How do you spot opportunities hidden in plain sight? In this episode, I sit down with Lux Capital co-founder Josh Wolfe to explore his unconventional approach to venture investing and decision-making under uncertainty. From his early days in Coney Island to building a multibillion-dollar venture fund, Josh shares how he spots hidden opportunities by asking a simple but powerful question: “What sucks?” He explains how this mindset drives Lux’s strategy of investing where others aren’t looking, taking bold bets on frontier technologies, and uncovering breakthroughs before they hit the mainstream. Together, we unpack the psychology behind big bets—balancing optimism with skepticism, managing uncertainty, avoiding biases, and learning when to trust your gut versus the data.
Key takeaways include how to distinguish between “nice-to-have” vs. “must-solve” problems, how to leverage inside vs. outside views for better decision-making, and why understanding human nature is as critical as understanding technology when investing in the future.
Guest bio
Josh Wolfe co-founded Lux Capital to support scientists and entrepreneurs who pursue counter-conventional solutions to the most vexing puzzles of our time in order to lead us into a brighter future. The more ambitious the project, the better—like, say, creating matter from light.
Josh is a director at Aera Therapeutics, Cajal Neuroscience, Eikon Therapeutics, Impulse Labs, Kallyope, Osmo, and Variant Bio, and helped lead the firm’s investments in Anduril, Echodyne, Planet, Hadrian, Osmo, and Resilience. He is a founding investor and board member with Bill Gates in Kymeta, making cutting-edge antennas for high-speed global satellite and space communications. Josh is a Westinghouse semi-finalist and published scientist. He previously worked in investment banking at Salomon Smith Barney and in capital markets at Merrill Lynch. In 2008, Josh co-founded and funded Kurion, a contrarian bet in the unlikely business of using advanced robotics and state-of-the-art engineering and chemistry to clean up nuclear waste. It was an unmet, inevitable need with no solution in sight. The company was among the first responders to the Fukushima Daiichi disaster. In February 2016, Veolia acquired Kurion for nearly $400 million—34 times Lux’s total investment.
Josh is a columnist with Forbes and Editor for the Forbes/Wolfe Emerging Tech Report. He has been invited to the White House and Capital Hill to advise on nanotechnology and emerging technologies, and a lecturer at MIT, Harvard, Yale, Cornell, Columbia, and NYU. He is a term member at the Council on Foreign Relations, a trustee at the Santa Fe Institute. He graduated from Cornell University with a B.S. in economics and finance.
Transcript
Producer’s Note: This transcript was created using AI. Please excuse any errors.
Annie: I’m so excited to get to do this with you and chat with you. So can you just tell us a little bit about your journey to where you are now?
Josh: Uh, well, grew up in Coney Island, Brooklyn, single mom, and that actually had a pretty formative shaping of my experience. Coney Island, if you’ve never been, is this weird amalgam in New York of every ethnicity that you could possibly imagine, but a very significant number of like hucksters and fraudsters and schemers. And so I think I always grew up squinty eyed and distrusting of human nature, which has for the most part, served me well because I generally like to describe myself as a technological or scientific optimist, but I’m generally quite skeptical about human nature.
I think, you know, businesses change and technologies change and markets can change, but human nature in its Shakespearean persistence is a constant. Probably my favorite Shakespeare quote is “there’s daggers in men’s smiles.” And I sort of grew up, you know, distrusting of, uh, what people’s angle and agenda and whatnot is. Doesn’t mean I still don’t get duped by people, but generally have a pretty high filter.
Always loved science and technology and, um, it started with a love of science fiction and, and then hardcore science. I was a HIV AIDS immunopathology researcher, which itself came inspired from a movie in the early nineties called And the Band Played On, which was this whole movie about the AIDS crisis. And at 12 or 13, with all the naivete that I think is necessary for anybody with ambitions, I was convinced I’m going to go cure AIDS. And in high school there was a Westinghouse Science Talent Search. I ended up doing this research with my mentor who took a kid that was 13 years old, me, into his lab.
And what was notable about that was not just the scientific research that we were doing, spinning down centrifuge of AIDS blood and performing an assay. It was that he was trading futures and options while we were waiting for that centrifuge to spin down. And this scientist of all people sort of inspired me to get into capital markets.
Went to Cornell, graduated, went into investment banking. Wasn’t even smart enough to collect my first year bonus and got very lucky and met a guy, Bill Conway, who’s one of the Carlisle founders, giant now multi-hundred-billion-dollar private equity firm. He put me in business and yeah, the rest is sort of history.
Annie: So you launched the fund. This is at a point when funds tended to be very, very focused on SaaS, on software as a service. So we can think about this whole generation of funds, which resulted in, like, Uber, for example. Or Roblox, or Notion, or Flexport, or you know, these companies that are really providing a service, right? Through software. And when we think about a lot of the really big names in venture, like, you know, First Round, Sequoia, Benchmark, and so on and so forth, this is where their focus is at that time. So you are very out of the box for that time in terms of what you’re thinking about with this idea of like physical and life sciences, science technology, that kind of thing. So I would love to understand what you’re thinking about that being the focus of Lux.
Josh: Yeah. So the backdrop even predates the SaaS movement, but you’re a hundred percent correct. It was actually post dot-com, uh, boom and bust. And if you go back to the history of venture capital, basically you have a dynamic where every 10 or 15 years there’s some secular wave in technology. It’s like a bio logistic S curve, total nascency, rapid-growth maturity. Seventies was personal computers and you saw the rise of Compaq and Dell and uh, eighties was biotech—Amgen, Genentech. Nineties was, uh, TMT and dot-coms.
And then our hypothesis in the early two thousands was that the next wave would be the physical and material sciences and the intersection with the computational and life sciences. And that was at a time when some of the breakthroughs and some of the Nobel Prizes that were being awarded to Rick Smalley at Rice University and to Moungi Bawendi and MIT or Paul Alivisatos at Berkeley.
Like a lot of the hardcore computer science chemistry interactions were not happening in Route 128 Cambridge or in Silicon Valley. They were happening at UT Austin and Georgia Tech and Cornell and Michigan. So there was geographic arbitrage, where we were able to go to places where there wasn’t a density of VCs. So that was number one.
