PERSPECTIVE3-5 min to read

The Value Perspective Podcast episode – with Josh Wolfe

Hi everyone and welcome to The Value Perspective Podcast. This week we are joined by Josh Wolfe, co-founder of Lux Capital and one of the most successful venture capitalists of the last generation. Josh could not be more different to the Value Team because he invests in cutting-edge technology and businesses that may not even exist five or 10 years down the line. Even though what he invests in is in stark contrast to the  Value Team, however, we found he has a similar mindset – especially in how he applies probabilistic thinking to his craft and how he uses behavioural science. We also greatly enjoy his mantra: ‘Believe before others understand’. Before we start, we would like to thank our colleague Jack Dempsey, who had to drop out as co-host at the last minute but did a lot of preparation work ahead of recording the episode – thank you so much, Jack. In this episode, Juan and Josh cover: pitching without a previous track record or experience as a venture capitalist, and the importance of experience; how to deal with information anxiety; the mindset of a value investor in a venture capital world; nuclear as an example of something with low acceptability in beliefs and narratives; the privileges and challenges of co-investing with Bill Gates; and, finally, why we are seeing such small, incremental progress in the defence industry and the usefulness of risk-gaming. Enjoy!

19/10/2023
EN

Authors

Juan Torres Rodriguez
Fund Manager, Equity Value
The Value Perspective Apple PodcastsSpotify_for_TVP2

JTR: Josh Wolfe, welcome to The Value Perspective Podcast. It is a pleasure to have you here. How are you?

JW: I am doing great. Great to see you.

JTR: Where do we find you today?

JW: We are on a vacation for the weekend – way out of New York City, where we are normally based.

JTR: Oh – well, thank you very much for interrupting your holidays to talk to us!

JW: My pleasure.

JTR: Josh, for those who may not know you, please could you give us a bit of your background?

JW: I am co-founder of a venture fund, Lux Capital. We are about 40 people, spread between New York and Menlo Park in California, and we have a little over $5bn under management. We do everything from super early-stage investments and spin-outs of universities to later-stage corporate spin-outs and all kinds of special situations. And the stuff we find ranges from cutting-edge biotechnology based on Nobel Prize-winning scientists to aerospace and defence and really speculative near-science fiction that becomes science fact.

JTR: I believe you started your career working in investment banking – and specifically doing research. So how does someone go from investment banking into the world of venture capital?

JW: Well, I don’t know that there was a linear path. I was in investment banking – I was actually in a real estate and lodging group so we were focused primarily on hotels and mobile homes – and it really was not that interesting to me. I was obsessed with biotechnology and science and technology and the future – and most technology at that time was really focused on the dotcoms. This was 23 or so years ago and everybody was focused on optical networking on the infrastructure side, and then all the dotcoms and search engines, and nobody was really focused on the physical and material sciences.

So, right out of college – I went to Cornell – after about nine months in my job as an investment banking analyst – and not even smart enough to collect my first year bonus! – myself and my co-founder Peter Hébert, who was in equity research at Lehman Brothers, decided we were going to start a firm and, with the help of friends and some others, we went out to try to raise ‘friends and family’ money. And I always joke that we both had a lot of friends and we had a lot of family but none of our family and friends had any money! But we got very lucky and met Bill Conway – and Bill had money. He was one of the founders of the Carlyle Group. At the time, I want to say Carlyle was at low single-digit billions, which was extraordinary – but today it runs hundreds of billions and is one of the most successful private equity firms in history.

We had a chance meeting with Bill and we pitched this idea that every 10 or 15 years, there is a secular wave that defines technology and a handful of people dominate that wave – either by virtue of domain expertise or luck. We had studied some of these waves in the past. In the 1970s, venture capital was mostly around the personal computer movement and companies like Compaq and Atari. Then in the 1980s, you had biotech and then, in the 1990s, you had the internet. And our hypothesis was that the next wave would be about the physical and material sciences. So that is what we carved out as a niche and it has served us very well.

The skill to navigate towards what can make you lucky

JTR: The main aim of this podcast is to explore the topic of decision-making in conditions of uncertainty and we are very interested in those early years just before and after starting Lux. In those key first decisions, what came down to skill and what was luck?

