20VC The 3 Forms Of Edge A Founder Can Have, Lessons From Being on A Board With Bill Gates & Why There Are A Lot Of Tourist VCs Who Are Going To Lose A Lot Of Money, with Josh Wolfe, CoFounder @ Lux Capital

In the 20 Minutes VC podcast, host Harry Stebbings interviews Josh Wolf, co-founder and managing partner at Lux Capital, a firm that invests in unconventional scientific and technological solutions. Wolf shares his journey from a science-focused upbringing in Coney Island to venture capital, where he finds a fusion of his interests in science and finance. He discusses Lux Capital's approach to investing in cutting-edge technologies, citing examples like metamaterials for satellite communication and AI for analyzing satellite imagery. Wolf emphasizes the importance of cognitive diversity in teams, Lux Capital's willingness to take both market and technological risks, and the firm's disciplined investment strategy. He also touches on the industry's tendency to falsely praise failure and the value of authenticity. The episode concludes with Wolf advocating for a behavioral edge in investment, particularly time arbitrage, and the potential need for longer fund cycles in VC.

• Josh Wolf is the co-founder and managing partner at Lux Capital, a venture capital firm.
• Lux Capital invests in scientists and entrepreneurs working on counterconventional solutions to complex problems.
• Josh is a founding investor and board member with Bill Gates in Kymeta, which focuses on satellite and space communications.
• Josh co-founded Curion, a first responder to the Fukushima disaster, which was acquired for $400 million in 2016.
• Renata Quintini, Josh's partner, is credited with the introduction that made the podcast episode possible.

"Well, today's guest is slightly different from many of the traditional software investors we've had on the show. With that in mind, I'm thrilled to welcome to the hot seat today Josh Wolf."

This quote introduces Josh Wolf as a guest who stands out from the typical software investor profile usually featured on the podcast. It sets the stage for discussing his unique approach and background in venture capital.

"Now, Josh is the cofounder and managing partner at Luxe Capital, the fund that supports sign scientists and entrepreneurs who pursue counterconventional solutions to the most vexing puzzles of our time."

This quote describes the mission of Lux Capital and emphasizes the firm's focus on ambitious and unconventional projects. It highlights Josh's role in supporting innovation in challenging fields.

"And in 2008, Josh cofounded and funded Curion. The company was among the first responders to the Fukushima disaster. In February 2016, Violia acquired Curion for nearly 400 million, more than 40 times Lux's total investment."

This quote provides an example of Lux Capital's successful investment in Curion, which played a significant role during the Fukushima disaster and was later acquired for a substantial return on investment.

• Josh grew up in Coney Island, Brooklyn, which he compares to the unpredictable nature of venture capital.
• His early interests included hip hop and basketball, but he was also pushed towards science by his mother, a teacher.
• Initially on a path to an MD-PhD, Josh's interest shifted to capital markets after being exposed to trading by his scientific mentor.
• He discovered venture capital as a perfect blend of science and finance, which he describes as an "endless frontier" with combinatorial possibilities.

"My personal life is a mix of science and finance. Now, you got to understand, I grew up in Coney Island, Brooklyn, and I don't know if you've ever been, but it's a special place, and it's actually got the scariest roller coaster in the world, not by virtue of descent or speed, but because it is so old, the cyclone, that your ride may be the last."

Josh uses the metaphor of Coney Island's Cyclone roller coaster to illustrate the high-risk, high-reward nature of venture capital, drawing parallels between his upbringing and his professional life.

"And then when I learned what venture capital was, this was the perfect hybridization of science and finance, and I was just hooked. And like science itself, it's the endless frontier."

This quote captures Josh's fascination with venture capital as a field that marries his interests in science and finance, offering endless opportunities for discovery and innovation.

• Josh discusses the perception of being at the forefront of new technologies, comparing it to past technological breakthroughs.
• He believes that while it's risky to claim "this time is different," the increasing number of technologies allows for more combinatorial possibilities.
• Specialization in science and entrepreneurship leads to incremental advances and breakthroughs when different disciplines are combined.

"So in one hand, saying this time is different is sort of dangerous, but on the other, you are correct in that the combinatorial possibilities, the more technologies that we create, the more things can be put together and remixed in different ways."