And number two, it was something that I think is a lens through which I typically try to find founders. And I think it is a contrarian streak that I try to understand what is the consensus? What is everybody else pursuing? And then what’s the variant perception? The reality is, if I weren’t doing venture capital and I wasn’t trying to find a scientist that was off the beaten path that other people haven’t discovered yet, I would be an A&R rep for music. And if people were playing pop music on the radio and I was a radio station DJ or station manager, I would be going underground, hip hop, and hardcore metal. If I was a real estate agent, I wouldn’t be going after the popular towns. I’d be going after the weird hipster, you know, edgy kind of art areas that are going presage where the cool yuppies are going to come and the nightclubs are going to open and that kind of stuff.
So I’m always thinking about, like, what’s the edge that people haven’t discovered yet? And that could be in art, in music, in technology, but in finance, to me that’s finding the stuff that people haven’t yet anticipated is going to be the front page of news and then going and funding those people. And we always like to say that we believe before others understand. And that’s really what it is.
Annie: Particularly when you’re funding companies early, you’re already taking on a lot of risk, you know, just there’s power law, right? So you know that there, you’re going to have some basket of investments and only a handful of them are going to drive all the returns. And in some sense, while there’s a lot of skill to it, you also have to get lucky to get that into your portfolio.
It seems like you’re making sort of a doubly uncertain bet. How are you thinking about the decision? Like how do you figure out, like, who am I supposed to invest in? What am I supposed to invest in? How are you just thinking about that initial sort of start?
Josh: Well, I think a lot of great ideas actually come from a very sophisticated question and you might need a Ph.D. to actually understand this question. Or maybe you need, like a lot of AI and deep spreadsheet analysis. And the question is this: what sucks? And literally if you can identify things that suck, you typically can either find an entrepreneur that’s like, I’m going to go and fix that. Or you go and start a company yourself because you know you’ve identified something that sucks.
And sometimes the thing that sucks is especially gratifying when other people either take it for granted or haven’t figured it out yet. So you mentioned First Round, you know, and I know you’ve worked there. And they’re awesome. Like, New York City, you just accepted that you hailed a yellow taxi or you used Dial 7 or Carmel, you know, 6, 6, 6, 6, 6, 7, 7, 7, 7 from the airport and then all of a sudden Uber comes.
Annie: Right.
Josh: And you’re never going back.
Annie: This is so much better.
Josh: And now sometimes you don’t even know that it sucks until you see a better alternative.
Annie: Right.
Josh: Now that was an example of a marketplace and existing assets that then use technology to be able to match buyers and sellers and drivers and riders, and create the logistics and the ecosystem and the payment, and do it all sort of frictionless and seamless. At the same time, effectively ignoring the rules and regulations and TLC and lobbying, just getting it done.
Annie: Mm-hmm.
Josh: And thank God for that. Right? So that’s an example where it wasn’t so much like a technological breakthrough and that wasn’t ours, but I admire the investors that put money into that. And as a consumer, I’m very grateful for it because it made all of our lives better.
But it started with that premise of what sucks? And why doesn’t the average person or a middle class person have the access that a corporate exec, you know, getting a town car every day does. Now, the reality is there’s so much in the world that sucks.
Annie: Right.
Josh: You know, you take any industry, healthcare, you know, dying sucks. People being sick sucks.
Annie: Right.
Josh: Cancer sucks. Brain tumors suck. There’s end—
Annie: I know you have a company where you could say, being blind sucks.
Josh: Yes.
Annie: Yeah.
Josh: Every facet of your existence, there’s something to improve. Even if, when you think about the pharma industry itself, partially because it’s run by and historically has been run by men.
Annie: Right.
Josh: The vast proportion of dollars and R&D budgets go towards hair loss, erectile dysfunction.
Annie: Yeah.
Josh: But there’s all these afflictions for women that have been underrepresented and underfunded, and so there’s a massive opportunity there. Because 50% of the population suffers from things that, you know, haven’t been prioritized.
So you just basically are reading voraciously and you’re meeting people and then you stumble across something and you’re like, oh, that sucks. And is there a company that’s doing that? And then, you know, sometimes you find one. And usually the way that we look through things, there aren’t 10 companies. There’s one or two, particularly if there’s a real technological angle to it, because to your first question of how do we know what to fund or whatnot? I like when there’s a technological moat, when there’s a monopoly on something, where there’s some barrier to entry and there’s two or three companies max, but not 20 or 30 or 50, which is why we don’t love doing enterprise and SaaS and software in marketplaces where anybody could effectively enter and maybe out-execute or raise more money and achieve and do. We much prefer when there’s a Nobel Prize winner and nobody else can do what they can do.
And literally every day I read 30 plus newspapers, and I’m looking not for the A-1 headlines, but for the C-22 page, you know, the small print that an editor has basically decreed this isn’t as important as maybe people think it should be.
Annie: Yeah.
Josh: And we have a differing variant perception. We think it’s actually important. And then we’re like, oh, that’s interesting. Like is there a company that’s doing anything about that? And if they’re not, then we will go and start one.
Annie: Right.
Josh: But it really could be in any area. But we particularly love when there’s something that sucks and there happens to be some technologist that has invented something that nobody else has. That’s when you get this beautiful intersection,
Annie: How do you distinguish sort of the different ways that things can suck? Right? Because there’s ways that things can suck, which would be like, that would be nice to have. And there’s ways that things can suck, which is like, this is actually really painful and if you could relieve this pain for me, I would give you a lot of money for you to do that. You make it sound very simple, but it’s not so simple to be able to distinguish between those two things.
Josh: Yeah. So in one case, it’s almost like the supply of problems. In the other cases, supplies of solutions. So supplies of problems are constantly looking and literally hearing people complain about things. And more often than not, for us, the consumer is interesting, but I don’t really understand consumers. Consumers are fickle, they’re influenced by myriad things, from fashion to political leanings to local influences. I just, I can’t predict that. But if there is, like, a larger macro problem then that is interesting.
So U.S. defense. That’s not an individual in a house saying, you know, it’d be great if we had superior technology. Like, I’m not selling to that audience. But if you think, okay, wait a second. We have rising adversaries on a global scale, there’s an $800 billion annual budget for the Pentagon. You have China, Russia, Iran, North Korea. The nature of the wars that we’re going to be fighting and the threats that we’re going to be facing in the next half decade or decade are different than what they were a generation ago over the past 10 years with the war on terror. And what are the technological capabilities that the war fighter might need?
