Conversation with Josh Wolfe — Where to be Bearish and Bullish in 2024

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0:55Welcome to the 298th episode of The Prop G-Pod. In today's episode, we speak with Josh Wolfe, the co-founder of Lux Capital, a venture capital firm that focuses on investments in emerging technologies. We discussed with Josh the current state of venture capital, the crypto market, and whether AI is a net destroyer or creator of jobs. This guy has such serious candle power. I feel like I'm on, remember how, I think it was Intel, had the 286 and the 386. This guy's like Pentium. I'm literally, I don't know, I am, you know, navigating by starlight. And this guy has, you know, GPS. It's incredible.

1:30I have a difficult time keeping up with him. And he definitely has the ability to see around corners. He saw this venture capital firm or started a venture capital firm that invests in the craziest shit, which usually spells disaster financially. And he's done really well. Anyways, this guy's the closest person I know to sort of a, I don't know, a fortune teller. Definitely can see around corners. Okay, what's happening? The dog is in Miami. It's the South Beach dog. That's right. Not in North Dakota. Not some depraved fucking weirdo is going to take me out back and shoot me and bury me in a gravel pit just because I'm poorly trained.

2:04I pee on everything. I literally, I'm looking at some curtains. The Faena has all these colors, this kind of Argentinian cool vibe. And I just see those luscious curtains. And I'm going to go over there and raise my leg and pee all over that thing and mark my territory. That's right. The Jewish professor owns this hotel room. Speaking of Jewish professor not having access to a room, have you heard about what's going on at UCLA and Columbia? Some kids have blocked access to the libraries and are issuing bans to students as long as they're not Jewish. So essentially they're restricting access. This is where you literally want to grab these kids by the lapels.

2:43Let's assume they're not bad people that somehow along the lines they got so caught up in an ideology around, I don't know, I don't know what it is, being woke, trying to be good people, that they've gone on the hunt for fake oppressors or for fake enemies and have just totally lost the script. And I'm not sure any of these students are listening to this podcast, but what I can tell you is, especially the kids that did anything but stand up for the rights of people of all special interest groups to have unfettered access, whether it's a six-year-old black girl trying to get into an elementary school in the South that needs the National Guard to escort her in, your kids and your grandkids are going to be so fucking ashamed of you.

3:26You're going to be that guy or that gal that's played back on video where your kids and your grandkids are just horrified at what you did. Look at the arc of history. This type of bigotry never wins. It never comes out, oh, that was a good idea. Oh, it made sense. We're scared that our enemy, Japan, is going to invade the country. We're scared they're spies. So we come up with this hysteria and we figure out a way to put them in what were essentially concentration camps. We intern them. Okay, was that a proud moment for us? We're going to sequester people from housing opportunities with redlining.

4:03Was that a good look? I mean, this is just such an easy one. And my immediate reaction, I've given some money to UCLA and Berkeley for the funding of vocational programs, something I'm passionate about, providing more on-ramps to the middle class into the real economy with jobs recognizing that not everyone's cut out for a traditional four-year degree and there's huge opportunities in kind of the main street economy. Anyways, enough virtue signaling. And I merely thought today, oh, I'll call and I'm going to pull that donation. This is just outrageous. And I kind of slowed my thinking and thought, you know what?

4:38I know the faculty and the leadership at these universities and distinct of a few fucking idiots that have decided to defend an ideology that if it registered traction in the United States, it would end up in the execution of the majority of our students who are Christian or gay. despite those individuals who, by the way, should be summarily fired. There is sharp relief between some 19-year-old exploring the boundaries of intellectual freedom and free speech, which has turned to hate speech, unfortunately. You got to cut a pretty wide berth for those kids. But faculty, we pay you. The students are paying us for a college experience.

5:18And part of that college experience, quite frankly, is making mistakes in a safe place. when it ventures into hate speech, that should be a life lesson and they should be expelled. Keep in mind, keep in mind at UCLA, we expel 91 % of the students. It's a public university. Everyone should have the right to study there. But we expel 91 % during something called the admissions process. Oh, but you can restrict access to people based on their religious identity. Andy, guess what? You should join the 91 % we expel that didn't have perfect SATs. You should not get in retroactively to UCLA. At what point do the faculty, administration, and leadership in California recognize that attending these organizations, enrolling in these organizations is not a birthright?

6:10And where it really loses the script is any faculty member who we pay for that mold to be removed. We pay you. Anyone who is not helping bring the temperature down, anyone who adopts this perverted, deeply violent, depraved agents of chaos, this ideology, anyone who defends it, then we as your colleagues at these universities and we as donors and people who supported this university, we fucked up. And guess what? We can fire you. You absolutely have the rights to free speech. You absolutely have the right to protest. And we, as an organization, have the right to fire your ass. Go into the lobby of any corporation and start screaming, save the whales.

