The Insane World of VCs, Softbank, WeWork, Uber & Lyft (w/ Josh Wolfe and Michael Green)

The Insane World of VCs, Softbank, WeWork, Uber & Lyft (w/ Josh Wolfe and Michael Green)


MICHAEL GREEEN: Mike Green, I’m here in New
York with Josh Wolfe– one of my absolute
favorite people.
JOSH WOLFE: The feeling is mutual.
Love to be with you.
MICHAEL GREEN: Thank you very much.
You’ve had several chances to sit down in
front of us on camera with Real Vision.
And one of the areas that you’ve spent a lot
of time talking on– and I’m just going to
jump right into it– has been this idea of
medical tech innovation.
And you had a huge event occur in just the
last couple of weeks where Auris Medical,
which was one of the investments that you
had discussed online, was just purchased by
Johnson & Johnson.
JOSH WOLFE: Yes.
MICHAEL GREEN: Can you tell me a little bit
about Auris in particular?
And I’d love to understand what helped you
identify this, and how you thought about this
type of investment, and what you were tapping
into that ultimately led to this incredibly
successful investment?
JOSH WOLFE: So let me give you the dishonest
answer, and then the honest answer.
MICHAEL GREEN: Perfect, I like both.
JOSH WOLFE: The dishonest answer– well, we
did really copious amounts of research, and
we analyzed from top to bottom, the state
of robotic surgery, and we looked at the past
four years of analysis for Intuitive Surgical,
and we looked at every single product line–
no, none of that was true.
MICHAEL GREEN: Was there a two by two involved?
JOSH WOLFE: No, there was nothing.
I mean, this was an engineer that we met.
MICHAEL GREEN: OK.
JOSH WOLFE: So it comes down to the two-legged
mammal.
We met an engineer.
And the engineer said, you know, I’m doing
this thing that’s pretty cool and it has to
do with robotic surgery.
And our first thought was, well, you know,
there’s this monster company– $30, $40, $50
billion, depending on what the time was in
market cap– which is Intuitive Surgical.
And he says, yeah, about that– actually,
the guy who founded Intuitive Surgical, Fred
Moll, is actually the founder of this new
company.
So suddenly, it piqued our interest.
OK, you’ve got an interesting segment, not
a lot of venture-backed companies– in fact,
you know, maybe less than 4.
And you’ve got the godfather of the industry
that is doing something new.
And the new thing that he was doing was taking
advantage of some of the most cutting edge
stuff that was happening in robotics at a
scale that had never occurred before and combining
that with software, so that you could start
to do things inside the human body akin to
what Google has done in mapping roads.
Where we’ve now called this, or I’ve called
this– Fred hates when I say it– Moll’s law,
where you went as a surgeon from– if you’ve
seen The Knick with Clive Owen– you know,
cutting people open– turn of the 19th century.
And then you went into small-scale arthroscopic
surgery, where you make a little small incision.
And now with Auris, you make no incision.
You go in through an orifice of the body,
and you basically navigate with almost GPS-guided
capability to the site of where you need to
perform the surgery, and you do it from the
inside out.
And so their first modality was focused on
lung.
And there’s a whole slew of other things that
they’re focused on.
But the basic thesis we had was Intuitive
was really focused on two things, which were
prostatectomies and selling to the urology
department, and then hysterectomies only for
women.
And we’ll expand beyond that, but it was basically
one department.
Go to the urology department.
And we said, OK, wait a second.
If you had a multimodal robot where you could
sell it into the ER or the OR and just basically
swap out one technique for another and put
different equipment on top, then you would
have this super flexible robot.
And that was the founding thesis.
We originally vested, I want to say, it was
around a $20 million pre-money valuation.
MICHAEL GREEN: Wow.
Now just to toss numbers on it, it just sold
for $4 billion, if I’m correct.
JOSH WOLFE: If everything pays off, it’ll
be just under $6 billion.
MICHAEL GREEN: Phenomenal.
JOSH WOLFE: We brought Peter Thiel into this
Series B– MICHAEL GREEN: I’ve heard of that
guy.
JOSH WOLFE: –and then a slew of crossover
hedge funds– Viking, and Coatue, and Partner
Fund, D1– at successively higher valuations.
And as you know, my view on valuations is
basically for us, the killing of risk.
And so for us, it was the super early identification
of OK, here’s an entrepreneur and an engineer.
You know, all they have is technical risk.
Can they actually make it?
Can they build it?
And then you have market risk.
Can you actually get indications from hospitals
and players that you’re going to be able to
actually enter a market where Intuitive is
the 800-pound gorilla?
And you know, fast forward, this was pretty
much in stealth for about five years, which
for me is very hard because I like to talk.
And my partner Peter was the board member–
Peter Hébert is my co-founder at Lux.
And we kept it under wraps.
$600 million was raised, FDA approval, and
then we came out to the public.
And within a year, J&J began negotiations,
and then the sale was announced in the early
part of Q1 2019.
MICHAEL GREEN: So one of the things that I
loved about what you skipped over in your
description is actually part of the product
creation process, right?
So as I think about the dynamics of da Vinci,
one, you’re hitting on the component that
it was sold within a particular department,
right?
And so this was not something that was broadly
utilized, and so other departments were available
to purchase the Auris system, for example.
JOSH WOLFE: Sure.
MICHAEL GREEN: There wasn’t a sunk cost component
where I have to depreciate my MRI machine,
therefore I’m not going to buy a new MRI,
right?
The second was that Fred, or whoever was behind
it, did something really ingenious, which
was give it a video game controller.
JOSH WOLFE: Exactly right.
In fact, I had Bill Gates, which I’ve been
on a board with for the past five years, come
and visit Fred.
And it turns out they didn’t know each other,
but went to the same high school and they
were a few years apart.
And it was amazing watching Bill Gates, using
a Microsoft Xbox controller, basically navigate
through a person.
In this case, it was a dummy, right?
It was a plastic doll.
MICHAEL GREEN: You’d have to be a dummy to
let Bill Gates do surgery on you.
JOSH WOLFE: But that was the point was take
the best genius of the best surgeons, and
if a single surgeon performs an operation,
the machine and the technology and the computer
should be able to learn the technique.
And so what you end up doing is you can make
great surgeons better, but you can make above
average or average surgeons really great.
And if you think about this, when a human
gets into a car accident, you know, the human
learns, right?
Maybe there was something to learn.
I went too fast, or I should’ve paid attention,
or I shouldn’t have been texting, or whatever
it might be.
When you have an autonomous vehicle that’s
networked, when one car gets in an accident,
a million of them learn.
Today if you have an amazing surgeon, it’s
really hard unless you’re watching videos
of the surgeon and you’re doing multiple repeat
techniques for millions of other surgeons
to learn.
It’s a very linear process.
But if you wanted it to be massively parallel,
then you would want a machine to learn from
the haptics of the robotics of a surgeon,
and then translate into a technique, which
means that some aspects of the surgery will
be entirely done by a robot with the human
effectively, just like autopilot on a plane,
taking off and landing.
And the same sort of thing will happen inside
the human body.
MICHAEL GREEN: So this is very similar to
the phenomenon that we see in electronic sports,
where there is only one Michael Jordan or
LeBron James or Stephen Curry.
And neither you nor I care about the sports
component, but it’s a useful analogy because
we see kids that can play basketball on an
Xbox and do things that they couldn’t possibly
imagine.
Effectively, the intelligence or the capability
of Michael Jordan, LeBron James, Stephen Curry
has been built into the machine.
You’re talking about the exact same dynamic
in the Auris Medical system.
JOSH WOLFE: Yeah, and the analogy is actually
quite interesting because I do think that
you will see the skill of the surgeon effectively
be replaced by the skill of the machine and
the technology.
And that is ultimately a function of a team
of engineers working with surgeons to embed
the very best algorithms, hardware, sensors
into the technology.
Now, the same thing is true in, you know,
what we’re calling now esports, where the
idea that somebody is actually an athlete
because what they’re effectively able to do
is rapid firing and eye-hand coordination.
MICHAEL GREEN: Extraordinary use of opposable
thumbs.
JOSH WOLFE: Yes, right?
I mean, this is the next stage of evolution.
