Fixing What Sucks with Lux Capital's Josh Wolfe
Dan and Rick Heitzmann talk with Lux Capital’s Co-Founder & Managing Partner Josh Wolfe about the venture capital industry’s transformation in New York City over the past two decades (2:19), whether major venture capital firms will start going public (11:01), where Lux Capital is seeing the best investing opportunities amid industry turmoil (14:33), the fallout from the intensifying ideological fight between the U.S. & China (23:24), why soaring inflation may trigger an “Occupy Fed” movement (), the “new, new normal” coming for workers as the economy slows down (29:58), where the stock market will go from here (38:22), and how Elon Musk has turned Tesla into a religion (45:36).
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00:37 Alright, welcome to OK Computer. I'm Dan Nathan. I am here with my co-host Rick Heisman of FirstMark Capital.
00:44 And here is actually a pretty amazing flex here. We asked Josh Wolfe of Lux Capital if he would come on this fine podcast.
00:52 And he was like, "Well, you know, let's do it from my fine offices here."
00:56 So Josh, you are hosting us for OK Computer. Thank you very much and thanks for joining us.
01:00 Thank you for having me. I'm playing a little way game here.
01:02 Yeah, a little bit. So we'll know. We'll know if...
01:05 And you got the right jersey. We're all wearing black.
01:08 I actually took off my black t-shirt because like looking at you, I always like every person that we interview,
01:12 I always go look on their Twitter and you're basically, that's the uniform, that's your uniform.
01:16 And I was wearing that same uniform, so I just thought I'd change it up a little bit.
01:19 New York VC uniform.
01:20 Yeah, well, here's the thing. New York's VC.
01:22 So you guys both started VC firms 20 years ago in the kind of aftermath of the dot-com.
01:29 Talk to me a little bit about that. How did you guys get to know each other, Rick?
01:32 Because this is... Josh was one of the first guys you're like, "We got to get Josh on the pod."
01:36 Definitely wanted to get Josh on the pod.
01:38 As you think about it, you had to think a little bit contrarian to build a VC firm in New York 20 years ago.
01:43 And Josh was my favorite contrarian thinker.
01:45 So independent, first principle thinker that stretches our minds a little bit. So thanks for coming on.
01:50 Great to be here. And feeling is mutual.
01:52 I mean, there are maybe, I don't know, half a dozen serious firms in New York that have both stayed the course
01:57 and evolved as venture has evolved and FirstMark has been one of them in a serious way.
02:02 So good to be with you, man.
02:03 This is great. All right, well, let's go back though. Let's turn the clock back because I heard you recently...
02:07 Did we get a sound effect for the clock?
02:09 No, this is not mad money, bro.
02:11 Bye, bye, bye, bye.
02:14 But you said, I think it was on CNBC to Leslie Picker, that you think there's going to be a massive culling.
02:20 Okay, you just said there's about six serious firms here, VC firms in New York City.
02:25 I know of about 20 people who have just launched VC firms in New York City in the last year.
02:31 Half of them gone in the next few years.
02:32 All right, so you basically said 50 to 70%.
02:35 I'm assuming nationally, maybe globally, VC firms will be gone in two years.
02:40 Is it just too much too fast? And then we're going to have kind of an overcorrection on the other side?
02:43 Natural cyclicality. So go back 20 years, you had maybe five or 600 firms.
02:47 2000, boom, bust, opticalnetworking.com, all of a sudden that balloons up to like a thousand firms.
02:53 And those firms varied, right? You had some that were like massive multibillion dollar firms that were few and far between.
02:57 And you had a lot of funds that back then were sort of in the $100 to $250 million range.
03:01 Within five years after they had been deployed, they either didn't get the upticks, you were in these range bound markets,
03:07 they didn't have momentum. All of a sudden, the firms start disappearing.
03:11 They didn't invest in succession planning of junior people.
03:13 They didn't have any hits to be able to raise LP money.
03:15 Some of the LPs themselves had overextended and now they were not re-upping into funds.
03:19 And so you went from a thousand firms to maybe five, 600.
03:23 So either it went back to what the core was or you had an incremental 20%.
03:26 We were one, and maybe you were as well, that basically entered and survived during that period.
03:31 And so we were born in the sort of excess of the dot-com boom.
03:34 And we had started by saying, look, even if we wanted to invest in this field, nobody's going to take Lux's money.
03:39 Nobody knows who the heck Josh is or Peter is, my co-founder Peter Aber.
03:42 Nobody knows who Lux is. And so we're only going to get adverse selection.
03:45 And so the founding kernel was, hey, what's going to be the next wave?
03:48 And when everybody else was chasing dot-coms and optical networking, we said,
03:50 let's go after the physical and material sciences with a bet that some of the stuff that was coming out of electrical engineering
03:54 and chemistry and physics and material science labs were going to be the next wave
03:57 and that we might understand those sectors better than everybody else who was making a ton of money doing other stuff
04:02 that we never would have had a shot at investing. And that became the sort of origin of Lux.
04:06 - And as you think about that, how has that evolved over the last 20 years?
04:09 - Well, when we first started, we were investing in nanotech and advanced materials
04:12 and sort of cutting edge, you know, material science related stuff.
04:15 We started with three main areas, which was energy, physics, and industrial stuff.
04:18 We did healthcare, which was everything from healthcare, IT to biotech,
04:21 and then med devices and robotic surgery. And then we do what we call core technology,
04:24 which is typically defined by what we don't do. And most of the people in VC, particularly in ITVC,
04:29 we're doing internet, social media, mobile ad tech, video games, all that kind of stuff.
04:32 And we basically said-- - Places like FirstMark.
04:34 - No, but we had no edge in that stuff, right? So avoiding the adverse selection,
04:38 we said, "Let's go where other people aren't going." And we always say to this contrarian point,
04:42 we want people to agree with us just later, after we've made our investment
04:46 and we've secured a stake and done something interesting.
04:48 One of the key things that we've always done is start companies de novo from scratch.
04:52 And so every VC says the same two cliched BS things, right?
04:55 We're value-add investors and we've got proprietary deal flow.
04:58 And most of the value-add is picking up the phone and calling who you know
05:00 and referencing what you know. And the proprietary deal flow is typically
05:03 just trying to parlay access and social currency and trade shits with other firms.
05:08 If you can originate companies de novo, so you actually are starting a company
05:12 with an entrepreneur, and whenever we did that, all the founding stock,
05:15 when we did that, went to the LPs. We never took it personally.
05:17 And it was an amazing phenomenon. We did it in biotech, we did it in nuclear waste,
05:21 we did it in cutting-edge genetics and microscopes and rockets and aerospace.
05:25 And so that has been something that has been a consistent, probably 15 or 20%
05:28 of our portfolio construction is companies that we co-found with entrepreneurs.
05:32 Our partnership grew over time. We opened a West Coast office.
05:34 We've always had what we call "Unum Lux, One Lux."
05:37 So you study the venture firms and you look at also why did they fail.
05:40 And they always failed because you had either a geographic silo where the East Coast
05:44 and the West Coast was like Biggie versus Tupac, but in VC, they just hated each other.
05:48 There was a coup. The East Coast guys lost to the West Coast guys who had the hot deals.
05:52 The LPs were like, "Okay, that's where the money is."
05:54 Or you had generalist firm that was co-mingled where you had health care guys
05:58 and IT guys and they hated each other because one was counter-cyclical
06:01 and the other was bring down, the other one is carry.
06:03 And then they go to the LPs and they say, "Okay, we're going to bifurcate.
06:05 We're going to split. We're going to keep to our thing."
06:07 And so we basically studied that and said, "Let's build a firm structurally
06:10 by design to avoid some of those things," which means East Coast guys are sitting
06:13 on West Coast boards and everybody is a generalist and we avoid these sector silos
06:17 and that kind of stuff.
06:18 Makes a lot of sense. We do some of the things that are similar.
06:21 We have one office in New York, so we're not sectorally fragmented.
06:25 But our history, going back to places I worked before, had the big screens
06:30 with the health care team from a buy on one screen, medical devices from Boston
06:35 on another screen, insurance software from South Carolina on another screen.