JW: I am a big believer in Michael Mauboussin’s spectrum of skill and luck – and he has a great test for if something is skill or something is luck, which is: Can you fail on purpose? And if you take something like dental surgery, the answer is surely, Yes. If you take something like running a foot race, the answer is surely, Yes. If you take something like blackjack or craps or roulette, the answer is, No. You might intentionally try to fail but you might still get lucky and hit 21 or throw sevens or land on red 28 or whatever it may be.

In venture, there is a great mix of both – you have to have some skill to navigate towards things that are going to make you lucky. And I very much considered it like having a fishing rod – you know, you might be a skilled fisherman but, if you go out into the ocean, you have still got to be really lucky to catch something; whereas, if you go to a pond, where there are thousands of fish, your odds of being able to catch something are much higher. So you really have to be selective about where you are going to try to apply your skill so you can get lucky. And I think, if you constrain some of those external parameters you have no control over –which is an act of skill – then you have a better chance of being lucky and a better chance of a good outcome.

JTR: In those early days when you are meeting with a co-founder of the Carlyle Group, what was the conversation like? Correct me if I am wrong but, at that point, you have never done venture capital and you do not have a track record, which is almost always a requisite when you are raising funding.

JW: That is absolutely right. It was entirely lucky – being introduced to Bill was an act of good fortune, as was even the circumstances of Bill’s mindset in the preceding day. If you read somebody like Robert Sapolsky – who would talk through the biochemistry of the moment or the day or the week or the month – there were any number of forces that might have been acting on Bill’s mindset. He might have just had a great meal right before we met him down in his Washington, DC office; he might have just got great news; he might have had a great evening the night before with his family that primed him to be in a good mood.

Conversely, if you ran the counterfactual, he might have just got terrible news; he might have been annoyed; he might have been distracted. And then here come these 20-something-year-old kids who are basically, like, We want to go and build a great venture firm and focus on these areas nobody else has focused on. And he might have been, like, That’s wonderful – I hope you have a great life and good luck but I’m not your guy. So whatever the circumstances of that day – and I can never understand the totality of what went into Bill’s mood and mindset – he was primed to say ‘Yes’.

Now, if we had walked in and knew nothing about what we were talking about, he probably would have been inclined to say ‘No’. But we came in with, I think, a versed expertise and understanding of the history of venture capital and why these particular areas we were focused on – that, at the time, very few people were focused on – were likely to become the next big wave in venture. And he was able to make a small bet on people with big dreams. I think he appreciated our entrepreneurial naivete and he said, I hope you make a billion – and it was one of the luckiest days of my life. I call that a very lucky day.

JTR: When you are starting in an area where you do not have that much experience, it can be very easy to make mistakes. How were your first few years of building up experience and knowledge and track record as you went along?

JW You know, most experience is gained in one of two ways – you are either doing and you learn and you develop a set of pattern recognition; or you read voraciously and you observe. So you observe both the successes of people and try to emulate or copy those and you observe the failures and try and stay away from making those same mistakes.

But the landscape is constantly changing – you know, the capital market environment when we started had just gone from a major boom in the dotcom sector to a massive bust. We were investing in an area of advanced materials and emerging technology that did not have a lot of people chasing it yet – so the financing risk of the companies was very high. Nobody had funded these companies – and I think I was inspired by a quote I had heard from a friend who was friends with [US investor, author and economist] George Gilder, who was a bit of a promoter of the telecommunications boom.

George is a brilliant, brilliant man with lots of interesting theories on technology and how they coincide with physics and entropy – I admire many things about him. And we actually emulated George in producing a newsletter with Forbes, which helped to build our brand and our name and get us access and appeal to the ego and the vanity of the scientists and the CEOs we were trying to court – because they didn’t know who Josh Wolfe or Lux Capital were but they wanted their name in Forbes.

But one of the things George said was that experience is massively overrated. When you really look at the great entrepreneurs – not the great value investors, but the great entrepreneurs – they really are people who did things that others had not done before. So nobody had done what Steve Jobs did before – and Steve Jobs had no experience doing what Steve Jobs did. Nobody had done what Mark Zuckerberg did, nobody had done what Larry Ellison did, nobody had done what Elon Musk did. And I am critical about many of those folks, for different reasons, but there often is no precedent for some of the things people do. Again, there were no biotech entrepreneurs doing what the founders of Genentech now do. Often, somebody stumbles on a discovery – or somebody stumbles on a discovery and is paired with somebody who has the vision or the greed and avarice that helps gets the discovery to market.