6:55Whatever the issue is, start screaming it at the top of your lungs and restricting people from different office spaces and becoming obnoxious and holding hands and holding up signs. Good for you. The First Amendment of free speech means we can't criminally prosecute you, but we can fire you. And this is what is not getting enough attention. And that is faculty who are not taking down the temperature and who have adopted a perverted, strange ideology and find any empathy for it. That means you do not have the critical thinking to be at a higher ed institution, free speech, First Amendment, rights to protest.

7:31Give me a fucking break. We're paying you. Go to a public square. Speak out. Do it on evenings and weekends. In the meantime, if you want us to continue to sign the front of your check, you have an obligation to create a civil learning environment where people can peacefully protest, the students, the students, and you can do your fucking job, which is make this a healthy, accepting environment for all of the students. It It is your job to be the adults in the room, for God's sakes. Anyways, go Bruins. Go Bruins. I should add that. I am confident they are going to address this issue. I know a lot of people at UCLA, good people, good people.

8:11I think they've been caught flat-footed by what's going on today, and that's a problem. But I just can't imagine. I can't imagine they are not going to move swiftly and crisply against the bigotry that has haunted this nation, that is the stain on this nation. Who thought we were going to be back here? I sure as hell didn't. But here we are. This is a moment in history. UCLA leadership, I believe in you. I know you are going to do the right thing.

8:40We'll be right back for our conversation with Josh Wolfe.

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9:25Welcome back. Here's our conversation with Josh Wolfe, the co-founder of Lux Capital, a venture capital firm that focuses on investments and emerging technologies. Josh, where does this podcast find you? I'm in New York. Are you London or whereabouts? Yeah, London. London. Go figure. Cherry ho. There you go. Inge of an accent. I'm hoping, I wish I'd got my kids here a little bit longer. I'd love to give at least my youngest a bit of a Scottish twang. I was, my dad, it was fascinating. People find my dad so charming and I figured out at a young age, it was more the accident than anything I was saying.

9:59But anyways, let's bust right into it. I think of you as this like very forward looking, big vision, kind of blue flame thinker. Give me a sense for where your head is at in terms of what you're most bullish or bearish on as we head into the rest of 24. So from the venture world, you've got a serious retraction that we've sort of prophesied about two years ago. And sometimes, you know, being early is the same thing as being wrong, but it's increasingly evident. You've got pullback from general partners who raise the funds, limited partners who over-allocate it to the asset class, startups with an increasing number of down rounds.

10:35I think it's like 15 or 20 % of all rounds being raised right now are down. So valuations are lower from the last round that they raised at. And you're going to have a lot of shutdowns. That's also becoming increasing evidence. So venture world, I would say, is generally becoming more realistic, but there's still a whole contingent of VCs that raised capital in the ZERP environment. I always say that low interest rates are like a tractor beam for the future. And so people that are looking at low rates basically are like, hey, we can fund these crazy 20-year things, these Elon things, whether it's like Neuralink or Hyperloop or things that basically don't make sense in a short period of time when rates are high.

11:06And now that rates are high and your tractor beam comes in and you're basically looking two feet in front of you instead of 20 years out, I still think that there's a whole cohort of venture investors that are going into crazy speculative sci-fi stuff. And we love closing that gap between sci-fi and sci-fact. But some people, I think, are just going to end up losing a fortune going after all kinds of nonsensical stuff in quantum computing is something I'm very skeptical about. Fusion is something I'm very skeptical about. And then there's the reality and the hype, which is what makes markets messy and beautiful in things like AI.

11:37I would say that there's a five-year psychological bias where you want to be invested today where you should have been five years ago. The investments that we were making five years ago in companies like Mosaic, which we sold to Databricks and Hugging Face and others, You know, those are doing really well right now. The incremental investment that people are making today at very high prices, capturing the sentiment and demand for AI makes it really hard because you might be right about the technology, but your expected return paying some crazy prices is going to mean, you know, pretty significant investment losses.

12:03So that's sort of the purview from venture with large AI. We can go into some of the details in AI where I think that there are segments. And then the other wave that is at first people felt very uncomfortable with, and now it has become undeniable. And I think we're probably three, four, five years away from it being bubble-like is aerospace and defense. And there you had tailwinds where there were basically no cutting edge companies. You had SpaceX on the one hand, you had Palantir on the other. We were early investors in Andruil, which has become a hardware kinetic. It was actually the first company that we as a partnership had to decide, hey, are we comfortable being part of a kill chain where you know that you are funding technology that is not killing the cancer cell but might kill an enemy combatant.