But they’re able to do it in a world that
is not real in the sense that it does not
exist in meatspace, but it does exist in bitspace.
Those worlds were conjured, like Inception,
in somebody’s mind, and then 3D designers
created them.
And we can objectively together share that
we are looking at the same space and somebody
can quickly navigate through that.
In a related company– and we may have talked
about this in the past– we have a company
called Drone Racing League.
Drone Racing League is literally a racing
league for drones.
Now whenever I have this thought, it usually
implies that the investment will end up being
good, but the thought that I had when I heard
about Drone Racing League was this is the
stupidest idea I’ve ever heard.
So whenever those words come out, it usually
means there’s probably something there and
I’m in the minority.
But here, you have people that were literally
racing drones.
And that evolved and these drones get faster.
And now, you have people who were able to
fly these flying projectiles 60, 80, 100 miles
an hour in 1/2 a second doing hairpin turns.
Now I know, because these guys also work with
the military, there are Air Force pilots that
can’t do these kinds of maneuvers.
And this becomes straight out of Ender’s Game,
where we’ve talked in the past about the gap
between science fiction and science fact,
but some of the pilots who are going to be
flying mission-critical military missions
will have been plucked from the video game
world.
The pilots that are flying these drones, they’re
doing them in the real world.
But now, they have a simulator and there’s
no difference.
The physics engine that is running the simulation
that has the course that’s plotted out, wherever
they’re going through– a stadium, a museum,
whatever the space is– it’s 3D scanned.
It’s photorealistic to a point that if you
were looking at this, you wouldn’t be able
to tell if you’re looking at video or you’re
looking at the simulacrum.
And people are flying through and it’s the
exact same controls, whether you’re controlling
reality or simulation.
And so that blurring between this sort of
meatspace and the bitspace is going to be
relevant for autonomous driving where we’re
training our cars effectively on simulators,
in robotic surgery where surgeons will be
effectively doing it in simulation and not
know the difference, and in drones and beyond.
MICHAEL GREEN: Well, and one way to think
about this– and I think this is how the da
Vinci system by and large had worked, right–
is that it raises the incomes of those who
know how to do it because they can do more
surgeries, they can behave remotely.
One of the things I love about what Auris
has done though by making it a video game
controller is just that you’ve expanded the
number of people who could potentially do
it, right?
That you’ve lowered the barriers to entry
to being a great surgeon as compared to a
mediocre surgeon.
JOSH WOLFE: Well, I’ve always said that just
like in investing, the most dangerous words
are, you know, this time is different, that
in venture, the most valuable words are it
will rot your brain because every time a parent
utters those words, it basically presages
the next $10 billion industry.
People that bemoan the couch potatoes who
were sitting there, you know, playing video
games back in the day on Sega Genesis, and
then Xbox, and then PS4– those are the people
that today are the drone pilots or the robotic
surgeons of the future.
And their dexterity and their skill to rapidly
learn new games that are coming out is just
off the charts.
MICHAEL GREEN: Well, it’s off the charts.
I would point out, just in case anyone’s confused
and thinking that you’re recommending that
you educate your children by putting them
on the sofa and having them play Xbox, that
what you’re describing is a situation in which
they will be able to do that, and therefore
the value of that will collapse.
You will effectively be able to have a truck
driver-type job be a surgeon.
JOSH WOLFE: Yeah.
In fact, there’s no reason why you wouldn’t
be able to remotely operate a truck.
And so somebody could be sitting in their
living room.
And maybe they were exceptionally good at
Monster Truck 2000 or whatever it is.
They could also be in the real-world situation
with sensors and Lidar, and complimenting
an autonomous system to be able to take remote
control.
Now, the stack of technology that you need
through that– right, you need the telemetry,
you need the connection, you need satellite,
you need GPS, you need the simulation, you
need real-time control– every one of those
pieces is whitespace opportunity.
There’s some technology company, just like
in the inside of a computer where you had,
you know, RAM, and memory, and compute, and
control, and GPUs– every piece of that stack
is a company that’s waiting to be funded.
MICHAEL GREEN: So every piece of that stack
is a company that’s waiting to be funded,
but there are tremendous nonlinear behaviors
associated with that, right?
JOSH WOLFE: And they’re hard to predict–
very hard to predict MICHAEL GREEN: Very hard
to predict, I think that’s absolutely correct.
And so part of the underlying dynamic, we’ve
talked about the TV show connections in the
past, right?
And there is this element of you can’t make
cannons until you’ve invented the casting
technology to make bells, right?
You’re describing something very similar,
where you can’t have autonomous driving until
you’ve got the systems, the telemetry, the
GPS, et cetera that can provide the feedback
for somebody to step in when it is absolutely
needed and the machine might not be good enough,
right?
And that person can be functionally in a call
center in India or sitting on their sofa in
Des Moines, but that system, that backup,
that overall system capability has to be there
before the thing can switch.
JOSH WOLFE: Exactly right.
And that’s the idea of the adjacent possible,
right– that certain technologies which are
intended for one use, then somebody else in
this different domain comes and plucks it
out and repurposes it.
You know, people have taken the Microsoft
Kinect 3D depth-sensing camera, which was
intended as a video game for just dance or
like doing three-dimensional depth perception
and playing games and controlling it with
your body, and people have taken that to say,
OK, we can do 3D scanning of rooms and we
can use that for real estate.
And so technologies exist and they basically
become like an artist tool.
It’s a palette that people can draw from,
and then mix, and remix, and combine.
Sometimes, you know, these big new inventions
are basically just the combinations of old
things.
By the way, talking about somebody being able
to operate in India, the single best drone
pilot in the world today– any idea?
MICHAEL GREEN: Well, I’m guessing India.
JOSH WOLFE: 12-year-old girl in Thailand.
MICHAEL GREEN: Really?
JOSH WOLFE: 12-year-old girl.
And she started playing when she was 8.
And she is better on every metric.
In speed, accuracy, she beats everybody.
Her name is Milk.
And that’s, you know, her call sign.
But a 12-year-old girl in Thailand is the
best drone pilot in the world.
MICHAEL GREEN: So it truly is actually Ender’s
Game, which is the book by Orson Scott Card
where we rely on children to fight the intergalactic
battle.
Fascinating.
That’s absolutely amazing.
Let’s think about the nonlinearity for a second.
And one of the topics you wanted to bring
up was this idea of liquidity as a nonlinearity.
JOSH WOLFE: Yes.
MICHAEL GREEN: And so one of the things that
we see within venture capitals is that there’s
been this explosion of liquidity, particularly
exceptionally well-funded growth equity.
So not the true VC stage one, Series A-type
round, although that obviously has benefited
from this dynamic, but the Series E pre-public
here’s $1 billion, here’s a $20 billion valuation,
here’s a $100 billion valuation.
Talk to me about how you think about this
liquidity switch and the impact that that
has on your industry and the impact that has
on innovation?
JOSH WOLFE: Well, it ultimately is going to
define all the returns.
And if you go back a little bit and say, well,
why are we in this situation, where we’ve
called this in the past, the minnows and the
megas?
You have lots of these small firms that are
starting up that are doing the seed checks,
and then you have these large players that
are writing these $100 million plus checks.
Going back 7 years or so, Andreessen– who
I think is a brilliant investor, a brilliant
technologist– basically said, there’s only
10 companies that matter in a given year.
And statically, that’s probably true.
Now knowing which 10 is very hard, but he
said, you just basically want to be in those
companies.
And I that was a meme that really went very
wide.
And people said, OK, well, it doesn’t matter
if you invest in Facebook at $1 billion, or
$5 billion, or $10 billion because we’re going
to be hundreds of billions.
And so does it really matter if we’re negotiating
here and quibbling over $1 billion or $2 billion.
Well, of course, it does, but that I think