This quote acknowledges the danger in assuming that the current era of technology is unprecedented, but also notes the unique opportunities that arise from the ability to combine various technologies in new ways.

"The people that are able to come in almost in a renaissance style and pick from this guy's discipline and that woman's discipline and put them together are the ones that make these big breakthroughs."

Josh highlights the potential for significant innovation when individuals can integrate specialized knowledge from various fields, drawing a parallel to the interdisciplinary approach of the Renaissance.

• Josh comments on the pros and cons of specialization within venture capital.
• Success in a specific field can attract the best entrepreneurs but can also lead to being pigeonholed in that vertical.
• Changes in capital markets can necessitate reinvention, and while some VCs may lose money, it is seen as a natural part of the industry's evolution.

"So if you are successful in a particular field, let's say you were an enterprise software investor and you had a big hit. Well, now you've got this halo and the best entrepreneurs are going to come to you and equate your prior success with the increased probability that they're going to have success."

This quote explains how a VC's past success in a particular area can create a reputation that attracts top entrepreneurs, reinforcing the VC's specialization in that vertical.

"And so I think that's a natural cycle of people reinventing themselves. But generally, I think on the one hand, you're right to be concerned because you see people sort of pushing off into these frontier areas."

Josh acknowledges the cycle of reinvention within venture capital and the inherent risks involved in venturing into new, untested areas of technology and investment.## Passion as a Predictor of Success

• Lux Capital focuses exclusively on counter-conventional, futuristic science technology ventures.
• They believe that passion is the best predictor of success for both partners in the firm and the entrepreneurs they invest in.
• Lux Capital commits to high-risk, cutting-edge science ventures, challenging the status quo and sometimes the laws of physics.
• The firm is dedicated to investing in the future, learning from their ecosystem, and understanding which risks are worth taking.

"Passion is the best predictor of success. And so at Lux, this is all we do."

This quote underscores Lux Capital's belief in the importance of passion as a driving force for success in their specialized field of futuristic technology investments.

• Lux Capital is willing to take on both market and technology risks.
• They invest in areas where there may be no existing market or comparable companies (comps).
• The combination of new technologies can create previously non-existent markets or niches.
• The lack of comps for a new venture can be an indicator that the venture is onto something novel and potentially significant.

"What was the comp for Microsoft before it existed? What was the comp for Facebook?"

Josh Wolf uses rhetorical questions to illustrate the point that groundbreaking companies often emerge without any direct comparisons in the market, highlighting the uniqueness of such ventures.

• The 100%, 0%, 100% rule is a mix of ambition and humility.
• The first 100% represents the certainty that Lux will invest in cutting-edge areas.
• The 0% represents the acknowledgment that they don't know exactly what those areas will be.
• The second 100% is the certainty about where these cutting-edge ideas will come from, which is their existing portfolio of cutting-edge companies.

"The 100% part is basically saying, I have 100% certainty that lux will be investing in the most cutting edge areas that you can imagine over the next one or two years."

Josh Wolf explains the first part of his rule, emphasizing Lux Capital's commitment to investing in innovative areas with certainty.

• Lux Capital focuses on hard sciences and technology.
• They scale the learning process by studying cutting-edge scientific literature and networking with experts.
• They invest in companies that lead to the discovery of new technologies and markets.

"It was an interest in a cutting edge area in physics that we studied for many years... And it leads us to start a company with Bill Gates and Nathan Mervold."

Josh Wolf describes how a deep interest and study in a specific scientific area led to the creation of a company with high-profile partners, illustrating the importance of continuous learning and exploration.

• Lux Capital's investment strategy involves following a chain of innovation from one company to the next.
• They use insights gained from one company to identify opportunities in related fields.
• This approach has led to investments in companies like Planet Labs, Orbital Insight, and Zooks, which have pioneered in their respective areas.

"From that company we got the idea that all that imagery that's coming off over time, it might get commoditized. And the real value is going to be in applying artificial intelligence or machine learning, the algorithms to be able to find patterns in the data."

Josh Wolf provides an example of how an investment in one company led to insights that spurred investment in another company that capitalizes on the data generated by the first.

• Lux Capital recognizes the shift from CPUs to GPUs as central to the future of AI and machine learning.
• Their investment in a company like Nirvana Systems was based on the insight that GPUs are becoming the soul of new machines.
• The company's strategy involves staying on the edge of scientific and technological advancements and being led by credible founders to the next innovative venture.