But whatever those circumstances are, I actually do think experience is very overrated in new things because, by definition, nobody has done that thing yet. And so people should just have the confidence to say, I am going to go and do it. It is almost like, if you are a scientist and you are trying to push the boundaries of a field, or you are an explorer – you know, what experience did anybody who made a great discovery have before that? They had some instinct and they might have had some skills or some tactics or some resources – but then they just went and did. And then history remembers the one out of a hundred who succeeded. And we forget or attribute to failure the 99 who did not. And so there is this survivorship bias in regard to the people who succeeded. But everybody who tried it had no experience doing whatever they were doing.

Information anxiety – and how to profit from it

JTR: That is really interesting. You are investing at the cutting edge but one thing a lot of younger investors struggle with is knowing when you know enough to make a decision. How do you deal – personally and as a team – with the concept of information anxiety?

JW: Well, there are two aspects of information anxiety – one is born in a competitive pursuit; and the other is the sense of discomfort you have when you just don’t know what the possibility space is. So, in the first case, I consider myself to have information anxiety because, if I find out somebody else knows something I don’t know, or another firm has knowledge we don’t, I consider that a sort of ‘failure of process’. And I think I am driven, competitively, to know what other people know – but to know a little bit more; or to know what they know – but to analyse it slightly differently and have a varying perception.

So that is one form of information anxiety, which is never resting on our laurels – never sitting back and thinking we know something – and that is evident in the kinds of stuff we find. You say, ‘cutting edge’ – well, the image of cutting edge is you are really on the precipice and you might leap into a pot of gold, or you might cut yourself fatally and lose all your money. With a lot of these fields, we don’t know anything about them – you know, it really is an instinct around something. And then you meet the entrepreneur – and the entrepreneurs are often so competitively obsessive and often have a chip on their shoulder. I like to say, Chips on shoulders put chips in pockets – but there is something that is driving them to prove other people wrong.

Again, I really love to study great scientists – and whether you look at Peter Mitchell, who came up with the chemiosmotic hypothesis that ultimately won the Nobel Prize; or Lynn Margulis, who came up with the endosymbiotic theory of archaea – a form of bacteria that basically got hostilely taken over by mitochondria – those two examples in biochemistry or cellular biology are the same thing that entrepreneurs experience, which is everybody thought those two scientists were wrong. And not only did everyone think they were wrong, they laughed at them and made fun of them – and the history of almost every spectacular scientific discovery is they were also spectacular targets of people’s derision and ire – and then they were right.

Well, entrepreneurs are the same thing. Somebody goes and does something – often with the arrogance of the highest order – and they say, This is the way the world should look and this is the way I want to shape it. And people think that person is an idiot and their idea will never work. And the more people that say that – for us – it is a good thing because, if everybody agreed it was going to work, then the provision of capital would be very high. And valuations would be very high because the demand to fund these people would be very high –and then future returns would be very low. So we actually want lots of scepticism and lots of doubts from everybody else. We want everybody else to agree with us ultimately – just later and not now.

And so we like to say – in a poetic, cheesy way! – We believe before others understand. And, in a sense, it is a little bit of a leap of faith in the entrepreneur. But that is the second kind of information anxiety, which is: we don’t know. Now, the way to control that is you try to do as much research as you can. If it is a scientific breakthrough, it is relatively easy to know if somebody is full of shit or if they are real because you have peer-reviewed science; you have people who are competitively motivated to disprove them; you have institutional error correction in the form of both institutes of science and national academies. And so there are some corrective mechanisms, which is why, if somebody comes up with some breakthrough in quantum physics or quantum computing or fusion – all of which are areas I am very sceptical of, because there is lots of BS there – but they are unaffiliated with a great institution, you generally are more sceptical because the error-correction mechanisms at great institutions are very high.

So we are constantly looking for brilliant entrepreneurs, engineers and scientists, who are on, as you noted, the cutting edge. And then we will say, OK, how much money accomplishes what? In what period of time? And who will care? And that is really the simplicity of it. It is not us modelling or supercomputers running numbers and spitting out some answer – it is an assessment of the cards on the table. And they say, you know, we think it is going to cost us $6m and a year and a half to be able to build this prototype or to do this thing, whatever it is. And the variety of those things could be, We are going to launch a manufacturing module in space; we are going to develop a microscope that can see inside of cells when you introduce a drug; we are going to develop a software with algorithms that can write proteins from genetic code that has never been done before.

