Josh Wolfe on “There will be chaos, and that chaos will be caused by people”

Danny Crichton:
So in terms of script, I think we should start there. Do the present pop culture zeitgeist shows, and then go to strategic ambiguity, and otherwise, just stay in front of the microphone.

Josh Wolfe:
Testing, testing. Good, good, good?

Danny Crichton:
Yeah, that's perfect.

Chris Gates:
Okay, Danny, here we go. Three, two, one.

Danny Crichton:
Hello and welcome to Securities by Lux Capital. I'm your host, Danny Crichton, and today we're talking about science, technology, finance, and the human condition. I'm here with Josh Wolfe, co-founder and managing partner of Lux.

Josh Wolfe:
Danny, awesome to be with you. And I got to be honest. I love listening to you. I hate listening to myself. I don't know how I'm going to listen to this episode. I'm going to have to listen to only the parts that you're in.

Danny Crichton:
One of the best parts about being a TechCrunch is I wasn't in charge, ultimately, of the content of the podcast, so I've never listened to myself until I came here. And then I was like, I feel like I'm somewhat responsible for what comes out of this place. So I have to listen to myself now, and it is very awkward to do so.

But it's great to have you here. We're talking about TV shows. I mean, there's the zeitgeist going on right now. I guess there's Super Pumped, super crashed, we pumped. Ah, there's so many of these, it's almost hard to keep track of them now.

Josh Wolfe:
They are birds of a feather in a genre. You've got WeCrashed which is nominally about WeWork, or exactly about WeWork. You've got The Dropout, which is about Theranos. You've got Super Pumped, which is about Uber. And each of those, I guess, respectively, were financial disaster, fraud, and then morally perilous in the case of Uber. But there's something that's notable about the fact that they all came out at the same time. Now, of course, they followed books that came out, and those books followed events that occurred, but art imitates light, life imitates art, and there's something about its demarcation of a moment.

If you go back, you think about the last time that this really happened in technology, you had the detailing of Facebook and the rise of it, in The Social Network. You had Aaron Sorkin, beautiful dialogue and these wonderful scenes, and actually heroicizing Mark Zuckerberg, 2010. It was basically a road show of fodder. Two years later or a year and a half later, you had a $100 billion IPO. So it portended the beginning of this wave of tech excess, and then some scrutiny, of course, on Facebook, but by and large, it was a decade-long boom that is now being bookended by this bust.

Danny Crichton:
Well, I think it's interesting because the most prominent in the last decade was Silicon Valley. It was a comedy, of course. One that was just pleasant. It Was funny. They're nerds and that didn't make a lot of sense. And that's converted now to drama of these Shakespearean characters that have these fatal flaws. And you have this rise and fall arc across all those shows. But why is it so popular and why are we getting so many all at the same time?

Josh Wolfe:
Well, first of all, I think they all occurred at the same time in a period of just absolute excess of monetary policy and speculation, and a lot of these things became frontline news. Why? Because we were going from 45 million to 47 billion in the caricature of Masa and the SoftBank shenanigans, and unicorns, and PowerPoint presentations to shareholders with arrows just exponentially exploding to the right with Community Adjusted EBITDA. I mean, these things became the very mockumentary that Silicon Valley itself was depicting on HBO. So I don't know why now, but again, it's like there's something to infer that that era has ended.

Danny Crichton:
And you watched multiple of these shows. I mean is it same arc across all of them? Does it feel like some are doing a different angle than others?

Josh Wolfe:
I actually think that they all have been fairly balanced in the protagonist. You would think watching this a priori that Adam Neumann is a villain. He's a bad guy. He's a liar and all that kind of stuff. In fact, you walk away and you say that they always start with the humble beginnings and the sort of Upton Sinclair Jungle-like terror that he's going through, and his rough childhood, or not having money.

But what you admire in the first one or two episodes, particularly of WeCrashed, is how relentless this guy is. And there's something that's actually admirable about that. And you see the relentlessness in his pursuit of his girlfriend, turned fiancée, turned wife, the pursuit of the investors, the pursuit of people to join him, the pursuit of Masa in the end, and the tactics that he used, almost like your average cad would to use tricks on women. And what was that book that Neil Strauss pickup artist kind of stuff.

Danny Crichton:
Pickup artists, yeah.