"Now the gpus are becoming the soul of the new machine, and those are made by people like Nvidia and others."

Josh Wolf notes the increasing importance of GPUs in computing, particularly for AI and machine learning, which informed Lux Capital's investment decisions.## Emerging Science and Tech Investment Landscape

• Investing at the outermost edges of emerging science and tech presents unique challenges due to the complexity and novelty.
• There are fewer competitors in both startups and investors in this space, making market analysis and founder identification somewhat easier.
• Companies in this field often have significant intellectual property and patents, which can act as a barrier to entry for others.
• Teams building these companies usually have unique technical knowledge, often stemming from universities or government labs.
• The importance of cognitive diversity within teams is emphasized, blending different scientific, legal, philosophical, or cultural perspectives.
• Founding teams often comprise experts from multiple disciplines, such as in the case of autonomous vehicles, which require knowledge in computer imaging, mechanical engineering, machine learning, and GPUs.
• Ethical considerations are also a key aspect of these complex technical projects.

"So on one hand, we're investing at the outermost edges of all this emerging science and tech, and there happen to be very few players and few players in startups and few players in investors, just because it's hard."

This quote highlights the scarcity of players in the emerging science and tech investment landscape due to the inherent difficulties.

"Our companies tend to have maybe four or five competitors. So from a market standpoint, your security selection is a little bit easier."

The quote suggests that due to the lower number of competitors, selecting secure investment opportunities is less complicated in this niche market.

"And then you've got teams that are building these companies who are often the only ones that technologically know how to do what they're doing, because maybe they came out of a university or a government lab."

This quote emphasizes the unique expertise of teams in this sector, often derived from academic or governmental research backgrounds.

• The heavy emphasis on intellectual property (IP) can make startups both acquisition targets and provide downside protection.
• Acquisitions by larger companies may be driven by their lack of investment in R&D, making startups with strong IP attractive for acquisition.
• There is a tension between the immediate financial benefits of an early acquisition and the potential for much higher returns if the company is allowed to mature.
• Large corporations are not heavily investing in R&D but are looking to acquire innovative startups, which can be seen as a positive development for the startup ecosystem.
• The concept of time arbitrage is introduced, where having a longer-term perspective than other investors can provide a competitive advantage.

"In some case it's a protection on the downside, in some cases it's a cap on your upside."

This quote reflects the dual nature of IP-heavy startups being both a safeguard against failure and a potential limitation on maximum return on investment.

"And so I think it speaks to the fact that you've got large corporations, despite having huge amounts of cash both domestic and overseas, are not heavily investing in R&D."

The quote points out the trend of large corporations preferring to acquire startups rather than investing in their own R&D.

"If everybody's looking for the thing that's going to show big user growth in the next year, it's just easy for hundreds of investors to be able to evaluate it."

This quote suggests that short-term investment opportunities are more crowded due to the ease of evaluation by numerous investors.

• The longevity of returns in hard science investments can be a concern, but there is potential for significant payoffs.
• Fund cycles, traditionally ten years, may be adequate as long as they are profitable for investors.
• The timing of venture investment is crucial, focusing on the point where science becomes scalable for venture rather than funding pure science risk.
• Assessing the amount of money and time required to reach significant milestones is a key part of the investment decision process.
• Different industries have different inflection points for investment, such as clinical milestones in biotech or technical and market validation in hardware.

"I think as long as you can make money for your investors, then investors are going to be okay with a traditional ten year fund."

This quote indicates that traditional fund cycles are acceptable if they yield profits for investors.

"But there reaches a point where you can see that they're starting to do something in a small scale, and that's the time when you can scale something up for venture."

This quote highlights the strategic point of investment when a project demonstrates scalability potential.

• The inflection point for investment varies by industry and is critical to determine the right time to invest.
• In biotech, clinical trial phases serve as clear milestones, while in hardware, the focus is on whether the technology works and can be scaled.
• Assessing the feasibility of technology, scalability, and market demand are the primary questions before making an investment decision.
• The speaker emphasizes the importance of not continuing to fund a technology that doesn't work and the necessity of proving both technical feasibility and market viability.