06:39 And it was a terrible experience not only being an investor but for an entrepreneur.
06:43 Totally.
06:44 So to come through and to have people who don't understand what you're doing
06:48 can help you but definitely want to judge you.
06:51 It's not the kind of firm we wanted to build and that's what was important.
06:54 So as you think about now, so kind of born out of, obviously, a topsy-turvy market
06:59 where we think a lot of firms are going to go away, and I agree with you
07:02 that you're going to see 50% to 70% of firms go away.
07:05 And the interesting thing in the '01 to '03 era, it wasn't what you perceive
07:11 as the worst 50% to 75% of firms, but probably the top five firms in Boston
07:16 all evaporated.
07:17 Well, in some of these cases, people were calling in rich, right?
07:20 And so they had made a ton of money and they were like, "Wait a second.
07:23 We just went through this amazing 5, 7, 10-year period from '96 to call it '02,
07:26 and we just made a ton of money." I mean, the guys that behind Akamai
07:29 and some of the networking infrastructure.
07:31 And so they're like, "Do we really want to sit in these range-bound markets
07:34 and then have to wait another 7, 8 years for another bubble
07:37 and a generation that forgot the last one's lessons?
07:39 Let's just hang it up, right?"
07:41 Some of the firms said, "We spent 20, 30 years."
07:43 Like you look at Battery or some of these others that became a little bit
07:45 more institutional.
07:46 They invested in the institutionalization, hiring a series of people that went
07:50 from analysts to associates to principals and partners.
07:53 They had economics in the firm.
07:55 And so I think, again, it's a question of, "Are you a boutique partnership?
07:59 Do you have your name on the door, or are you trying to build some institution
08:02 that transcends you and maybe you have some trailing economics over time?"
08:05 And I just think that the current market moment, you have a bifurcation,
08:08 what I've called the minnows and the megas.
08:11 The megas are what really began as like the soft banks and some of the very
08:15 large crossover funds, but you've seen a natural evolution of people like
08:18 Andreessen, NEA, General Catalyst, General Atlantic that feel like,
08:23 and in some cases now are evidenced to be, following the playbooks of KKR,
08:27 Apollo, Carlisle, Blackstone, TPG, eventually getting $50 to $80 billion
08:30 plus under management so that they can sort of go public.
08:33 And they'll build lasting institutions.
08:35 The thing, if you remember, right pre-crisis was all these things were
08:39 becoming these financial supermarkets where they were doing credit and equity.
08:42 And so some of these firms are going to emerge into that.
08:44 The minnows at the complete other end are these individual sole GPs that were
08:50 at Pinterest or Twitter and they have super connected networks of
08:54 entrepreneurs and engineers that are starting the next company and they've
08:56 got access and they convince NLP, "Hey, give me some money."
08:59 And so they sort of have a sole person, almost a large family office
09:02 that's supplemented.
09:03 Then you have smaller groups that do the same sort of thing.
09:06 We're seeing some of those people start to approach us and other firms saying,
09:08 "Hey, can we join the platform?"
09:09 Because they're starting to look for cover, realizing that if they were
09:13 Cedar Series A investors, now they're going to be in this valley of death
09:15 for a while, hoping that the kindness of strangers that was in very rampant
09:21 provision over the past few years is now drying up.
09:23 And they're like, "Okay, shit.
09:24 We've got to make sure that we've got following capital."
09:26 To that point, though, what's different, I guess, 20 years on right now is
09:29 the amount of capital.
09:30 If you look at the percent of investable capital as it relates to alternatives
09:33 is so much bigger right now.
09:35 So you said 20 years ago it was about 1,000 firms.
09:37 And it was probably not a huge number being allocated towards VC or
09:42 tech VC in particular, right?
09:44 So think about it now.
09:46 We have this situation where rates, no matter where they go in the next year
09:49 or so, they're still going to be abnormally low in historical terms or so.
09:53 So you have all of this money in pension funds and all these other huge pools
09:57 of capital that need to chase return.
09:59 Is there a chance that it's kind of different this time, especially as you
10:02 think about these companies institutionalizing, becoming the mega?
10:05 They all want to go public.
10:06 They've all changed their kind of bylaws so they can do all these
10:09 different sorts of things.
10:10 I'm curious whether that some of those massive trends are kind of here to
10:13 stay in venture.
10:14 And maybe it's just, I don't know, it's some kind of bastardization of what
10:17 happened with crossover over the last 10 or so years.
10:20 Of course, you know, this time is different on the most dangerous words.
10:22 But I do think that you will have a structural change in the size of the
10:26 firms.
10:27 I think there's a natural progression when they get larger.
10:28 I mean, your last fund was a billion most recently raised.
10:30 Our last year was a billion five.
10:33 Funds are sort of ranging in this larger scale.
10:36 It was very rare 20 years ago that you would see billion dollar plus funds.
10:40 So you have lots of billion dollar funds.
10:42 You have some four, five, six billion dollar funds, let alone, you know, the
10:45 giant megas.
10:46 So I still think that there's going to be this bifurcation and you're going to
10:50 have a shrinking.
10:51 Now, today I think there is somewhere between 18 and 2200 new firms, you know,
10:55 in total.
10:56 And so to see that go to a thousand would still be a doubling of the number,
10:59 the N of firms that existed 20 years ago.
11:01 I just think that consolidation in any time when you have rising rates,
11:04 increasing scarcity of capital is going to be the name of the game.
11:07 So when do you think the first VC firm goes public?
11:10 I think GA filed, General Atlantic filed.
11:12 So if you count them, I mean, that was originally really almost like duty free
11:16 capital that Chuck Feeney that parlayed into institution.
11:19 I think there was only eight LPs until a couple of years ago.
11:22 Right. And, you know, incredible group of people, Anton Levy and Bill Ford.
11:25 I mean, and they build a great business and do really interesting and smart
11:29 deals.
11:30 So, so I, I think that there will be a wave over the next two years when people
11:34 find that moment that they say, okay, you know,
11:37 now's the time where people want some stability and, you know,
11:39 a large asset manager with predictable revenues and some participation in
11:42 whatever economics they have.
11:44 And I would put 60 to 70% odds that in the next three years,
11:47 at least three of those firms that I named before are public.
11:50 We're agreeing too much.
11:51 It would be a very boring, very boring pod, but I disagree.
11:54 It's going to be an exciting.
11:55 I think, yeah,
11:56 I think you're going to see at least a couple of them that are getting it out
11:59 and are going to have more scale than anyone thought was imaginable five or
12:03 six years ago. And there'll be,
12:04 there'll be more VC M and a than what you would have ever expected.
12:08 I definitely agree. So I, I remember when Lux was starting again, you know,
12:10 go back to like 2000 timeframe. I remember visiting Sandhill, you know,
12:13 and you go to visit all these places and you had the merger of Brentwood and
12:18 IVP.
12:19 Brentwood and IVP forming Redpoint.
12:20 Right. And so you have these dynamics where these people come together and
12:23 they might say, okay,
12:24 we're going to take the life science guys from this firm and that firm from
12:27 this other firm.
12:28 These guys are going to get together and it's going to be LA and Menlo.
12:31 Exactly. And so, so I think that there'll be a bunch of those. And you know,
12:34 again, it'll be sort of few and far between,
12:36 but those things are reasonably predictable in the industry structure.
12:38 The bigger thing to me is the LP allocation to venture.
12:43 You know,
12:44 I remember Cambridge associates was putting out pieces a few years ago and we
12:47 value them as a partner saying upwards of 50% target for venture capital,
12:51 you know, was interesting for people's portfolios.
12:53 And you had very similar people like Jeremy Grantham also, right?
12:55 I mean,
12:56 generally a guy who think of as a deep value investor who understand cycles and
12:59 allocation across as a class was getting very long and bullish in venture.
13:02 Right. And this was before things got bubbly.
13:04 Now I think he's back down to like, let me old gold and ag and productive farm
13:09 yields. But I think that there's been a massive over allocation.
13:12 Now you'd think a guy like me who runs a venture firm would be talking to his
13:15 book and saying, no, it's a great time to invest in venture.