That’s a very different scale problem where we can feel comfort to say: big problem, world’s not getting safer, bad actors, some of those bad actors have bad technologies, or at least good technologies that can do very bad things. What do we have? And maybe we’ve been complacent. Maybe we’re fighting the last wars, as the cliche goes.
And then you might come across an entrepreneur and the entrepreneur says, “You know, there is no secret James Bond vault with cutting-edge technologies made by Q. There is no real life Stark Industries with Iron Man developing these crazy cutting-edge technologies.” You have a bureaucratic, sclerotic oligopolistic industry structure with four or five defense primes, Raytheon, General Atomics, Boeing, Lockheed, L3, and they win big contracts and they take a long time. And we’re losing the capability to produce all kinds of things to be able to compete with our adversaries or peer adversaries.
And so then you meet an entrepreneur, somebody like Palmer Luckey who founded Anduril, and he says, no, I want to go build these cutting-edge things and I want to do it not to get cost plus contracts from the government. I want to spend billions of dollars of equity money, and are from investors, and develop the thing and then show it to the Pentagon. And for them to say, we need that, we want that. That’s an example of identifying a macro problem, seeing the situation on the ground of what the current industry is doing or failing to do, and then going and finding the next generation of company with the founder who’s got the ambition and the gusto and the naivete and all of that that can go get it done.
And the same thing can happen in genetic medicine delivery. It can happen in self-driving cars, it can happen in cutting-edge chips for AI. You’re generally saying like there’s either a directional arrow of progress technologically where there’s a deficit of capabilities from the current industry structure. Or conversely, somebody just invented something and they don’t know what it’s going to be used for. But we’ve been reading voraciously and we see that there’s a problem here and let’s go solve that. So it can come either from us or an entrepreneur identifying the thing that sucks. And it’s to your point, a big market and a big unmet need and a big problem. And we’re convinced that if we can make it, you know, sort of Field of Dreams style, somebody important is going to pay a lot of money for this.
Annie: Can you talk a little bit about fund one Lux? Where generally was your focus? What types of things were you generally investing in and how has that really evolved over time?
Josh: Our first fund was under $10 million and, you know, last fund was $1.2 billion. First fund, we did six companies and you know, now we do like 60. So the scale has changed, but the general theses and the things that we invest in has been pretty constant. We generally invest in three main areas. We do a lot in healthcare, which is everything from hardcore biotech, therapeutic drugs, platforms, scientific instruments, some healthcare IT, although I tend not to love that category because it tends not to have deep technological moats, and it tends to be more about execution, relationship with hospital systems, and whatnot.
And then we do aerospace, defense, industrial manufacturing, physical, mechanical engineered systems. And then we do what I call core technology, which is more defined by what we don’t do. So very little in internet, social media, mobile ad tech, video games, SaaS, all that kind of stuff. Just because we’re not competitively advantaged, we can’t compete with the firms who have done outstanding in those domains for 10 or 20 years. And so we carved out a different niche.
And then we do three styles. So we do thesis driven, which is my favorite, which is, in the context of the decision making, how do I allocate where we’re going to spend time and focus, read voraciously, understand the consensus, find the variant perception, and then go find a company or start one.
So when the world was going crazy 15 years ago for clean tech and green tech and alternative energy. Everybody was chasing after solar, wind, biofuels, ethanols, battery, electric cars, nobody was focused on nuclear.
Annie: Mm-hmm.
Josh: And we decided, okay, let’s, let’s study it. Why is nobody focused on nuclear? And it wasn’t part of Al Gore’s movie An Inconvenient Truth, it wasn’t part of like the lore of some famous VCs that were giving TED talks and writing op-eds about the importance of climate change and new technologies.
And then we looked inside of the fuel cycle in nuclear and we said, okay, where do we invest here? You know, do you fund the uranium miners? And turned out most of them were hucksters and fraudsters in New Mexico and Nevada. Do you do small scale modular reactors, which have found a rebirth now and people are excited about, and I hope it happens as a consumer, but we’re not funding them and didn’t back then. And then we decided, well, what sucks about nuclear? It’s really what do you do with the waste?
Annie: Right. Right.
Josh: We decided to find a company that could focus on the technological solution to the waste problem in nuclear, and nothing existed. And so we started a company named for Madame Curie, spelled it with a K, called it Kurion, locked up the best people, in-licensed a whole bunch of technologies.
And then frankly, we got very lucky when Japan got unlucky because what would’ve been a pretty good business over many years, solving low level nuclear weight, treating some of the plants, ended up becoming a spectacular one overnight when the Fukushima disaster happened. And that was a low probability, high magnitude—
Annie: Yeah. Because of the tsunami, right?
Josh: Correct. Tsunami, earthquake, nuclear disaster. And the only company in the U.S. that got picked for that cleanup was this little company that we started. And they removed 99% of the radioactive cesium, strontium, technetium, uranium, plutonium, all the worst elements. And, um, we went from a million in revenue the year after we started it. About four or five years later, uh, $180 million of revenue and 40 million of EBITDA. And we sold that for 10 times EBITDA to a big French environmental company called Veolia. But we started that as an idea from scratch and it was a total sort of contrarian take on that sector.
Annie: Mm-hmm.
Josh: So we like doing thesis-driven stuff, and then we do people-driven stuff. And one of the great virtues of venture capital is you find an entrepreneur and you get to back them in company after company if you’re a great partner to them, and they’re a great trust, you know, entrepreneur. And the cadre of lieutenants that work for them, you know, that’s very special.
And then the third style are special situations. And you never know where these are going to come from. You have some inklings and ideas, but generally it’s how do you invest in a later-stage business at an early-stage price? Now with larger funds, we’re able to do that. We’ll take an entire division out of a large company. We’ve done two out of Google, two out of Apple, and one out of Meta, where we’ve taken a 10- 12- 15-person team, all the technology, spun it out, and capitalized that as a sustainable venture. And those are a lot of fun to do.
Annie: If there isn’t someone already doing it, you’ll just start it. That seems very unusual that you’d be like, all right, I have a very strong point of view. This isn’t just coming across my desk. So can you talk about, like, how did that come to be? How early in the lifetime of Lux did you say, “You know what, I should just start that”?
