like, my life sucks. These are maybe the masses, 20-30% of people. They show up for a job at nine, leave at five, go home, crack a beer, or just shop online or do whatever. They have no institutional loyalty, no sense of meaning, no sense of purpose. And it's unfortunate, it's tragic, but they're like, my life sucks and they feel like a victim. In the end, there's no agency to propel themselves with any conditional optimism, let alone complacent optimism.

The next one is internal. It's prevalent in many partnerships, many small VC firms, small hedge funds, small law firms, any boutique group where there's zero sum resources, and high visibility of people. It's ‘I'm great, you're not.’ And that was the transformation that I think Phil Jackson had to do when he had high ego people like Kobe and Shaq on the same team, which was how do you transform a culture that has a bunch of people that are I'm great, you're not, fighting for status, fighting for money, for acclaim, for recognition, for dominance and influence within the group, to we're great, they're not. You need an external enemy. I believe that that's true whether it's here at Lux, sometimes our competition might be another firm, it might be a partner in another firm, but we are most galvanized and unified when we have some common third enemy. Countries throughout history have the same phenomenon. Growing up in the 80s, it was US versus Russia, communism. I think we would be well served to have a common third enemy, my candidate for that is not China but the CCP, to galvanize us as a country.

The next one after that is Life is great. When you look at the early Google culture, the early Facebook culture, it was that. You were part of this mission. Money was great and you're like, life is great. As that starts to sour you go down the rungs, from life is great to we’re great, they're not, to I'm great, you're not, to life sucks. That's the main cultural thing.

I find, coming full circle to your question, that being together physically, being a social primate, being with other people reading their body language, having meals together, being able to have the quick side conversation without the linearity that happens on a conference call or zoom, where it's awkward to take a break and come back. I'm able to bump into somebody else and bring a guest in and they can meet with one of the other partners in passing in the same moment of serendipity. I feel like presence is really important for the sustenance and sustainability of a culture. Like any system, things fall apart. Entropy is the norm. And you need to put energy into a system to prevent entropy. And that's true of human relationships.

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Frederik Gieschen: You had this really interesting quote: ‘some of the smartest, most creative people are not just borderline, but actually not sane.’ And you often reference your childhood in Coney Island and the need to distinguish the genuine from the con. Tell me more about the kind of insanity you look for when you meet a founder. How do you underwrite these people?

Josh Wolfe: The perfectly sane person is middle of the pack, they don't want to stand out. I teach my children, it's finding the balance between fitting in and standing out. The crazy people stand out because they act differently, they speak differently, they think differently. And the best of them have either an internal confidence or something broken, that is not regulating or correcting them to want to fit in. They don't care. In some ways, they've been rewarded for it. Comedians, maybe they were being silly and got positive feedback. It was cool to stand out, to be the one guy on the stage when there's thousands of people watching you. But for other people it was the feeling of being ostracized, being the kid with a handicap or a speech impediment, or being a minority in a mostly white neighborhood, or being a nerd in a Friday Night Lights Texas town. Whatever it is, there's something that people are motivated to or push to stand out.

The best entrepreneurs that I've seen are people that are really comfortable thinking differently, because they realize it's almost futile for me to try to fit in. It's almost a waste of time to try to be like these other people. I'm not going to do it. It's only gonna make me unhappy. The forces that be, the status quo, the popular kids, they're not going to let me in. So I'm gonna go find my own way.

I read a quote by William Blake: I must create my own system or be enslaved by another man's. I just love that. Either you're going to be part of somebody else's game, company, system of thought or you're going to develop your own and other people will be attracted to that. 

Now you get to the entrepreneur and how do you tell the difference between the totally crazy person that's over the edge? I don't mind if they're crazy as in they're willing to take a risk or do something that somebody else might be afraid to do. I don't mind if they say the crazy thing, I don't mind if they have an ambition that borders on delusions of grandeur. I just want them to be honest. It's one thing if you believe that something might be possible. It's another thing, and this is really hard to detect, if they are deceiving you. I'm convinced that we can create a device to capture smell. And I meet a scientist, and he's like, I'm absolutely convinced that this will exist in two years. I know people say it's not possible, but I believe it's possible. That's a very different kind of crazy. They have the conviction and confidence that it's gonna work.