13:17 But I actually do think that there's been an over allocation in the asset
13:19 class compounded by denominator effect where LPs that let's say you had a 20%
13:23 target to PE and you hit that all of a sudden,
13:26 let's just say average LP maybe a billion dollars, you know,
13:29 small foundation, 200 million allocated to private equity.
13:31 Let's just say 800 million simple plain vanilla book allocated to publics.
13:35 Publics is now down 30, 40, 50% that 800 is now 400,
13:38 the 200 at a 600 denominator effect. Now it's 33%.
13:42 Now they're going to your IC to your investment committee and basically saying,
13:45 you know,
13:46 we really wanted to get access to these new managers and I mean like, look,
13:48 we got to slow down our role here.
13:50 So the risk curve has materially changed. Yes. Yes.
13:53 And I think that small manager, I was a solo LGP. I was at Facebook.
13:57 I know all these other guys were at Facebook.
13:59 They picked up someone that used to work with them at Facebook.
14:01 They get two institutions, they raised $50 million.
14:04 They think they're on their way to 500, but they're probably staying at 50.
14:08 Right. Or, or they might say, you know what? This is like,
14:10 we're not raising another fund. We're going back.
14:12 We're going back to, yeah, we don't, we can't send each other.
14:15 We're going back to Facebook.
14:16 I would have made more money if I went to Tesla instead.
14:19 Let's talk about this though. What do you think of the mission?
14:22 How that's changed over the last 20 years? You just said, Josh,
14:25 you guys don't chase the shiniest,
14:27 let's call it social or whatever object that's out there.
14:30 And I definitely want to get into this kind of thought that you're investing in
14:33 hard power and soft power technology. I read that in Barron's.
14:36 It was really interesting. And these are clearly not shiny objects,
14:39 but they're,
14:40 they're things that probably have like tremendously long tails that a lot of
14:43 your competitors are not particularly focused on.
14:45 Well, at the risk of sounding arrogant, they are shiny objects to us.
14:48 And so I like the fact that they are not shiny objects to others.
14:50 So if you zoom out, you think about Lux itself, the etymology,
14:53 the name Latin for light, looking where other people aren't looking.
14:55 Now it's philosophically true that when you shine a spotlight on something,
14:58 you light it up.
14:59 And then what's on the circumference of that light is darkness. Right?
15:01 And so the bigger that circumference gets of light,
15:03 the more that you're lighting up, the more that you're investing in,
15:05 the more you're expanding. So too is the circumference of your ignorance, right?
15:08 You're revealing all the stuff you don't know.
15:09 What we find fascinating is that the stuff on the edge,
15:11 which is the least well-known stuff is the stuff that in combination with
15:14 each other leads to the biggest breakthroughs.
15:16 So AI was like in this nuclear winter, you know,
15:19 people were not really interested in AI.
15:21 All of a sudden out of nowhere, and you can actually trace it now causatively,
15:24 but it wasn't predictive a priori.
15:25 NVIDIA comes up with this graphic processing unit and people are now using
15:29 it for multiplayer games.
15:30 People in mass are demanding better graphics for their PS4 and their Xboxes.
15:34 They come up with this language on how to use this GPU.
15:37 The graphic processing unit is a substitute for CPU called CUDA.
15:40 And all of a sudden this thing takes off, right?
15:42 A bunch of people go as they often do, right?
15:45 This is how Danny Kahneman won his Nobel prize.
15:47 You reach into the other guy's domain and you're like, hey,
15:49 that's sort of interesting. I might use it in mine, right?
15:51 So he was a psychologist who won the Nobel prize in economics.
15:53 He reached into the other domain.
15:54 So a bunch of AI researchers reached in and said, wait a second,
15:58 we don't need this crazy supercomputer.
15:59 What if we were to use this NVIDIA GPU with this massive parallel processing?
16:03 And all of a sudden that begot this new revolution in quote unquote,
16:06 deep learning. And you have these convolutional neural nets.
16:08 And people were able to do things like recognize images faster than humans could
16:13 and start to do natural language processing.
16:15 I mean, we all remember the early days of natural language processing
16:18 for voice to speech recognition like Dragon.
16:21 And some of those guys were frauds, but learned how to house me, right?
16:24 >>Obviously nuance came in.
16:25 >>Nuance. But that then evolved to suddenly, oh my God, actually like Siri
16:29 and Alexa and Google Now and all this stuff actually works.
16:31 And the AI to do speech recognition works.
16:34 And so you had this boom in AI.
16:36 And that's one of the things that's out on that circumference,
16:38 which was sort of left for dead.
16:39 At the other end, you have people in biotech who are doing everything that they're doing.
16:43 All of a sudden you have a bunch of these AI researchers now that are saying,
16:46 wait a second, we can not only use AI to search through text and pictures,
16:49 but what if we do this to search through genetic code
16:51 or search through scientific literature and start unearthing ideas
16:55 that people hadn't had before.
16:56 So whenever you get this combinatorial possibility at the edge,
16:59 for us, it's super exciting.
17:00 So that's where we're always looking like, what's the thing we're really smart,
17:03 what's the thing that we're really self-motivated out of ambition or greed
17:06 or to be the alpha male or female are pursuing in academia?
17:09 And they're typically the leading light.
17:11 So we're always looking at the scientific literature
17:12 trying to figure out what that is.
17:13 Now, some of that led us to sensors, cutting edge acoustics, optics, AI,
17:18 and some of that was related to a macro overlay, which was geopolitics.
17:22 We love investing in areas where there are a reasonable probability.
17:27 I always love this of Jeff Bezos.
17:28 He would say, I have no idea what technology is going to matter in five or 10 years,
17:31 but I know that people are going to want more choice, lower prices, more convenience.
17:35 So directionally, I'm just going to invest in stuff like that.
17:37 I know that the world over time is going to become as unpredictable,
17:40 if not more so, as it is today.
17:42 There's going to be more uncertainty.
17:43 There's going to be greater demand for uncertainty and control over the world,
17:45 and people are going to want technologies for that.
17:47 So you turn to defense.
17:48 The world is getting more dangerous.
17:50 I don't think it's getting more safe.
17:52 Now, violence and other things may be on decline.
17:54 I'm a big believer in Steven Pinker and the empirical evidence for that.
17:57 But overall, there's more probability of chaos.
18:00 Conscious countries, rising Russia, China, you're seeing it now.
18:03 The nature of the threats change.
18:05 We go from non-state violent extremists and terrorists to state actors,
18:09 which we thought had died with the Cold War.
18:11 And so we start looking around, and we say, okay, you've got these big giant incumbents,
18:15 the Lockhees and Raytheons and Boeings and BAEs,
18:18 and there's nobody in technology that was really working on this stuff.
18:21 People were doing one-offs.
18:22 The DOD and Pentagon were giving small SBIRs, small business innovation research grants,
18:26 which were basically nonsense.
18:28 It's sort of like performative, that the government actually cares about innovation,
18:31 but all the money is going to the Beltway Bandits and these big giants.
18:34 Along come five founders, and they basically are like,
18:37 we're going to take cutting-edge Silicon Valley technology,
18:40 which is eclipsing what the military is making itself.
18:42 We have this conception that the military has these secret labs, like out of James Bond,
18:47 where you've got Q that's coming up.
18:49 It doesn't exist.
18:51 There's nothing like it.
18:52 We have national labs.
18:53 Most of them are not, unfortunately, getting the very best people.
18:56 They are not developing the very best technology.
18:57 The smartest and most aggressive engineers that are working on these things,
19:00 like I was describing, in AI or in biotech or in sensors,
19:03 are working at commercial companies.
19:05 They are working or going to the places where they think that they can make a lot of money,
19:08 be around their fellow nerds, and make a ton of status and acclaim,
19:11 and that's typically at Facebook and Google and Netflix and Snap and all these other places.
19:15 So if you could redirect that talent to a more important mission,
19:18 what we like to say sort of sanctimoniously and righteously,
19:20 a matter that matters, then you could do a good virtuous thing.
19:23 So these founders, in particular, at a company called Anduril,
19:25 decided, hey, we're going to take the most cutting-edge technology that you can imagine,
19:29 and we're going to build a next-gen Prime.
19:31 Now this starts with a guy, Palmer Luckey.