induced a lot of growth investors to say,
let’s just try to speculate on some of these
big unicorns.
And you’ve got this phenomenon of companies
that were pining to signal that they were
going to be that next Facebook by attaining
a billion-dollar valuation.
And then you got a positive feedback effect
where people were funding these things, and
to get access, would write an $100 million
check at a $900 million pre.
And they would own 10% in a billion-dollar
valuation.
And the problem for the early-stage investors
and their limited partners is they were getting
these huge markups.
And on paper, it looked phenomenal.
And then they would go out and raise their
next fund and put it into more illiquid companies.
But they weren’t necessarily getting liquidity
on that billion-dollar company.
And you have started to see over the past
3 or 4 years, a lot of these unicorns not
go from $1 billion to $800 million.
They’ve gone from $1 billion or $2 billion
to 0.
MICHAEL GREEN: To 0, yeah.
JOSH WOLFE: And so there’s this liquidity
trap that is natural in markets because people
are basically taking massive amounts of capital,
which in the venture world, there’s a capital
structure just like in the traditional public
markets.
And you have common equity, which sits on
the bottom of the stack, and then preferred,
and then debt on top.
When you have preferred equity of a size that
is so large, and with it might have the classic
Carl Icahn, you know, your price, my terms.
So SoftBank would come in, for example– we
could talk a bit about them– and say, sure,
we’ll give you $20 million, and we want to
own 20% at a billion-dollar valuation, and
we want a 2x or 3x liquidation preference.
Now, you’re talking about a payout where if
they actually got sold for $1 billion, SoftBank
is not getting 20% of that.
They’re getting $600 million.
And so all the people below the stack, that
might be OK because you’re really actually
getting your percentage of a $400 million
distribution in a waterfall, but what if it’s
only $400 million or $500 million?
You’re getting nothing.
So the presence of SoftBank coming in and
basically said, you know what?
We’re going to do this in a huge way.
And combination of Saudi money, and others,
and complex debt structure, started basically
becoming in a relatively– not relatively–
in an absolutely inefficient market, the top-tick
price setter.
And suddenly, they were writing these large
checks, owning very large pieces of companies
at extraordinary valuations, setting comps
that other people would reference, while SoftBank
just did that as though they would fund the
other.
They would publicly come out and do these
Solomonic baby splits, right?
We’re going to go to California and we’re
going to invest in either Lyft or Uber.
Fight it out because we’re going to king-make
one.
It’s my view that– and this is a borderline
tinfoil conspiracy theory– I think that part
of what’s going on is SoftBank is investing
in companies that they know that they will
be able to inflate the value of later on.
You saw this with We Work.
First investing at around $10 billion valuation,
then $20– basically, pricing up the deal
themselves.
And when you looked at the earnings release,
either a quarter or two ago, most of the profits
that SoftBank was able to show on paper were
from the write-ups of their equity holdings.
So I believe that a lot of the activity is
done not just because they think they can
make money– although I’m sure that’s true–
but because they believe that it will serve
as collateral against a massivelyindebted
mothership parent company.
And so that has absolutely distorted the venture
market.
And we have warned our companies, unless you
and we are getting liquidity in one of these
monster rounds, you’re basically taking the
risk that you’re going to be holding zombie
shares.
And I think that there will be a rude awakening
for a lot of people that that’s the case.
Now, it has attracted other people who are
providing capital as alternatives to SoftBank.
And so you have crossover funds and you have
really smart groups.
We get Tiger– who has absolutely killed it
in a really smart way– Viking, and Coatue,
and others that are writing $100 million plus
checks.
They do have the public market savviness and
understand what the comps are.
They are generally value-add.
In the case of Auris, you know, all those
groups that came in were, I think, super helpful.
But it’s a very dangerous phenomenon where
you have huge amounts of money coming in at
huge valuations on what are still largely
unprofitable binary outcomes.
MICHAEL GREEN: Well, so those companies hit
on two separate issues, right?
One is at minimum in a Minsky-type framework,
they’re speculative finance, right?
They rely on the capital markets remaining
open in order to cover their costs and service
their existing levels of debt.
At worst case scenario, they have Ponzi-like
aspects, which is in order to keep going,
they need to keep raising more money, right?
The second component though that you’re describing
when you talk about these types of preference
rates is you’re creating waterfall characteristics
similar to a securitized debt stack.
JOSH WOLFE: The structure of the payout.
MICHAEL GREEN: The structure of the payout
is very different depending upon the underlying
outcomes.
And pricing that is really quite tricky, right?
It’s very unclear that anyone involved is
actually making the type of calculated analysis
that says, well, I have an option that suddenly
has very different components.
JOSH WOLFE: I actually think that there is
a very sophisticated step– there’s just three
steps.
The first step is the finger in the air.
The second is to the tongue, and then the
third is to put it in the air.
MICHAEL GREEN: To put it up, yeah.
Yeah, it’s a highly efficient temperature
gauge.
I think that’s right.
And that would largely argue that most of
the participants in the venture space are
not by experience equipped to do that type
of calculation, right– understanding the
option components.
JOSH WOLFE: To be fair, Auris from a $20 million
pre to a $5.75 billion exit– MICHAEL GREEN:
Oh, sure, pick on something that worked.
JOSH WOLFE: –I didn’t look at a single spreadsheet–
not a single one.
We didn’t model anything.
MICHAEL GREEN: Right.
JOSH WOLFE: I mean, it was literally, you
know, we’re backing a team.
They’re developing a technology.
We think it’s going to be relevant to this
market.
And if you would’ve told me that it would’ve
been sold for $3 billion, or $8 billion, or
$4 billion– like we had no conception of
what that range could actually be.
MICHAEL GREEN: So that’s traditional venture
capital, right?
And that’s obviously meant as a compliment,
all right?
But when you start making an observation about
a historical distribution of payouts, and
then change your behavior based on that historical
distribution of payouts, what you’re actually
doing is changing the future distribution
of payouts– i.e.
Marc Andreessen’s observation was correct
as it described the history of venture capital.
But by choosing to act on it and act on it
as a scale enough agent– and SoftBank obviously
is even larger in this context– but by acting
on it as a scale agent, you’ve changed the
future distribution.
You won’t know that until you observe the
outcomes.
JOSH WOLFE: I think you’ve skewed the probabilities
lower, right?
I mean, just by definition, the more people
that are chasing things, you know, the greater
the competition.
Now if you have these layers in the public
markets where there were pools of capital
that were voracious to be buyers of IPOs,
then you would see this flood of IPOs, like
we saw in the late ’90s and early 2000.
You don’t see that today.
Now for a variety of reasons, the narrative
is to stay private for longer, control.
But I think you’re absolutely right that by
making the observation that there’s a handful
of companies that mattered and the price that
you paid didn’t, it attracted a flood of capital.
But that’s flood of capital, I believe is
going to end up with a lot of donuts.
MICHAEL GREEN: I think that’s correct.
And I think the challenge is that there is
a feedback loop as you go through that process.
So exactly as you highlight with SoftBank,
where they’re able to write up their investments
and show profits, that in turn is then able
to be presented to investors and say, hey,
look how stable this process is or how profitable
it is.
JOSH WOLFE: Which induces more capital.
MICHAEL GREEN: Which induces more capital
to come in.
JOSH WOLFE: It’s very dangerous.
I mean, it is, in a sense, like a Minsky cycle.
MICHAEL GREEN: It’s absolutely a Minsky cycle.
The challenge on all of this though is that
in a world that is dominated by empirical
finance, which is the historical returns are
the only fact pattern, the future returns
are your opinion and my opinion.
Particularly in that process of migration
where more pools of capital are coming in,
raising the valuations, improving the returns,
you can look like a fool– a complete Cassandra–
