Lux Riskgaming Initiative

“Securities” is back*

After a long winter foraging in the wilderness of content management systems, “Securities” has finally declared independence and moved entirely to our own infrastructure after Elon Musk unceremoniously dumped Revue and deleted all of our data (well, I scuppered the site a day early so it’s really me that deleted Musk, but who’s tracking?)

We now have a new front page right on the Lux website that has both this newsletter and the “Securities” podcast in one place. We’ve also got a new coat of paint — we’re still fixing bugs, so please hit reply if any of the text or design looks janky.

We’re going to get back to our weekly cadence here but *be prepared for a skipped issue or two while we get our groove back.

The Lux Riskgaming Initiative

Players in “Hampton at the Cross-Roads” negotiate a series of Capitol Hill hearings on the future of the Norfolk Naval Shipyard. Photo by Josh Wolfe

The world is more competitively constrained than ever before. Eight billion souls are now breathing on Earth, nation-states are intensely clashing over resources, industries, and clout, and nearly every arena of human endeavor requires a ferocious fight for dominance. Victory requires more people with more skills and backgrounds to cooperate, and yet, miscommunications between scientists, technologists, entrepreneurs, policymakers, and others hinders collaboration on these pressing challenges.

That’s why we’re starting the Lux Riskgaming Initiative to help all kinds of leaders build up their expertise, risk-taking acumen and decision-making skills by confronting them with realistic but challenging scenarios on the frontiers of our collective understanding.

Wargaming has been a critical practice for military experts and field armies to encounter, contextualize, understand, and ultimately command complex defense issues. Unlike think tank memos or nonfiction books, the goal of a well-designed wargame isn’t to convey statistics or make recommendations, but rather to transform participants into experienced leaders with a deep appreciation for the tradeoffs and limits that a scenario forces on its players. Fantasies and dreams are quickly replaced by the sober rationality that all competitive environments require.

Wargaming’s history goes back to the 1800s, when the Prussian army used a newly-created game called Kriegsspiel to help officers and soldiers understand battlefield maneuvers. Since then, they have become a mainstay at the Pentagon and particularly at the Naval War College, and competitive simulations are now widely used across international relations, policy, business, and economic modeling to understand how individual players compete with each other to achieve their own objectives.

While the word “war” is present, that’s really a synonym for competition, and we believe that wargaming should expand far beyond the remit of defense. How will synthetic biology and the CRISPR economy change the organization of American healthcare? How do public schools compete with the prevalence of homeschooling in an era of social distrust? How will emerging markets compete in industries that require large capital outlays like semiconductors?

During the “Securities” hiatus the past two months, I’ve developed our first scenario that centers on the future of the Norfolk Naval Shipyard, one of the U.S. Navy’s most important installations and the key construction and repair facility for America’s aircraft carriers (including, yes, the Gerald R. Ford we talked about in “Defense Fordism”) as well as nuclear-powered submarines. The shipyard is the nation’s oldest, but it is increasingly among the most vulnerable given the rising waters from climate change. What are the dynamics influencing the future of this shipyard? And what would happen if a hurricane hit the Hampton Roads region (which has never happened despite being in the middle of the Eastern Seaboard)?

Where hurricanes have made landfall since 1851. Highlighted is Norfolk, Virginia. Map by Philip Klotzbach via Twitter

I’ve dubbed it “Hampton at the Cross-Roads” and we’ve already operated the scenario three times in the Lux office with friends. It’s been incredible to watch seemingly normal people transform into power hungry local politicians, fame-seeking journalists, and legacy-preserving Navy leaders in sometimes as short as 10 minutes.

Scenarios don’t provide answers, but rather offer something far more valuable: intuition. We want players to forego their present lives and motivations in order to inhabit new characters with different goals and behaviors. That creates distance between ourselves and the strategic questions on offer, and also deepens our empathy, allowing us to understand why people make the decisions they do.

While scenarios can indeed be quite sobering as the last three runs can attest to, the other important half of wargame is “game”, and everyone has enjoyed the chance to act outside their normal boundaries, to try new strategies, and to experiment. Open-ended play is just as useful for learning in adults as it is in children, and a stimulating scenario is infinitely more interesting and memorable than a dry report prepared in some basement dungeon of an office.

