Josh Wolfe, co-founder of venture-capital firm Lux Capital, is not a person one might expect to pen a dystopian vision for 2022.
After all, the Covid-19 pandemic has put a torrent of cash in the wallets of investors and has pushed scientific breakthroughs to the forefront of their brains, leading to an incredible run at Lux, a relatively small player in the world of venture capital. In the past two years, its assets have doubled to $4 billion, with 25 of its portfolio companies creating almost $30 billion in value through mergers, acquisitions, or IPOs — including deals with 11 special-purpose acquisition companies.
But the extraordinary run has clearly brought out the dark side of the quirky financier. “Failure comes from a failure to imagine failure,” he wrote in a recent ten-page letter to investors, proceeding to envision what he might be saying a year from now: “2022 has been a punch in the face.”
He imagines a “black Wednesday” stock-exchange hack — “the result of a virtual challenge on TikTok ‘won’ by three 17-year-olds in the Philippines” — that cripples global capital markets for 72 hours and causes stocks to fall 40 percent. This bleak future includes an overreaction by the U.S. Cyber Command, leading to a choking of ports and global trade.
That’s not all. Rolling blackouts send Bitcoin down 50 percent, “with protests in the streets for coal to come back online so HODLers [can] access their digital accounts to get currency out for basic necessities,” he adds, using the misspelling of the word “holders” that has taken root among retail investors determined not to sell. Finally, he suggests a group of “Occupy Fed protesters comprising both crypto-maximalists and goldbugs” will storm the steps of the Federal Reserve Board chanting “End the Fed.”
Farfetched? Maybe — but perhaps not more so than his benign alternative scenario, in which “humankind is capable of cooperation, collaboration, and a chorus of optimism striking a chord of hope for a better future”; the pandemic ends; and the Fed is able to nip inflation in the bud.
Wolfe acknowledges that the truth is probably somewhere in between. But his willingness to entertain the dark side — and to do so in such a fanciful way — is what has made him one of the most iconoclastic VC founders out there. In fact, a number of the companies Lux has financed started out as mere concepts in Wolfe’s brain, leading him to go out and find the scientists who could turn his vision into reality. That could prove to be a competitive advantage in a more circumspect VC world, which until now has been dominated by too much money chasing too many investments.
Lux invests in what Wolfe calls “deep science” or “matter that matters” — in other words, companies you’ve probably never heard of. They tend to be at the far end of what’s possible and include everything from nuclear waste removal and space manufacturing to drone sailboats diving into hurricanes and a far-flung search for scarce genetic traits that could help develop promising new treatments for a variety of diseases.
Still, Lux’s recent successes have made the firm “more — not less — humble and cautious of what may go wrong,” he says.
Wolfe, of course, isn’t letting these worries stop him. That’s because he also believes in what he calls “the inevitable arrow of progress.” In other words, he says — quoting the Jeff Goldblum protagonist in the movie Jurassic Park — “life finds a way.”
Using fictional characters to make a point is classic Wolfe.
“You can see how almost every one of our companies has its basis in science fiction,” the 43-year-old venture capitalist says from Lux’s downtown New York City office, where he’s dressed in a black T-shirt and jeans, seated next to a wall of books that includes a number of well-worn sci-fi paperbacks, along with a handful of Star Wars action figures. With a childlike enthusiasm for the possibilities around him, the only thing that gives away his age is his salt-and-pepper hair.
Wolfe has been called a Renaissance man by such individuals as Carlyle Group co-founder Bill Conway, Lux’s first outside investor, and acquaintances like Herb Greenberg, the former CNBC journalist who is now a senior editor at Empire Financial Research. Wolfe’s (admittedly biased) wife, Lauren Taylor Wolfe, co-founder of hedge fund Impactive Capital, says her husband “ingests more content than any human I’ve ever encountered in my entire life, and I know a lot of English professors.”
