Josh Wolfe, Venture Capital's Passionate Skeptic
"I am hyper-optimistic and confident, even though I'm definitely a cynic."
The 2011 Fukushima Daiichi nuclear disaster was a turning point for a little-known startup called Kurion. Founded in 2008, the company was a contrarian bet on nuclear waste management by a young venture firm called Lux Capital. Kurion became instrumental in the clean-up of the Fukushima meltdown and in 2016 was acquired by Veolia, earning Lux a 34x return on its investment. It was a key win for the team at Lux which had raised its first institutional fund in 2007 after years of hard work building an integrated investment, research, and media platform.
“The Wasteland. It’s where we went seven years ago in search of new ideas and opportunity,” Lux co-founders Josh Wolfe and Peter Hebert wrote at the time. “What we found was an unmet, inevitable need with no solution in sight.”
“The thing with nuclear that sucked was, what do you do the waste? We started the company from scratch. Named it after Madam Curie called Kurion. In total I think $3 million went in. We sold that to Veolia for $400 million, with $140 million run rate, $40 million of EBITDA, doing nuclear waste cleanup.”
“A fluke low probability black swan in Japan that was negative for that country became a positive black swan for this little company and turned what would have been a phenomenal business into a spectacular one essentially overnight. We became the only US company on the ground in the clean-up, and they were responsible for removing 99% of the radioactive cesium and strontium from that disaster.” Josh Wolfe, Realvision 2016
Since its founding in 2000, Lux has been venturing into the wasteland to find creative contrarian ideas.
“We were born focused on crazy cutting-edge material science, physics, and chemistry when everybody was chasing dot-coms.”
Fast forward to today: Lux manages $4 billion in AUM and according to Barron’s “its funds averaged annualized returns of 30% to 40%” through the end of 2021. It has funded in areas such as self-driving cars, robotic surgery, brain-computer interfaces, and ocean-going drones. Wolfe still has his eyes on nuclear and is on a quest to rebrand it to ‘elemental power’.
Unlike many venture capitalists Wolfe doesn’t shy away from being negative in public. In Lux’s 2021 letter, he warned of an observable “excess of excesses.” “We were born in the tail end of this dot com mania,” he told Motherboard in December 2021, “watching money being spent on ice statues peeing vodka at parties and the Bacchanalia of excess. Today, there is an excess of excesses, and it's not a prediction. It's observable.”
As tech and venture markets came unglued, he wrote about reaching an “entropic apex” and survival as a necessary precondition for growth. A market defined by FOMO was turning into SOBS - the shame of being suckered.
His candor is one reason why I enjoy studying Wolfe. He is also a walking treasure trove of fascinating frameworks. And despite describing himself as a “horrible storyteller growing up,” he is now coining one catchphrase after another in his quest to share compelling ideas.
Wolfe embodies a unique mix of techno-optimism, scientific inquiry, and hard-boiled skepticism of becoming of a Wall Street short seller. He modeled his own approach to learning after the interdisciplinary ideas of biologist E.O. Wilson and value investor Charlie Munger. Wolfe studies venture capitalists, scientists, value investors, and even macro traders. A trustee of the Santa Fe Institute, he set up an internal working group to discuss decision making including Annie Duke, Danny Kahneman, and Michael Mauboussin.
The following is a summary of key ideas I learned from Wolfe (call them Wolfe-isms). A big shoutout to Kevin G whose compilations, including the one on Wolfe, are simply the most comprehensive work on the web.
“I love contrarian thinkers and people possessed by doing things others aren't. I see genius in founders who others might think are just eccentric or strange. I like lifelong learners connecting different disciplines together and take to competitive people with chips on their shoulders because of some unique event in their lives. I see the gap between science fiction once imagined and science fact now realized ever shrinking. I'm both an optimist about the endless frontier of technological possibility and a realist who believes failure comes from a failure to imagine failure.” Product Hunt Discussion with Lux Co-Founders (2017)
Ideas in this piece:
“Avoid boring people.”
“Chips on shoulders put chips in pockets.”
“Passion is the best predictor of success.”
Coney Island Contrarian
“The best way to predict the future is to invent it.”
“The governing force in my life is randomness and optionality.”
“We believe before other people understand. (And we always want them to agree with us, just later.)”
“100-0-100”: Arrogance, intellectual humility, ambition and curiosity.
“Storytelling ability captures the best and worst about humanity.” “Shove it down people’s throats.”