Josh Wolfe:
And using psychological tactics of scarcity and the old Kierkegaard line that "We pursue that which retreats from us," the sort of artificial scarcity. And they were intentionally not outright lying, but it was ambiguous. The truth was somewhat ambiguous. I mean-

Danny Crichton:
Well, they hacked heuristics. I mean, to my mind, they hacked social norms. They hacked the ability of how people evaluate these companies. Particularly Masa Son who I think saw all these companies at the various points, maybe not Theranos, but certainly saw Uber, and was invested, I think, through the Delta fund with Uber's China fund and all this different stuff. People used to have tips and a cheat sheet of how to actually talk about it is actually the language he loves to hear. People used to use those heuristics and take advantage of them.

Josh Wolfe:
Absolutely. And there's a moment, I don't remember if it's episode three or four, where Adam Neumann is sitting there talking to Masa in the show. And he's like, "Who wins in a fight? Strong guy or the crazy guy?" And Adam is like, "Of course, the crazy guy," like you need to be crazier. It was an invitation. It was permission to go and do crazy stuff. And I actually think it was a strategy.

Danny Crichton:
Well, when you think about these strategies, I mean to some degree I think of it as strategic ambiguity, right?

Josh Wolfe:
Mm-hmm.

Danny Crichton:
You have this situation where... Do you think these folks knew what was going on at their companies? Were they fundamentally acknowledged or were they true believers? Because that leads to this next piece on strategic ambiguity.

Josh Wolfe:
Well, I think there are three pieces. On the two extremes, you have somebody that is wittingly and maliciously defrauding people. They know it is not true, but they are trying to persuade and induce people to believe something that they know is not true. The other end, which is both naive but arguably more noble, is somebody is a true believer, that they truly believe that this is the way that the world ought to look. That they, even if people consider that arrogance of the highest order, they're going to go and push it and believe.

And in the middle are the people that you can sort of see maybe they sort of believe it, but then they think maybe it's not, but they can't show weakness. And then they happen to be surrounded by yes-men or women who just won't tell them the truth. So it's really hard, I always say, at the moment of inception, even when we're funding companies. I mean my perennial fear, as you know every time somebody walks in here to pitch us, is are we being defrauded? Right?

Danny Crichton:
Right.

Josh Wolfe:
And I am so fearful of what I call... Other people have a FoMO, fear of missing out, and I have a shame of being suckered, SoBS. I am so fearful of being shamed because I fell for the seductive spirit of an entrepreneur, that I'm always hyper skeptical.

I think we were just in a moment where that was all suspended. People suspended disbelief. People were able to go bigger and bigger and crazier. The bigger and crazier people went, the more they had comps to be like, "Well, he just went absolutely crazy. And by the way, crazy worked on Masa. Let's do crazy."

Danny Crichton:
I think it's also a sign that success begets success. And you got to a point where, recursively, no one had done due diligence on any of these companies, at a certain point. Famously, the Section 32, was it Adam Maris or-

Josh Wolfe:
Bill, Bill Maris.

Danny Crichton:
... Bill Maris who had actually gone out or had sent someone out to go to a Walgreens and actually try the Theranos machine, and only to find out it didn't work. And they took way more blood than they expected. But no one was really checking a lot of these companies.
But to me, that leads to strategic ambiguity because part of what they were signaling is what they didn't want you to know, is, "Are we going to grow superfast? Yes. But we're not going to give you the data. You have to just believe." And I think there's a lot of game theory there of what do you expose to your competitor, your enemy versus what you give away. And these folks, I think, did it really, really well.

Josh Wolfe:
Strategic ambiguity for an entrepreneur is interesting because obviously this is relevant in game theory. It's relevant in current geopolitical crisis between Ukraine, US, the Cold War. You go back over 40 years. I mean this is a permanent feature of nature.

Strategic ambiguity for somebody like Adam Neumann or somebody that is in a position where they're trying to raise money, on the one hand, you have plausible deniability because you never overtly said, "Oh, we're growing that way," but you never said we weren't.

If you leave things a little bit abstract and you leave things to the imagination of the recipient of the communication, whether that's something verbal, or something that they're seeing, or something that they're reading, then if they are primed for greed, they're going to believe that it's positive. If they're primed, like I am often, for skepticism or cynicism, then they're going to be like, "This person is full of it."

So strategic ambiguity for an entrepreneur is like if somebody says, like, "Oh, I heard so-and-so built a billion dollar fund, is investing," it's one of those house of cards I can neither confirm or deny. Or you might think so, but I certainly couldn't say so. So that is used as a tactic. And they're not outright lying, but it is used as a form of non-denial to induce somebody into believing, knowing that it's like wink, wink.