arguing that this is bad in the future because
the immediate history is going to tell you
the exact opposite.
JOSH WOLFE: And the analogies between the
history in public markets, which I try to
study a lot– not anywhere near as well as
you.
I learn way more from you than I do from any
of my venture brethren when it comes to capital
markets.
And you compare that to the venture world.
There are really ends of ones in venture.
Like looking at comparables, in 1997, you
would have been an idiot– or ’98– you would
have been an idiot for saying, who the hell
needs another search engine, only to miss
Google.
But then once you see the presence of Google,
you would’ve been an idiot to try to fund
the next 10 Lycoses or whatever it was.
And so it’s very hard because you have these
aberrant outcomes.
They are total anomalies, and then people
try to learn from these things.
And it’s just it’s way different.
And I would actually argue that the reason
it’s different is because you do not have
the kind of information that is conveyed through
price discovery in traditional markets.
You do not have the number of really smart
people that are looking at a security, analyzing
its history, looking at the fundamentals,
debating it, being long it, being short it.
The absence of that kind of relative efficiency
is totally missing in venture.
And so you also get, which you don’t typically
get in the public markets as much, massive
dislocations between bids and ask in pricing
events.
So the step-ups that we see in, you know,
seed stage round can be 10x into a Series
A. Now the scale of what you’re talking, you
might be putting a few $100,000, or a few
million dollars in it, a few million dollar
valuation, and then you might be raising $20
or $30 million at a $50 million valuation,
then $100 million at $1 billion.
The gaps– the discontinuities between those
is huge.
Now, liquidity is one form of that– this
sort of asymmetry of information– but it
starts before conception or inception of a
company.
And there’s information asymmetries all the
way.
And you could argue that they get reduced
over time.
But the first information asymmetry– like
the maximum information asymmetry– is with
the invention that a scientist has.
And you know, there’s this quote from Linus
Pauling, a Nobel Laureate, who said, I know
something that nobody else in the world knows.
And they won’t know it until I tell them.
That is the ultimate power in the world–
to know a secret that soon, the rest of the
world will know, but you’re the only one that
knows it.
So that’s maximum information asymmetry.
The next is, OK, now, the scientist has teamed
with an entrepreneur.
Now, the entrepreneur might have asymmetry
because not a lot of other people know about
it or they’ve befriended the scientist and
they started the company.
But then the entrepreneur has an asymmetry
of both a false positive and maybe a true
positive, which is their estimation of their
ability.
Almost all entrepreneurs believe that they
are more valuable than the market thinks they
are.
Because if the market thought that they were–
MICHAEL GREEN: Most teenagers as well.
JOSH WOLFE: And by the way, the disposition
are the same.
MICHAEL GREEN: Very similar.
JOSH WOLFE: They throw tantrums.
MICHAEL GREEN: Absolutely.
JOSH WOLFE: They seem like they’re drunk.
You don’t know if you should trust them with
money.
The entrepreneur, if they felt fairly valued
by the market, would go and just join a consulting
firm– a McKinsey.
But they say, no, either because they were
rejected, and they say, no, I’m going to go
do it myself.
And so to do something entrepreneurial, in
a sense, is to have an overestimation of the
thing that you know or think you know that
the rest of the world doesn’t.
Now 90% roughly, let’s just say, failure means
that 10% of those people are actually right
or lucky.
And maybe some of them are right and unlucky.
So that’s the next asymmetry– the entrepreneur
who thinks that they know something or maybe
does, in fact, know something the rest of
the world doesn’t.
Then the next stage is the investor.
So now, we come along and we meet the engineer
or the Fred Moll.
And we think, OK, wait a second.
We’re early here.
We’ve got something that nobody else knows.
And so we jump on that.
And that’s really, it is the same phenomenon
as the teenager who is discovering the band
that nobody else knows about yet– the book,
or the movie, or the artist that is going
to impart on them social currency because
they have discovered the thing that everybody
else is going to celebrate later.
There’s no difference.
So for us, it isn’t an Excel spreadsheet.
It’s not a model.
It’s like based on the market, and the understanding
we have, and the marketability of this entrepreneur,
and their ability to raise money, and recruit
people and convince them to part with their
jobs and move across the country and join
them.
Do we think that these guys and girls are
going to be really valuable?
It’s a total qualitative psychological judgment.
So now, we’re in the first few board meetings.
And we know everything that’s going on in
the company, or let’s say, 80% of what’s going
on in the company.
And if you have a good relationship with the
CEO, you know a lot more.
And if you don’t, then they hide things from
you.
But now, a new investor comes in.
And so, let’s say, we’ve invested in this
case, like in Auris a $20 million pre, and
then Peter Thiel comes in at 80 or whatever
it is.
Does Peter know more than we do?
Now, maybe he knows something about the market
that we don’t know or maybe he has an unfair
access to be able to make introductions that
are going to create value by reducing risk.
But there’s very improbable chance that a
new investor knows more about what is happening
in the company than an existing investor.
So now, we have asymmetry of information.
And so it’s very different than public markets
where you might have different preferences
in time, or liquidity, or expected return.
The information asymmetry starting from that
scientist to the entrepreneur to the first
founders to the funders to the later funders
is just enormous.
Over time, I think it starts to reduce.
And then ultimately, you’re going to the public
markets.
And the public markets are saying, well, we
demand to be able to look at the books, and
understand, and how this compares to comps,
and how it’s going to be valued, and what
our estimation is of how other public market
investors are going to value it.
And then you start to get more and more scrutiny.
And scrutiny, I think ultimately creates liquidity
and it creates markets because you have more
information.
So that information asymmetry is, I think,
where most of the returns on venture come
from, and being able to identify people early,
develop a reputation so that you can attract
the next entrepreneur who believes that they
might be like your last entrepreneur, and
have a reputation for being a good actor with
other investors, and not being zero-sum–
knowing that this is a long game.
And otherwise, I think it’s an asset class
that, frustratingly for us as insiders and
definitively for outsiders, is really dominated
by luck.
MICHAEL GREEN: Well, you know, Michael Mauboussin–
who we both are close with– has the classy
expression, is it luck or is it skill?
If you can lose money intentionally, then
it’s skill.
JOSH WOLFE: Can you fail on purpose?
MICHAEL GREEN: Can you fail on purpose?
I would argue empirically, you can do that
within venture.
So I’m going to take away some of your luckiness
and replace it with skill.
JOSH WOLFE: Wait, wait.
If I tried to bet that a person was a fraud,
I might still– so I’m intentionally trying
to fail– I might have identified very early
on that Elizabeth Holmes from Theranos was
a total fraud.
And I would say, OK, guys, watch this.
We’re going to lose some money.
And I put money with her.
I might have gotten very unlucky in the attempt
to do that because there were all a lot more
suckers that actually believed it was real.
MICHAEL GREEN: I think you’re being too self-deprecating,
but I understand your point.
And certainly in this environment, exactly
as we’re describing, if you’re in the process
of changing the distribution of outcomes,
you can absolutely confuse skill for luck.
And there will be people who carry that.
I mean, you talk about investing in search.
One of the things I think is often underappreciated
within search or the emergence of Google is
their luck in buying DoubleClick.
Had they not had that integrated advertising
platform, you would have had people out there
trying to sell ads in the exact same way that
they did for Yahoo and other display banners.
And it’s not at all clear that the game would
have played out the way it did.
JOSH WOLFE: Now post facto, I’ve constructed
a narrative as it relates to Google that has
informed some of our other investments, which
is thinking in a market sense like about abundance
and scarcity.
What became abundant as Google was rising?
It was the presence of a ton of information
being produced online.