These descriptions might sound a bit over the top until you talk to Wolfe at length (or follow his musings on Twitter). “I’m intellectually competitive,” he says, explaining that he would rather spend weekends reading than watching football. In the course of a two-and-a-half-hour interview with Institutional Investor last year, he manages to casually quote theoretical physicist Richard Feynman, political philosopher John Rawls, and British playwright Tom Stoppard, while showing off Lux’s mural of what he calls the “rebels of science.” (Think Charles Darwin, Alan Turing, Rosalind Franklin.) He commissioned the bright red painting from an artist he met at the Santa Fe Institute, where he is a trustee.
Wolfe is also fond of repeating the Middle Eastern tale behind John O’Hara’s novel Appointment in Samarra. Put bluntly, the moral of that story is that you cannot escape your fate.
But this clever venture capitalist appears to have done exactly that.
A longtime New York resident, Wolfe says he learned most everything he needed to know about humanity growing up on Coney Island, with its hucksters and scammers, where he lived next to the big roller coaster he now sees as a metaphor for the ups and downs of life. (A replica of the famous Coney Island Cyclone is also displayed on his bookshelf.)
“I grew up sort of squinty-eyed, always distrusting, trying to figure out what’s somebody’s agenda and game,” explains Wolfe. “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.”
Wolfe’s gritty New York sensibility, which is the opposite of the unbridled optimism that prevails in Silicon Valley, may be the key to his success.
“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,” he says, referring to the Theranos founder convicted of fraud this month. “And so 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.”
Lux co-founder 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,” quips Hebert, who works out of Lux’s Menlo Park office.
Wolfe’s life story may help explain his innate skepticism. (And why his tastes run to the dark side. “I like horror movies, and Dexter, and Hannibal,” he says.)
The only child of divorced parents, Wolfe was raised by his public school teacher mother, living in a two-bedroom apartment with his grandparents, a retired meter maid and a truck driver who worked nights delivering the New York Daily News. It was, by Wolfe’s account, pretty raucous — “a vibrant, debating, cursing household. People were opinionated.”
The family scraped by, his mom taking on additional jobs and getting no child support from Wolfe’s father, a businessman with whom Wolfe reconnected in recent years via email. Wolfe says his father “contributed nothing, and she did everything as a single mom sacrificing everything to put me on stable footing.”
Wolfe says he likes “strong women,” acknowledging that his mother, Diane Wolfe, was the role model, but also pointing to his wife Lauren, one of the few women to run a hedge fund. (Carson Block, the Muddy Waters Capital CEO and a friend, calls the Wolfes “a power couple.”)
Despite what Wolfe calls the “dysfunction” at home in New York as a child, he was the pride and joy of his family and early on got into gifted and talented school programs, eventually becoming a semifinalist in the prestigious Westinghouse Science Talent Search. At the time, the AIDS epidemic was raging in New York, so 13-year-old Wolfe decided he wanted to try to find a cure. His career plan was to be a research scientist, publish his discoveries, and “go be a doctor and make money,” he says.
But then he was exposed to the markets by the scientist he was working with for the Westinghouse project, who traded futures and options while waiting for blood tests to be processed. Trading mesmerized Wolfe. “I knew nothing of this world,” he recalls. “I was just like, ‘Wait, you just made thousands of dollars while we were sitting here?’”
Wolfe went on to study at Cornell University a few years later, starting out as a biology major but ending up with a degree in economics and finance — and his road to Wall Street began.
Wolfe says one of the most memorable moments of those early days came during his internship at Merrill Lynch, which led to a visit to the Greenwich, Connecticut, home of a senior Merrill executive. There the young intern saw firsthand a level of wealth that he had never imagined. “That lit something in me,” he remembers. “I felt I was smarter than certain people. I was just born in different circumstances. And I’m like, ‘I can have that.’”
As Wolfe likes to say, “Chips on shoulders put chips in pockets.”
With such ambition, it isn’t surprising that in the heady dot-com bubble of the late 1990s, Wolfe and Hebert, friends who were working at separate Wall Street firms at the time, had an itch to go out on their own. By the time they incorporated Lux in March 2000, however, tech investing was about to collapse.