19:33 Palmer is very controversial because at a young age, he made FU money,
19:36 and he's got some FU views.
19:37 I don't agree with his politics, but I absolutely agree he's a technological genius.
19:40 Palmer was a founder of Oculus, which begot virtual reality for the masses.
19:44 He was acquired by Facebook for $4 billion, made about a billion,
19:47 was fired from Facebook, mostly for political reasons.
19:50 He is a big Trump supporter.
19:52 I don't like Trump.
19:53 He's, you know, hardcore, right?
19:54 His other founders are left, center-left, and it's just a good balance.
19:57 They decide, we are going to bring the cutting-edge technology to the warfighter.
20:00 Now around this time, I start getting involved with the special operations community,
20:04 in particular a guy, Tony Thomas, who came and visited me.
20:06 He wanted to know what is in the Lux portfolio that can help us,
20:08 from drone technology to counter-drone technology to AI to be able to detect imagery
20:13 from drones or aircraft or space that's giving off so we can discriminate
20:16 between a guy with a pickaxe or a guy with an AK-47, you know,
20:19 and be able to make that discrimination for a kill shot.
20:22 Help us find this stuff.
20:23 He's supposed to come here for a half hour.
20:24 We spend three hours together.
20:26 He says, "Look, I want to take you out to the edge of the formation."
20:28 I said, "What does that mean?"
20:29 He says, "I want to bring you into theater."
20:30 And I said, "Okay, my wife is going to kill me."
20:32 So anyway, I end up going for two weeks and in bed with operators.
20:36 It was an absolutely incredible experience, and I got to see firsthand
20:39 the very thing that I do on a day-to-day basis here at Lux,
20:41 which is ask the question, "What sucks?"
20:44 And so I went around and basically looked at what sucks.
20:46 You and I can pull up our iPhone, and we can do simple blue-dot tracking
20:48 of our family, you know, find my friends.
20:50 If you are under triple canopy in the Philippines,
20:53 and you're trying to track some terrorists, you can't do that.
20:55 The technology just doesn't exist.
20:57 If you are using satellite antennas, you have to put it on the back of a truck,
21:01 go out to an open space, you're basically a sitting turkey,
21:03 you know, waiting to be caught and shot.
21:05 Instead, if you had very flat planar antennas that can communicate
21:08 without needing these giant dishes, it would be a game changer.
21:10 So we go and basically show them all these different technologies.
21:13 Tony retires, four-star general, head of SOCOM, ends up joining here
21:17 and just lights us up into this world of what sucked and what was needed.
21:20 We become big investors in Anduril.
21:22 Anduril now is actually a really important company,
21:25 not only for, I think, the future of American defense,
21:27 but as a theme for investors.
21:29 It's what I call the consolidators.
21:30 They now have over a billion dollars of cash on their balance sheet,
21:32 and they are starting to acquire companies and win contracts in a big way.
21:35 So they represent one of the kernels of what you were talking about before,
21:38 which is hard power--air, land, sea, space, both hardware and software.
21:42 How do you project power?
21:44 Because truly, if you want peace, you do it through strength.
21:47 And I think increasingly we have seeded that to other countries
21:50 where in the U.S. for two generations,
21:53 we talked about the military-industrial complex.
21:55 This was a taboo thing that we were warned about.
21:58 In China, they talk about military-civil fusion.
22:01 This is a government admonition.
22:03 They're telling you this is what we want.
22:04 If you are working in technology, we want it, and we're going to use it.
22:07 So that's the hard power piece.
22:09 The soft power piece is a realization that through history,
22:12 countries competed with Hollywood, MTV, Netflix, or movies generally, fashion,
22:19 basically exporting culture.
22:21 The other way they compete is by winning gold medals--Dream Team USA.
22:24 I mean, it was amazing, like it was shining moments in the Olympics.
22:28 And then also by winning other kinds of medals like Nobel Prizes,
22:31 being able to show that you have the smartest people in the world in your country.
22:34 One of the great losses when Germany during the Nazi era was the Senate
22:38 was you had all of these incredible Jews that left Germany and came to the U.S.,
22:41 and that's why we ended up getting the technology for the bomb.
22:44 And so I think that there is a race for soft power,
22:48 which is the prestige that comes from breakthroughs in science.
22:51 And the prestige that comes from breakthroughs in science
22:53 comes from having tools and technologies that lets you discover something
22:56 that the other guy can't.
22:58 And where is America right now on that curve?
23:00 I think increasingly we are leading in certain areas like biotech.
23:04 In semiconductors, we have a geopolitical structural disadvantage because of TSMC.
23:09 We're making efforts for--right now it's a lot of jawboning.
23:12 ChIPSAC and all this stuff is a lot of paperwork,
23:14 but we aren't actually building fabs here.
23:16 But I do believe autonomous vehicles, biotech, instrumentation,
23:20 there's a reason that COVID vaccines were effectively discovered by the West
23:23 and not by China.
23:25 It's amazing that they still do not really have a super effective vaccine
23:28 or that they haven't even stolen mRNA vaccines.
23:30 It's actually quite shocking.
23:32 And I assume that's who you're thinking about, worried about.
23:35 If the great superpower is not the U.S., it's Belt and Roads
23:39 and the network that China's built.
23:41 To me, hands down, when you think about peer competitor,
23:43 it isn't a question, are we in a Cold War, or will we be in a Cold War?
23:47 We are in a Cold War.
23:48 China is our adversary.
23:50 And I want to be specific that it isn't China.
23:52 Chinese people are amazing.
23:53 It is the CCP. It is the Chinese Communist Party.
23:55 This is a fascist, totalitarian, suppressive--
23:58 and I understand, by the way, it is also an effective government
24:01 that can build stuff and orient a country.
24:03 Very quickly and very efficiently.
24:04 But this is our major threat.
24:06 And I had hoped that this was actually going to be a regalvanizing threat
24:11 to make the United States united again and not untied.
24:14 But it hasn't been effective yet.
24:16 Russia, to me, at the moment, is a sideshow.
24:18 Russia feels like a Hail Mary pass of a guy who is losing power
24:21 and needed to effectively throw something.
24:23 There are major disruptions that come from energy,
24:25 the geopolitics of natural gas,
24:27 and the absence of nuclear and decline in Germany,
24:29 of food supply chains, wheat, etc.
24:32 But China is the real threat.
24:33 Where do you think that's played out and what time frame?
24:35 Is this played out in Africa over the rest of the century?
24:38 Is this played out--are people wanting access to those markets?
24:42 Because China has some power today, and it's a tension.
24:46 As they want access to our market, we want access to their market.
24:49 We're relying on them for certain things.
24:51 As that market power shifts to Africa, is that going to be the battleground?
24:56 Africa is still very poor, but Africa is very strategic.
24:58 We can talk about that as a continent.
25:00 I think if you look back again to the rise of the Cold War,
25:02 '40s, '50s, '60s, '70s, up through the late '80s and the fall,
25:06 this was an ideological fight.
25:08 It was really at root about totalitarian dictators and communism,
25:12 which was a failed experiment, a four-decade-long failed experiment,
25:15 and capitalism and democracy.
25:16 And we have imperfect capitalism, and we have imperfect democracy here,
25:20 but it's still a better system compared to the others.
25:22 We have an ideological fight coming with China,
25:24 because it is a resurgence.
25:25 Remember, China, as many historians have said,
25:27 for 13 of the last 16 centuries, ruled the world.
25:30 They don't view this as a new thing.
25:32 They view this as a return to--
25:34 Yeah, it's like America was a little bit of a speed bump.
25:36 Yeah, no, I mean, we're a startup, right?
25:38 A 250-year startup.
25:40 So I believe that this is going to be playing out over decades.
25:42 I think you want the commercial engagement.
25:45 You want to find ways of collaboration to have a detente against some of this.
25:50 You'd like to have productive conversations around things that we agree on.
25:54 Whether people think that that's climate--
25:56 China will be the greenest economy over the next 20 or 30 years.
25:58 Why? Because they're building a ton of nuclear,
26:00 while we've got Greta and other people that are influencing and saying,
26:03 "Shut down nuclear," and they're basically anti-progress.