Josh: Well, at a meta level, it started with Lux itself, because we didn’t join a firm. We decided we’re going to start one that focuses on this, you know, weird stuff.
Annie: Right.
Josh: On a second level, it really started from a guy who passed away about eight, nine years ago, Larry Bock. Larry was one of the first entrepreneurs that we invested in, in a company called Nanosys, and he had licensed all this amazing technological innovation, IP and patents from like 12 different university professors and formed a company around them in this cutting-edge area of nanotech. But the most important thing that Larry had done was he was a VC for 20 something years of his career doing exactly this, starting companies from scratch. And the most notable one is Illumina, which is a major, publicly-traded $50 billion plus, you know, gene sequencing company. But he did 17 companies from scratch.
Annie: Wow.
Josh: That he started going to the university professor, beginning with something called the Bayh-Dole Act, which was, Evan Bayh and Bob Dole. The U.S. gave universities the right to take taxpayer money from grants that they were getting from National Institutes of Health or National Science Foundation, so our tax dollars that go to these government agencies, which then get allocated to universities and the universities then invent something.
The principal investigator or the scientist invent something, they’re an employee of the university. And this act said the university can now treat that taxpayer money and the IP that results from it as an asset owned by the university, which is really important because it put property rights in the hands of the university and the university could then transact.
And that coincided along the 1970s or so, late seventies with the ERISA Act, which allowed retirement money to go into venture capital. But you had two things converging that were new money coming into the sector, giving VCs more funds to invest, and intellectual property coming out of universities that could be licensed to become the founding asset of a new company.
And that’s what Genentech was based off of. It was Cohen and Boyer and the University of California Education System. And that work went into this company and became the founding intellectual property and patents upon which they were able to impose a negative right on other people to say, you can’t do what we’re doing. We have a monopoly on it. And that’s really valuable.
When Larry did that, you go to the university, you get the professor, professor becomes a founder. They’re typically around 20% of their time in a startup. And then the university gets royalty on the sales of whatever product you might sell in the future. They get equity in the company and they get a license coming back to the university. And some of the university endowments have made billions of dollars by owning a piece of a company that was derived from work that happened on their campus and that pays scholarships and new buildings and faculty and all that. So that system is something that Larry was really good at. Of those 17 companies that he started from scratch, 14 of them, he took public.
Annie: Wow.
Josh: And we had the benefit of investing in him as an entrepreneur. It was one of the first deals we did at Lux in like 2003 or 2004. And then we convinced him to join us as a partner, beginning in or around our second fund. And we learned how to do these new codes. So once we had the playbook for that, the world was like our oyster, you know. We could figure out, well hey, this thing sucks, or there’s this new breakthrough that we just read about in science or nature or the proceedings of the National Academies Sciences. And we would go find that professor.
And because it’s hard work, you didn’t have a lot of VCs going and walking the halls of academia, particularly in weird places, saying, “Hey, I want to start a company, you know, around your work.” And we’ve done over 20 companies de novo, in everything from high tech nuclear waste cleanup to robotic surgery, 4D LiDAR for autonomous vehicles, finding real life X-Men out in the world with genetic traits upon which you can make drugs for the masses. And it’s a lot of fun.
Annie: Do you find with the companies that you’re starting de novo, that you’re seeing a difference in the rate of success and, you know, how many of them end up being unicorns, and so on and so forth, compared to the things that you’re sort of investing in, in the wild?
Josh: In every one of our funds, about 10% of the funds—so if we were to do 40 companies, four of them might be de novo startups and some of them over the life of all of our funds have been some of our best performers. And part of that is we get very high ownership for very small investment, because we don’t personally take founder’s economics, but the fund and our limited partners get it. So you get this disproportionate ownership for small dollars, which is a great thing.
So you’re putting a smaller percentage of the total fund into this company, but you get a large piece of it for doing work and the sweat equity of putting it together and creating it. So that’s one sort of hack that has been a value add, and then the fact that it’s our baby and you feel the sense of maternity or paternity and the partnership really cares about it deeply and doesn’t want it to fail.
The upshot of that is that everybody’s really invested in making it succeed. The downshot is you could be subject to all the biases that, in the presence of negative signals about why it might not work, you might irrationally try to persist, which of course is on the one hand the hallmark of a great entrepreneur, that in the presence of lots of naysayers and people that don’t want to fund it, and the market saying, we don’t believe in it, you know that you keep going and going, but it’s also a great way to lose a lot of money.
Annie: Well, I think that’s why you do what you do, right? Because there’s always a downside associated with whatever you’re doing.
You know, I think this is a complaint that I’ve heard really across capital cycles, even in public investors as well, who are investing in public equities. That, and I think this is particularly true of founders, that that ability to be able to see something from someone else’s point of view, or to understand that somebody’s kind of on the outside of what your passion is, you need that passion. You need to feel like this is the only thing that you need to do, right? Like you have to do this or you will die. Otherwise you wouldn’t become a founder, right? Because it’s so hard. But that ability to balance that with somebody who has lots and lots of experience and has seen lots and lots and lots of companies and has seen whatever problems that you’re facing, probably in some form, in some way, that that is analogous, right? That’s like an isomorphic to the problem that you’re considering and has sort of repped that over and over again, that their advice would actually be really important to take in. And I think that you do get this kind of, like, stubborn streak and this inability in founders or founding teams to be able to listen to that outside view, right? To know that you actually have their best interest at heart, that you want them to win, that what you’re saying has some validity and should be considered.
Do you feel like part of the advantage that you have is not just that like it’s your baby and you care, but also that they’re more likely to hear you as someone who has done this over and over and over again because you’re more considered sort of on the inside of the company?
Josh: Yes. I guess I’d answer this two ways. First, when you start something and you bring somebody in, especially if they come in really early and you’re like, look, I’m effectively making you a co-founder of this, so that they do feel the maternity of paternity themselves. There is a feeling of loyalty that, you know, to this day, Bill Conley from Carlisle put us in business 20 something years ago, but I, there’s not a day that I don’t think about him, credit him in immense sense of loyalty for believing in us and setting us on the trajectory that we did and continuing to invest with us and advise us and all that. And I wouldn’t say we take his advice to a T, but we weight it more heavily than anybody’s.