It's different when somebody comes in and is like, I have a full body scanner a la Star Trek. And in two years we'll be able to cure cancer. There's this palpable sense of skepticism that we have immediately because I have a fear of being duped. I do not want somebody to come in and be smarter than me and have tricked me. I have to find this balance between believing before others understand, and not being duped. And so I have to spot the liars. Not the people who are just naively ambitious, but the people who are intentionally wittingly knowing that they're defrauding. We had a guy come in from London, years ago, who was pitching some quantum computing thing. And I was absolutely convinced that this was like an outright fraud. And he knew it. And we asked some really probing questions. It was one of the three or four meetings ever in my life where the guy knew that we were on to him and got up and was like, Okay, I think we're done here and just left.

 Frederik Gieschen: He knew the game was up?

Josh Wolfe: We were calling bullshit. And he was like, Okay, I'm just gonna go on to my next mark, I guess. But the biggest problem is at the moment of inception, or conception, especially if you are primed to believe, it is very hard to know whether somebody is naively ambitious or intentionally duplicitous and trying to deceive you. That's what our job is. But we're not buying businesses as they're fully funded or valued. You're buying with procedures. You run milestones, how much money is gonna accomplish what and what period of time is the simple task we have. You put enough money in to turn over the next card to use a poker analogy. And then you avoid the sunk cost bias, because you're now invested. What you're really investing is to see that next card.

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Frederik Gieschen: On a previous podcast you talked about BUD/S, the Navy SEAL training camp, and you said that it was not possible to predict who would make it through but it was possible to predict who would drop out. I wonder if there is a similar way to think about entrepreneurs - you can't predict what's going to work but you can find indicators of the opposite?

Josh Wolfe: The former head of SOCOM Special Operations is a partner here, Tony Thomas, four star general, incredible guy. It's very hard to predict who will make it through but it's easier to predict who won't. The people who won't are the people that are tatted up, look really big, tough guys, super macho. And oftentimes it's the skinny or scrawny or almost like a yoga physique, but they have the mental toughness to be able to make it through. People might be signaling visually that they are tough or strong, but internally or mentally, maybe they don't actually have it. The very fact that they need to signal is sometimes counter-indicative. 

In the entrepreneurial sense my pet peeve is when somebody comes in, and I'm like, why do you want to do this? And they're like, I just want to change the world or I want to save the world. I'm so cynical or skeptical about that. The best entrepreneurs we see are the ones who are so obsessed to prove other people wrong who don't think this is possible. That to me feels honest. It feels petty, but it's real. We're all changing the world, every second. It feels dishonest. I have found that the best entrepreneurs are just psychotically obsessed with some hard technical problems and they feel like they've discovered something and they see the prize at the end of the rainbow. With a little bit of money or time or more talent they will get the status and the fame and the acclaim on having done the thing. That to me feels like a much more honest, social primate human pursuit than signaling virtuously, oh I just want to save the world.

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Frederik Gieschen: Something that Lux has done really well is setting up de novo companies. Taking some capital, a person, and an idea. You start at a really low cost basis. Why doesn't everybody do this? What is the secret?

Josh Wolfe: It's hard. It takes a lot of money, it takes a lot of time. It's much easier when everybody's talking about some SaaS company or some area where there's twenty competitors, and you have social proof already from one or more dominant investors in the venture world. And you do an adjacent one, probably the market’s big enough for a bunch of those and you can get data if the thing is working. If it's a software-driven thing, in the next 3-6 months, you can see if a cohort is buying, if it's got uptake. So it's just easier. But as the cliche quote goes, go out on a limb because that's where the fruit is.