26:06 Then we're restarting coal and nat gas and other stuff.
26:09 You sound like a macro strategist here.
26:12 And so I'm just curious, when you think about this
26:14 through this private tech investment lens,
26:16 what do the exits look like?
26:17 Is it M&A, or are you investing in the next Raytheon or Lockheed?
26:23 Do you think that's even possible to see one of these companies
26:26 kind of turn into one of these huge defense players?
26:29 I do think that they will turn into mega-deca-billion-dollar defense companies.
26:33 Andril today is high single-digit billions in valuation,
26:36 but I easily see a path where they're $50, $60, $70 billion.
26:39 And it's part of--capital stays where it's welcome--
26:41 or goes where it's welcome and stays where it's well-treated,
26:43 as Walter Wriston said.
26:44 Same thing with talent.
26:45 If you're a cutting-edge MIT or Stanford engineer,
26:47 do you want to go work at Lockheed?
26:49 Probably not.
26:50 We actually manage money for Lockheed.
26:52 They're great, but it's just not the place that you want to go
26:54 if you really want to build a career and make an impact.
26:56 So I think that the primes are going to have threat from inside,
26:59 and I think that that's a good thing.
27:00 Competition is one of the great American virtues,
27:02 and it's something that we should use
27:04 to be able to beat our adversaries on the outside.
27:06 So exits on the defense side, I think, will be publicly listed companies,
27:10 and in some cases it will be consolidation and M&A,
27:12 and hopefully you have the right leadership that doesn't kill innovation.
27:15 But the idea that you have an F-35 Joint Strike Fighter
27:17 that is in 300 congressional districts,
27:19 and most of these guys, their business model is cost plus.
27:22 They go to the government, they pitch, they get 5%, 6%.
27:24 What Anderol and some others are doing are basically saying,
27:26 "No, no, no. We're going to use equity dollars.
27:27 We're going to fund this ourselves.
27:28 We're going to build the product, and you're going to buy it,
27:30 and you're going to give us 50% to 60% margins."
27:32 So you could see an emergence of a new defense company
27:34 that's actually trading not at few single-digit times,
27:37 but at 20, 30 times like a traditional tech company.
27:39 Are you pitching a SpaceX?
27:40 No, no.
27:41 But SpaceX, interestingly, versus Tesla,
27:45 which of course you've heard me publicly rant about,
27:47 is a reasonably well-run company by Gwynne Shotwell.
27:51 And what they're doing is really admirable.
27:54 And they've taken on, if you actually look at this,
27:56 they've taken on a great competitor.
27:58 Their competitor is NASA.
28:00 And NASA is huge, but it's also bureaucratic.
28:02 It's the same framework you outlined of
28:04 take on a great competitor who's run by the government,
28:08 get reasonable margins, have great people,
28:10 do things for equity, and see what happens.
28:12 Totally.
28:13 And that makes sense.
28:14 So, yes, SpaceX, I'm reasonable.
28:16 We're not stakeholders in it.
28:17 But you've got a $2 billion a year TAM
28:20 for launch capabilities.
28:22 Starlink expands that TAM in terms of comms.
28:24 There'll be other stuff.
28:25 It's nationally important.
28:26 I'm reasonably confident that SpaceX will do just fine.
28:30 Hey, Dan.
28:33 What up, guy?
28:34 You're into this fintech.
28:35 What's all this I'm hearing about Current?
28:37 You're going to like this guy.
28:38 Current is a fintech company that's completely disrupting
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28:41 Wait a second.
28:42 Does that mean I don't have to drive to the bank anymore?
28:45 Yeah, exactly.
28:46 I'm a new Current customer,
28:47 and I manage all of my finances from one easy-to-use app.
28:51 Well, I got to get this app, but where can I learn more?
28:53 It's super easy.
28:54 Just go to Current.com/OK, OK-A-Y, and download the app.
28:59 That's Current.com/OK.
29:01 Current is a financial technology company, not a bank.
29:04 Banking services provided by and Visa debit card issued
29:07 by Choice Financial Group, member FDIC,
29:09 pursuant to a license from Visa USA, Inc.,
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30:51 Let's hit this because when you think about
30:56 your geopolitical worldview,
30:57 we got to take a step back here and just talk about
30:59 how disruptive the last couple of years,
31:02 you said we have an imperfect democracy,
31:04 we have an imperfect capitalistic system here a little bit
31:07 and we're seeing kind of the reverberations
31:10 of just kind of a black swan event,
31:12 which was obviously the pandemic.
31:14 And now, look at this period that we're in right now
31:17 with all of these massive trends
31:20 just smashing into each other, right?
31:22 So the whole idea, all of us are kind of too young
31:24 to remember what inflation feels like
31:26 or stagflation or whatever.
31:27 So when you think about what's going on here in the US,
31:30 this week alone, we're likely to get a GDP print for Q2
31:33 that basically by traditional definition
31:36 signals that we're in a recession.
31:37 What does that mean?
31:38 Well, that means maybe like,
31:39 and we're starting to see this,
31:40 I see your Twitter, I see your Twitter,
31:42 we're already starting to see some of the advice
31:43 that you guys have been giving your portfolio companies
31:45 for quarters now maybe,
31:47 that some of these large publicly traded companies,
31:49 especially in tech, have halted hiring, slow hiring,
31:52 firing people, rationalizing costs,
31:53 all that sort of stuff.
31:54 So the likelihood that this gets worse
31:56 before it gets better,
31:57 with interest rates continually going higher a bit,
32:00 maybe Fed funds tops out at 3.5% or something like that,
32:03 I do think it's fascinating right now.
32:04 So we have this Fed meeting tomorrow,
32:06 by the time the listener is getting this,
32:07 likely to raise 75 basis points,
32:09 yet the 10-year US Treasury yield is trading at 275.
32:13 So we have this inverted yield curve, right?
32:15 We have risk assets that are rolling over,
32:17 stock market, housing, there's other things that,
32:20 like if you look at commodities across the board,
32:22 the thing that they were fighting was inflation,
32:24 yet we've seen most commodities, industrial, ag,
32:27 all that stuff come in about 30% from their highs.
32:30 And then you say to yourself,
32:31 all right, what the hell's going on here?
32:32 Because we could find ourselves
32:34 in a really hard return environment.
32:36 The last piece of this whole economic picture
32:38 that we haven't seen,
32:39 one of the reasons why a lot of people think
32:41 we are not in a recession right now,
32:42 is we have not seen unemployment tick up.
32:44 We are at pre-pandemic lows,
32:46 which were 40-year lows at 3.6%.
32:49 I suspect that's coming to a theory near you.
32:51 Josh, curious how you think
32:53 we get out of this economic period,
32:55 because it really feels like
32:56 we are in a stagflationary environment.
32:58 - Okay, so my best stab at this is a few things.
33:01 One, a few quarterly letters ago,
33:02 we called it biflation,
33:03 and it was a basic neologism to basically say
33:05 that we're gonna have a bifurcation of inflation.
33:07 All of the consumer discretionary stuff,
33:08 all of the upper middle class stuff,
33:09 everything that was pulled forward
33:10 from three or four years,
33:11 where people basically turned their home
33:12 into a three or four star hotel,
33:14 all that stuff is gonna see
33:15 massive inventory bills at the sellers.
33:17 Even if they think that it was an aberrant uptick
33:20 on a secular demand line,
33:21 they over-order on inventory,
33:22 you're gonna see liquidations over time.
33:23 And you start to see that with Peloton,
33:25 with Nike, with Under Armour.
33:26 - I mean, you're saying with Walmart, with Target,
33:29 it wasn't just in these providers.
33:31 - Totally, and it wasn't even to the high-end providers.
33:32 Now it's starting to tick down exactly,
33:34 as you said, to Walmart and Target at all.
33:36 So that is deflationary, right?
33:38 You are dumping inventory, okay?
33:39 The inflationary stuff,
33:40 it is difficult to tell how much of this is geopolitics,
33:42 how much of this is supply chain,
33:43 how much of it is actually just Fed policy,
33:46 which is food and fuel in particular.
33:48 But the poorest are getting hardest hit the worst.