So I do think that there’s something about that, just in the loyalty itself, which is more of a psychological phenomenon than it is a rational analytical one of, oh our advice has a lot of experience and therefore you should weight it more heavily. It’s more, I’m really grateful for Josh or for Peter, or for Shaheen or whomever in my partnership, you know, gave the person their start. There’s immense personal loyalty and if you don’t screw that up, it’s really valuable. On the founder relationship, it’s more important the 20 or 30 minute calls I have with the CEO or founder than it is the three-hour board meetings that we have. So yes, on that.
However, the flipside of that is the very best outcomes we’ve had and the very worst outcomes we’ve had have both had the same characteristic, which is a very hardheaded founder. You know, I started Kurion from scratch and the CEO we brought in, even though that was a good financial outcome, it could have and should have been—you know, we made 43 times our money. It could have and should have been a much bigger outcome, but the founding team were all in their late fifties. They had never grown up in an industry in the nuclear energy industry where equity ever really mattered. They were salaried employees. They got bonuses. They got pensions, 401(k)s, but it wasn’t like, wow, I’m going to get really rich by owning stock. And as they saw the stock increase, it was still paper money to them, but it wasn’t, it wasn’t real. And so they wanted to sell much earlier than I did.
Annie: Right, right.
Josh: Which is interesting because oftentimes you might think, well, oh, the investor’s trying to sell and make money. But we sort of have a weird, perverse, not fully aligned incentive with an entrepreneur. An entrepreneur has all their eggs in one basket, this is their baby. And we have 50, 60 companies in every fund. And so we’re diversified, and so we’re willing to take more risk and let it ride because we want a bigger outcome.
Annie: Right.
Josh: So there’s that dynamic. Now the flipside of it is, the best companies in our portfolio across every single fund we’ve ever invested have an extremely capable founder who can recruit, raise money, who makes strategic decisions, deals with competitors in both an ethical and clever way, can attract media and press and attention, can sell partners and customers, and ultimately, when it comes down to acquirers, believe so deeply in what they’re doing, that they’re able to walk into a room with a leverage of a willingness to walk away, which is always the great price maximizer in a negotiation. And they need very little help from us. And so really the most important decision I can make is backing the right person who is going to make the right decisions and really doesn’t need very much help. Most of my best performing companies require close to zero of my time, and I get to take disproportionate credit for being involved for all the work that they’re doing.
Annie: Mm-hmm.
Josh: And most of my worst performing companies require a disproportionate amount of my time to try to undo the situation and salvage our investment or salvage our reputation for being affiliated with them. And so it’s a weird thing.
Annie: So it sounds like you would want to look for hardheaded people, but who are very good storytellers, really good with sort of the marketplace, really believe in their vision, really competent at hiring their team. So you have to find, sort of, that sounds like a unicorn in itself, right? Because the hardheadedness would work against all of those.
Josh: There is a common trait that you can see amongst many of the top founders that have persisted and built enormous value and are still running their companies. First of all, more often than not, they are the founders. There are very few, you know, hired CEO hands. You know, you could look at, like, Satya at Microsoft, but he was there for a very long time and it was Bill forever. You know, Steve Jobs at Apple, Elon at Tesla and SpaceX, et al. And so there’s something about the founder that just, like, feels this profound sense of ownership in their identity that’s wrapped up in it and, yeah, all of the traits that you named, the ability to recruit, storytell. But they also have to be credible because you can recruit amazing people, and if you’re just a BS artist or great storyteller and then you don’t have the competence behind it, you’re not going to retain your people.
Annie: Right.
Josh: Or you’re future investors.
Annie: Right.
Josh: So the necessary ingredients to get something off the ground and running are often different than what you need to keep doing it. Because you have to not only be a really good storyteller, you have to be credible at actually executing, because otherwise your people will be like, he or she is full of it, you know, and they leave. And you’ll have a hard time raising follow-on funding because your investors won’t believe in you. And so you need both. But those are truly, like you said, unicorns, in that they’re rare. They’re rare individuals that can do that all, and even rarer the people that want to do it again and again.
Annie: Venture really is like, you just have to have so many things go right, right? Like so for example, when you’re thinking about you are sort of looking into the future, right? Like you have your crystal ball and you’re saying, I think we want to do this thing like invest in nuclear, right? First of all, are you doing it too early for when people are ready for it? Do you get the timing right that the company is going to mature at the right time? Are they going to have enough runway to be able to wait for whatever that need is to mature?
If you take Kurion, is this very unlucky thing for Japan going to occur that turns out to be very lucky for that company, right? Like there’s all sorts of things that are happening. Like you could absolutely get it right but be 20 years too early, like you don’t know. You could absolutely get it right but not have whatever those lucky things are that line up for you.
How are you sort of thinking about that? How are you communicating with founders about that? How are you identifying a founder whose company they’ve had to sell it in a fire sale or they’ve had to shut it down because it’s not working. How are you separating the people where it’s not working because they actually aren’t that good at it versus it’s not working, I want them to stop that, and then I want to give them money for whatever the thing is that they want to do next?
Josh: It is very much like process versus outcome. There are outcomes that have made us money and founders or CEOs, we would never back again.
Annie: Right.
Josh: They were too difficult to work with. They got lucky. The strategy decisions that they insisted on making were the wrong ones, but something happened that was fortunate and so there’s a ton of stories like that of good outcome, we made money, and you say, well, don’t you want to back that person again? I’m like, nope. You know, we’re good.
If I email somebody that I saw was an early investor in a founder that had a good exit, they made money, it was a good outcome, they made money for themselves. They made money for their investors. And then they’re starting a new company and those investors are not invested, it’s a red flag. But the two words that I use and PRVCs use, if I send a note to you and you are a PRVC, and I said, “Annie, what’s your take with uh, Joe Smith?” And you write, Call me. I don’t need to call you.
Annie: Yeah. It’s like, I don’t want to put this in writing.
Josh: You just told me everything I need to know.
Annie: Yeah. So going back to sort of from the founder’s perspective, when you can see that it’s not working and they want to go till the bitter end, like how do you handle that situation?