All of this is to say: come join us! Generate ideas for crazy speculative scenarios with competitive dynamics and email me. Sign up for one of our wargame simulations that we’re hosting in the Lux office (details coming!). In time, we also hope to openly release these scenarios so that anyone can play them with their own group of friends and colleagues.

It’s our hope that a combination of grit, wits and conviviality may just be the spark needed to invent the future and save us from the ominous chaotic hell that always seems to be just a few ticks of the clock away.

“Securities” Podcast: Why quitters are heroes with “Quit” author Annie Duke

One of our most popular podcast episodes last year on “Securities” was “Risk, Bias and Decision Making” and so we brought back one of the guests from that episode, Annie Duke, to discuss her new book “Quit”.

They say that you miss 100% of the shots you don’t take, but what if each shot costs money and is actually a tradeoff with taking a different shot? Time and money are limited, and that means we must constantly balance investing in our current projects and ideas against seeking out new opportunities. While there has been prodigious work published on how to find the “next big thing”, few researchers have investigated what it takes to just throw in the towel, jump ship, fold and quit in the face of a bad situation.

In conversation with Lux Capital’s own Josh Wolfe, the two discuss the challenges of walking away, why professional poker players are better at quitting than amateurs, the geopolitics of war, and the importance as always of premortems for quitting.

🔊 Take a listen here

New fundings: Digital olfaction and fixing the inequities of clinical research

While “Securities” was on hiatus, we missed out on two of Lux’s most recent investments that will change the way we think about smell and solve the bureaucratic stench of clinical trials.

First up, Osmo is building on the frontiers of digital olfaction by using artificial intelligence to predict how humans judge the smell of a molecule (“strawberries in cream”) from that molecule's actual chemical structure. As Emily Mullin wrote in a wide-ranging overview of the flavors and fragrances space in Wired titled “This Startup Is Using AI to Unearth New Smells”:

Chemists at fragrance companies have figured out how to replicate some natural aromas, but it’s still a largely manual process, and many scents don’t have synthetic substitutes. “We need to be building replacements. Otherwise, we’re going to have to continue to harvest these plants and animals from our ecosystem,” says [Alex Wiltschko], cofounder and CEO of Osmo, who headed the digital olfaction team while he was at Google Research. “There’s a huge opportunity to build safe and sustainable and renewable ingredients that don’t require that we harvest life.”

I didn’t even know that “There are just 600 perfumers in the world, according to New York-based International Flavors & Fragrances, one of the major companies that concocts new scents.”

Our own Josh Wolfe is a co-founder of the company, and Lux co-led a $60 million initial funding round along with GV.

Meanwhile, there’s something rotten in the state of clinical trials. For clinicians and researchers, the Kafkaesque bureaucracy burden has only gotten worse. Antiquated systems (when systems exist at all), complicated filing requirements, and terrible collaboration have meant significant overhead for all involved. We have some of the brightest minds in medicine figuring out how to output clinical data in the right formats. That’s ultimately led to a slowing pace for trials, ultimately harming the already alarmingly small drug pipeline.

That’s why we are excited about the potential for Paradigm and its attempt to rebuild the clinical research ecosystem, where Lux joined ARCH and General Catalyst in a $203 million Series A round. Maureen Farrell in The New York Times described the company’s mission and hopes for the future of medicine:

It’s an unusually large sum for a fledgling company, but one that reflects the opportunity in a growing industry held together by a patchwork of outdated technologies that don’t always talk to one another. Last year, more than 430,000 clinical trials were conducted globally, according to government data. By comparison, there were just over 2,000 trials in 2000. “Part of the problem with what we do with trials is there’s a lot of misplaced precision,” said Dr. Laura J. Esserman, a breast cancer surgeon at the University of California, San Francisco, who has been an innovator in clinical trials but is not affiliated with Paradigm. “We spend a lot of effort on things that aren’t particularly meaningful.”

Lux’s Bilal Zuberi is an observer on the board, and the expansive list of executives and directors involved is available in the press release.