And you had the rise of blogs and web pages.
And it just like the abundance of information
was abundant.
What was scarce was being able to search through
it.
So we talked about this in the form of technology,
be it from game controllers, or the gamers
themselves, or components like 3D cameras.
When you can identify a technology, or component,
or a market phenomenon where there is abundance,
then if you turn your turrets to look at what
is scarce, it’s not going to definitively
lead you, but I think it increases the probability
that you’re going to find something interesting.
So today, we look at this and say, OK, with
the abundance of information again, we feel
like there is a scarcity of veracity– of
being able to tell what’s real or not.
And that’s not just for fake news.
That’s is the image that I’m looking at a
real image or not?
Is the video that I just watched a real video?
Is the object that I’m looking at a simulacrum
or reality?
And I think that there are going to be companies
that rise to basically solve that problem
for people when they encounter negative events
from having made a mistake.
MICHAEL GREEN: Well, you see this online on
a continuous basis, where information comes
out.
It’s presented in a certain way.
The reaction function from a subset of the
population is with extraordinary certainty,
about what this indicates.
And then we discover that it’s edited video
or that we didn’t get the full picture.
Some fraction of the population retracts their
view.
Some fraction of the population insists that
this is true in the broader sense, but not
true in the specific sense.
JOSH WOLFE: And by the way, some portion of
the population– probably the majority– doesn’t
even know because the information cascade
has taken off, that there is a debate about
whether the information is true or false.
And so in markets, it’s the same thing.
MICHAEL GREEN: Well, in markets, I think you
actually have– and you mentioned the dynamic
of public versus private markets.
Ben Hunt has been on my mind a lot with Epsilon
Theory.
He’s been talking about the dynamic of information
as alpha, full stop.
I think it’s a little bit of a simplification,
but I think that there is some truth associated
with the broader observation.
In the public markets, information by and
large has become explicitly illegal.
Reg FD made it impossible for management to
disclose to even sizable investors, information
that hadn’t been disclosed to everyone else.
JOSH WOLFE: If not regulated away, then competed
away.
MICHAEL GREEN: And so I think that’s actually,
to me, that’s the most interesting dynamic
about what’s happening in the public markets
is that the information is actually increasingly
becoming a disadvantage.
This can be seen in things like the volatility
of individual securities around fundamental
information events.
So much of the focus in the public markets
is around things like can I predict earnings?
Can I access all the credit card data so that
I know exactly what’s going to happen?
And the challenge is that you are a possessor
of fundamental information, trading against
individuals who, for the most part, you’re
uncertain about their information.
And so there’s an element to the game of,
do I know what you think you know, sort of
thing.
And then there’s a second component, which
is, is the dominant flow players with information
or with an entirely different modus operandi?
JOSH WOLFE: Now, I know you have views about
the structure of the markets, say, today versus
5 years, or 7, or 10 years ago.
MICHAEL GREEN: Yes.
JOSH WOLFE: And so how does that play into
it?
More passive players today– what’s the implication
for the value of information on an individual
security?
MICHAEL GREEN: So information, as I think
about it, is ultimately an event that creates
volatility, all right?
The reason we as public investors or you as
private investors gather information is not
for the beauty and the joy of having information,
but because it prepares us to actually provide
liquidity.
So if an earnings beat occurs or if an earnings
miss occurs, it’s incumbent upon me to immediately
internalize that information and decide, am
I going to become a willing provider of liquidity
or am I going to become somebody who demands
liquidity?
Am I going to buy the stock or am I going
to sell the stock?
JOSH WOLFE: Now, something that Mauboussin
has also, I think, noted really well is that
gap between fundamentals and expectations.
And most of the information change in the
volatility isn’t really an adjustment of what
people’s prior assessment of what fundamentals
were and their expectations suddenly meeting
new facts and information about what fundamentals
actually are.
MICHAEL GREEN: So I think that there’s an
additional layer on top of that, which is
again, the expectations game can only be played
by people who value information and expectations.
There is nobody at Vanguard who cares what
Apple’s earnings were.
Literally, nobody in the room.
So the single largest holder– the majority
provider of liquidity on a day-to-day basis
for Apple in the event of an information event–
Apple reports earnings– disappears.
They don’t exist.
They cease to exist.
They neither provide liquidity or demand liquidity.
Potentially based on totally extraneous dynamics–
what is the flow coming into and out of various
Vanguard funds, or BlackRock funds, or State
Street funds, not to pick on Vanguard– they
could behave in a manner that is completely
contrary to the underlying information.
As they become larger and larger players,
the impact of their lack of concern of information
and response strictly to a flow dynamic radically
changes the structure of the market and the
behavior.
And so what we’ve seen is despite the fact
that we’ve had among the most robust earnings
periods in history, stocks have become incredible–
individual securities are becoming dramatically
more volatile around the fundamental information
events.
JOSH WOLFE: So what changes that?
MICHAEL GREEN: I mean, the quick answer is
I don’t know.
My concern is that the behavior is being driven
by these flow dynamics and that these flow
dynamics, because of the regulatory structure
in a variety of ways, continues to drive that.
I think it’s one of the reasons why people
are creating a story for themselves around
a desire not to IPO.
I don’t want to be a publicly-traded company.
Of course you want to be a publicly-traded
company because that provides liquidity for
your investors.
That’s optionality.
What you’re actually saying is, I’m not sure
I can convince Vanguard to buy enough of my
shares to support the price that is currently
embedded in the private markets.
Because within the public markets, particularly
when you think about passive investing being
driven by things like index inclusion, how
do I get into the S&P 500?
That’s an entirely different investment criteria
than is this the most fascinating and wonderful
thing ever?
JOSH WOLFE: What’s interesting too is private
market prices in some ways are eclipsing the
historic relationship, as I understand it,
in public markets.
Where in public markets, you would pay a premium,
in the private markets, you would demand a
discount because of liquidity.
In public markets, you were paying really
two prices– the price of what you actually
value the fundamental security at based on
the future cash flows that were being discounted
and the right to sell it.
In the private markets, you have no such right
to sell it.
It’s very hard, if not impossible sometimes.
MICHAEL GREEN: 100%.
I mean, this is what underpins David Swensen’s
original analysis of the advantage that a
long-dated endowment has– the endowment-type
model for investing in vehicles that you can
extract a liquidity premium for.
JOSH WOLFE: It’s interesting.
I’m almost imagining an event horizon where
people had the longer-term view, and it got
shorter and shorter as you had more competition.
And then so you’re focused on the annual event,
and then you’re focused on the quarterly,
and then you’re focused on information to
understand what weekly or daily sales are
or the hourly sales.
And as you come closer, and closer, and closer
to the present, information paradoxically
becomes less valuable, as you said.
MICHAEL GREEN: I think that’s actually the
world that we inhabit.
And again, it’s one of these things where
this is a forecast.
And the process of moving there feels very
much like progress.
The market gets more efficient.
The returns are becoming more stable and more
predictable or they’re becoming better.
And really what’s actually happening in my
analysis is money is flowing into Vanguard.
Vanguard, while we typically think of algorithms
as super complex and built around machine
learning and all sorts of stuff, actually
has the world’s simplest algorithm.
Did you give me cash.
If so, then buy.
Did you ask for cash?
If so, then sell.
JOSH WOLFE: So this may be the answer of what
causes the breakdown because on the upside,
it doesn’t matter.
I see good news.
I see bad news.
I can come up with a story.