Whatever it is, in their estimation, it will take a certain amount of money and a certain amount of time. And I always quote the ‘Rule of Pi’ – If they say it is $3m, you have got to multiply that by 3.14, so it is probably $10m. If they say it is going to be six months, you multiply that by Pi, so it is probably 18 months. And you give a margin of safety – a little bit more money and a little bit more time than they think. And then you turn over the next card – just like in poker – and now what I want is that a risk we identified before we funded has been killed.

This is the way I think about value creation – if you can kill a risk, the next investor should feel like this is a less risky company – it is more exciting, there is more proof – and they should pay a higher price than we did because they are taking less risk and therefore they should demand lower reward than we did. That is the way I think about value inflections. It is not based on discounted cashflow – it is based on a multiple. If we paid $5m for a 25% stake into a company and it is valued at $25m post-money valuation, $20m pre, well, maybe the next round is at $50m or $60m. And, because we have the ability to fully fund our companies, then there really has to be an attractive offer from a new investor at a much higher price – otherwise we are going to keep funding the company ourselves.

JTR: You have spent a lot of your life in venture capital yet you talk – and you seem to think – like a value investor. Is that fair?

JW: It is – in that I think the only real form of investing is value investing. Everything else is speculation – and we are speculators betting on, you know, somebody or a dream – but I think the only rational approach is to try to buy something for less than what it is worth. And there is a timeless, unchanging logic and rationality to some of the great investors who have been wise capital allocators. They are not storytellers – they are rigorous and logical and I really respect and admire that – whereas I look at a lot of the greats in venture capital and they have been phenomenal promoters. Yet I would much rather be in the Buffett-Munger-Klarman camp of people, whose intellects and emotional states I respect, than the PT Barnum hucksters who are telling you, This is going to be the next great thing – like ‘Monorail Man’ in The Simpsons or, frankly, like Elon Musk – and who are able to get people to part with their money to buy a dream.

Avoiding the ‘high price of cheery consensus’

JTR: That is a great segue into my next question, which is that Peter Thiel once said: “We wanted flying cars, instead we got 140 characters.” Where do you think we have gone wrong? Most venture capitalists seem to be chasing Web 3.0, more social media, more ‘software as a service’, more video games – why are more not doing what you are?

JW: I think it comes down to incentive – like Charlie Munger said: “Show me the incentive, I’ll show you the outcome.” If you fund a company where the feedback period of whether it has worked or not is a month or a quarter or a few weeks – you know, you launch a software product or an app and you can see  it has taken off. Take Threads, which is the Twitter competitor Meta just launched ...

JTR: Where you just launched an account?

JW: Yes. I have both – @wolfejosh on Twitter and now @joshwolfe on Threads. It is an interesting experiment but 30 million people signed up in just 24 hours. And whether that is because they are voting with their feet – or their fingers – to leave Twitter and the perception it has become a toxic place or they find that there is something curious or whatever it is, that is an interesting phenomenon. And the social media companies are ones where that kind of data on lift-off is very short-term.

So, if you are an investor and you want to know if something works, you want to invest in things where you can get that information very readily. It is sort of like, if you were betting in sports, you would want to bet on a fast-paced high-scoring game and not, say, a soccer game or a hockey game, where there is just a lot less action on the scoring. So there is a short-termism that attracts a lot of people and, if you go back to what we were discussing before, the more people who are focused on something, the more competition you get, the more irrational behaviour you get, the more bubbles and inflated prices you get. As Warren Buffett says: “You pay a very high price in the stockmarket for a cheery consensus.”

Well, there is this great set of experiments through time – for example, Odysseus tying himself to the mast to resist the siren song. He wants to experience the pleasure of hearing it but not be tempted by the short-term consequences that would result so he won’t let himself steer the ship and his crew towards the sirens. Then there is the ‘Marshmallow Test’ – even though elements of that have been debunked, the idea is that you focus on something that is longer term. So the reason we do not focus on advertising and social media and so forth is mostly because everybody else does. And if everybody else is focused there, then we just think you can get massive mispricings that are positively favourable for the entrepreneur, not for the investor.

Conversely, if you focus on areas where there are very few investors – things that are more technically complex, that fewer people understand – you immediately lose that segment of the investor base that is just, I don’t understand this complex biotech thing. So you have taken out a whole group of investors. And then maybe it is something in aerospace – and some people again say, I don’t understand. Now, you are still going to have people that fund stuff they do not understand because they buy the story – but, by and large, that is why we like to fund these very technical things: there are just fewer competitors. So we like to go out on a limb because, as the old cliché says, that is where the fruit is.