“Failure comes from a failure to imagine failure.”
“The most valuable words are, ‘It will rot your brain.’”
More reading, podcasts, and books
“Avoid boring people.”
If you don’t have time for anything else, I want to leave you with just this one idea. As Wolfe described it: three words, two meanings: Avoid boring people.
“The best advice I ever got was from Jim Watson, who co-discovered DNA. Jim is brilliant, and as many brilliant people are a little bit crazy, and Jim has this admonishment, which is double meaning, three words, “Avoid boring people.” I love it, because what he’s saying is, “Stay away from people who are not interesting,” avoid boring people, and, “Avoid boring people. Don’t be boring to people. Be interesting.” I have information anxiety, because I need to know and want to know something about everything, whether that’s poetry, or literature, or science, or sports, or whatever it is, I need to know something so that I’m never in a conversation and be like, “Oh, okay. Yeah,” nodding my head. I want to be able to converse about everything.”
I like the idea of being intensely curious across disciplines and “information anxiety” is a catchy way to describe it. Avoid boring people is a powerful guiding principle that Wolfe is certainly living up to, having surrounded himself with interesting people and being a fountain of interesting ideas himself.
“Chips on shoulders put chips in pockets.”
This is one of my favorite Wolfe-isms and I’ve started using it all the time.
Wolfe grew up in Coney Island, Brooklyn, and was raised by a single mother, a schoolteacher, who “did everything, sacrificing everything to put me on stable footing.” He attended Cornell to pursue an MD-PhD. However, while working in an immunopathology lab, he observed his mentor trading the markets “making tens of thousands of dollars.”
“I became way more enamored with capital markets, while we're literally spinning a centrifuge down of blood.”
“That lit something in me. I felt I was smarter than certain people. I was just born in different circumstances. And I’m like, ‘I can have that.’”
Wolfe accepts his hunger for more and dissatisfaction with the status quote as a driving force in his life.
“People always tell me you should have this great, positive energy: I think amazing things happen with negative energy. With dissatisfaction. If you want to change and progress someone has to look at something and say that sucks. And then be motivated to change it. I think that comes from negative energy.”
However, this must not be misunderstood as an excuse to be unkind:
“You need to find a balance between having a chip on your shoulder and the ambition and then being mindful that every relationship you have and every person that at some point in the future they’re going to be a call option and you don’t want that to expire. So, be good to people.”
“Passion is the best predictor of success.”
Wolfe started his career in investment banking but left within a year, before collecting his first bonus check, to pursue his dream of working in venture capital. He was only 24 years old and driven by an intense passion which becomes apparent when he talks about his life’s work:
“Venture capital to me is like the perfect hybridization of science and finance. I love science. It's the endless frontier. You're always meeting people that are coming up with new things and inventing new things. And I think all growth comes from this sort of endogenous new things that are happening in science. And finance, it's I think I probably have ADD, and the ability to focus on one particular thing is scarce. And so being able to find all these brilliant scientists and inventors that want to commercialize their ideas is the essence of venture capital.”
“Passion is the best predictor of success: If somebody is psychotically passionate about something then they have the fuel and the energy to go do it.”
Wolfe talked about what motivated him in this incredibly honest thread. Passion, fear, and “chips on my shoulders.”
Coney Island Contrarian
Coney Island and its amusement park left Wolfe imprinted with lasting skepticism:
“I grew up in Coney Island. There were carnie barkers, and hustlers, and con men, and so you just grow up skeptical, right? You don’t make eye contact, and if you do, it’s sort of like half-squinted like, ‘What’s that guy’s agenda? What’s the game he’s running?’ I’m generally skeptical of people and more distrusting.”
“I grew up sort of squinty-eyed, always distrusting, trying to figure out what’s somebody’s agenda and game. I’m always trying to spot the sucker at the proverbial table. If you sit down and you can’t spot the sucker, you’re it, you’re the patsy.”
This turned into a search for understanding what hidden games are being played in markets:
“I think every system at every point is rigged and if you can figure out that little mechanical torque in the machine that’s pulling the con. … ‘99, 2000, people thought you’re just going to pick the winners but the system is rigged. IPOs were rigged. The distribution of IPOs was rigged. Housing market, CDOs, there’s always a game being played and there is a secret that the people who are making the most money keep. They won’t acknowledge publicly until after the fact.”