"Does it work? How much money and how long to figure that out? And then when the answer is yes, can you make it?"

This quote outlines the sequential questions that guide investment decisions, focusing on the functionality and manufacturability of technology.

"And so each one of those things, I think, are a fundable worthy series."

The quote implies that each stage of validation—technical, scalability, and market demand—presents a fundable opportunity.## Incremental Capital and Funding Discipline

• Josh Wolf emphasizes the importance of being disciplined with capital allocation.
• He advocates for setting milestones and adhering strictly to them.
• Funding is provided incrementally to manage risk effectively.
• A failure to assess the time and money required for a project at an early stage is seen as a red flag.

"We tend to be very disciplined, and I always say I'd rather lose half my investors than half my investors money. So we're very disciplined about setting milestones and sticking to them, and we'll give here incrementally 10%, 30%, 50%."

This quote underlines Josh Wolf's priority on protecting investor capital and his method of incremental funding based on milestone achievement to mitigate risk.

• "Sapiens" by Yuval Noah Harari is cited as Josh Wolf's favorite book.
• The book is praised for its concept that humanity's success is due to our ability to believe in shared fictions.
• These shared fictions include money, religions, and nations, which exist because of a collective belief.
• This idea encourages reevaluation of societal constructs and the potential for disruption.

"Why favorite book is sapiens fundamental conceit. As you may know if you've read this, what made us great was not our speed or our power or agility, or our knowledge, but the unique ability to conjure and share fictions."

Josh Wolf explains the central thesis of "Sapiens" and why he finds it compelling, highlighting the power of shared belief in shaping human society.

• Josh Wolf criticizes the startup culture that superficially praises failure.
• He observes that entrepreneurs often feel pressured to maintain a façade of success.
• This leads to a lack of authenticity and honest dialogue within the industry.
• Wolf suggests that a culture shift towards openness and honesty would be beneficial.

"I think that there is a culture that talks about praising and prizing failure, but I think it's disingenuous."

The quote captures Josh Wolf's view that the startup culture's approach to failure is often not genuine and that there is a need for more sincerity.

• Josh Wolf shares his observations from working with Bill Gates.
• Gates focuses on the most impactful aspects of a subject and supports founder CEOs.
• Wolf tells a story highlighting Gates' simplicity despite his wealth.
• The story serves to humanize successful individuals and emphasize their similarities with others.

"He would listen and sit and think, and then it would be the 90 ten of it, meaning he would get to the 10% of the subject matter that had 90% of the value."

This quote reflects on Bill Gates' ability to identify and concentrate on the most significant parts of a discussion, which Josh Wolf admires.

• Josh Wolf used to enjoy reading Sam Arbisman's work before hiring him.
• He appreciates the Santa Fe Institute and the complexity theory it explores.
• Jason Hershhorn's redef newsletters are also among his favorites for their aggregation and commentary.

"Another one I love, Jason Hershhorn. So all his redefs, media, sports, technology, I think he does a great aggregation with a little bit of commentary and snark, and I find he's got a great net to capture and filter a lot of stuff."

The quote showcases Josh Wolf's appreciation for Jason Hershhorn's ability to curate and comment on various topics, which aligns with Wolf's interests.

• Recursion is a company that combines AI and pattern recognition with phenotypic discovery.
• They focus on structural biology to discover diseases and drug targets, a novel approach compared to genetics-based methods.
• The investment decision was based on high conviction and consensus within the team.

"It mixes artificial intelligence and pattern recognition with phenotypic discovery. So it's looking at the structural nature of biology and cells and trying to use that to discover disease and then drug targets."

Josh Wolf explains the innovative approach of Recursion, which influenced his decision to invest in the company due to its potential to disrupt the field.

• Josh Wolf expresses pleasure in participating in the podcast.
• Harry Stebbings appreciates the different perspectives and learning experience from the conversation.
• Renata Quintini is thanked for making the introduction.
• The podcast ends with a promotion for the Eight Smart Mattress and Full Contact.

"Such a pleasure. Thanks for having me, Harry."

This quote is Josh Wolf's closing remark, indicating his enjoyment of the conversation.

"I have to really say how much I truly enjoyed that. So fascinating to hear such a different perspective."

Harry Stebbings expresses his enjoyment and appreciation for the insights gained from the discussion with Josh Wolf.