We like to go where there are less competitive, less populated areas. When we do these NewCos, it starts with a survey of what is everybody else doing? What does everybody else believe? And I'm trying to find the whitespace just like an animal hunting in an ecosystem. You could go where there's a fresh kill and everybody else is going, or you could take the risk, which is a risk, and go out and try to find your own bounty. And that is my preference, rather than trying to join the scrum, to find something that other people aren't doing. And we've done this very consistently across so many different sectors. And I never know where the next sector is going to come from.

When the world was going crazy about cleantech and greentech, you had John Doerr and Vinod Khosla, very famous VCs, promoting this, writing op-eds about it, galvanizing people to fund these things. What was totally absent, the whitespace, this curious incident of the dog in the night, in Sherlock Holmes parlance, the thing that wasn't being spoken of at all, was nuclear. We looked at every part of the fuel cycle, uranium miners, modular reactors. You turn your attention to the thing that sucks. And the thing that sucked was, what do you do with the waste. There was a market for commercial waste, a market for defense waste, cleaning up pre and post cold war bomb processing, which many people including us at the time didn't know. Which is another trick that we use. When we come across some information that reduces our ignorance, we have this response, Wait, what? We just learned something. If you think about Lux being poetic here for a moment, Lux is Latin for light. I always say that it's shining a spotlight on what's known, but at the edge of that circumference of the spotlight, there's darkness. And that's always unknown. As that spotlight grows with what we know, so too, does the knowledge of what we don't know of what's missing from our knowledge.

What's the thing that is not being illuminated? That ‘wait, what’ moment with nuclear was, my god, 25% of the Department of Energy's budget, $25 billion a year, six of it is spent on nuclear waste cleanup. You talk to other people, you want to confirm that your ignorance is not siloed, that other people also don't know that. And then you're like, Okay, we found a secret, we found something that is asymmetrically known by us. So let's go do something about that. And so we've done that, repeatedly. We've done it in nuclear waste, in robotic surgery, in cutting edge microscopes, in brain machine interfaces, in finding real life X Men, mutants with crazy genetic properties that are all over the globe. Most recently, my decade-long obsession to digitize our sense of smell. Those are all NewCos.

Other people don't do it because it's hard. Particularly if it's coming from universities. We learned from a wonderful guy, Larry Bock who passed away many years ago, but was a mentor to us. He was a mensch on a mission. He started in biotech, went into semiconductors and electronics and touched pretty much everything. But he would find the principal investigator, the PI, at the university. He would go to the university, negotiate the tech transfer, give them a royalty or equity, structure the deal, serve as the founding CEO, recruit the first 10-12 people, recruit the board, recruit the advisors, put together the syndicate. I just love that. That was a true zero to one company creation thing. We do a few of those every year in a wide array of sectors and hope we get to do it for the next 40-50 years.

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Frederik Gieschen: I couldn’t be more excited to learn about the smell company when it gets announced. 

Josh Wolfe: I have a crazy story about that. It's coming out of a big tech company. I'm spinning this division out, and we're doing a $55 million series A and we're doing 20 of it. And while I'm negotiating with the key guy, I had gone two and a half years without getting COVID. I felt like that meme picture from The Walking Dead, the last five people fighting off zombies. I had come from a board meeting in San Francisco and I land in New York and go to the gym. Normally, when I'm finished working out, I stink. For whatever reason, I'm like, Ah, I don't smell. Interesting. Go upstairs, take a shower. Don't smell the shampoo or soap and I'm like, Oh god. I test positive. My only symptom for an anxiety-producing two weeks was loss of smell. I am negotiating for a historic technology that mankind has never really had, to be able to have a Shazam for smell, a digital detection of what a molecule is and what odor it is, and inversely from a molecule predict what it should smell like, while I've lost my sense of smell. So there was nothing more poetic than that moment.

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Frederik Gieschen: It strikes me that every time you make a new investment you have a brief synopsis that tells a story about why this is really interesting. Yet you said you grew up a bad storyteller. That's clearly changed and communication is a big strength of yours. How did you go about changing that? Did you study storytellers?