This attitude shapes how he approaches the business of venture capital and underwriting the rebel scientists who walk through the doors at Lux:
“When I have these crazy, cutting-edge people come in, you don’t know at the moment when they’re pitching you whether they’re going to be the next Thomas Reardon, who’s a guy that we backed that is doing brain machine interfaces, or if you’re going to see an Elizabeth Holmes. My no. 1 fear when an entrepreneur walks in is, ‘Am I going to get defrauded right now? Is somebody going to try to pull one over our eyes?’ To this day, I would say that if everybody at Lux shared my vantage point, we’d probably be a team of cynical short-sellers.”
But not everyone at Lux shares Lux’s skepticism:
Peter Hebert, who both men agree is the opposite temperamentally, does not dispute the analysis. “Josh likes to say that I invented the airplane and he invented the parachute.” The Renaissance Man of Venture Capital
“The best way to predict the future is to invent it.”
The combination of optimism and contrarianism led the founders of Lux away from the popular dotcom startups. Instead, they pursued what they called “matter that matters.”
“In the history of venture capital, every 10 or 15 years there's some secular wave in technology. 1970s was personal computers, 1980s was biotech, 90s was TMT and dot com. And here we are early 2000s, and we're thinking, OK, where are we going to focus? We decided to focus on the chemistry, physics, materials science, the hard sciences.”
“Everybody else was focusing on dot-coms and optical networking. The secular S curves, these biologistic curves that start off slow, rapidly grow, mature, and fade into the next. I thought the next wave was going to be the physical, material sciences, breakthroughs in chemistry and physics and materials science that were coming out of universities that were not MIT and the venture cluster there in Cambridge, or Silicon Valley and Stanford.”
“It started with this sort of definitional focus on an area that we thought was totally neglected, and even the derivation, the etymology of Lux, Latin for “light,” was looking where other people weren’t looking. We said, Let’s go after the chemistry, physics, material science departments.”
Wolfe likes to say that the gap between Sci-Fi and Sci-Fact keeps shrinking. The thesis behind Lux is that it is profitable and important (and fun?) to help make this happen.
Lux had a thesis and a team but it still needed capital.
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“The governing force in my life is randomness and optionality.”
Wolfe thinks in terms of odds and bets and acknowledges the role of luck. “The only certainty is uncertainty.” This means he emphasizes focus on the process, preparation, and creating conditions that offer optionality:
“I call this randomness and optionality ex post facto. You can explain everything as like this perfect linear chain of events, but a priori, if you’re intellectually honest, you have no idea, so you meet everybody, and you talk to everybody, and you learn as much as you can, and then one piece falls into the other, and you look back, you’re like, “Oh, okay, yeah, it all makes sense.”
We’ve already seen this play out with this own journey from the Westinghouse Science Competition to Dr. Dominick Auci at SUNY Downstate in Brooklyn. Wolfe first convinced Dr. Auci to let him work at the lab, then learned about financial markets from him.
The next pivotal moment was a meeting with Bill Conway, co-founder of private equity firm Carlyle Group, which Wolfe called the "luckiest day of my life."
“I got very fortunate and met Bill Conway, one of the founders of the Carlyle Group. He took a stake on me and put us in business. That was luckiest day of my life, and we never looked back.”
“I don’t know if he had a good day or whatever the circumstance, but the counterfactual could’ve gone very different. He could’ve been in a bad mood, he could’ve not had time, he could’ve had to cancel the meeting. But the circumstances and the stars aligned in that moment, and he was like, ‘I hope you make a billion.’”
“The most important conversation was when we went to Bill Conway and I was talking about all these crazy areas of emergent tech. I said, ‘I want to put our money where our mouth is now in this space, and actually I want to put your money where our mouth is.’”
Conway provided not just the initial capital but also asked key questions that shaped the firm’s trajectory:
“Bill asked us probably the two most important questions that anybody had. Number one, why should you exist? Why does the world need an incremental venture fund?
And “if we're right in this hypothesis, how are we going to compete with Kleiner and Sequoia and Benchmark and all these top tier funds in these other sectors? Because if they agree with our hypothesis, they're going to blow us out of the water.”
What would Lux’s moat be?
Conway’s questions and the example of The Carlyle Group with its ties to Washington DC led Lux to create more than a venture fund. The firm wanted to offer multiple services that made it differentiated, visible, and valuable to entrepreneurs.
“We ended up creating a platform underneath a management company out of necessity.”