Then there is time arbitrage. If, depending on your view of them, the markets generally are discounting six months, 12 months, 18 months, two years – well, we have ten-year funds. So we are able to invest for a very long time period with patient limited partners and a patient partnership. Whereas, if you are focused on trying to get the next big social media hit or the next big app or the next Bored Apes or whatever, you are really speculating on some fad that is going to pop. And then the persistence of that is improbable, for one thing, and the number of people who are chasing it is just near-infinite. So we like some intellectual barriers to entry that are at times a little bit arrogant-sounding.

JTR: That is really interesting. Fund size can be the enemy of good returns and, while Lux Capital has continued to grow fund sizes successfully, how do you think about capacity and future returns?

JW: Our fund sizes have increased – we started with a small hedge fund, then we went to a $100m fund and $250m and so on and our latest fund was $1.2bn. And we made a decision that it was better to have one single fund than an early-stage venture fund and an opportunity fund, which is historically what we have paired. Some of that was based on the incentive around decision-making – on where we were putting a company and when we would stop funding it in one fund and then port it over to another fund – and we realised we were making imperfect or suboptimal decisions on doing that. Now, if you are an entrepreneur, we can fund your first $100,000 cheque when you are getting started and we can fund your last $100m cheque before you go public or get acquired. I think that is the right size for us.

We also have 10 people on the investment team. There are just under 40 people in total at the firm – in infrastructure and marketing and communications and finance and business development and platform and all kinds of stuff that supports the partners and the companies invaluably. But, if you think about the investment team, each person is responsible for allocating roughly $120m – if we were to do it equally, although it does not always work out that way. And you have five years to really do that. So we are typically making one or two deals per partner per year and, over the course of three or four years, that ends up with about 40 core positions – of which a handful are the prime drivers of return.

You look at the opportunity set and then at the team and its capabilities to allocate capital, while the reserves you need, the external markets – those have changed. We concluded we needed a larger fund at the current moment because the availability of the irrational marginal price-setters, who were giving you money at ridiculous valuations, had disappeared – or their participation had, in fact, become an adverse signal and thus undesirable. And you really want to be able to fully fund the best companies and not rely on the kindness or not-so-kindness of strangers. So that is how we think about it and, I guess, the cadence will probably be, whereas we were fund-raising every two years or so and it would take us maybe two or three months to go out to our investors and collect their commitments, it took about 10 weeks to close $1.2bn, which was pretty remarkable. We will probably go again in another two or three years – and I think that is the right size for us.

Low-density energy sources and nuclear confusion

JTR: Congratulations on the success of your latest fund and best of luck going forward. You have argued in the past that nuclear was clearly on the right side when you looked at your ‘directional arrow of progress’ framework so why do you think it is still failing to be more widely adopted? Why is the world still so stuck on ‘low density’ alternatives?

JW: The simple answer is beliefs and narratives. To explain the ‘directional arrow of progress’, there are certain things I feel very high conviction about – even if I don’t know who the company or the entrepreneur is – and one of those phenomena I feel very high conviction about is that mankind’s energy use went from ‘low density’ to ‘high density’. By that, I mean carbohydrates had very low density; then you went from carbohydrates to hydrocarbons – what we know as oil and natural gas and you crack those molecules and you release energy.

And then you went to uranium and releasing the power of the chain reaction in the nuclear reaction, which I have re-dubbed ‘elemental energy’ because I think it is a better name – going back to the story and narrative piece in a moment. But the concentration and the density of the potential energy that can be released in a pellet of uranium far eclipses all of the people who were doing anything in biofuels – you know, hundreds of thousands of drums of oil or natural gas for transportation that worked for powering industrial plants – let alone solar or wind.

Beginning in the early 2000s, when Al Gore’s movie An Inconvenient Truth started the Clean Tech 1.0 movement, it was a sort of a religious movement that coincided with speculative venture funding of clean technology – and what was absent from that was nuclear. I got very excited about the fact nobody was really talking about it and that is one of the prime drivers of why we ended up funding a company that we created – because it didn’t exist – to go solve the nuclear waste problem. And then we got very lucky – and Japan was very unlucky – with the Fukushima disaster [in 2011] and this was the only US company picked for that clean-up. It became a giant financial and moral success we are very proud of and is a company called Kurion.