But if I know that a company is actually doing
well, fundamentals are good, but the flows
are bad, suddenly people will say, wait a
second.
There’s this breakdown in this relationship.
There’s no reason that this company should
be below the historic values of this and that.
Now, the question is what causes the flows
to suddenly reverse, and for massive amounts
of inflows into equity to reverse and go into
debt or something else?
But it seems to me like today, flows trump
fundamentals.
MICHAEL GREEN: I think that’s correct.
JOSH WOLFE: And when outflows trump fundamentals,
then people will suddenly say, wait a second.
Active investors make more sense than passive
because clearly you can look at this, and
observably discern that this is a quality
company– that Apple, let’s say, is not going
to be worth $100 billion.
There’s massive outflows and it’s just structural.
It seems like it will invite an analysis and
reinvention of market structure.
MICHAEL GREEN: So well, you can actually think
about it– and this is a lot of the work that
I’m doing currently.
The way my industry is managed is on the term
alpha.
And alpha is literally just the simplistic
solution to a linear equation, y equals mx
plus b, where it’s the intercept.
The issue is if passive penetration is influencing
the return– i.e. if it’s a multi-variable
equation and you failed to disclose the component
of the return that’s associated with m2, x2–
you create curvature in space.
And inflows would drive a positive curvature
to space.
The linear solution to a positively-curved
space is negative alpha– a negative intercept.
And that’s what’s actually happening, I think,
in our industry– that we’ve completely misdiagnosed
the dynamic.
We think that there is an excess of active
managers and that they’re overcompeting away
the opportunities.
I would actually suggest that what we’re about
to find out is that the penetration of passive
drives the solution set for alpha by active
managers negative.
And when it reverses, as you’re describing,
that convexity flips.
Suddenly, the alpha becomes extraordinary.
JOSH WOLFE: I’m visually imagining a bunch
of surfers at sea, and they can actually [INAUDIBLE]
and move the waves.
But suddenly, the wave becomes so big that
their individual movements have no impact.
MICHAEL GREEN: That’s 100% correct.
And so we see this if we actually– I’ve built
simulations of some of this stuff.
And I want to focus on you in a second, but
this is exactly what’s happening.
The wave is becoming so big that it’s swamping
any of the individual actions.
JOSH WOLFE: Now, the relevance for me is in
the absence of the buyers, who provides liquidity
for us?
Now in the case, you know, we’re talking about
Auris, J&J was a motivated buyer.
They’re motivated to compete with Intuitive
Surgical.
You’ve got a news cycle about talcum powder.
And so you can identify post facto reasons.
What would be the drivers of this?
Because I’d love to believe it’s just because
robotic surgery is amazing and Auris is the
most incredible company in the world, but
there are other things in work.
And if we can identify that, we might be able
to skew our odds across many of our private
companies.
Who is the natural buyer here?
But it isn’t always obvious to us.
MICHAEL GREEN: I think that’s actually going
to be the crux of the situation.
I think you’re hitting on possibly the most
important question that comes out of venture.
And so far in the presence of that wave of
liquidity that’s coming from SoftBank and
others, the answer is, well, why would we
need to?
JOSH WOLFE: Well, and to be clear, it isn’t
necessarily a wave of liquidity coming from
SoftBank.
It’s a wave of marginal pricings.
MICHAEL GREEN: Yep.
JOSH WOLFE: Because unless you’re getting
liquidity, my view is you’re getting zombie
shares.
You’re getting a nice paper mark.
And many people will use that paper mark to
actually make then irresponsible decisions,
which is, in a sense, that illiquidity is
almost like leverage.
Because if you have a ton of money in your
private portfolio as an endowment, and you’re
like, hey, we’re doing pretty well on the
private equity side– I mean, we’ve got all
these great marks– and then you either allocate
more to it or you overallocate to another
sector.
And then all of a sudden, you know, that billion
dollar mark goes down not again to $800 million,
but to 0.
It’s the equivalent of having like a 20% turn
in something that is levered 4x or 5x.
MICHAEL GREEN: I think that’s exactly the
right analogy because what you’re effectively
doing is– and I misspoke when I used the
term liquidity– if I keep pricing it higher,
you’re right back to this underlying dynamic
of a structured product with a waterfall structure.
And you’re pushing yourself further and further
out the equity spectrum.
Some would argue this is central bank-driven.
I’m less convinced of that, by the way.
But you have created this underlying dynamic
where you’re being pushed out, right?
And what I would suggest to most venture players,
public markets are not there for you.
So you need to figure out who’s the Johnson
& Johnson.
And perversely, you can’t have Johnson & Johnson
buy you.
You can’t have General Motors buy Tesla or
Toyota buy Tesla when the valuations get pushed
to the levels that they’re getting pushed.
Can anyone show up and buy Uber?
It’s highly unlikely.
The only buyer is Vanguard and they don’t
care.
It doesn’t exist.
JOSH WOLFE: That’s a great point.
MICHAEL GREEN: The company doesn’t exist.
JOSH WOLFE: That’s a great point.
MICHAEL GREEN: What changes if this dire forecast
emerges?
JOSH WOLFE: Well, I think we’re going see
whether the sophisticated things that you
were talking about in the structure of markets
and the nature of liquidity in the public
markets, which historically have accounted
for a significant, if not the majority of
venture exits.
I think we’re just in a natural cycle.
I think overinvestment will lead to underinvestment.
How does that happen?
LPs look at the denominator effect and how
much money that they’ve put out.
They say, wait a second.
I’ve got all these paper marks.
I don’t have realizations.
I don’t have liquidity.
So I would love to invest in your next fund,
which by the way, the measure of when you
know that the people who know the information
asymmetry– the GPs– are raising money at
faster and faster rates.
Why?
Because they know that the party is going
to end.
And this is the same thing as like Chuck Prince–
or was it Chuck Prince back in the day?
MICHAEL GREEN: While the music is playing,
you got to dance.
JOSH WOLFE: Yeah, it’s the same thing.
There’s somebody else who’s going to say it
in venture and they’ll be quoted for it.
It’s not going to be me.
But people are raising funds at ever faster
rates before the punchbowl gets taken away.
And in some cases, they’re raising the money
and saying, look, we’re actually not going
to invest this for the next 6 months or a
year because we’re still investing out of
our last fund.
But the FOMO– the Fear Of Missing Out– is
still there from limited partners and endowments.
We go in because we’re intellectually honest
and we think it enhances our credibility–
when we say, LPs, they say what should we
be doing?
We say, you should be investing in secondary
funds because the shit is going to hit the
fan and a lot of people are going to lose
money.
So sit out the ride because people en masse
will go from FOMO– Fear Of Missing Out–
to shame of being suckered.
Now, anybody that was in Theranos and some
of these other frauds has shame of being suckered,
but it’s going to start to trickle into the
actual returns.
You’ll be like, oh, my god, we’re overallocated
into venture.
And I think that the sophisticated LPs will
start to pull back from the asset class.
And when you see some of the recent visitors–
the tourists that have come in– corporates
are always a countercyclical indicator for
where we are in the peak of venture.
5 years ago, there was very little venture
activity from corporates.
What happens?
Somebody is in a board and they say, well,
why didn’t we see that or our peers are doing
that?
And all of a sudden, they ramp up a venture
program.
Now Intel has Intel Capital.
They’re very active.
But every other corporate that you can name
starts a little venture unit.
And they open up a 3 or 4-person office in
Palo Alto, and it’s their innovation lab and
their innovation unit.
And that starts to escalate.
Corporates are almost always seen as the dumb
money in the cycle.
And I think you’re seeing peak corporate venture
activity.
So that’s one sign.
The second sign are the crossover funds.
They’re looking for the big growth.
And if you’re not getting in on the public
markets– and these are guys that historically
were really smart on the long and short side–
and you talked to John Griffin and other really
smart guys, most of the money that they made
was significant market outperformance was
from the short side.
And it’s really hard in an up market where
you’ve got this Vanguard algorithm, or where
it’s just basically money comes in and buy,