“We developed a bunch of sort of subdivisions underneath the management company where we had a media business with Forbes. We had some public policy efforts. We created a research business called Lux Research.”
“We had to have something that was like structural and real and tangible. With these different entities, if you were an entrepreneur, we could get you tens of millions of dollars of non-dilutive government money or foundation money. We can get you partnerships with Intel, and Kodak, and HP, and Saudi Aramco, that were the clients of our research business, and we can get you visibility in the media.”
Peter Hebert: “Lux Research was originally an extension of the deep research and work we were doing internally at Lux Capital to assess technologies and market opportunities. Then we recognized that there was a burning market need (primarily from heads of R&D at Global 1000 companies who were looking for better ways to position their companies & allocate capital for the future) and launched "Lux Research". Today it's an independent company and one that has 100+ fantastic deeply technical analysts and team members across the globe.”
Here is Wolfe with fellow VC Vinod Khosla who he once sold a nanotech research report:
“We believe before other people understand. (And we always want them to agree with us, just later.)”
I was curious what the tension between optimism and skepticism meant for Lux’s investment process. Wolfe likes to say that Lux believes before others understand. However, presumably it would be difficult to find consensus within the team for ideas that require a leap of faith and encounter strong skepticism?
Wolfe hinted at this when he talked about Lux’s “biggest mistakes.” They occurred when the team fell in love with an entrepreneur and “won’t let them leave. We want to give them terms almost on the spot.”
“The best-performing companies we’ve had, conversely, are when everybody in the firm disagrees except for one person. One person is the passionate tablepounder, and they’re like, “I’m telling you, she’s got it,” or, “He’s got it. We got to do this,” and everybody else is like, “I just don’t see it,” and that is usually the best-performing company when we do that.”
It reminded me of the passion Barry Diller required from his lieutenants in order to greenlight their movies. He tested their conviction with a barrage of questions and skepticism. He believed that without that vigorous debate he could not unearth the great ideas that would persevere.
Wolfe outlined the process by which a venture partner can make one, but only one, investment per fund against others’ objections.
“When you see consensus here, you got to say something’s wrong. Some firms implement a devil’s advocate to do that. It’s much better when it comes naturally, and certain people have that disposition where they’re naturally argumentative. It’s somebody seeing something and feeling so passionate about it that we have confidence that they are going to be obsessed in making this a success.
They’re putting their brand on the line, they’re putting their reputation on the line. We allow people to get one of those in a fund. It’s almost like a Josh rule, because I can be pretty persuasive and a strong table-pounder. If I did that all the time, I would abuse the process. I really have to think about, “What’s the silver bullet that I’m going to really pound my table?” I basically get one of those in a fund, as does everybody else. I just think it’s that phenomenon that you’re looking for that contrary view, seeing something that somebody else doesn’t, and then doubling down with your personal passion to make it so.”
“100-0-100”: Arrogance, intellectual humility, ambition and curiosity.
Wolfe has a great shorthand that separates what he can control from what is unpredictable in the investment process. Controllable: having a strong process to source, attract, and filter the next generation of entrepreneurial renegades. Unpredictable: what their ideas will be. Randomness and optionality dictate creating bottom-up conditions vs. wasting time trying to predict what will transpire.
“It’s this mix of ambition and arrogance and intellectual humility. The arrogant part is the 100. I am 100% certain that Lux will be investing in the most cutting-edge, crazy things that you can imagine. The 0 part is the intellectual humility. I have no idea what those things will be. None. The next 100 is the ambition and the confidence, which is, I know with near 100% certainty where we will find those things. It’s at the edge of our already cutting-edge companies. As long as I stay curious and paranoid and ambitious, and we listen in the boardrooms about the hard problems that these companies might be solving, it’s just, that’s where the next thing comes from, but it’s all random until after the fact.”
“Storytelling ability captures the best and worst about humanity.” “Shove it down people’s throats.”
Storytelling is interesting because Wolfe grew up “consciously insecure” about being a “horrible storyteller” and he became “obsessed” with its importance.
“My best friends, they literally used to make fun of me. They would literally say, "Beginning, middle, end.”
“If any idea is really good you have to shove it down people’s throats. You don’t have to worry about people stealing it.”
Effective storytelling was not only crucial to Lux’s own success, Wolfe uses it as a key marker to vet investments. An effective storyteller, he reasons, will be able to attract the right talent and capital to turn the idea into reality. And the quality of talent joining a company is visible early on. It is one quality Wolfe admires in Elon Musk despite sometimes being a vocal critic of his actions at Tesla.
