Lux Q3 2023 Report

Lux Q3 2023 Report

Instrumental Objectivity 

The history of science is the evolution of instruments-our invention of them, our inquiry of the natural world using them. For most of humanity's evolution, our main scientific instrument was the eye, a penetrating and perceptive organ. It's a coincidence of history that "eye" in English is homophonous with "I", that our perception implies who we are. As web developers call it, What You See Is What You Get or WYSIWYG. 

But as Plato wrote in The Republic's famous "Allegory of the Cave": 

No; a sensible man will remember that the eyes may be confused in two ways-by a change from light to darkness or from darkness to light; and he will recognize that the same thing happens to the soul. When he sees it troubled and unable to discern anything dearly, instead of laughing thoughtlessly, he will ask whether, coming from a brighter existence, its unaccustomed vision is obscured by the darkness, in which case he will think its condition enviable and its life a happy one; or whether, emerging from the depths of ignorance, it is dazzled by excess of light

The human discovery of reality-science-is darkness dazzled by the excesses of light. From Plato and the natural philosophers of the Royal Society to the scientists of today's world writ large, all have come to understand one fundamental insight: our eyes are infinitely perceptive, but they can be deceived. Truth is fixed, but how we see truth can readily change-and even be manipulated by others. Our instruments offer only a refraction of the truth, even as our own contexts, biases and emotions further obfuscate the very truth that lies before us. 

Eyes were once our only tool of observation, but today, we don't perceive the world just with our eyes, but rather through some of the most advanced instruments humanity has ever invented. We observe the farthest reaches of deep space through the complex lenses and machinery of the James Webb Space Telescope. We magnify the intricacies of biological cells through the cryo-EM microscopy of Lux- family company Gandeeva Therapeutics and the novel single-molecule-tracking technologies of Lux- backed Eikon Therapeutics, allowing us to follow individual proteins and RNA strands as they transit through a cell. Lux companies are also involved in the precise scanning of physical space using CT scanning and metamaterials; the observation and analysis of Earth from satellites; the physics of hurricanes through autonomous maritime drones; the optimization of energy for machine learning computing through better software; the digitalization of olfaction by the observation and modeling of scent molecules; the improvement of clinical outcomes through more precise testing; and so much more. 

These instruments expand human perception-and thus, progress-but not all instruments have the same effect. We also use our eyes to perceive the world through the blinkered lenses of social media like Twitter (X), reading and watching an algorithmic feed that highlights the most heinous activities humanity has ever undertaken even as it suppresses stories of the pervasive goodness radiating from our multitudes of multitudes. We read shrill headlines of doom, even as the progress of science is breaking through ever more barriers. 

The light of the 2010s gave way to the darkness of COVID-19 and its immediate after effects. But as Plato noted earlier, our transition from darkness to light must not blacken our perception of reality, nor our internal constitutions. We must seek instrumental objectivity by questioning what we are seeing, ensuring that our eyes and our instruments see real truth and not merely its shrouded shadows

Let's Get Real-The Cacophony of Chaos 

Let's get real. War, death, horrific terror, loss of innocent lives; displaced peoples, refugees from climate and conflict, migrants and immigrants; political dysfunction, rising interest rates, oil prices, inflation, indebtedness. How is it possible amid all the trauma and tragedy, across the never-ending news of negative shocks and surprises and arguably against all reason, that we at Lux are more constructively positive and conditionally optimistic than we've ever been

How? Because we are at a nadir of negativity, where observably everyone we speak to is overwhelmingly and abundantly pessimistic-sands of hope slipping through shaky fingers of despair. The cacophony of chaos overloads our senses with negative inputs, frightening our minds and circumscribing our pursuit of the possible. Yet, the instruments of human progress continue unabated: scientists continue to experiment, engineers find ways to build, and entrepreneurs seek profitable growth. Humanity's openness to serendipitous discovery is the elusive element in scant supply we're seizing upon at Lux. 