In geopolitics, this has been going on forever. The US has a deliberate strategy of strategic ambiguity where they will not refer to China or Taiwan, in certain cases, as a country. They will not reveal whether over-the-surface naval vessels are actually carrying nuclear weapon or where certain nuclear weapons might be. And that's all intended game theoretically to basically keep you guessing. And it is safer to assume that there is the proverbial bustle in the hedgerow hiding a tiger than to reveal that you do or don't have it.

Danny Crichton:
It reminds me of a founder I used to know, who every time we went to a partner presentation, he would set a calendar invite to say, like, "Sequoia Partner presentation," with a cal invite that would show up 15 minutes from the end of the presentation, as a reminder. And he would, "Oh, I'm so sorry. I need to close that out." And everyone would look around the room, and it was a faux pas.

But it worked because, again, it was heuristics and strategic ambiguity. Didn't say he wasn't having it. He didn't say he was making it up, but just this invite popped up, "I have to close it out. Sorry about that folks." It is a literal false flag operation. Now, I personally admire the cleverness of it, but I also think it's unethical.

By the way, there was an old stockbroker that I had heard this story. He used to call billionaires, and he would say, "It's Scott from Lehman Brothers." And they'd like, "Who? Who are you?" He's like, "I'm calling about his tax refund." And they would say, "A tax refund?" and suddenly he's appealed to greed. So they put him through. And a famous billionaire would answer, and he'd say, "I'm calling about your tax-free fund here at Lehman." It was just the subtle manipulation of the language. And what's crazy is, like the Nigerian scams and all these other things, they are effective because they are preying on the ultimate unvarying thing, which is human nature, greed and fear.

But I think, I mean, it brings up a lot of questions because we've seen a lot of fraud obviously across the three companies, WeWork, Uber and Theranos. But only one of those entrepreneurs is potentially going to prison, Elizabeth Holmes, found guilty in the San Jose Federal Court for defrauding investors, mostly because she specifically said in statements that but this machine works in a certain way and, therefore, violated the law. Whereas Adam Neumann and Travis Kalanick hasn't faced the same penalties. They face some civil stuff obviously because investors angry about it. But where is the line when you're using strategic ambiguity? Because it seems clear that there is a line, but it's very blurry, very wide. How far can you go before it is too far?

Josh Wolfe:
I mean, look. I think the canonical example that happened, I don't know, two, three, four years ago, the time is a blur, was Elon, funding secured. I mean that was the ultimate bluff, in an attempt motivated by a disdain and frustration of short sellers and critics, to bluff and say, "We're about to go private," and then thinking of taking it public at 420 a share, or whatever. He suffered marginal consequences from that.
But people have done far... Or look at Nikola. I cannot still believe that this is a publicly traded company, billions of dollars in market cap, and they've admitted to fraud.

Danny Crichton:
Well, they admitted to pushing a truck down a...

Josh Wolfe:
That is fraud. That is fraud. That's like back in the day, in late 19th century, when they had the automaton that's playing chess, and then you got this homunculus of a man underneath it that's actually moving the pieces. That's fraud. When you tell somebody that something is X, and it's actually not X, and you know it's not X, and you're doing Y to make people think it's X, that's fraud.

Danny Crichton:
So this leads to optimism because you keep referring to yourself as a cynic or cynical about a lot of folks, or always worried about the SoBS.

Josh Wolfe:
I'm very cynical about you calling me a cynic.

Danny Crichton:
I'm curious, though. I mean there's different types of optimism. I'm curious. I mean, do you have an ontology of types of optimism and which ones are good and which ones are bad?

Josh Wolfe:
Well, I would say generally, and I think that I... I share this with you because I love our conversations offline, that more skepticism. Cynicism, to me, feels more close on the spectrum to pessimism. But optimism is not blind optimism because there really are two kinds. You have complacent optimism, and you have conditional optimism.

A complacent optimist is somebody that just expects, that they almost feel a sense of entitlement. "It will happen. It'll be fine. We'll come up with a cure." And that's the equivalent of a kid on Christmas Eve, sitting around and waiting to collect their presents. They know it's coming. They don't have to lift a finger. There's no energy requirement, just sit back and have faith.

I, not being a particularly religious person at all, do not have much faith. I don't have faith in my fellow man. I don't have faith. As the famous rapper, Mos Def, "Tomorrow may never come." I just don't know.

Conditional optimism says, "Okay. There is a better path. There is a better way. But for me to go from here to there, I have to do something. I have to persuade people, hopefully, honestly, and induce them to join my mission." And that has been the case for anybody, whether they were an early religious leader, a captain of industry, somebody leading a charge of young men or women in a battlefield. Whatever it is, conditional optimism always trumps complacent optimism.