Josh: Well, for us, the two decisions that we have in encouraging somebody or discouraging them is willingness to write another check. Okay. Four scenarios, we believe in them and they want to go the distance. Great. We’re putting more money in. We believe in them, but they’re ready to take the exit ramp off. You know, maybe it isn’t as obvious or transparent to me. The inner struggle that they’re dealing with on a daily basis, it’s really stressful. They’re less optimistic than I am. Maybe I see, you know, sales are going up and technology is improving, but they’re fighting all kinds of, you know, internecine struggles and, and they’re just like, I’m exhausted and I’m stressed and I just want to, you know, sell the company there. We might have a little tension because I might be like, well, but we can go more, you know, and, and we’re willing to put more money in. And they’re like, yeah, but I’m, so that’s a harder one. And then in the other ones where they’re like, I really believe in it and I just need another turn, you know, these are the harder ones because they may legitimately believe that, or they may just be saying everything that they think is the right thing to say, to get more money. And that’s when having a partnership is really valuable because sometimes the partner that’s responsible for the deal is emotionally very close to the founder and it’s very hard for them to say no.
Annie: Right.
Josh: But when they have to come in and give an update to the partnership, and the partnership is objectively looking and saying, if you’re very close to it all the time, the gradual changes for the positive or the negative, you may not notice, but when your partnership gets an update once a quarter, once every few months, and they’re like, well, wait a second, you were promising that you were going to get those deals, you know, six months ago or a year ago and they still haven’t converted, you know, what’s going on here? Are you overconfident or is it really, you know, it’s got pushed out another quarter. And so the partnership is able to hold the partner closest to it, more accountable with a more objective view. And then the most important decision we make is to say to that founder, you know, we’re just not able to continue to fund.
Annie: Yeah, I think it goes back to what you said before about this is their thing and then you have a portfolio.
Josh: I’ll give you a quick story, but we were selling a company called Control Labs to Meta, which made non-invasive brain machine interfaces. You could wear a wristband and it could detect the 15,000 muscles in nerves that innervate the 14 muscles in your fingers and you could just gesture and control around you instead of, you know, typing on a keyboard or turning dials or moving a mouse.
And I remember this was in, uh, fall of 2019 before everybody was really using Zoom like crazy because of COVID. And we were on the board meeting approving the deal, and I’m looking at the screen and the founder’s there and me and three other VCs are there. And the corporate general counsel is there and the outside lawyer’s there. And I look at one of the founders who’s a technical guy, and I text the other founder who was the CEO and I said, is he still in the dorms? He was at Columbia University. Is he still in the Columbia University dorms? Because I saw bunk beds. And he was like, yeah. I was like, oh my God. And they wanted to sell earlier than I did. And what I realized is what an idiot we were for not giving them some secondary, meaning letting them take some cash off the table, putting a few million dollars to give them the wherewithal. I mean, this was somebody that probably had made $40 to $60,000 as a postdoc working in the university. And then they stood to make nearly a hundred million dollars. And I’m like, no, no, no. You want to wait for $200 or 300 million. And, you know, that was just insanity to them. So you can help somebody go the course by letting them take some money off the table.
Annie: Right.
Josh: And refreshing them. And then the inverse is that it’s not ripping off a bandaid when you’re telling somebody, look, we’re not going to continue to fund by having them come into the partnership and give regular updates, you can also give honest feedback.
Annie: Mm-hmm.
Josh: And you can say, listen, you know, this is the second quarter. You’ve given presentations and you’re not hitting the numbers, or you’ve been promising this and I’m losing support internally. And you can still be a good cop with the partnership truly being the bad cop to say like, I’m accountable to my partners and my partnership is accountable to our limited partners and, and we can’t continue to fund. So I want to work with you now before you know you’re out of cash to make sure that we line up new investors or whatever else. And you can do that in a collaborative way. It’s still painful, but less painful than it feeling like a shock.
Annie: Yeah. I feel like we’ve had a theme through this conversation that’s come up many, many times, which is the inside versus outside view. You just mentioned it in terms of the partnerships, right? That point partner can get very endowed to that company that they’re a point partner of and sometimes they need, this is sort of why you have a partnership in part, right? It’s not just that you have a lot of people sourcing deals and you can, it’s better deal flow and division of labor. It’s that it should actually make the decision-making much better. Here’s an example of what you’re saying is that when you have the people coming in and giving updates, point partner may not actually be able to see what the rest of the partnership is able to see, and the rest of the partnership can kind of offer a view from the outside, fresh to the decision that can help to discipline sort of the shared biases now of the point partner with the founder, right? That they’ve become sort of melded into one.
You know, we’ve talked about it in other ways as well. I mean, I sort of think about the way that you’re talking about how you source deals is actually related to inside versus outside view. That there’s the view of, like, the industry itself and what people think they want and so on and so forth. And you’re looking for the thing that nobody has seen yet.
And I think conceptually that just becomes so incredibly important, particularly as you get deeper and deeper into the deals, but also in terms of how are you thinking about what you’re investing in in the first place? So that’s a long way around to me wanting to just ask you about Daniel Kahneman, who very much has popularized this concept of inside versus outside view, which is so thematically embedded in how you speak about what you do. And what many people may not know is that you were quite good friends with him. So I’d just love to hear what was the start of that? Because by the way, just for the record, I was introduced to Danny by you. You arranged for Danny and I to have lunch, and then we formed a friendship because of you.
Josh: It was a fourth friend of ours, which was Michael Mauboussin. Michael had gotten me involved in the Santa Fe Institute, which is sort of a place that’s dedicated to the birth of complexity theory and taking really interesting different disciplines, based in Santa Fe, New Mexico, but really born post-Manhattan Project with brilliant physicists and biologists and mathematicians and seismologists.
And anyway, Michael got involved because he was, I think, one of the true sort of Wall Street polymaths. He was, you know, writing something called the Concilient Observer back in the day, which itself was a reference to E.O. Wilson and the consilience of the hard sciences and the soft sciences. And it must have been, I don’t know, 12, 15 years ago or something that Michael and Danny were in conversation at a small group, SFI event, and then we had a dinner afterwards. And Danny and I hit it off and then I went and hosted him and we would just riff. And then the four of us, me, you, and Michael, and Danny would get together and do lunches and talk about risk and decision-making.