Nuclear has not taken off because, beginning in the 1970s, you had the Three Mile Island accident in the US; you had the movie The China Syndrome, which also talked about nuclear disaster; you had the conflation, for a relatively naive population, of nuclear power and nuclear war. Nuclear war is bad – of course, we want to prevent nuclear war – but nuclear power is great. But you had people in the 1970s saying ‘No nukes’ and it was like the post-hippie movement. You had famous musicians who were then the great influencers – James Taylor and Joni Mitchell and Neil Young – and they would do their concerts in parks and everyone would come with their ‘No nukes’ bumper stickers. So I think that kept people supportive of the cause and then you have the nuclear waste issue – what do you do with this stuff? And we have had 25 or 30 years of proposals to put this in Yucca Mountain, a geological repository, but Nevada says, No way, not in my backyard.

And then you had Chernobyl in the 1980s, which was not just a technology failure. I mean, most Soviet-era technology – save for the MiG fighter jet and the AK 47 – were atrocious. There is not a single consumer product anybody would buy from the Soviet Union whereas, conversely, Japan was very competitive in that domain. But Chernobyl was also a systemic failure in human control and communication – and if you have seen the great HBO documentary and drama series on Chernobyl, you will know the details of the human error that led to that. Then you have the Fukushima disaster, which was an architectural or engineering disaster from a earthquake that caused a tsunami that caused a near-meltdown.

Yet nuclear is the cleanest, safest source of high-power electricity and I think there is a movement and a zeitgeist that is building – and it is a generational one. So I think it will probably take another 25 to 50 years for people to wake up to it. And I suspect China will build a lot of nuclear power plants – and suddenly they will claim the mantle for having the most clean green power – while we are still trying to fund windfarms and solar plants, thinking that is the be-all and end-all, even though solving for the density and the intermittency and the battery storage issues is still not there yet.

JTR: That sounds like a very long period of time and a bit depressing, given where we stand today.

JW: Yes. I mean, there are lots of things that could accelerate it – you know, if you start a movement, if you get a great galvanising figure, if you have another Inconvenient Truth-like movie or series of them from people that demand it – but, when you have people like Greta Thunberg who are anti-nuclear, these are the sorts of things that throw molasses in the wheels of progress.

JTR: And if, in Ukraine, Putin blows up a nuclear plant, for whatever reason, or one blows up as an accidental product of the war, then it might actually take much longer than your estimate.

JW: Yes. Anything that again creates fear, changes people’s beliefs, alters the narratives – you know, these are the most powerful engines and currencies that run humanity: the stories we tell. And so, if we have good storytellers and good stories that are based on truth – in this case, that nuclear really is clean and safe – we stand a chance. But for sure – front-page news that creates perceptions of fear and danger will always slow things down and unfortunately, as I always say, the greatest threat to the environment are many of the people in the, quote-unquote, ‘environmentalist movement’. I think they can actually be anti-environment and they are anti-capitalism and anti-progress, whereas some of the greatest conservationists I know are giant capitalists – but, you know, we need to tell better stories.

JTR: I know you used to think Bill Gates had been a co-investor on your nuclear waste company but he was actually a co-investor with you in a satellite company. Still, he is very much pro-nuclear, isn’t he?

JW: He is pro-nuclear and has a company called TerraPower, which is developing a travelling wave reactor that can take the waste generated from a reactor and reprocess it as fuel. I think that is a great design and I hope it sees the light of day. And it needs people like Bill who are dedicated and deep-pocketed – and whether it is out of self-interest or wanting to make history or to leave the world a better place or to be celebrated, I think those are great virtues. And I would not bet against him on that.

And, yes, Bill and I have invested in four or five companies on a breakthrough in physics called ‘metamaterials’. Some of them have been in radar and satellite fields but Kymeta is the one where we served on a board together for many years. It was developing very thin-film satellite antennas, anticipating the days that have now arrived for ‘LEO’ and ‘GEO’ – low earth orbit and geostationary orbit – satellites to be able to have global communication. So those antennas compete with the likes of Starlink, which Elon has launched for his constellation, and they are partnered with folks like Intelsat and OneWeb that have their own global constellation. So we are very excited about that. I think it is a next frontier on being able to communicate wirelessly, globally, always on 24/7 and the first early-adopters, as you might expect, were the military.