“That was like Joseph Kennedy getting the stock tip from the shoeshine boy,” jokes Hebert. “It was probably the moment you have sold every single technology stock you owned.”
How could their new venture possibly survive?
Neither man had a track record, a wealthy family, or a deep network to draw on. “We always felt the need to be more tenacious, to have greater grit, to feel like we needed to outwork people, be more creative and more clever,” says Hebert. They decided Wolfe’s deep interest in science would offer them a competitive advantage.
Their big break came with the parent of a college friend’s introduction to Carlyle’s Conway, who agreed to meet the Lux founders. (Lux started out with several additional founders, but only Hebert and Wolfe remain.)
“I don’t know if he had a good day or whatever the circumstance, but the counterfactual could’ve gone very different,” says Wolfe, who is also obsessed with probability analysis. “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.’”
Wolfe has called Conway the most important man in his life — a not-so-subtle reference to his father’s inattention.
Conway seems flattered by the mention. “It was just at the time when he needed a break and he needed somebody to come in and believe in them,” says the older financier, who says he was intrigued by Lux’s focus on “the new, the exotic, the interesting, the ‘what in the world is that?’ kind of ideas.”
To be sure, Lux was different from other VC firms. “Everybody else was focusing on dot-coms and optical networking,” recalls Wolfe. He goes on to explain in his wonkish manner “the secular S curves, these biologistic curves that start off slow, rapidly grow, mature, and fade into the next” in the world of venture capital — from personal computers in the ’70s to biotech in the ’80s to telecom and the internet in the ’90s. “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.”
He foresaw — accurately, as it turns out — Nobel Prize winners from other places, like Cornell, the University of Texas, and Georgia Tech University, leading that wave.
The pitch won Conway over. “He is very, very smart and very broad in his intelligence, which is a very powerful thing, because if you think about the Renaissance and then what a Renaissance man or woman used to stand for, it was people who could cross a lot of disciplines. And I think it makes him probably a better investor to be able to actually understand a broader part of the world, rather than a narrow little niche of mRNA vaccines.”
For example, Conway recalls an investor annual meeting where Wolfe started talking about interspecies communication. “And I’m thinking, ‘Well, what is that? Is it like, how am I going to talk to my dog?’ I didn’t know what it was. It was jaw dropping — ‘What in the world are they talking about?’”
The private-equity billionaire has gone on to invest in every one of Lux’s ten funds. And while most of its investors now are endowments or other nonprofit institutions, Lux had a number of heavy-hitter financiers as investors in the early days, including Stanley Druckenmiller, Ken Griffin, and Peter G. Peterson.
But it took a disaster in Japan to put Lux on the map.
Kurion, named after French scientist Marie Curie — who discovered radiation and later died from exposure to it — is now the best known of Lux’s investments. That’s because of Kurion’s role in cleaning up the nuclear disaster at the Fukushima Daiichi plant in 2011 — not to mention the massive return on its money that Lux made when Kurion was sold to Veolia, a French nuclear cleanup specialist, for $350 million in 2016. The sum was many multiples of the few million dollars Lux had invested in it.
Kurion, like so many other investments, was a creature of Wolfe’s brain.
“No one came to him,” says Hebert. “He had this thesis based upon the future of low-carbon or zero-carbon energy.”
Wolfe is an advocate of nuclear power as an alternative source for power generation, and he wanted to tackle the issues hindering its embrace as a solution to the climate-change crisis. One of them is what to do with nuclear waste.
“From that first-principle approach, he went out, sought out the best and the brightest — former secretaries of energy and the heads of the Nuclear Regulatory Commission and the founder of Greenpeace and all these really bright MIT chemical engineers and material scientists and physicists — and ultimately created what Kurion became,” says Hebert.
Adds Scott L. Wilson, chief investment officer at longtime Lux investor Washington University in St. Louis, “They solved a problem that really wasn’t a problem yet. But they knew there would be a market for this type of solution.”