Lux talks 2023 investment themes

It’s January and that means an opportunity to assess and reassess the state of the markets and where the future of venture investing is headed. What’s on our minds? Some highlights:

In The Information’s weekend Big Read “Josh Wolfe’s War: The Lux Capital Founder Blazes a Controversial Path in Defense Tech”, Margaux MacColl explores all aspects of Lux's approach to defensetech as well as taking a wider lens on us over the past few years. "If you ask Wolfe, the new groundswell of support [for defensetech in Silicon Valley] couldn’t have come soon enough. ‘There’s a reawakening to the reality of the world: It isn’t just Kim Kardashian and Kanye [West] and popping bottles and crypto bubbles. There are bad actors and there are bad people,’ he said. ‘If you go to Anduril and talk to the employees, they really feel a sense of purpose in a way that the employees at Facebook don’t. There’s much more meaning in truly saving human lives.’” Josh also discussed his investing philosophy with a Praying for Exits interview and with Mario Gabriele as part of The Generalist's Modern Meditations series.
Deena Shakir discussed the future of healthcare at a Barron’s LevelUp event that was recapped by Josh Nathan-Kazis: “‘We have conversations all the time with most of the big pharma companies,’ Shakir said. ‘And I can tell you that almost every single one has brought up women’s health, even ones that have historically not had major pharmaceuticals in that space. So I think that the excitement and interest we’re seeing from investors, and from payers, is starting to be reflected in pharma as well, which is always an interesting sign of what’s to come.’”
Spacetech-focused publication Payload hosted Navigating Uncertainty: 2023 Space Economy Outlook which included Shahin Farshchi. Ryan Duffy recapped the event and noted that the panel highlighted that “Long-term liquidity for space investors should ultimately not be too much of a concern. Even though SpaceX has been private for 20 years, investors have had many opportunities to generate liquidity through secondary sales. Today’s best companies will have robust secondary markets tomorrow.”
On artificial intelligence and physical security, Bilal Zuberi discussed where we are going next on Bloomberg with Caroline Hyde and Ed Ludlow. “The good thing is that nobody is looking at exits for these companies in the next year or two. We’re just making sure these companies are fully funded and are able to create great products and take them to market.”

Lux Recommends

Our scientist-in-residence Sam Arbesman recommends Matt Clancy’s post “Age and the Nature of Innovation.” "At the outset, perhaps a scientist’s work derives its impact through engagement with the cutting edge. Later, scientists narrow their focus and impact arises from deeper expertise in a more tightly defined domain.”
Josh Wolfe recommends the animated TV series Primal for its ability to communicate a complicated storyline exclusively through art, as the series has no dialogue.
Deena Shakir recommends “A.I. Turns Its Artistry to Creating New Human Proteins” by Cade Metz in The New York Times. “‘What we need are new proteins that can solve modern-day problems, like cancer and viral pandemics,’ [Dr. David Baker] said. ‘We can’t wait for evolution.’ He added, ‘Now, we can design these proteins much faster, and with much higher success rates, and create much more sophisticated molecules that can help solve these problems.’”
I recommend a long read in, of all places, The American Conservative by Peter Robinson on “What ‘Long Covid’ Means.” It's one of the most empathetic accounts of the struggle of helping patients while also handling a disease that's impossible to classify. "A good physician, similarly, is to a degree agnostic about disease: all diagnoses are provisional but some are helpful, if they lead to a successful treatment or prognosis; all diagnoses are to at least a tiny degree tentative; all are subject to later revision. They could be well-reasoned but completely wrong. They could be only partly correct—and this may be the most common case, and fortunately partly correct is sometimes correct enough.“
Josh recommends the just launched dual and inter-related novels from Cormac McCarthy: The Passenger and Stella Maris with a preference for The Passenger.
Deena recommends Jared Council’s piece in Forbes on “Boosting Black Women In Physics With The Aim Of Making A Big Bang In Business”
Finally, I rather enjoyed (via “Securities” reader and podcast guest Eliot Peper) Ted Gioia’s “Notes on Conceptual Fiction” on why fiction tends to look like real life even though it really doesn't have to.

That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.

Forcing China’s AI researchers to strive for chip efficiency will ultimately shave America’s lead

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Right now, pathbreaking AI foundation models follow an inverse Moore’s law (sometimes quipped “Eroom’s Law”). Each new generation is becoming more and more expensive to train as researchers exponentially increase the number of parameters used and overall model complexity. Sam Altman of OpenAI said that the cost of training GPT-4 was over $100 million, and some AI computational specialists believe that the first $1 billion model is currently or will shortly be developed.