Make no mistake: this isn't insensitive indifference about the state of the world but a difference in sensibilities. Over the past few years when everyone crescendoed to egregious ebullience, we documented an excess of excesses and called for caution, capitalizing our companies for the coming storm. Our focus now invokes not the callousness of Baron Rothschild (the time to buy is when there's blood in the streets) nor the calm of Warren Buffett (be greedy when others are fearful) but instead a renewal of focus on reason and science through instrumental objectivity. Why? Because the odds of incrementally negative surprise appear to us lower today than the possibility of substantial positive surprise especially from the science that creates compounding progress in the form of new ventures that we find and fund. 

A realist view of the present is that things are better-much better-than the negative instruments of social media suggest. We won't recount the data-driven case for optimism over the long-term that has been well-researched by Steven Pinker, Hans Rosling, Matt Ridley and others about nearly every facet of human progress, from the rise of literacy, longevity, and leisure to the reduction of poverty, child mortality, and disease. The news is always an intentional, non-random sampling of the most salient surprising negative events, which is why headlines outcompete trendlines for our attention and emotional reaction. Much like Plato's transition from dark to light, the cacophony of chaos on the front pages colors our eyes' perception, preventing us from accurately considering the positive developments located deeper in the publication. Even more importantly, our eyes and brains are highly biased toward fast-moving phenomena, a form of protection from the dangers of the wild. The rapid daily developments of news distract us from the slow-paced improvements of human progress. Read the news and it's depressing, but read expansive history and marvel at the teleological miracle of human ingenuity and improvement. Last quarter, we highlighted our improving lot with the time- price of goods, a novel instrumental objectivity that proves that we exchange less hours of work than ever before to purchase nearly everything from food to housing to electricity to illumination to computation. 

A realist view of the future is that scientists, engineers and founders will shape it into a more desirable place we all wish to live in-which will also be far less rosy than techno-optimist utopianist hallucinations. 

Before we get to that future though, we do need to address the reality of that cacophony of chaos. With clear eyes and clear thinking, the reality is that we are seeing very visual mass sufferings, malicious murderous rampages, and involuntarily uprooted refugees which together have shifted the world's eyes from the wishful illusion of peace to the allusion of Yeats' rough beast slouching towards Bethlehem. Globally, we witness growing geopolitical tension and live theaters of war including Russia's invasion of Ukraine, Hamas's terror attack on Israeli civilians, and China's aggression over Taiwan and the Philippines in the South China Sea, plus violent extremists in the Sahel and Maghreb unleashing brutality that's led to a record series of political coups. 

Even as the world shapes up into a new axis of opposing interests, we must use our instrumental objectivity to accurately identify the alliances of power. We observe that there are just a handful of countries who will realistically tip the global power balance (Saudi Arabia, Turkey, Indonesia, and India). Domestically and realistically ahead of upcoming U.S. elections, 45 states have effectively already cast their electoral votes, leaving just five states (Arizona, Georgia, Pennsylvania, Michigan, and Wisconsin) up for grabs. Even within those states, the cities have gone blue and the suburbs red, so the reality of the future of U.S. leadership and all the decisions that flow from it realistically come down to 50,000 people in a handful of competitive counties. 

The reality of markets is rates are high and holding and the risks of debt dislocation have risen (whether from consumer or auto loans, mortgages, corporate or government indebtedness, or some other pocket of finance unappreciated now to be obsessed over tomorrow). One early backer of Lux, the late Pete Peterson (Blackstone co-founder whose book Running on Empty presaged the present predicament of twin deficits that would have him rolling in his grave), has passed the baton to another early Lux-backer Stan Druckenmiller, who is now loudly raising the alarm on how $33 trillion of U.S. debt with 5% interest expenses alongside rising entitlements will crowd out America's ability to invest on defense, climate and innovation. We still have an inverted (but flatter) yield curve amidst historic deficits and a historic need for more borrowing to finance it, at the highest rates in 22 years. Any bull steepening of the curve would need short-term rates to fall (which the Fed controls) or long-term rates to rise (which the market controls based on anticipation of inflation or more issuance by the government). 