“It’s very hard in the early, embryonic stages of a business, to really know if somebody is going to be an absolute genius or a total fraud. Because the best storytellers are also the best con men. Amazing narrative storytelling ability that captures all of the best and worst things about humanity. It captures our aspiration, our virtues, our sense of status, desire, greed. People that can tap into that, who understand people, are really influential with people, are almost always predictive of great success.”
“Amazing people recruit amazing people and you can see the momentum in hiring and quality of hiring very early.”
“Somebody that is a great storyteller is really good for a startup business because they can recruit really well. They are telling a story where you meet with that person, and one of my partners used to call it, somewhat inappropriately, the Pampers effect. You’re like, wetting yourself, you’re like, ‘Oh my god, I need to join this person. I need to invest with them.’”
“Failure comes from a failure to imagine failure.”
Wolfe wrote in late 2021 that “good times let guards down, making companies vulnerable to, as [President Lincoln] put it, the silent artillery of time.” In other words: it’s easy forget during a bull market just how much can go wrong. It’s tempting to overspend, overcommit, and overvalue. The first implication is to not wear rose colored glasses when everything seems to be going right.
“Venture, by definition, is a cheerleader business. You’re optimistic. You’re promoting the future. You’re supporting companies that against all the odds are likely to fail, and you are cheering them on. But I think internally and privately, you have to anticipate what is everything that could possibly go wrong with this company so that you can help to put time and talent, and money to prevent those bad things from happening.”
The second implication is that value is created the more of these imaginable failures get taken off the table. It is not just a call to be skeptical and prepared but to actively work on reducing the likelihood of negative outcomes.
“If you can imagine all the things that can go wrong, you can flick them off the table. I think of it almost like the first law of thermodynamics, like energy is not created or destroyed, risk and value just change form. Technology risk, product risk, market risk, finance … All those things are risks. I kill one of those risks with time or talent. If you’re a subsequent investor, you should be paying a higher price and demanding a lower quantum of return, because you’re taking a low quantum of risk. When this entrepreneur comes in and is pitching us, maybe they’ve eliminated the financing risk, but all those other things exist.”
“The most valuable words are, ‘It will rot your brain.’”
How does one spot the next big thing? Wolfe uses an interesting framework: rejection and sneering by older generations.
“It will rot your brain, whenever those words are uttered by a parent, it basically presages the next $10 billion industry. Rock and roll in the '50s, TV in the '60s and '70s, chat rooms in the late '80s and '90s. The internet, then video games. The video game couch potatoes of yesteryear are today's drone pilots and robotic surgeons.”
“All the multiplayer stuff that is happening, what today looks crude and doesn't makes much sense - second life or virtual reality and massive online communities - I think it's going to take off, and I think that they're going to be much more lifelike, much more simulacrums of reality. Our kids are going to be totally native inside of these.”
“Every book today is saying, kids' attention spans are too short, they don't write, they don't read. I don't think any of that is true. I think they read, they write, they consume. The language and the syntax changes, but they're communicating more than ever, and I think they're consuming more information than ever.”
More reading, podcasts, books
Institutional Investor January 2022: The Renaissance Man of Venture Capital
Barron’s June 2022: This VC Firm Thrived Through the Dot-Com Crash.
Kevin’s compilation
March 2022: How Tech Can Help Defend The US with Josh Wolfe
February 2022: The rise of defense tech is bringing Silicon Valley back to its roots
December 2021: The ‘To the Moon’ Crash Is Coming
Josh Wolfe’s bookshelf: part 1, part 2, part 3. And more obscure books.
Q3 2021: "Valuations have risen, diligence has fallen and excess is in excess"; “Preparing for this turn - when it comes - is wiser than predicting when it may”
The 2020 COVID memo
Invest Like The Best 2021: The Past, Present, and Future of Defense
Invest Like The Best 2019: The Tech Imperative
Invest Like The Best 2018: This is Who You Are Up Against; and David Senra’s Notes
The Knowledge Project: Inventing the Future
Realvision March 2019; Realvision November 2019; Realvision 2018 (transcript)
Good overview! I certainly wish a lot more neurons and capital went to the kind of hard-science fields where Lux operates. We need a lot more heavy lifting to be done in the world of atoms, and to bring more digital innovation to hard fields that haven't benefited from it as much as the low hanging fruits.