Why the Most Futuristic Investor in Tech Wants to Back Society’s Outcasts

Polina Marinova, creator of the must-read The Profile newsletter (curated longform stories on people and businesses), wrote a profile of Lux Capital’s Josh Wolfe for Trends.co.

The timing of the profile could not have been better. Wolfe was recently on Eric Weinstein’s popular The Portal podcast (see a summary Twitter thread here). The conversation was very insightful but pre-pandemic.

Marinova’s interview dives deep into how Wolfe got started, his investing process and views on the post-coronavirus world. We excerpted parts of the conversation below, and if you would like to read the entire interview, sign up for a 14-day trial of Trends for only $1.

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Josh Wolfe believes that society’s outcasts are the ones who hold the secret to human progress. And he’s dedicated his life to spotting them early. 

Wolfe is a co-founder, along with Peter Hébert, of Lux Capital, a New York City-based early-stage venture firm whose guiding philosophy is “the more ambitious, the better.” Lux recently raised $1B across two new funds to invest in frontier technology companies that focus on areas such as neurostimulation, nuclear energy, and synthetic biology. (You can see Lux’s portfolio companies, including biotech startup Kallyope and 3D virtual reality firm Matterport, in action here.)

Although Lux has maintained a relatively low profile over the years, the firm had a banner year in 2019 as two of its portfolio companies were scooped up in massive acquisitions. Auris Health sold to Johnson & Johnson for $3.4B, and CTRL Labs sold to Facebook for somewhere between $500m and $1B, producing big returns to the firm’s outside investors.

In an extensive interview, I spoke with Wolfe about Lux’s humble beginnings, how rejection can act as a motivator, and how entrepreneurs can turn their outlandish idea into a sustainable business.

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How did you first get the idea for Lux?

Peter and I had the idea to start something in venture capital. Venture, to me, was the perfect hybrid between science and finance. It had the endless frontier of science and the possibility to back people who would make a fortune that you could partake in for believing in them early.

As humans, we construct this very linear narrative where you say, “I did X, and then I did Y, and it led to Z.” If you’re really intellectually honest, it’s really this crazy ball of randomness. You just never know. So randomly, there was a guy in my investment banking group whose dad worked with a famous investor. We got to pitch that famous investor, whose name was Bill Conway, one of the co-founders of the Carlyle Group. 

Bill’s disposition at the moment when we met was one of enthusiasm and support for a bunch of young entrepreneurially naive guys. And he bet on us. What that meant was helping us capitalize our management company, which would become Lux Capital.

How much money did he give you?

Just a little under $10m.

What did you pitch him on?

The idea was that every 10 or 15 years, there’s some secular wave in technology. In the 1970s, it was personal computing. In the 1980s, it was biotech. In the 1990s, it was the internet. When we were starting Lux, we said, “Let’s turn to an area that other people aren’t looking at that we suspect will be a big area.” We believed it was advanced materials and breakthroughs in chemistry and physics. It led us to all these off-the-beaten path places. For example, if you’re looking for the next breakthrough band, you’d be looking in the dingy, underground nightclubs, not in the mainstream. So we started looking inside Cornell, Georgia Tech, UT Austin, and Michigan. It was all these universities that weren’t Stanford or MIT where all the venture capitalists already were.

A piece of advice that I think is important for any field — whether it’s venture, technology or media — is to really identify what everybody else is doing, find a white space, and try your best to own it. We carved out a niche in nanotech and advanced materials, which allowed us to focus on an area where there was a high degree of mainstream ignorance but one where we had built a lot of knowledge.

So you decided to narrow your investment focus to the hard sciences, but you didn’t structure Lux as a traditional venture capital firm in the beginning, right?

Well, it began as a venture firm, but the only money we had was the several million dollars from Bill Conway. The simple agreement we had with Bill was that we would bring him deals, and he could veto them. He was basically our investment committee. 

We were successful in carving out a niche because it was an area that people weren’t focused on, but we realized we needed a competitive edge. We asked ourselves: If Benchmark, Sequoia, or Accel tried to do the same thing as us, could they crush us? I mean, they’re in these giant war ships and we’re in this tiny raft boat. How are we possibly going to compete with those guys?

So we came up with three ways to gain that competitive edge. The first was to focus on public policy. As young venture capitalists, we would try to have some influence on the legislature that might get passed and where money might flow on a competitive basis to startups. That was particularly important for us in the early days because without really having large funds, the ability for companies to access that money was really advantageous. 