12:42And that was a difficult partnership discussion. But that became exhibit A for the wave in aerospace and defense. And now people are coming out of that company and role and starting new companies. You're getting capital formation, dedicated funds, whether it's firms calling it American dynamism or global resilience, packaging these things. And then you're getting fund to funds that are investing in the space. And that's actually really interesting because a CIO friend of mine said, this space is really interesting for fund to funds. because if you invest in a fund of funds that invests in a venture fund that invests in a company like Anderil, you're at least two or three layers morally removed.

13:15So it's a little bit easier from an investment committee to say, hey, like we're funding this stuff, but we're not directly involved. So I know enough about venture to be dangerous. I want to put forward a thesis and you tell me if you know, validate or nullify it. My sense is the opportunity when I talk to VCs is in follow on rounds of good companies where the valuations have been rationalize. Is that where the opportunity is? There definitely is opportunity there. You have to consider the thing that I think you're really brilliant at considering, which is the human condition. Yes, the rounds might be lower valuations, but you've got people that were there five, six, seven years.

13:48Their options are underwater. They need to be restructured or repriced. Maybe they're looking at greener pasture somewhere else. And so how do you retain talent in these down rounds is a pretty hard thing when you get this sort of spiral of negative psychology. I will say that one adjacent area, and we sort of come up with this framework, this tri-party framework of what I call bubble, anti-bubble, and consolidation. So bubble is not actually hope that there's a bubble, like the old bumper sticker following the last dot com blue bus, which said, you know, please God, let there be another bubble.

14:16This is putting people in a protective bubble for basically two and a half, three years so that they can basically be relatively ignorant or immune from the volatility of the system to the markets, whatever happens with Trump and Biden, wars, et cetera. They just focus on their technology. They can do it in a in a bubble protected by enough capital when they go out and actually prove that they did what they said they could do and raise their next round. The second is anti-bubble, which is sort of what you're talking about, which is how do you get a later stage asset, less risky, but at an early stage price so that you can get higher returns.

14:44And I think actually the one interesting niche in this are corporate spin outs. Corporates are always, on one hand, a little bit late to the game as venture investors. But in the past 10 years, you had Meta, Alphabet, Microsoft, but particularly the former too, funding all these other projects. And about a year ago, there was a whistle that I heard. And the whistle was Chris Hohn from Children's Investment Fund. He's an activist investor, a very successful one. And he wrote a public letter to Google and said, you got to cut all these other projects. There's 20 % time that people are doing these fanciful things where you're trying to retain talent.

15:17You got to focus on contribution margins. You got to stop wasting money. And they and others have listened. Budgets have been cut for some of these programs and they're legitimately good as standalone ventures, but not as divisions of these big tech companies. So we did two spin outs in the past year. And I predict we'll probably do another two or three over the next 12 months. We took one group out of Google, which basically created a Shazam for smell. So the ability to walk into a room and using cutting edge AI with sensors, be able to detect what is that smell? What is that odor? And that can be used for healthcare from everything from like detecting COVID, Parkinson's, Alzheimer's, all of which have a disease state, a chemical signature that gives off.

15:54We know that dogs can be trained to sense that. So why can't machines? So that was one. It's called Osmo, Osmo.ai, run by a brilliant PhD. And they just weren't going to get the funding at Google. And we said, spin out, we'll give you some residual common equity, did a$60 million founding round, and that's a good playbook. So let's talk a little bit about AI. There's a general sense or there's a fear or risk that it'll destroy jobs and consolidate power. It does feel as if the biggest players are the guys we know already, that the majority of the market cap has accreted to the Microsofts of the world.

16:30Do you believe that it's going to be a net destroyer or creator of jobs?

16:38Net destroyer of existing jobs, but it's going to create new jobs. And that's always been the case. So the jobs that people have done over the past 15 years with the advent of the IT revolution going back 30 years, nobody ever forecast like, you know, HTML designer or JavaScript programmer or web coder or social media marketing influencer or guru. So all these things, I think, in a sense, democratize the ability for people to express their genius. It makes it harder when everybody can do it because you have a supply of talent. The interesting people that are getting hit now because of technology are actually the white collar workers.

17:12I mean, the people that are doing, frankly, bullshit jobs, you know, consultants and copywriters and people that increasingly some of these chatbots can do as good or in some cases better than they can do. The group that I actually think is more protected, ironically, are the blue collar workers. You know, there's a shortage of nurses, massive shortage of nurses in this country. There's a shortage of plumbers, massive shortage of plumbers. And these are things that we just don't think about. And we sort of look down upon. And you go back to like, you know, workshop is soul craft and people actually using their hands that combined with technology is a theme that I'm actually really excited about.