JTR: It must be a great pleasure to sit and invest with someone like Bill Gates – but what is the biggest challenge of having him as a co-investor?

JW: Well, you have the ‘short stack’ at the poker table! Bill, on the one hand, has been extraordinarily fair in our dealings – there are people far less rich than Bill, who could have been predatory. There have been times where we were investing in a company out of a fund that was running out of capital and he could have basically raised the ante and bankrupted us, so to speak, at the poker table – but he has been nothing but generous and fair and I admire the ethics in all the dealings we have had. There are a bunch of times where he could have tighten the screws in a tough way – I mean, he was taking a lot more risk with a much larger amount of capital – and he was extraordinarily fair. Still, the bigger risk is if you sit down at a table with somebody who has a lot more money – it is hard to compete with!

JTR: A book that my colleague Jack Dempsey – who very much wanted to co-host today’s episode and be able to chat with you – has recommended is Skunk Works: A Personal Memoir of My Years at Lockheed by Ben Rich, which tells the story of the glory years of innovation at US aerospace giant Lockheed Martin. Have you read it?

JW: Yes.

JTR: Jack made the point how truly amazing it was what these guys did, just working with pen and paper. Given we now have simulation software and semiconductor processing power today, why are we only making what seems like very incremental progress in the defence industry?

JW: I do think it is changing now but, historically, it is less about the tools to design or even to manufacture and more about the procurement process – that is where the bottleneck is. The bottleneck is in the bureaucracy that has been built up by a handful of defence firms and lobbyists and support infrastructure in Congress – where, for example, an F35 Joint Strike Fighter is made in over 300 congressional districts. And, you know, Apple would never do that – Apple would never have the iPhone made in 300 different cities. So, again, there are incentives and there has been political capture by industry. You have had massive consolidation in the defence industry – and I think that is changing now.

You have some of our best and brightest engineers – people who come from many other countries – who work here now in the US and many of them are patriotic and grateful for the country that has given them the opportunity. And many of them are drawn, not towards ads and crypto, but really to defence – because it is a hard problem. And it was one thing to feel that a few years ago – before it was obvious and evident there are bad actors with good technology and you need better technology from better actors to be able to defeat those people, or at least deter them.

You are seeing this play out now in Ukraine in real time – lots of Western technology is being tested. It is almost like a giant laboratory for people to be able to see what happens and scale it without actually directly deploying it themselves. So, many of our companies have benefited from that but also, I think, there is a new generation of special operations forces of generals and colonels across almost every domain in warfare – the Coast Guard and the Navy, the Marines and Air Force Space Command – that are wanting to adopt cutting-edge technology because they do not want their women and men disadvantaged. They want them to have the best technology – and when they complain that they prefer the Palantir software system over the Booz Allen one, for example, those voices are getting louder and louder. So I think that is a change that is probably very late in coming but is observably evident now – and I am optimistic about that.

Risk-gaming and two book recommendations

JTR: You have thought and written a lot about the concept of risk – and I know you have a special interest in risk-gaming and have recently launched an initiative there. So I wanted to ask you – what is risk to you, what is risk gaming and how can it help you to think about and manage risk in the future?

JW: Credit for the risk-gaming initiative is really due to my colleague and partner Danny Crichton, who used to run TechCrunch and now runs all editorial and content at Lux. He is a very brilliant guy – very creative and steeped in technology, history, geopolitics, policies – and it was his idea that we should run a wargaming scenario, specifically around a key naval shipyard and if some catastrophic weather event essentially crippled the Navy. And it was identifying this as a point of vulnerability and tying in factors from climate change to geopolitics, technology, supply chain and procurement – to that root of everything, which is human incentive.

And we ran an experiment in New York with two different groups of six to eight folks – each assigned a role, each privately given a set of incentives and a set of resources – and it was fascinating how each group varied in how they played the game. There is no right way to play but it was due to the game’s design – which was entirely Danny creating incentives and conflicts and opportunities to collaborate between, in this particular scenario, local politicians, the media, generals, defence contractors and non-profit folks. So it is this really fascinating set of co-operating and competing interests and conflicts and how people teamed up and what sort of outcomes that leads to.