Kurion was the only U.S. company to “run to the disaster in Fukushima,” Wolfe recalls. “That is extremely psychologically rewarding. It happened to be financially rewarding to our investors, but this was an idea that we conceived here, started the company, recruited the people, took the risk. As we like to say, we believed before others understood. That is something that my kids are and will be proud of. Dad helped create a company that removed nuclear waste from a disaster.”
The success of Kurion married Wolfe’s goals of making money and being “part of history-making companies” that have an impact on humanity.
In its 21 years of existence, Lux has invested in 200 companies, many of which may have similar potential. There’s Saildrone, which is mapping the ocean floor via drones and last year sailed into a hurricane. Or Varda Space Industries, a startup created by former SpaceX engineers and a Founders Fund veteran, which is building a space factory to launch and return space-made products to earth.
But the idea that has Wolfe the most excited at the moment is Variant Bio, another one that came out of his imagination — and, in this case, the sci-fi series X-Men.
In the X-Men movies, and in the comic books the movies were drawn from, the main character wears a helmet that allows him to spot a mutant in a crowd, explains Wolfe. “It got me thinking: If there’s a one-in-a-billion chance in real life [that] somebody has a special trait, with seven and a half billion people on earth, there should be seven or eight people walking around that have the ability, for example, like the Nepalese Sherpa to climb the Himalayas.”
He spitballs a few other useful traits: “very high oxygen saturation to be able to plunge the depths in the ocean and hold your breath for long periods of time, to be able to sleep for two hours a night, to be able to eat food and not gain weight, to drink alcohol and not get liver disease, to have a huge sugar intake and not get diabetes, to smoke and not get lung cancer.”
He wondered: Could such genetic traits help lead to breakthroughs in disease treatments or drugs?
Through his contacts in the scientific, finance, and academic communities, Wolfe put together a team that included geneticist Kaja Wasik, who became one of the co-founders of Variant Bio.
Variant Bio says its mission is “to develop lifesaving therapies by studying the genetics of diverse populations that are outliers for health-related traits.” Its website lists studies of genetic traits responsible for strong bones, low cholesterol, and resistance to cholera as examples “that inspire us.”
Lux put up $1 million in seed financing for Variant Bio in 2018, then added another $15 million in 2020 after recruiting Andrew Farnum from the Bill & Melinda Gates Foundation as CEO. In November, Variant Bio hit a milestone when it announced a new Series B financing of $105 million, led by SoftBank Vision Fund 2, with new investors General Catalyst and Vulcan Capital.
There are plenty of other far-out ideas rolling around in Wolfe’s brain. The way he describes his work to their three children, says Lauren, is by saying, “I figure out what sucks about something. And let’s find an idea that addresses it, and fixes it, and makes life better for everyone. That’s a billion-dollar idea.”
One of his current ideas has to do with capturing smells. Listening to him describe it offers a glimpse into how his mind works.
“If I say, ‘I was on the beach in Florida, and there was the most amazing moment that I can describe to you in words of the citrus smell with the salt of the sea,’ you’re like, ‘Ah, yeah, I can sort of picture that,’ from your own memory,” he explains. “But now if I could actually play that back for you, it’s magical.”
Wolfe says the idea isn’t like “time travel or teleportation or something that [as of] yet we have no evidence could work.” He points to his iPhone, saying, “I can capture a moment with a click of a button,” referring to its now highly sophisticated camera.
“Sight, as an extension of our human senses, is technologically capturable and replayable,” he says. “Sound, same thing. I can record a sound. And then you can play that back.” Taking it one step further, he mentions the app Shazam. “I’m in a coffee shop or a restaurant or a hotel, and I like a song, and I press Shazam and I hold it up, and the sound of that song goes into my little pocket computer, and decodes the waveform and tells me exactly what song that is by the artist.”