Josh Wolfe: It started with negative feedback. Friends would literally tell me, and I would eventually observe from my mom, who was a very long-winded storyteller. I love her and she's amazing, but she was just not a good storyteller. I probably learned how to tell stories from her. It's like, then I went here, and then this and then, the level of detail, like. I tell her the same thing that a friend used to tell me back in high school college time: beginning middle end. Make a point.

Part of it was looking at other people and admiring how they spoke, and seeing that they were effective, and that they can make a point. I tried reading books about writing, but those never really stuck with me. I love the cadence and the speech of Steven Pinker, or to watch Christopher Hitchens speak, or to watch Dawkins speak. Now, of course, they're all birds of a feather but there were no ‘uhms,’ there were no ‘uhs’. They spoke in paragraphs, they spoke with Victorian English flourishes. Around the same time, I started watching Deadwood. I don't really like westerns but my gosh, that language of David Milch. The Shakespearean juxtaposition with these horrible gutter words, curses was just such a beautiful language.

I started reading letters of great investors. Whether it was reading Buffett letters, which of course were co-written with Carol Loomis. There was excellence exuded in the way that people spoke or the way that they wrote and I wanted to be celebrated in the same way that I celebrated many of these people. So it was repetition. I would write every week, with Forbes, in a newsletter. It wasn't very good at the start and it got better. I developed a voice. There were little verbal tactics, like alliteration, that I picked up or stole or copied from George Gilder. There was a series of books written by a guy named Ward Farnsworth. The first book I came across was called the Predator at the Chessboard, very interesting, chess strategy. It was beautifully written. He wrote another book called the Legal Analyst Toolkit that was basically about law, but was very savvy. I wasn't really interested in law but you made me interested in it. Then he wrote Classical English Rhetoric, which sounds utterly boring, but every chapter was an exposition of the different techniques of speaking. Like Chiasmus: things looked good from far, but it was far from good. I just studied that through repetition. Even the Greeks and Romans, they learned rhetoric.

If you take a technological view of this, language is a form of code, just like law is a form of code. And just like code and software can program machines, I am influenced by language, I'm influenced by a beautiful quote. I'm influenced by a great scene of dialogue. I just wanted to be better at that.

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Frederik Gieschen: Let’s talk about personal finance. You tweeted “husband your personal cash, don't overspend, have credit.” Your own exposure is to illiquid, early stage, risky equity. How do you think about your own personal finances going through a cycle?

Josh Wolfe: The vast majority of my personal money is invested in Lux. We eat our own cooking. If there are things that are outside of Lux, on the private, highly speculative side, things that Lux would never do. The partners may invest personally in some of those things. I have investments mostly around people who I like, admire, and trust and just want to bet on. Philanthropy for me is a handful of things. Coney Island Prep, having grown up there, but believing that kids sometimes lose that ovarian lottery, as Buffett called it. They’re born into not great circumstances and need the right people to believe in them before others understand that. The charter school movement and ed reform has been a big personal push and allocation of personal capital. The Santa Fe Institute where I feel thrilled and lucky to be part of it as a trustee.

Lauren, my wife, runs a $3 billion activist hedge fund. You can think of it within the family as I do highly speculative privates and she does liquid deep value investments in a more concentrated way. My kids actually teased that it took a lot longer for Lux to get to $4 billion, whereas it took Lauren shorter to $3 billion, so they want to work for mom, not dad.

My speculative views, when I have an itch I want to scratch, it could be long dated puts on Tesla, it could be being long Twitter in this current merger arb moment, things that don't affect either Lauren’s firm or my firm. Those tend to be very small. There's real estate, and then there's things that we do for our family and parents and extended folks.

But otherwise I'd say we're relatively conservative. I don't care about boats, or cars, or watches or material possessions. I like vacation indulgence and we invest a lot in our kids’ education. I really value time and moments and memories and experiences. Wherever money can help to create that, that's what we invest in. Lauren will give me crap because I pretty much wear the same thing almost every day. I don't spend a lot on a t-shirt, but I spend a little on a lot of t-shirts. I have the same 20 t-shirts that are like 30 bucks each.