17:46It's this idea of maintenance. And if you think about the past, I don't know, 10 years, everything's been about growth, growth, growth. And you know, you know, accounting, you talk about the flawed accounting of a lot of these big tech companies. You take CapEx, it's got two components, you got growth, and you got maintenance. Everybody's been finding growth, growth, growth, maintenance, you have trillions of assets from basic infrastructure, apartment buildings, the human body, hospital systems, there's all kinds of things where you can apply new technology to maintaining these systems. And I think that labor, blue collar labor, is going to be a critical piece of that.

18:17So it sounds like you think there's investment opportunity and like hard assets that have been overlooked. Is that what you're saying? Well, that's true also because regardless of what expectations, and we've been sort of saying for, I don't know, two or three quarters, that maybe rates don't go lower. Maybe the cost of capital naturally is higher, even though we're in an election year and they're trying to press things down and create a stock market wealth effect and people are looking at their everyday inflation hit goods and they're feeling pain. I actually think that when rates are rising, you know, geniuses like Buffett figured this out, you want to invest in capital intensive industries as early as possible because the replication cost of those hard assets is just really hard to do and cost of capital is much higher.

18:59So I do think hard assets, this touches everything from industrials, infrastructure, aerospace and defense. And I think that that has been an under-invested sector of the venture world. And you're seeing a ton of talent going into this. I mean, I can tell you right now, Anderil, some of these people work. They've asked for four years. This is the defense company, you know, raised billions of dollars, generating billions of revenue. It's like one of the great successes in the space that people are pointing to. But these people that work there are super talented and they're spinning off from Anduril, from SpaceX, and they're going into not SaaS companies or chatbots.

19:35They're going into composite manufacturing, rebuilding the arsenal of American democracy with hardware manufacturing, building robots that build robots. So that is actually a really, I think, underappreciated thing that in the next few years, people look back and be like, oh shit, I should have been invested in that. What do you think our economy's Achilles heel is right now? Ourselves, people. I mean, we're our own, you know, you talk about this, I think, brilliantly a lot, but we are our own worst enemy. Just the divisiveness. There's so many opportunities for people to come together. I actually think that that will probably be with foreign adversaries that unite us again.

20:10I thought it was going to happen earlier with China and the Chinese Communist Party. It really hasn't as much. But yeah, I think we're the biggest obstacle. It's not foreign adversaries. Foreign adversaries can exploit our divisiveness, but it's our intrinsic divisiveness that I think is slowing us down. That's the biggest friction of progress. Yeah, we're brothers from another mother on this one. You had also said that we should be spending less time thinking about fusion and more about fission. Do I have that right? Yeah. This goes back to this idea, again, people looking at far out ideas, and you're always trying to look at the next thing.

20:45I mean, this is what makes music great, right? Young people don't want to listen to their parents' music. They want their own thing. They don't want to wear the old clothes. They want to invent their new thing. Well, it's the same thing for technology investors. They're always thinking about what's new, what's next. We do the same thing, but we try to temper ourselves with reality. The reality is fission is amazing. We've got decades of very safe use and lots of records of how to operate these plants. We have a declining labor force supporting them, which we should adjust. It goes back to this idea of supporting these blue-collar workers and maintenance of systems that we already have.

21:13But we used to have 104 domestic reactors in the U.S. Now it's down to 90-something. You've lost political support in not only the U.S., but in many countries. Germany, which shut down their nuclear, even though you had an engineer at the helm of the country and its leadership in Angela Merkel. And what happened in Germany? They delivered themselves literally to the natural gas grip of Putin and created enormous dependencies. Right now, there's five countries that can basically drive nuclear. And it's interesting because this sort of comes back to AI in a sec, but you've got France, you've got South Korea, you've got UAE, you've got Russian, you've got China.

21:47And I testified in front of Congress last summer, basically saying this is another threat that we are not appreciating. That threat being the U.S. has gone from 104 to 90 something reactors. We've declined. The cost for the newest reactor that we put up, which was in Georgia, about$6,$8,$10 billion a gigawatt to serve roughly a million people per gigawatt. China is doing it for about a billion and a half,$2 billion, okay? Fifth of the cost, 80 % less. Why is that important? They went from two reactors to 20 on their way to 50, but now they're exporting that technology. And if you are a geopolitical strategist, if you care about foreign policy, your State Department, your Department of Defense, you do not want China reactors all along the coast of Africa or South America providing large baseload power and creating decades-long dependency on China to provide fuel and maintenance and, you know, basically controlling the ultimate kill switch of the electricity for your economy.