33:50 Now, I have heard from folks that were Fed governors
33:53 that are friends with Powell
33:54 that the number one thing that he wants to do
33:56 is basically be seen as vulgar.
33:58 He wants to slay inflation.
33:59 Now, inflation is an abstract thing.
34:01 It is poorly measured.
34:02 We've got statistics and numbers that tell us what it is.
34:04 Most people are feeling it in their wallet,
34:06 but particularly poor people, right?
34:07 And so there is this sort of double-edged sword
34:09 of do you kill inflation and do you kill poor people?
34:11 Because people that had $400 or $600
34:14 or less in their bank account,
34:15 everybody knows they can't afford basic medical bills,
34:18 suddenly are seeing doubling or tripling of their mortgages,
34:21 their interest payments, cable bills.
34:22 Everything else is increasing.
34:23 And so suddenly they're being squeezed really hard.
34:25 Middle class, I think, is going to be bifurcated even more,
34:28 where the super rich are going to be just fine.
34:30 You're going to have more ire against them
34:31 just like you did in Occupy Wall Street 15 years ago.
34:34 But I think there's going to be an element in the middle class
34:36 that is over-indebted, overspent,
34:37 and just going to start to be part of the lower class.
34:39 So there's going to be sort of a further skewing
34:41 of the middle class.
34:42 Housing is another area where you've got now
34:44 an abundance of housings that have been built over,
34:46 but record low in affordability with rising rates.
34:49 And so all of this to me just speaks to chaos.
34:53 If I was the Fed, I think that they were too late to act,
34:56 and now I think they're actually acting too intensely.
34:58 That sounds like somebody that's talking their book,
34:59 hoping for a bubble.
35:00 You had absolute inflation for at least 5, 6, 7 years in assets.
35:04 But now you're going to have the reverse wealth effect
35:06 because so many people were induced into the market,
35:08 so many retail people, whether that was meme stocks, crypto,
35:11 ARK, all the ETFs, all that capital is gone.
35:14 And if you're young, if you're under 37 years old,
35:16 the last crisis you experienced 15 years ago at 22,
35:19 graduating college, was the credit crisis.
35:21 Most people, unless you're 44,
35:23 didn't experience the dot-com crisis in 2001.
35:26 He's calling us old.
35:27 He was looking at you.
35:29 But I just think that people are in for a world of hurt.
35:32 How long does it last?
35:33 I think the Fed reversed it.
35:35 I thought that they were not going to go as aggressive
35:37 as they have on raising.
35:39 When I heard that Powell is really caught with the idea
35:42 that he's going to be this Erez Volcker and slay inflation
35:45 and that what he really wants to see is
35:47 whatever the headline statistical numbers are on inflation
35:49 start to trend down in the same way that Volcker did,
35:51 I think he's going to push us--
35:52 he's pushed us into a recession.
35:53 I think we're starting to see the signs for it.
35:55 But I think whether it gets very severe
35:56 and poor people really start taking to the pickaxes kind of thing,
35:59 then the question becomes what happens there.
36:02 Now, you had strange bedfellows 15 years ago in Zuccotti Park
36:05 where you had the Tea Party right
36:07 and you had the anarchists left, right,
36:09 chanting against the banksters, you know,
36:11 and that became Occupy Wall Street.
36:13 I actually think that we could get an Occupy Fed movement.
36:16 The Fed is abstract enough.
36:17 It's got the symbols of power.
36:19 It's called MAGA.
36:21 But you need the left here,
36:22 and the left is basically like this guy screwed our bank accounts
36:27 and screwed our crypto and screwed our meme stocks,
36:30 and so you get the apes and the amplification of social media,
36:33 which didn't exist 15 years ago like it does today.
36:35 And I actually think that you have people that go Occupy Fed
36:38 and it ends up being bullish for two things in the next two years.
36:41 One is crypto for the neo people, right,
36:43 and one is gold for the old gold bugs,
36:45 and I think you have this bifurcation that against a strengthening dollar today
36:49 sees people basically rallying for crypto of some kind and--
36:53 Well, that's the only-- that's the only pillar of the bull case left for crypto right now
36:56 is that the Fed pivots and starts to devalue again.
36:59 I mean, that's pretty simple.
37:00 You know, it's interesting that Bill Ackman of Pershing Square
37:02 had a tweet thread today on Tuesday saying almost exactly what you just said
37:06 is that notion that is becoming, I think, kind of somewhat prevalent
37:11 among market participants is that the Fed will pivot at some point.
37:15 Fed Fund Futures is already pricing in cuts next year,
37:18 and so that very notion that everyone's comfortable with a pivot
37:22 that's going to happen in 2023 where Fed Funds tops out just below 3.5%
37:27 is the thing that doesn't slay inflation
37:29 because if you know what's going to come around the corner
37:31 and all you have to do is look at a chart on FactSet or Bloomberg
37:34 of the 10-year US Treasury yield or Fed Funds 30 years out,
37:37 it's upper left, bottom right.
37:39 And just because we've come off of the zero bound,
37:42 which no one thought we ever were going to do,
37:44 and we stuck our head above it, we're going back below there
37:47 because all of the sovereign debt that's been accumulated,
37:49 all the debt all over the place that's been accumulated during this funky period--
37:53 Including the consumer.
37:54 And the savings rates going down for the-- I mean, rates can't go meaningfully higher.
37:58 And you will have that chaos.
38:00 If we did have interest rates anywhere near what our parents were dealing with
38:03 in the '70s, that sort of thing, or the mortgages that they had.
38:06 So again, it's one of the reasons why, to your point,
38:09 it's maybe more subtle than a movement in Zuccotti Park or something like that.
38:12 It's just they continue with these dovish folks.
38:15 You know what I mean?
38:16 The other thing I'll just say about inflation is that before the situation--
38:19 It's not a black swan. We could all see it coming,
38:21 Russia's invasion of Ukraine and the situation as it relates to,
38:24 let's say, natural gas and Europe's reliance on it.
38:27 I know that you've been very vocal about the mistakes that were made with Europe
38:31 as it relates to nuclear, okay, but also with wheat.
38:34 Before that invasion, all of that stuff was going to revert to the meat
38:38 as far as the post-pandemic thing.
38:40 If you think about how far we overshot during 2020, early 2021,
38:44 we overshot late 2021 into 2022.
38:47 It was all going to come back. Is that fair?
38:49 Well, I mean, you're basically saying that the Fed overreacted
38:52 because there were so many knobs and dials that they just--
38:56 Like, every other reaction was an overreaction.
38:58 Like Josh said, they were super late.
39:00 Yeah, too late.
39:01 Dogmatic, too.
39:02 Too blunt.
39:03 The thing that we've talked about before, Josh, I think is interesting,
39:06 is one element of this employment.
39:08 And what does this mean for Gen Z?
39:11 What does this mean for--
39:13 If you're in your late 20s or 30s and pushing this forward,
39:17 what does maybe the employment world look differently in '23
39:20 than it looked differently in '21?
39:22 Well, before I give you my view, let me take sort of a Charlie Munger approach
39:25 and be able to argue the counter view.
39:27 My view is we are in a new, new normal, and anybody can work from anywhere.
39:31 Work from home, remote access.
39:33 The young person that is untied does not need to own a home.
39:36 They can use Airbnbs.
39:38 They don't need to own a car.
39:39 They can use Ubers and ride shares.
39:41 They can travel around the world.
39:42 Sort of a global traveler, and they can work from anywhere.
39:45 You had one of our peer firms, Andreessen Horowitz,
39:47 declare that their new headquarters is in the cloud right now.
39:50 Now, how much of that is because Mark just wants to work from Hawaii
39:53 or whatever, you know?
39:54 From Malibu, man.
39:55 Who knows? Or Malibu, right?
39:56 But I will now take the counter, which is in a downturn,
39:59 I believe that there's a few things that you need.
40:01 Number one is camaraderie amongst people, and camaraderie is just stronger.
40:05 If we were on a Zoom right now, the nature of this conversation is very different.
40:08 Our ability to read our body language, interrupt each other,
40:11 the absence of latency, technology is great, and Zoom has changed a lot of things.
40:14 And it's great.
40:15 It's great for the environment, and it's great for productivity,
40:17 but it's not great for human connection.