And so one of the things that I took from Danny, well two things really, or maybe three things that I think are important. One is he was one of the great catalogers, of course, of all of our biases, but he was the first one to say, no matter how much you know about these biases, in many cases they’re like optical illusions. You know that it’s an optical illusion, but you still fall for it. Your brain still sees the square in the cube, it still sees the Dalmatian in the dots, and it’s hard. You can put systems in place, as you do, as Michael does, to try to thwart these biases, but you really still fall prey to them, number one.
Number two, you might rationally believe—we all do that—we believe something because of, you know, careful analytical probabilistic or Bayesian reasoning or taking an outside view. But he would say that the vast majority of the reason that you believe the stuff you believe is because of the four or five people that surround you and the affinity you have for them and their beliefs and that might affect everything from propensity for risk taking to your optimism or your pessimism or your political alliances and views and how those might shift.
And so, not that that was a nihilistic view, but it was a very pragmatic, realist view. But the most important thing, which is something that we carry with us every day at Lux, was really this idea of errors of omission and errors of commission. And a thing that we institute. Pete and I make the final decisions in our firm. We’ve got 11 people on the investment team, 40 people in the entire firm.
We’ve never pushed through something that everybody didn’t want to do, and we’ve never vetoed something that everybody did want to do. But we have had instances where nobody really wanted to do something except for one partner. And going to this outside view, the irony is if Lux itself thinks we as a partnership have a contrarian mindset and everybody else believes X, but we see X prime, or we see Y, and we’re taking this orthogonal bet, you know, they’re going after solar and wind and biofuels and we’re going after nuclear, they’re going after implantable brain machine interfaces and we’re going after non-invasive, you know, wristbands. Well, shouldn’t we also have that at a micro level inside of Lux where maybe there’s a contrarian naysayer? And so it’s more the case that somebody really wants to do something. And they are convicted and have this deep abiding belief in the founder of the market or the technology or the directional arrow. And they’re like, this is the one. And everybody else doesn’t see it.
And we had an instance where this happened and it was with a company called Cruise Automation. We offered them a $20 million round, I think we were doing 12 of it at a $40 million pre-money, $60 million post. And they thought the price was too low. And Pete and I were disciplined and we didn’t want to pay a high price. And Shaheen, who is our partner, is an electrical engineer, Ph.D., loves cars, loved this space. And he was right that self-driving cars were going to be a thing. And this was one of the leaders, but it was really early. They didn’t even have a prototype. And they just had this great founder, this guy Kyle Vogt. And during diligence we introduced them to General Motors to get a sense like, is this something that you would introduce into your vehicles? Would you work? And whatnot. Anyway, they decide, we’re not going to take Lux’s offer. We think we can get higher. And they did. They got an offer from Spark Capital, great firm.
Annie: Mm-hmm.
Josh: At a hundred million and Spark did the deal. Fast forward nine or 10 months, and GM is going to make a $50 million investment in Cruise. And so they write a term sheet and they say $50 million for X percent of the company. And they leave it blank. They left it blank because they didn’t want to negotiate what the valuation of the company would be. So they sent it to the founders, they said, we want to invest $50 million, tell us what that will buy. And they wrote back 2%. Now they could have written back 20%, 50%, but then implied a billion dollar valuation. Now this was just valued at a hundred million pre-money, $120 million post money. And GM writes back, not with an aghast, offended response, but they said at that kind of price, we should talk about buying you. Now they end up buying them, and it would’ve been for us an 11 x return.
Annie: Right.
Josh: In a year. And so I can tell you that the permanence of regret that Shaheen felt and that we all in the Lux partnership had to listen to every time a new company came in where he felt convicted and was like, ugh, this is going to be like Cruise again. I told you guys, you know, we should have done it. We shouldn’t have been so disciplined about price, et cetera.
So what we decided because of that, which really came from Danny, was errors of omission, errors of commission. You get one. If nobody wants to do it, but you really want to pull the trigger, you get one silver bullet per fund. And you don’t know if this is the one that you want to pull it on, because in a month or in two months, or in two weeks, a new company might come and you might decide that that’s the one. So you have to be really judicious in your gut. Is this the silver bullet I want to use? And if you do, we’re still going to size it, not with full conviction, but you get to do it.
And the virtue of that was that if it turns out to be an error of commission, we made the investment. It was wrong. Our partner was overconfident, he incorrectly handicapped it. It was a dud. We lost money. But it’s a slot in the portfolio. But if he was right and we didn’t do it and it was an error of omission, we missed the opportunity to make a lot of money. He’s bearing the permanence of regret. This was the one that got away. I knew we should have done it. He feels a burden of regret that is also diffusing to the rest of the partnership with the expectation in every subsequent decision that we’re making around a company that might be his, that he deserves heightened gravitas.
And so we just decided the way to solve that is everybody gets one. And you would think that people would abuse it, but they care deeply about their standing internally and they’re very judicious about it. And I have to say that many of those companies have been our best performing outcomes.
Annie: So depending on what you’re doing, a false positive may be a worse mistake than a false negative or a false negative may be a worse mistake than a false positive. So for example, if you’re eating berries in the wild, a false positive is really bad, right? If you eat berries that are poisonous, your dead, right? So you should err on the side of mistakenly not eating berries that actually wouldn’t hurt you.
Josh Wolfe: Right.
Annie: I’d rather not eat the berry or not eat the mushroom, even if it doesn’t hurt me, because the mistake of mistakenly believing it’s okay and it’s not is really bad. In venture though, it’s a little bit different, right? So a false negative is really bad because the return profile is so skewed that getting it wrong and passing on something that’s going to be great can be incredibly painful, not just psychologically, but also from a return profile. Like if you’re too conservative.
But this reminds me of something in poker, which we used to think about, which is a pot mistake versus a bet mistake. So if you’re thinking about calling and you’re sort of like, I’m not sure, should I call or not? If you call, you’ve made a bet mistake. So we could think like maybe you called a hundred dollars when maybe you shouldn’t have and you actually had the worst hand. But if the pot is a thousand dollars, I’d rather make that mistake, right? So when you’re unsure, you tend to call, like you might raise and try to win the pot in a different way, but assuming you’re doing it for value, when you’re unsure, you would tend to lean toward calling because that’s a bet mistake, which is a smaller mistake than giving up the pot, which is what this reminds me of.