As semiconductor chips rise in complexity, costs come down because transistors are packed more densely on silicon, cutting the cost per transistor during fabrication as well as lowering operational costs for energy and heat dissipation. That miracle of performance is the inverse with AI today. To increase the complexity (and therefore hopefully quality) of an AI model, researchers have attempted to pack in more and more parameters, each one of which demands more computation both for training and for usage. A 1 million parameter model can be trained for a few bucks and run on a $15 Raspberry Pi Zero 2 W, but Google’s PaLM with 540 billion parameters requires full-scale data centers to operate and is estimated to have cost millions of dollars to train.

Admittedly, simply having more parameters isn’t a magic recipe for better AI end performance. One recalls Steve Jobs’s marketing of the so-called “Megahertz Myth” to attempt to persuade the public that headline megahertz numbers weren't the right way to judge the performance of a personal computer. Performance in most fields is a complicated problem to judge, and just adding more inputs doesn't necessarily translate into a better output.

And indeed, there is an efficiency curve underway in AI outside of the leading-edge foundation models from OpenAI and Google. Researchers over the past two years have discovered better training techniques (as well as recipes to bundle these techniques together), developed best practices for spending on reinforcement learning from human feedback (RLHF), and curated better training data to improve model quality even while shaving parameter counts. Far from surpassing $1 billion, training new models that are equally performant might well cost only tens or hundreds of thousands of dollars.

This AI performance envelope between dollars invested and quality of model trained is a huge area of debate for the trajectory of the field (and was the most important theme to emanate from our AI Summit). And it’s absolutely vital to understand, since where the efficiency story ends up will determine the sustained market structure of the AI industry.

If foundation models cost billions of dollars to train, all the value and leverage of AI will accrue and centralize to the big tech companies like Microsoft (through OpenAI), Google and others who have the means and teams to lavish. But if the performance envelope reaches a significantly better dollar-to-quality ratio in the future, that means the whole field opens up to startups and novel experiments, while the leverage of the big tech companies would be much reduced.

The U.S. right now is parallelizing both approaches toward AI. Big tech is hurling billions of dollars on the field, while startups are exploring and developing more efficient models given their relatively meagre resources and limited access to Nvidia’s flagship chip, the H100. Talent — on balance — is heading as it typically does to big tech. Why work on efficiency when a big tech behemoth has money to burn on theoretical ideas emanating from university AI labs?

Turn to China now, and the story is in a very different place. The Biden administration has placed a series of export controls on advanced computation and semiconductor fabrication to China, including blocking the export of Nvidia’s H100 and A100 chips. Nvidia responded in March by offering tweaked versions that comply with U.S. export controls (with what it dubs the H800 chip), but the general policy remains in force: prevent China from acquiring the best chips that Earth produces.

Without access to the highest-performance chips, China is limited in the work it can do on the cutting-edge frontiers of AI development. Without more chips (and in the future, the next generations of GPUs), it won’t have the competitive compute power to push the AI field to its limits like American companies. That leaves China with the only other path available, which is to follow the parallel course for improving AI through efficiency.

For those looking to prevent the decline of American economic power, this is an alarming development. Model efficiency is what will ultimately allow foundation models to be preloaded onto our devices and open up the consumer market to cheap and rapid AI interactions. Whoever builds an advantage in model efficiency will open up a range of applications that remain impractical or too expensive for the most complex AI models.

Given U.S. export controls, China is now (by assumption, and yes, it’s a big assumption) putting its entire weight behind building the AI models it can, which are focused on efficiency. Which means that its resources are arrayed for building the platforms to capture end-user applications — the exact opposite goal of American policymakers. It’s a classic result: restricting access to technology forces engineers to be more creative in building their products, the exact intensified creativity that typically leads to the next great startup or scientific breakthrough.

If America was serious about slowing the growth of China’s still-nascent semiconductor market, it really should have taken a page from the Chinese industrial policy handbook and just dumped chips on the market, just as China has done for years from solar panel manufacturing to electronics. Cheaper chips, faster chips, chips so competitive that no domestic manufacturer — even under Beijing direction — could have effectively competed. Instead we are attempting to decouple from the second largest chips market in the world, turning a competitive field where America is the clear leader into a bountiful green field of opportunity for domestic national champions to usurp market share and profits.

There were of course other goals outside of economic growth for restricting China’s access to chips. America is deeply concerned about the country’s AI integration into its military, and it wants to slow the evolution of its autonomous weaponry and intelligence gathering. Export controls do that, but they are likely to come at an extremely exorbitant long-term cost: the loss of leadership in the most important technological development so far this decade. It’s not a trade off I would have built trade policy on.