40:19 It just isn't.
40:20 Number two is signaling.
40:21 People still do many things in life to signal.
40:24 Of course, we virtue signal, but we also signal status,
40:26 whether it's what you're wearing or where you're employed
40:29 or what you believe in or your haircut or your clothes or whatever.
40:32 And today, if you are a techie or a crypto guy or, like, you know, whatever,
40:36 you can wear whatever you want, and nobody really cares, right?
40:39 You're gainfully employed.
40:40 Nobody knows if you're a billionaire or a millionaire.
40:41 Then you get the black T-shirt.
40:43 He's still wearing black, though. It works.
40:44 It looks good.
40:45 So I actually believe--this is my contrarian view for the fall, 2022.
40:49 Fall--so six weeks away.
40:51 Making a call, okay?
40:53 Suits.
40:54 Suits are back.
40:55 This is the fall trend.
40:56 People are wearing suits and ties.
40:58 Why?
40:59 Because you are signaling you are gainfully employed,
41:01 because I do think--going to the employment question--
41:03 you're going to see mass layoffs.
41:04 And I actually think the layoffs are going to hit the middle class the hardest.
41:07 I think if you are lower class, if you're a blue-collar worker,
41:09 I actually think demand's going to be really high for you later.
41:11 - Demand's been fantastic for any kind of service industry and manufacturing.
41:14 - Which is both necessary and it sucks because they're also the people
41:17 that are getting hit the hardest with food and fuel, okay, and indebtedness.
41:20 But I think that other people that were like living fat and bought their
41:23 second vacation home and spent all this money and built out their home,
41:25 all of a sudden they're like, "Shit, I'm now losing my job,"
41:28 or there's a pay cut, and they are actually increasingly happy to keep their job.
41:33 Now, you're hearing and seeing all the headlines about job freezes,
41:36 and then you're going to start to see layoffs.
41:38 And this is the same thing.
41:39 In our world--going back to venture capital for a second--
41:41 the first thing that happens is a company does an extension to a round.
41:44 They add a little bit more money.
41:45 The next thing that they do is they add some preference or structure
41:48 for existing investors to induce them positively.
41:51 Then you have a pay to play to punish the people that aren't participating.
41:54 Then you have a down round, and then you end up with a recapitalization.
41:57 Translate that to human nature.
41:58 First thing you do is, "You know what? I'm going to come into the office
42:00 a few days a week."
42:01 And then you start dressing a little bit more proper to show the reverence
42:04 for the appreciation that you are not one of the ones that are being laid off.
42:07 Then you start-- - You're part of the tribe.
42:08 - Yeah, exactly.
42:09 And so I actually think that this is just natural social primate human evolution.
42:13 You are going to see people respect for the jobs that they have,
42:16 grateful that they haven't been let go or fired out of just a logical necessity
42:20 of some of these companies to save money,
42:22 and you're going to see the return of suits.
42:24 So that old SNL skit of Joseph A. Banks where they were using the suits
42:28 by the dozen to clean up messes or whatever--
42:30 Joseph A. Banks.
42:32 - All right, before you kick us out of here--
42:33 because it is him kicking us out of here, it is his room here--
42:36 I want to get your take on the stock market really quickly here
42:38 because Rick and I have been talking about this--
42:40 - I am long the stock market.
42:41 It's going to be around for a long time.
42:43 - Fair enough.
42:44 - Hot take right here.
42:45 Josh Wolf said it.
42:47 Listen, but we've been talking about these kind of pockets of overexuberance,
42:51 whether they were crypto, whether it was SPACs, whether it was meme stocks.
42:54 I mean, the list goes on and on, and all of us who've been around
42:56 a couple cycles can see very clearly that this was a bubble.
42:59 It was going to burst.
43:00 No one knew when or how, but you could identify how the things started
43:04 to kind of stack up to make its way into--
43:06 listen, the S&P still closed at an all-time high last year, right?
43:10 As there was dozens, if not hundreds, of stocks that were down 30%, 40%.
43:14 Now a lot of those stocks that have been correcting,
43:17 or a lot of these sectors, are down 60%, 70%, 80%.
43:20 And these, again, are things that we can look back 20 years from now,
43:24 but it took almost two years from the highs in March of 2000 in the NASDAQ
43:28 to the lows in late 2002, and that was actually excruciating
43:32 if you think about it.
43:33 So we've had this crash under the hood in a lot of high valuation,
43:38 high growth, kind of interesting things if you're putting your VC hat on,
43:42 I guess a little bit, but taking it out 10 years from maybe your seed investment,
43:46 they're just lights out.
43:47 They're never going back to those highs for all intents and purposes.
43:50 Now I'm finding some really interesting value right now,
43:53 and I think it's a really interesting period to dollar-cost average
43:56 into a Snap that's down 80% or a Shopify that's down 80% or something like that.
44:01 Curious your thoughts here because we still have the NASDAQ's only down 25%
44:05 from its highs. The S&P is only down about 16% or 17%.
44:10 It doesn't seem like those two major indices really encapsulate all the problems
44:14 that we've just talked about for the last hour or so.
44:16 So remember, a stock that's down 80% could still be down,
44:19 if it goes from 10% to 8%, could still go down another 80%.
44:21 We saw it with Snap. Snap was down 40% in a day last Friday.
44:24 So your stats, March 10, 2000, NASDAQ hits a high of 51.32%.
44:28 By October 2002, losses compound daily 78% to 11.08%.
44:32 Took 12 years. 12 years. I mean, people think, "Oh, maybe it'll come back."
44:36 All people have known is BTFD, right, for the past-- but by the dip.
44:39 Took 12 years till November 2014 for the index to recover to the March 2000 levels,
44:43 including dividends. Adjusted for inflation, that recovery took 17 years.
44:46 So you went from 2000, 2002, to 2017. I mean, that's just insane, right?
44:51 And I mean, that's an entire generation of lost capital, lost wealth.
44:54 I think that what is going to happen is you're going to have a range-bound market
44:57 for the next two years. You're going to then have the resurgence of stock pickers.
45:01 And those famous stock pickers, when you think back 2002 to 2007--
45:04 so literally 20 years to 15 years ago, respectively--
45:07 you had long hedge fund investors that were basically Buffett acolytes
45:11 or Klarman acolytes that truly understand great compounding businesses.
45:14 They also were great at shorting terminal zeros.
45:17 They were able to identify the frauds, the fads, the technological obsolescence.
45:20 You will start seeing headlines in this market when everybody is feeling pain and suffering
45:24 about this guy or this girl or whoever it was that made 30%, 80%, 90%,
45:29 and money will float in them. Why? Because they were short and intelligently so.
45:32 There's a reason why you see certain tiger cubs that are super long growth in a religious way
45:36 getting crushed, and you see Philippe, Lafont, and Cotu actually doing on a comparable basis quite well.
45:41 He knows how to short. So I actually think that we still have a ways to go.
45:46 You need some signs. What are those signs? They're going to be qualitative things.
45:49 In 2000, you had the Putnams and the Amarindos, and who was the guy, Alberto Vilar,
45:54 who ended up in prison, maybe committed suicide, I can't remember.
45:57 But he was one of the big tech investors. That's like this generation's Cathie Wood.
46:01 She's still getting inflows, even though it's down.
46:03 She's an afterthought. It's Elon Musk.
46:05 But she owns that.
46:07 I'm telling you, when Elon Musk--
46:09 Can only hold on for that long.
46:11 But really quickly, I've never seen a cult leader or a cult story in the public markets
46:16 in the 25 years that I've been in it not blow up.
46:19 And he will be the poster child for it.
46:21 I'm going to offend somebody that's listening, and I feel like one of those cliches,
46:24 but I have Mormon friends. Joseph Smith, whether he was real or not, died, whatever.
46:28 Mormons continue, and they are one of the fastest-growing religions.
46:30 Tesla is a religion. I can believe that there's accounting fraud,
46:34 that there are shady shenanigans, that there are definitions of working capital,
46:37 that the spin-- Elon is undeniably the greatest carnival barker,
46:41 the greatest capital market fundraiser in the history of technology.
46:44 But you didn't say genius, because I hear this all the time.