And that was the most interesting thing because, again, you want to try and understand the incentives of a politician, who might want to fill their coffers, or a contractor, who wants to get the biggest contract they can, or a media person, who wants to expose certain information, and how people can team up either to temper those incentives or collaborate against somebody else. Sometimes there are hidden political agendas where one person hates the other and they don’t care about the national interest – they care about destroying that person. So those kinds of things happen in real life but are not always seen and Danny did a phenomenal job of creating this ‘war-gaming’ – but we realised it is much bigger than just war so we renamed it risk-gaming, which was really about thinking hard on, What are the risks in different scenarios?

And it is virtually endless and infinite – the number of scenarios you can imagine. You can take anything from thinking about AI and its role in biotechnology – being able to generate an infinite number of viruses and how that might lead to global epidemics or to global cures – and the different parties and incentives, and show that playing out. I mean, who would have thought, had you done a risk-gaming scenario in late 2019, even before the emergence of the Covid virus – we forget, you know, it was 2019 and Covid19 is the name – or early 2020s, when everything set off and then, my God? But nobody really foresaw the supply-chain impacts; nobody foresaw the domestic disturbance and instability and politicisation of something like wearing masks or getting vaccines.

So running those kinds of scenarios is valuable because I always say that failure comes from a failure to imagine failure. And so, if you can think about all the bad things that can happen – whether that is in a company or your own personal life or a relationship – then you can put in the time and the money and the energy and the talent and the resources to try to stave off those failure points. So that is the virtue of risking – and my definition of risk is the old definition, which is ‘more things can happen than will’. And that is also an act of imagination. So if I go to do something – sort of as a psychological, comforting corrective – I am always imagining worst-case scenarios, because if I can avoid being negatively surprised, I can generally stay calm. Usually, it is the ‘Oh crap, I can’t believe that just happened’ moment that sends somebody into panic.

So risk is more things can happen than will. Addressing that requires imagination. Failure comes from a failure to imagine failure. So you want to imagine all the bad stuff that can happen so as to prevent it – so it is the idea that to foresee a circumstance is, in part, to help prevent its occurrence, or at least to help prepare for its occurrence. Go back to Fukushima – people never expected a tsunami would breach the walls that protected a nuclear power plant so what will happen next? When they rebuild, those walls will be much bigger. And that holds for most of the stuff around us – you know, most of the stuff around us exists because somebody suffered the negative outcome of a risk. And now we have a system or an architecture or a design in place that is directly speaking to the past to say, We are not going to let that risk happen again. So yes, I like to try and do positive things by thinking negatively!

JTR: You may have described yourself as a pessimist but arguably you are paranoid – the distinction being, a pessimist thinks things are going to be bad but a paranoid person understands they can be bad!

JW: Perhaps. Paranoia has always had a negative connotation of being a psychological reaction so I would say I am cynical, maybe sceptical – and, yeah, maybe a little paranoid, I’ll concede!

JTR: Josh, we are coming to the end of our session and we always end by asking our guests for a book recommendation. Before I do, though, am I right in thinking you are coming out with a book yourself?

JW: No, no – I did that as a joke on Twitter. Eventually, maybe – a bunch of people have approached me about packaging up some of my ideas – but no books in the pipeline just yet.

JTR: In that case, could you please recommend us one or two books? I know you are a huge hard rock metal fan so maybe a book recommendation and one of your favourite bands?

JW: I think the last thing I read on metal was the autobiography of Maynard James Keenan, called A Perfect Union of Contrary Things. He is best-known as the lead singer of Tool but he is also a generally interesting polymathic guy. He does everything from Brazilian jujitsu to winemaking to being in two or three other bands and is a relatively bright, intellectual, smart guy, who can also scream at a crescendo peak that gives you chills. And then also Anthony Kiedis and Flea from Red Hot Chili Peppers – you know, the fact these guys are still alive, given some of the stuff they did, is sort of fascinating.

So that would be on the rock side. On the non rock side of non-fiction, I really am a big fan of Robert Sapolsky’s Behave, because it is a temporal analysis of why you do what you do – going back to the nanosecond of a moment ago and a minute ago and an hour ago and your hormone levels from a week ago ... And the shocking, or jarring, conclusion as you read the book is, no matter how intelligent you are – in fact, maybe the more intelligent you are – you have to accept its very discomforting premise, which is we do not have free will.

JTR: Josh Wolfe, thank you very much for being our guest on The Value Perspective Podcast – and enjoy the rest of your holiday.

JW: Great to be with you. Thanks.

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Juan Torres Rodriguez
Fund Manager, Equity Value

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