The second was the media. There’s an old Ben Franklin quote that says: “If you would persuade, you must appeal to interest rather than intellect.” One of the ways we could get Nobel laureates or entrepreneurs to take our calls was to partner with a media outlet. In our early days, it was Forbes. By writing with appropriate disclosure, we could appeal to the vanity and the ego of the entrepreneurs and billionaires we wanted to connect with. 

The third piece was research. Any time there’s a high degree of informational uncertainty where people don’t know what to do, they will spend a lot of money to reduce that uncertainty with information, so we spun out a standalone business called Lux Research. Pete was the founding CEO of it, we built it to 150 people, and sold it to a private equity firm a few years later.

We built this platform of media, research, and public policy because we were looking for a source of competitive edge that others didn’t have. The reason it was so important to structure it this way is because we could tell entrepreneurs the following: “One, we can get you tens of millions of dollars of non-dilutive money where the capital would be effectively government money. Two, we can raise your profile in the media when the time is right. And three, we can get you access to the key decision-makers in an instant because they’re part of our research arm.” And that’s how we built our early reputation.

If I’m an entrepreneur, how do I figure out if my outlandish idea can become a real business?

If you think about it like chess, you’re trying to think a few moves ahead. If I tell you someone has an idea for teleportation, it’s a big crazy idea. The total addressable market (TAM) is trillions of dollars. Does it work? No. 

The starting point is some competitive advantage that you can compound on. You have a moat around the castle that you can continue to dig deeper and wider while also throwing alligators, spikes, and bombs in it to prevent a competitor from entering. If you have a competitive advantage early on, you will be able to attract money. And money means time. And time can compound that advantage.

Every early entrepreneur should be asking themselves, “Is there something I believe I can do that no one else can do? How much money and how long will it take me to prove it?” Going back to the chess analogy, if you’re thinking a few steps ahead, the next question is, “Who will care?”

When we’re funding something, we’re not just looking if they do what they said they’d do in the time and money we gave them. We’re also thinking about, “When they do it, who will care?” Because we’re now thinking about the next risk, which is the financing risk. Will their discovery matter to new investors? Otherwise, we’re the only investors left holding the bag funding this thing.

People come up with these arbitrary technical milestones. Who cares? Who is it meaningful to? If the answer is nobody, it’s a fake milestone.

You’ve said that the best founders aren’t risk-takers, but risk-killers. How do you assess risk before making an investment in a moonshot company?

The easiest way is to assume that everything is a risk. I always say that failure comes from a failure to imagine failure. You have to be able to imagine everything that can go wrong. If something were to happen that you failed to imagine, you weren’t prepared for it. 

Peter’s the optimist, and I’m the pessimist. People joke that he invented the airplane, and I invented the parachute. We both want our companies to become really valuable, and we have two different, complementary mindsets. Pete is thinking, “What can we do to help this company be successful? Who can we introduce it to? Who can join the board? Who do we raise the next money from?” All the positive, constructive things.

And I start with the opposite. I ask, “What are all the ways this company can fail? What are the different risks?” You’ve got people risk, technology risk, product risk, financing risk, and market risk.

People risk: Are the founders going to work well together? Are we going to find out in six months that they hate each other or that they’re jockeying for power? Assessing the founding team and the dynamic between the founders is incredibly important.

Technology risk: Will it work? On the amount of money in the amount of time they’re asking for, will they be able to create something that matters?

Product risk: If they develop the technology, will they be able to productize it in a way that people will care? Will it sell? 

Market risk: Are there two competitors or 200 competitors? 

Financing risk: Financing risk is really the most important risk. You can have an amazing technologist but if they don’t have the money to do the work, they’re going to fail. You could have the most amazing technology and you could have great, earnest people, but if they can’t sell a vision, it’s really tragic because they won’t be able to fundraise. 

Most companies fail for two main reasons: people or money. If the technology doesn’t work but you have a lot of money and really smart people, you can figure out a way to get it fixed or a way to acquire some other technology. But if you have people who don’t get along or can’t raise money, companies usually fail. As long as you can raise capital, you can buy time and you can buy people. Those two risks to me are the most important because everything else flows from them. 

I like to think of entrepreneurs not as risk-takers but as people who are trying to kill risks. The best entrepreneurs are always thinking about what could go wrong and engineering solutions and systems to prevent that from happening.

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If you’d like to read the rest of this interview, including what Wolfe has learned from previous downturns and opportunities in the post-coronavirus world, sign up for a 14-day trial of Trends for only $1.