46:47 People say, "Well, he's a genius." I say, "Is he a genius?"
46:49 He's all those things that you just said, but that doesn't make him a genius.
46:53 I want to make one other point.
46:54 But he's a genius at the things that he just said.
46:56 Yeah, but is he a technological genius?
46:59 Because that's the only way that you would assign an $800 billion market cap to Tesla.
47:05 No, you assign an $800 billion market cap because it is the word of credit,
47:09 credare, credulity. It is belief. People believe, and they want to believe.
47:13 And he has done a great job at convincing people, like a religion,
47:17 that he is leading them to the promised land.
47:19 Now, you and I will look at this and be like, "I think the guy's full of it."
47:22 You know a Carney Barker when you see one.
47:24 It's like Monorail Man on The Simpsons.
47:26 It drives me crazy in the same way when I watch Joel Osteen
47:30 or one of these other Sunday morning preachers preaching the prosperity gospel.
47:33 I feel like people are being snookered in.
47:36 But so far, it has worked for anybody that has believed.
47:39 So it doesn't matter what I say about their calculations of working capital.
47:42 It doesn't say what about warranty reserves, about any of the accounting.
47:45 By the way, on Twitter, one of the most amazing things, this was a great phenomenon.
47:48 One of the most widely followed tweets that I saw trending the other day,
47:51 it literally said, and I thought it was a joke,
47:53 "What is EBITDA and why does it matter?"
47:56 And so you're going to have an entire generation of people
47:58 that are learning basic accounting.
48:00 And I remember that happened, by the way.
48:01 The best book that you could buy between 2000 and 2002
48:03 was like Financial Shenanigans or Gram and Dodd
48:06 or all the stuff that was Buffett and Munger-esque.
48:08 And so you'll go through the same phenomenon.
48:10 Elon has built a cult.
48:12 He has built a belief.
48:13 Some of it are using tactics of promise the future.
48:16 It is identity building.
48:18 People have associated.
48:19 They are branding themselves.
48:20 They are getting tattoos.
48:22 And he has created a brilliant us-versus-them.
48:24 The us-versus-them of the upstart David
48:27 versus the Goliath of the automakers, Big Auto or Big Oil.
48:30 It is the upstart stock promoter versus--or CEO--
48:34 versus the short sellers that want to kill us.
48:37 And every time you create an us-versus-them, you can solidify your base.
48:40 Trump has done it.
48:41 Elon has done it.
48:42 To me, they are the same character.
48:43 Well, it's really important, though.
48:44 Trump lost the White House.
48:45 He lost the House.
48:46 He lost the Senate.
48:47 He got impeached twice.
48:48 He started a violent insurrection on our Capitol.
48:50 And I will just say this.
48:51 I think he's the big loser other than what he's been able to raise.
48:55 Now, I will say this.
48:56 Elon's--
48:57 Wait, wait, wait.
48:58 --alt-right turn--
48:59 I mean, as far as I know, I think Trump is making something like $200 million this year
49:02 from getting suckers to pay--
49:04 Understood.
49:05 --to speak.
49:06 And that's how he's keeping score.
49:07 Yeah.
49:08 Right?
49:09 Yeah.
49:10 But I'll just say this.
49:11 I just think that there's a couple things going here.
49:12 This alt-right turn by him.
49:13 He voted for this woman, Mayra Flores, in Texas in the special congressional election.
49:17 He said he's going to vote for DeSantis.
49:19 The people who buy Tesla cars don't vote that way.
49:22 They don't think that way.
49:23 They don't believe in climate change for the most part, OK?
49:26 And now that he's in this battle with Donald Trump, OK, I just don't think it's going to
49:30 end well, particularly for him at any moment.
49:33 And then the other thing-- one question for both of you, and then we can get out of here
49:36 maybe because I'll give you guys the last word.
49:38 You know, you guys have been in business-- you for 25 years, me for 25 years, you a little
49:42 less than that, Josh, you're a little younger than us.
49:44 Every single absolute scumbag that I've known in their private life have absolutely been
49:49 scumbags in their professional life, just matter of factly.
49:53 And this guy-- And vice versa.
49:54 And this guy seems to take the cake with the news this week.
49:58 Thoughts?
49:59 I think the news every week is, look, you had the pedo thing years ago.
50:03 I mean, that to me was like, are you kidding me?
50:04 You had the SEC and the fake bio, you know.
50:07 Which is going to trial, OK, in October.
50:09 The Twitter thing's going to trial in October.
50:11 The SolarCity thing, I mean, he faked a product literally out of monorail from Simpsons.
50:15 So far, like the Teflon Don, it has been Teflon Elon.
50:20 And to me, they are symptomatic of a moment.
50:23 I'd like to believe that the purge that we saw of art imitating life, imitating art,
50:28 where you saw WeWork and WeCrashed, you saw Theranos with bad blood that became the dropout,
50:34 and then you saw Uber, which was more bad management, not absolute fraud or anything like that.
50:39 Super pumped, I like that.
50:40 I think that that was a marking of a moment,
50:43 and it marked the end of an era that arguably began with social network, with Facebook,
50:48 right before their IPO.
50:50 So you had a 10-year period that Aaron Sorkin started with the social network
50:53 and that ended with Jared Leto's incredible performance of Adam Neumann and WeWorked.
50:59 I'd like to think that the last two shoes to drop, and to me they are giant clown shoes,
51:03 are Elon and Trump, but I don't know how much longer we have for that.
51:07 Will they last a generation? No. But could it go another few years?
51:11 Hopefully not. I'm taking the under in two years that he's the CEO of Tesla.
51:15 I think he's going to be out probably within a year.
51:18 I think he's trying to get out of being CEO for Tesla for a long time,
51:20 and I think that this move with Twitter to dump $8.5 billion of stock was a stroke of evil genius.
51:28 It was a stroke of evil genius.
51:29 It'll be interesting how the courts--by the way, my prediction here, Delaware-Transferry,
51:33 they will say--they've got two cases up against for the judge.
51:37 She's going to say he's absolutely allowed to be paid whatever shareholders voted for.
51:41 He can get hundreds of billions of dollars, and he's got to spend $44 billion by Twitter.
51:46 I think he wins on compensation. I think he loses on Twitter.
51:51 So six months from now, he owns Twitter.
51:54 And how many of SpaceX, Tesla, and Twitter--what's the over/under on the number of CEO positions he holds?
52:02 I don't know. At least one. I'm confident saying it's just one.
52:05 I'll just say there's no way he actually closes on the Twitter deal,
52:09 and that's the thing that bounces him from Tesla as CEO and the board,
52:13 because if you're that board and he's not going to--basically, he's got this judgment against him to do this thing.
52:20 And I also think there's tons of risk to Tesla shareholders.
52:22 The only way he can get it done, the banks are not going to want to provide the debt or the equity at that point.
52:26 When you look at Snap, it's got a $16 billion enterprise value.
52:29 He is the key to the entire complex. I mean, all of it, right?
52:33 And he has been, again, to his credit, an incredible fundraiser.
52:36 If he's not there to raise the capital or for whatever reason people stop believing in him, that's when the house of cards breaks.
52:43 But as long as he can continue to fill the tents and get people to tithe as true believers and give money--
52:48 and so far they've been rewarded for that. It doesn't matter what the truth is, what reality is, what the fundamentals are.
52:53 And for those of us that look with scrutiny or see somebody being duped, it feels frustrating.
52:59 I've come to accept that the masses are not that bright.
53:02 And I think Elon has just exploited it in a Machiavellian, immoral way.
53:06 The rest of us, hopefully, if we podcast through this, maybe educate a few people.
53:10 There you go. All right. Well, listen, Josh, thanks for hosting us.
53:12 Thanks for coming on OK Computer. It's really fun to have you guys together.
53:15 You guys are two NYC VC OGs. That was a lot of letters there.
53:19 We have to come back with a lot of New York City love. We'll be back. That's the next version.
53:24 All right. Thanks, guys.
53:25 You got it.
53:26 Thanks again to our presenting sponsor, Current, and our supporters, Masterworks and Taboola, for bringing you this episode of OK Computer.
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53:46 We'll see you next time.