to be killing it on the short side.
So they start looking and saying, well, wait
a second.
We can get, you know, 2x, 3x returns, which
for us would be paltry.
On an individual company, we need to make
10x because a 1/3 of our companies are going
to be 0’s, a 1/3 we make our money back, a
1/3 we get 10x.
We end up with a 3x cash-on-cash fund.
For them, 2x is amazing.
So they can invest in something at $3 billion
and sell it for $6 billion, and that’s a killer
home run.
But I think that they will start to say, well,
wait a second.
If the corporates retract, and you don’t have
the public markets to sell to, and there aren’t
50 J&Js buying companies, then they’re going
to start to retrench.
And if they retrench, then the growth equity
guys say, well, who are we going to sell to?
And if the growth equity guys start to retrench,
then we start to say, well, who are we going
to sell to?
And you start to have that same cycle on the
downside.
Now what the catalyst is and when, my bet
would be it would be a colossal poster child
failure, whether it was from somebody like
SoftBank or somebody like Tesla, where everybody
hails them as the inventor of the future,
you have, in my view, insane valuations, and
there is a liquidity crunch at one or both
of those companies that has people scratching
their heads and saying, wait, what do you
mean?
How do they not have money?
What happened?
And then it just becomes this downward spiral.
MICHAEL GREEN: I’m super sympathetic to that
articulation.
And I think we’re likely to find that the
irony is, as you’re also describing, that
pulling-back process raises the probability
of that outcome because all of these companies,
or almost all of these companies– a disproportionate
fraction thereof– don’t generate their own
internal funds.
There’s a limited number, I believe– like
Airbnb is profitable and a few others that
are profitable and capable of self-sustaining
because of their business model, as Google
was, as Facebook was when they went public.
JOSH WOLFE: By and large, they depend on the
benevolence of strangers.
They depend on capital markets of some form
and the provision of capital.
And the provision of capital is dependent
upon expectations.
And as long as they can show growth expectations,
then people will provide capital.
You’re starting to see growth expectations
come in from some of the big tech guys– Facebook,
and Google, and others.
And I think that that may also be one of the
things that starts to set the downward spiral.
MICHAEL GREEN: Well, there’s a feedback loop
as well, right?
I mean, most of the numbers that I’ve seen
suggest that somewhere around 50% of Google’s
search revenue is being generated by venture
capital-funded entities.
JOSH WOLFE: I almost had a heart attack looking
at the amount of aggregate spend from our
portfolio on AWS, which for Amazon is an amazing
thing.
You call this right.
I mean, I identified early that Nvidia was
going to be this, you know, soul of the new
machine for AI and machine learning.
And that went from an underappreciated story
to a massively overbought story.
And fundamentals and expectations were totally
detached.
And you were one of the few people early that
said, you know, one of the key drivers of
this is– MICHAEL GREEN: Crypto.
JOSH WOLFE: –the cryptomining.
And like, this is going to abate, and then
all of a sudden, it’s going to hit the fan
and it did.
And I think it’s going to be the same thing
here on the growth story on a lot of tech
companies, where people say, well, the source
of their growth came from these startups,
and the source of the startup’s capital came
from expectations from these new players.
And when that disappears, the dominoes fall.
MICHAEL GREEN: So let me ask you one other
quick question because you and I both spend
a tremendous amount of time getting into exclusive
nightclubs.
My understanding is that when you try to pitch
that to investors, we’re trying to stay sober.
We’re not going to use this money.
Please don’t invest.
Do they listen or do they say, no, please
take our money?
JOSH WOLFE: I think we’ve been– well, look.
It’s scarcity and perception.
And I think it was Kierkegaard, one of the
philosophers who said, we pursue that which
retreats from us.
It’s true in love.
It’s true in business.
It’s true in entrepreneurs.
When an entrepreneur turns us down, I mean,
my god, I didn’t sleep for three nights.
My wife, Lauren, you know, she was going crazy
because of this company Control Labs doing
brain-machine interfaces because the founder–
this PhD genius– was rebuffing me.
To be rejected makes you want something more.
And so I think one of the few exceptionally
smart people in venture, who I really respect–
and he comes from a capital markets perspective,
very close also with Mauboussin– is Bill
Gurley.
And Bill says that one of the biggest mistakes
that he made 20 years ago during the boom
was that they raised like a near billion-dollar
fund, and they ended up giving it back.
But I think he’s got the ethics, and the integrity,
and the team structure, which is super rare.
Everybody is an equal partner at their partnership.
Most places are hierarchies.
You’re in the fund or you’re not.
And if you’re in the fund, it’s all for one
and one for all.
They’ve been going to LPs and saying, stop.
The more money you put in, the higher the
price is.
The higher your price is, the lower your expected
returns.
Stop.
If you want this to be a good asset class,
just pull back.
Well, the smart ones will pull back, but the
new ones say, well, we want to get some of
that too.
And so in aggregate, you have all of these
endowments and LPs that are new to asset class
coming in.
And he has been trying to talk money out using
fear.
And fear has had the opposite response.
It’s got social proof.
Everybody wants to do it.
Sequoia went and raised $8, $10, $12 billion.
And you could argue that they’re appealing
to greed and saying, look, if the money is
out there, you know, it’s better that it go
to us than to go to 10 of our competitors.
And so especially if we have to control the
fate of our own companies and not let them
be beholden to SoftBank, on both ends of this,
fear and greed are sort of fighting for the
soul of the LP.
And right now, greed is winning.
MICHAEL GREEN: Yeah, it definitely feels that
way.
I mean, I’m seeing that.
I just had a discussion with somebody about
this dynamic within credit markets, where
the current pitch to raise funds and credit
is things are so bad that we want to be positioned
for the other side of this.
And inevitably, like if you hear this, your
immediate reaction is like, well, wait a second.
We’ve got existing investments in credit,
but things are so bad.
We should probably pull back, right?
And the exact opposite reaction.
These guys are so sober.
They can see all the problems ahead and we
want them to be positioned for it.
JOSH WOLFE: Now, we’ve been lucky over the
years.
We’ve gotten more sophisticated investors.
The number of LPs has shrunk.
It’s 10-year locked.
You’re in this for the long term.
And reputationally, it’s the game theory.
You want to do right by people because you’re
going to have down years and you’re going
to have up years.
There are things that we did in the past that
we won’t point to and say, yeah, we’re going
to do that again.
We did Kurion– nuclear waste.
43 times our early money.
I never want to touch nuclear waste again.
People send me deals for nuclear waste all
the time.
We did it.
We made our money.
You know, I have my battle scars.
Robotic surgery– we got like 20 companies
now pitching us because also on our early
money, 60 something times.
We might not touch robotic surgery again for
2 or 3 years or more.
And so I think it requires a lot of intellectual
honesty and discipline, which I think itself
is a currency that you can gain with limited
partners.
MICHAEL GREEN: Well, it’s one of the many
reasons why people love to listen to you so
much.
And I say this with all sincerity.
I mean, you’re brilliant and you’re intellectually
honest about a lot of this stuff.
JOSH WOLFE: Mostly because I grew up in an
area where I hated being conned and bullshitted,
so I can smell it.
MICHAEL GREEN: Brighton Beach can do that
to you.
The vast majority of people inhabit a very
different space, which is I’ve demonstrated
expertise in this one area, therefore I’m
going to stick to that expertise.
I think you and I both have a little bit of
a feeling that we get bored very easily with
doing the same thing twice.
JOSH WOLFE: I would say we’re just insatiably
curious.
Yeah.
MICHAEL GREEN: Yeah.
With that observation, I love that we’re able
to bring you back and talk about the success
of Auris, having heard you talk about it two
years ago when you first came on.
Can I get you to come back again and we’ll
talk about the next big win or how the industry
plays out, and maybe how that’s creating some
challenges in the next 6 to 12 months?
JOSH WOLFE: 100%.
I would love to.
MICHAEL GREEN: Fantastic.
JOSH WOLFE: Great to be with you, Mike.
MICHAEL GREEN: Josh, thank you.