But what I think is interesting is this dichotomy that you’ve set up, which is, that’s fine on the entry, but when we’re making later decisions like should we invest at later rounds? Where point partner, it’s now not just like I’m making a start decision. I think this thing is going to be really big. You’re all sort of poo-pooing the valuation and so on and so forth, but I really want to do it and I want to play my card for this thing. That as that sort of bias toward alignment with the company itself, becoming endowed to that company, that skews their view of that worth that you don’t allow that card later. Right? So I think it’s interesting, it’s like at the point that maybe they are actually seeing something and you have confidence that it’s not just because they’re super biased, that you’re allowing them to sort of have that one per fund. I’m going to go for it. Right?
But it sounds like at the later round you’re like, no, no, no, no, no. Because now the bias is going to be too strong and so we’re going to lean on the outside view and say, if the rest of the partners aren’t seeing it, we have to go with the rest of the partnership. Is that kind of a fair characterization?
Josh: Yes. And as you’ve noted, in a later stage company, you have a lot more data. So your ability to analyze it is higher and your expected return, unless there’s some special situation where this later stage company is really at a beaten up price or some weird stress situation, is going to be lower. Whereas in the earlier stage, you’re making much more bet on the people and the technology, and there isn’t really data, it’s much more instinct and you’re granting the judgment of one partner a pass. You’re basically saying your judgment is valued in all these other situations and you see something that the rest of the partnership doesn’t, and so you get one. And it’s a release valve because the things we’re solving for, of course, is maximizing performance of the portfolio and portfolio construction, but we’re also solving for a team that is going to be stable and stay together and trust each other.
And so if somebody has a really strong instinct, but everybody else doesn’t particularly care about the space or doesn’t feel what they feel, then their bias is not going to be aligned with them. And then that person, we risk them being like, you know what, guys? I’m obsessed with this area and I’m going to go and leave Lux and start my own fund that just focuses on—and we don’t want that.
Annie: Right. Right.
Josh: So there’s a spirit of how do we keep the team tight and cohesive and give people that release valve when they feel so strongly convicted that they’re willing to put their reputation on the line?
Annie: All right. This has been an amazing conversation. I knew it was going to be great. I’m so grateful for your having come on the show. So I’ve got a couple kind of rapid-fire questions that have to do with the Alliance for Decision Education, and you’ve been such a great friend to us, so incredibly helpful in driving our mission. What decision-making tool or idea or strategy would you want to pass down to the next generation of decision makers?
Josh: I think the most important thing, which is a relatively easy one, is thinking in probabilities, thinking in expected value, thinking about worst-case scenarios and best-case scenarios, and then realizing that you have a subjective weighting for those things, and then try to understand what that outside view is to have a more objective weighting.
I am blessed with a partner who is more optimistic than me. My co-founder, Peter, is always thinking about what if it works? And I always say that failure comes from a failure to imagine failure. So I am constantly thinking about the worst-case scenarios. As it relates to the next generation, I have indoctrinated my kids with this quote, and they all know my adjacent quote, which is, it’s better to have it and not need it than to need it and not have it. And that is true of an extra umbrella, a sweater, some pocket change, a battery charger for your phone. But just imagine the worst case and have some hedge so that if and when it goes wrong, you’re prepared. And just sort of always be thinking about that worst-case scenario. Not to be the negative Nelly and the nattering nabob, you know, but just to realize that when stuff hits the fan, and it does, not because of something you did, but just because life. You know, the power goes out, the battery runs out, your pants get stained, somebody cancels on you, whatever it is, just be prepared for it and have that hedge. So think in probabilities and expect the worst-case scenario and be prepared.
Annie: Yeah. There are people who’ve made fortunes on the fact that people tend to underestimate tail risks, so you are thinking in the right space, I think. What do you think the impact on society will be when the Alliance succeeds in its mission to ensure Decision Education is part of every K-12 student’s learning experience?
Josh: I think we will have an ideally less divided country. And people will appreciate each other, that there will be a more civic Oxford-style debate rather than a manipulative, you know, extreme, that we’ve seen. And so understanding the other side, trying to be reasonable, reasoning, logical, seeing when hot emotions can influence people.
You know, the most valuable thing that our family has done, which sort of relates to this, is CBT training, DBT training, like understanding that things do not have to be zero, one, black, white, all or none. Even that language can be the things that provoke people into defensiveness. “You always do this, you never do that, but what do you mean I don’t?” And so, whether as a parent or as a partner, as a spouse, as a friend, I have found that these techniques are super useful in mitigating big emotional responses. So that you can sort of be your best self and think more clearly. And I wish that I would’ve been trained in those kinds of things when I was younger. And I do think that people that can make better decisions, because that is what we do.
Annie: Yeah.
Josh: We have brains that help us move and navigate to things we like and away from things that we don’t. And we make decisions. And if we can understand why we’re deciding the things that we are and why other people are, then you can have a little bit more grace and a little bit more stoicism and a little bit more calm and you can be more unified and we’ll be less polarized in divisiveness. And I think we can, as a country, outcompete other countries that don’t have that.
Annie: I’m going to steal that answer. Thank you so much. That was so thoughtful. Well this has been really lovely. If listeners want to go online to learn more about you or follow you on social media or find out more about what you do, where would you direct them?
Josh: You can go to luxcapital.com for all the stuff we do at Lux, and then if you want the firehose of my chaotic Twitter, it’s @wolfejosh, W-O-L-F-E-J-O-S-H, on Twitter.
Annie: Well, anything that we’ve talked about will be mentioned in the show notes. And Josh, this has been just lovely. I love every conversation with you and I’m so happy. I think this is the second time that we’ve made a conversation that we’ve had public. The first one was with Michael and Danny actually over in the Lux offices. And so I’m so happy to be able to share your brain and the conversations that we have with other people. So thank you so much for coming on. I’m so grateful.
Josh: Thanks for having me, Annie. Appreciate all you do. See you soon.
Annie: See you soon.
Show notes
Films
Resources
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Employee Retirement Income Security Act (ERISA) – U.S. Department of Labor
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An Introduction to the Inside View and the Outside View – Alliance for Decision Education
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Thinking Probabilistically – Alliance for Decision Education
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Recognizing and Resisting Cognitive Biases – Alliance for Decision Education
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Using a Weight-and-Rate Tool – Alliance for Decision Education
Websites
Social Media