So why, he wonders, can’t people do that with smells? “Sound is just a waveform that’s traveling through the ether — I can’t even see it, and I have a piece of technology that can capture, invisibly, sound, and play it back,” he says. “A smell is just a volatile organic compound. When you have a candle, or you have chocolate, or you have food, or you have wine, or you have a shampoo, or the smell of your grandparents, or a home, there’s a distinct smell.”
The playback, he explains, wouldn’t come from a smartphone but from something called “mass spectrometry, which is a nearly invisible laser that is hitting the particle, and when it bounces back it tells you what it is.” Today, mass spectrometry exists in laboratories that allow scientists to figure out the chemical signature of a smell. But he envisions a day when it will be miniaturized, “just like all technology.” He’s absolutely convinced that eventually handheld technology will be able to detect a smell and tell you what it is.
Admirers like investor Conway wonder if Wolfe’s idea might someday be able to help long-term Covid sufferers who’ve lost their sense of smell.
Wolfe has promoted the idea on Twitter and says he has received pitches. But so far, he says, neither the entrepreneurs nor the science is there yet. He’ll be ready when they are. “I have a whole list of those kinds of things, and we go and talk to people and we throw it out there, and then somebody’s like, ‘Oh, you’ve got to go talk to this scientist, they have a breakthrough.’ And one day, some woman or man is going to be like, ‘This is what we’ve invented,’ and I hope that we’re their first check to back them.”
Small wonder that when a group of Muddy Waters summer interns visited New York City last summer and met with a number of Wall Street players, they voted Wolfe as “the coolest,” according to Block.
In addition to being cool, though, Lux has also proved lucrative for the investors who’ve gone along for the ride. “Their returns have been phenomenal,” says Wilson, noting that Washington University’s endowment has now committed roughly $185 million in four Lux funds.
Not every brainstorm of a VC investment works out, however. As Wolfe explains, “You typically have one or two companies that return the entire fund one time over. And so if you have two of those, then you have a 2x fund, and then maybe the next ten companies combined might be another turn of the fund. And then everything else, including all your losers, would be another turn. And you ended up somewhere between 3 and 4x.”
That’s the type of performance Lux has been able to achieve, he says, averaging between 30 percent and 40 percent on an annualized basis.
“I think we have confounded people in that we have actually delivered excellent investment returns in areas that are extraordinarily hard and generally not the most popular of the moment,” says Hebert. “It’s not social media. It’s not traditional enterprise, SaaS, and software, and yet we’ve been able to find and deliver multibillion-dollar outcomes in things that people would say are really hard, complex, and generally not easy — and so they’ve avoided it.”
So why is Wolfe telling investors about his dystopian fantasy of 2022?
“The macro is insane,” he says, referring to the market conditions that are outside of the firm’s control and have bid companies up to stratospheric heights in the past few years. “Our main competitive advantage when the market turns — and I’m tracking for signs of when that will be — is our steely fortitude,” he says.
Wolfe mentions that years ago, Lux’s partner meetings, held on Mondays and Thursdays, were full of talk about problems with CEOs or down rounds of financing. “Every meeting right now,” he says, “is, ‘Oh, another one of our companies just went public, a SPAC just bought this company, these guys just got a $300 million offer from Tiger,’” referring to Tiger Global Management, the big hedge fund that is a major VC investor.
That has him concerned — and citing another famous author. “As Hemingway wrote on going broke (or dying): slowly, then all at once. Let’s call it the ‘Hemingway Hinge’ — things that occur gradually, then suddenly. The creaks of the hinge are audible,” Wolfe wrote in the letter to investors, referring to a “combustible concoction fueling the rise of nearly all assets.”
At the same time, he argues that “the one steadfastly scarce source of bargains are those that don’t have a price, as they don’t exist until Lux and our network of scientific founders actually create them.”
With the markets looking more uncertain every day, Wolfe tries to look at it like the scientists he both admires and works with do. “They don’t care what the ten-year rate is; they don’t even know who the head of the Fed is. I mean, they couldn’t tell you what the S&P level is, they couldn’t tell you the price of gold. They’re focused on their own chip on their shoulder and their ambition to go produce some matter that matters.”