Frederik Gieschen: I did not expect t-shirts to be a major line item!

Josh Wolfe: I have probably 20 pairs of these vans.

Frederik Gieschen: Is that because you’re minimizing decisions? I don't know if you subscribe to that concept?

Josh Wolfe: I do subscribe to that. I don't spend a lot of time on that. I believe it would be fair, without being too armchair psychologist, to say that for a variety of personal reasons, my fear of loss of little things makes me hedge. Why wouldn't we just have extra pairs? And I do go to excess. I love that shirt and what if they don't make it anymore? What if I spilled coffee on it? What if I lose it? I tend to have backups for things. Since my kids were little, they've been indoctrinated with this idea that it's better to have it and not need it than to need it and not have it. And that's true of an umbrella. And it's true of the extra mask when you're going to school. That's a little bit of my mindset of failure comes from a failure to imagine failure. Think of what could go wrong. I'd rather just have a backup and it gives me peace of mind. For some people, it seems a little bit of minor excess, but in aggregate, it's not so bad, and it makes me happy.

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Frederik Gieschen: Stanley Druckenmiller talked about how important it was for him to have this sabbatical in 2000. You just went on a vacation. Are you able to completely detach? How do you think about the need for rest?

Josh Wolfe: There are periods where I feel utterly overwhelmed. I do feel lucky, I have a great partner, and we're able to check in with each other and be like, do you need me to listen? Or do you need me to help solve your problem, which is a really important thing, because sometimes people don't ask that. And sometimes I just want Lauren to listen. I'm more sensitive than her. And sometimes I just want her to listen to me complain or feel frustrated, or whatever. And sometimes I'm like, What do I do here, and she's got amazing outside objective advice. So part of that is the psychological piece of it, where, at times, I feel like I need a break.

My days are very heavily scheduled. There are moments where I'm mad at myself that I allow that to happen. At the same time I have that mindset that I get to meet all these amazing people. Maybe they're gonna give me some insight or they're going to be connected to somebody. That randomness and optionality lead me to over index towards that kind of stuff. I have between 12 and 14 meetings a day. And then I have board meetings. It's a lot. And there are times when I haven't left the margin of safety for some exogenous shock. I have some crisis, some portfolio company or some team drama. And I just have to blow up my schedule. So that gives me moments where I need a break. But what I'm really saying is that I wish all these things that I don't have control over, I had control over and were going exactly as I want them. It's not like taking a break is going to help there now.

There's one activity at home, and one activity alone, that gives me great pleasure. Being with my kids is just the great salve. Kids can be extremely stressful because they're sometimes the epitome of somebody who doesn't want to do what you want them to do. And you have no control. But it's mostly because of the absence of it in my own life, of not having a nuclear family and not having a present father, it made me want to be a very present father. I have a big nuclear family and I love my kids dearly and they're my main priority. Family stuff for me is very cathartic. Whatever is going on, I could be negotiating a big $150 million financing. And my little guy who's six is like, Dad, I can't get the screw into this thing and that is more important. Getting the screw into the little toy is more important at that moment. That to me is a big thing.

Vacation, we're both working most of the time. It's rare that I shut down. We have an expectation that on the one hand family comes first, and you should never miss a child's recital or anything like that. But on the other hand, you should be responsive to your CEOs and your CEOs are in constant need. And it’s not like the market where it's nine to four. Somebody might need to talk to you that night. So we balance that kind of stuff.

The second thing that gives me great pleasure, and usually I'm a very competitive sports guy, I love basketball, but surfing is the one thing where I am totally present. I'm not thinking with anxiety about the future. I'm not thinking with depression or concern or regret about the past. It's just like, don't die, don't drown. I enjoy pockets of solitude out on the water. And I find that a combination of exhaustion and the present mindset out of necessity of not dying or drowning leaves me really well equipped to then come back and whatever stressor I might have faced earlier, suddenly I'm like, okay, we'll deal with this, whatever it is.

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