Danny Crichton:
22 years in the venture industry, I'm curious, has this changed over time? Were you more optimistic when you started?

Josh Wolfe:
I'm sitting here thinking about it, which implies probably not. I always say it doesn't matter. Markets can change. Technologies can change. Products can change. Geopolitics can change. People will always say, "Oh, we're at this hinge of history," or where this peril... What other time would you have rather lived in the past? I mean, a few people, maybe before they knew the AIDS crisis and all this stuff, wanted to live in the go-go '70s or '80s or something. But my god, we still live in the best time ever. Life is getting better.

But the one thing that doesn't change, even though markets and products and technologies, oh, is people and human nature. That's why actually I made a terrible mistake when we started Lux. And Peter, our co-founder, he had a great insight, which is... I always index towards technology. I need to understand technology better. I need to understand which semiconductor is going to be better, which biotech approach is going to be better, which robot is going to move faster, which autonomous system, which software, whatever it is that we cover. Pete always indexed to the people.

And at the end of the day, I can push a cup in front of me, and it doesn't push back. I can move a technology and it doesn't push me back. People push back. They are both beautiful in their ambitions and they are vain glorious, and petty, and jealous, and bitter. It is human nature that is forever constant.

Now, the great virtue of that is while I'm optimistic about science and technology and progress, the world will be better in two years and 10 years than it is today. There will be chaos. That chaos will be caused by people, but they will also be solved. The problems will be solved. The solutions in the future that solve the problems we have today will be solved by people. And they will create new problems.

But it's finding that balance of skepticism or cynicism about human nature with an optimism that the institutions that corral those people, be it venture capital or startup community, or the media that holds them accountable, sometimes celebrates them and then can bring them right back down. Those are the things that give us progress.

Danny Crichton:
The semi-fictional portrayals of Theranos, Uber, and WeWork that littered television may indeed mark an end of an era, but there are also signs that society is increasingly grappling with the dubious ethics and fake it till you make it startup culture that now is the mainstream of American economic growth. The global financial crisis should have offered the US and much of the globalized world a moment to cleanse the stench of fraud and abuse that littered American and British finance in the 2000s. Instead, the corruption and corrosion have only grown deeper and more pervasive.

Oliver Bullough writes in his book, Butler to the World, that following World War II and the Suez Crisis, Britain was struggling to find an identity for itself in the world order. Where it headed to was money laundering, with the city in London becoming the home for Russian oligarchic wealth. But it wasn't enough to just offer bagging services for these plutocrats. No. London went far further, offering legal services, tax evasion and reputation rehabilitation, with Russian money flowing through British charities, universities, and museums.

Then there's Casey Michael, whose book American Kleptocracy talks about much the same, but from the United States's perspective. As has been widely reported in recent years, while the American government constantly complains about global tax havens, no country is a better tax haven than the US of A. Its corrosion at the very fiber of western society.

And unfortunately, technology is not immune to that larceny. Big tech companies and wealthy individuals pumped tens of millions of dollars into Washington, lobbying to protect vital interests. R&D tax credits, qualified small business stock, self-directed IRAs and other provisions wreak of exactly the kind of vested interest as 1031 exchanges do in the real estate world.

A decade ago, large tech companies led by Steve Jobs worked to limit wages for Silicon Valley tech workers. Facebook has been repeatedly caught inventing metrics on its platforms, metrics that directly determine the spend of advertisers on its platform. Intuit, the makers of popular tax software, TurboTax, endlessly lobby the federal government to not offer comprehensive free tax filing software, to keep its cash cow alive. And it trickles down even further.

The searing intensity of the startup world means that there is always a fight between the truth and pushing the envelope. A little nudge on a metric here, make your numbers, get the VC dollars and worry about making up the difference next year, or just make the whole damn thing up. We're living every day at Fyre Festival.

It's time to step back. Small lacerations to our principles tend to become grievous wounds. A slight tweak of a metric today tends to snowball because the pressure on growth and numbers never abates and often only intensifies. Everyone wants to succeed, but there is a right way and a wrong way to go about doing it. Too many people are choosing the wrong path. The cautiously optimistic view is that the world is increasingly coming to grips on its degradations.

Multiple TV series show how phantom growth destroyed the value of some of America's most impressive unicorns. There's more scrutiny than ever on Russian and global oligarchic wealth, where it comes from and the high price of holding it locally. These changes will take time to build momentum, but one thing is clear. Everyone needs to build an ethical foundation to operate in tech and business because no one wants a TV series where they are the villain.