41 comments

  1. This is going to be a very educational video about investments and what mergers do and how it affects the growth of your company. Watching it now.. Always excited to watch your content

  2. Are you tired of getting these videos weeks, months, or years after they were recorded? Sign up for a free trial with RV Premium here: https://rvtv.io/RealVisionYT

  3. Hola on!!!
    I saw a movie long ago called “Fantastic Voyage” where miniaturization of humans navigated inside the human body!!! Science Fiction becomes Fact?

  4. These venture capital discussions with Josh are very insightful. I hope Real Vision premium has more topics surrounding the VC industry.

  5. VC's PUMPTING FRAUDS — like UBER< and WEWORK — this is not venture capitalism it is FRAUD and should be prosecuted by SEC. But of course it won't.

  6. For the safest driver, they will not be committed to safety on a machine. If they are distracted or tired of it, they will let it crash, or make it crash, then quit the game. Dumb risks!

  7. ADam Of wework NY hustled Silicon Valley. I saw the game that was being played since the “How I Built this” podcast ep. He figured out the Tech hype scheme and got an Easy 700M out of it

  8. Ha, lol, he used technology to revolutionize the medical device space, but he didn't use it to put the deal together!🤷‍♂️🤦‍♂️

  9. Machine simulation will not confer medical expertise to just anyone, only multiply risks for the recipient of the service. There is no "reset" for life and death situations.
    The whole point of Ender's Game is how deceiving the gifted into doing evil like genocides, corrupt and twist them.

  10. 47:30m "Corporates are always seen as the dumb money…." Versus the conversational I.Q. of you two tripping over each other's thoughts like two puppies from the same litter. Thanks for the update – I was definitely a decade stale on this.

  11. For the discussion around fake news, deepfakes, the difficulty of telling what is authentic and what isn't, there are already a bunch of companies that have developed solutions on the Factom protocol. In fact the Baidu-TikTok lawsuit was decided in the Chinese Supreme Court based on data that had been processed by the Factom blockchain.

  12. Yes, drones can outmaneuver fighter jets. And robots will eventually crawl around infrastructure before you know an attack has begun.

  13. All block chain based crypto currencies are definitely a total fraud with zero intrinsic value. Worst is Bitcoin.

  14. Most probably Tesla will go bust within the next 5 years, when traditional manufacturers like GM & Toyota & Volkswagen will have catched up in electric cars manufacturing at half the price as Nissan has already done. And don't forget Geely of China who have already Volvo/Polestar in the market!

  15. put proper title…12 minutes through the video, yet no mention of Softbank, WeWork, Uber…. This guy just keep bragging about his skills…..

  16. There are handful of startups that went down due to not scaling up quickly. Very sad.
    Some of the new startup companies are not even a $100M or $1B valuation.
    WeWork, Uber, Lyft, Blue Apron, Tesla, SpaceX, Dropbox, Honest, Beats, What's up, Snapchat, etc.

  17. Anyone in the VC love to speak corporate jargon and hear their own voice. They are just GLORIFIED money-lenders, but somehow managed to convince themselves they are godsend to the startup world and somehow eerily depict themselves as 'tech', bit like WeWork..

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