The life and death of air conditioning

Across six years of working at TechCrunch, no article triggered an avalanche of readership or inbox vitriol quite like Air conditioning is one of the greatest inventions of the 20th Century. It’s also killing the 21st. It was an interview with Eric Dean Wilson, the author of After Cooling, about the complex feedback loops between global climate disruption and the increasing need for air conditioning to sustain life on Earth. The article was read by millions and millions of people, and hundreds of people wrote in with hot air about the importance of their cold air.

A few weeks ago, Bloomberg had a great piece about the rising toll of air conditioning under the similarly scary headline, “A Billion New Air Conditioners Will Save Lives But Cook the Planet.” The numbers, as always, are staggering:

Demand for air conditioners is surging in markets where both incomes and temperatures are rising, populous places like India, China, Indonesia and the Philippines. By one estimate, the world will add 1 billion ACs before the end of the decade. The market is projected to
before 2040. That’s good for measures of public health and economic productivity; it’s unquestionably bad for the climate, and a global agreement to phase out the most harmful coolants could keep the appliances out of reach of many of the people who need them most.

This is a classic feedback loop, where the increasing temperatures of the planet, particularly in South Asia, lead to increased demand for climate resilience tools like air conditioning and climate-adapted housing, leading to further climate change ad infinitum.

And there doesn’t appear to be a way out. Scientists have determined that there is a zone of comfort for humans where we can function at peak performance. Much of the industrialized world happens to sit in these temperate zones, which is one argument for their long-term economic success compared to the tropics. But as climate change intensifies, the world’s temperate zones are expected to narrow dramatically, and some countries like India may have next to no temperate zones left to protect its people. Air conditioning is a necessity (with some even calling it a human right), but greener coolant alternatives are still in their infancy. In other words, cooling innovation needs to heat up in a big way.

Lux on the Farm

Josh Wolfe speaking at Nvidia Auditorium at Stanford. Photo by Chris Gates.

Josh Wolfe gave a talk at Stanford this week as part of the school’s long-running Entrepreneurial Thought Leaders series, talking all things Lux, defense tech and scientific innovation. The
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Lux Recommends

As Henry Kissinger turns 100, Grace Isford recommends “Henry Kissinger explains how to avoid world war three.” “In his view, the fate of humanity depends on whether America and China can get along. He believes the rapid progress of AI, in particular, leaves them only five-to-ten years to find a way.”
Our scientist-in-residence Sam Arbesman recommends Blindsight by Peter Watts, a first contact, hard science fiction novel that made quite a splash when it was published back in 2006.
Mohammed bin Rashid Al Maktoum, and just how far he has been willing to go to keep his daughter tranquilized and imprisoned. “When the yacht was located, off the Goa coast, Sheikh Mohammed spoke with the Indian Prime Minister, Narendra Modi, and agreed to extradite a Dubai-based arms dealer in exchange for his daughter’s capture. The Indian government deployed boats, helicopters, and a team of armed commandos to storm Nostromo and carry Latifa away.”
In the happier news department of science, Ina Deljkic recommends “’Quite science fiction’: Brain-spine interface system helps man with paralysis walk again.”
Sam recommends Ada Palmer’s article for Microsoft’s AI Anthology, “We are an information revolution species.” “If we pour a precious new elixir into a leaky cup and it leaks, we need to fix the cup, not fear the elixir.”
I love complex international security stories, and few areas are as complex or wild as the international trade in exotic animals. Tad Friend, who generally covers Silicon Valley for The New Yorker, has a great story about an NGO focused on infiltrating and exposing the networks that allow the trade to continue in “Earth League International Hunts the Hunters.” "At times, rhino horn has been worth more than gold—so South African rhinos are often killed with Czech-made rifles sold by Portuguese arms dealers to poachers from Mozambique, who send the horns by courier to Qatar or Vietnam, or have them bundled with elephant ivory in Maputo or Mombasa or Lagos or Luanda and delivered to China via Malaysia or Hong Kong.”
Finally, Sam recommends Brick Technology’s video of “Making A Billion-Year Lego Clock.”

That’s it, folks. Have questions, comments, or ideas? This newsletter is sent from my email, so you can just click reply.

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December 31, 2022

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