That steepening curve gives LPs more options for yield coincident with them pulling back from the VC asset class (as we previously and accurately anticipated, LPs experienced indigestion from too many GPs forming funds, rapidly deploying capital and quickly returning to fundraise). That decline in venture capital inflows means valuations have fallen, IPOs, M&A and exit valuations have fallen, and VC deal activity and startup cash balances have all fallen. Everything seems to be down except the number of startup failures (and for the undercapitalized, that will increase). Inflation is showing signs of being tamed but consumers are still suffering. Labor strikes are (as we correctly predicted earlier this year) increasing along with rising union membership which will (as wages and benefit costs rise) weigh on corporate profits in frothy public markets already above historical valuation norms. Meanwhile, decoupling and diversifying from dependency on China is leading to more supply chain redundancy and duplicative manufacturing, which will mean more supply such that inflation today could turn into a deflationary glut tomorrow. 

Let's get real: just as in geopolitics, only a handful of economic actors realistically will tip the entire future growth and financing of America's economy. The Fed, Congress, plus a handful of large LPs and union leaders can intensify the cacophony of chaos in the market through the reverberations of their actions, or significantly soothe it. How they conduct themselves-and orchestrate the market-is what we will be eyeing. 

The unrealistic euphony of techno-utopianism 

The future is a destination-and its two polar opposites are apocalypse and utopia. Rush toward the darkness of the former, and what comes into our eyes' focus is futility, nihilism and resignation that cedes to strongmen and populists, destroys institutions, and invokes the bleak imagery of bombed-out, rubble-razed sintered cinder blocks, crumbled infrastructure, and the eroded, erased vitality of all color, all life. No thank you. 

Lying at the other extreme are the pollyannas promoting the promise of techno-optimist utopia. This too in its euphonic exuberance is utterly unrealistic-and always has been. The cliché imagined is the sci-fi sleek chrome metal and reflective bubbled glass architecture of biodomes, airtrams, flying cars and man-made marvels, springing forth amidst fountains and fauna and flora. Yet instrumental objectivity dictates that unfettered free proliferation of technology is no panacea. Progress comes from the restraining inhibitory forces and controls we call criticism and error correction. We won't cure all disease nor live forever nor have infinite free time nor abundant energy nor hold hands and live in perfect peace. But the good news is that every problem today was created intentionally or inadvertently by past people awaiting other people in the present and future to solve it—and that is who and what Lux funds. The path forward is the reasonable return to realism. 

The more a tech movement needs boisterous boosters and a choir of cheerleaders to attract attention, the less likely it will persist (think: Segway and Google Glass, or 3D TVs and VR, or the metaverse and crypto). In contrast, inventions like Wi-Fi, microwaves, velcro, wireless mobility, LEDs, GPS, and smartphone cameras were all based on real breakthroughs that became pervasive and more commercially widespread than ever imagined. Take the recent example of the anti-obesity wave of GLP-1 agonists (Ozempic, et al.) that arrived on the scene and spread with surprise, delivering billions of revenue for their inventors, reducing human suffering, weaning people off other medications for diabetes and hypertension and even meaningfully contributing to the GDP growth of Denmark. Our partnership at Lux expects we may see a similar moment in neuroscience—where Lux companies like Cajal Neuro are working hard to advance a positive surprise for the world after decades of stunted or failed efforts in diseases like Alzheimer's and Parkinson's. 

Whether discovered intentionally or accidentally, the atoms and molecules of a drug, the biochemical effect they have on signaling pathways in the body-all are real. The science and truths of biology, chemistry, computation, physics and math are all real whether or not people believe in them. Our instruments provide us with this objectivity. It is why we can be perennially bullish on the continuous compounding nature of knowledge (which advances through conjecture and criticism, experimentation and implementation) even as we are permanently skeptical of the cyclicality of the human condition in all of our Shakespearean vanities and fallibilities. 

The present favors a near future with instrumental objectivity. Why? Because of the rising rates we detailed earlier. Recent low rates acted like a tractor beam to pull forward futuristic fantasies begetting a frenzy of speculative ventures. WeWork's bankruptcy is the best closing bookend of the unreal, a facade of a business model built on a foundation of faith that leased out a fever dream fueled by the supply of suspended disbelief. Many other entities (not even worthy of being called businesses) will crash and burn with observers asking in hindsight, "Were they for real?" The less realistic or totally unrealistic technologies along with more than a few frauds that attracted excess capital sloshing around looking for speculative returns struggle to find funding. Money now flows to the more probable, more pressing and more meaningful things we happen to focus on at Lux: what we've called inner space, outer space and latent space-respectively cutting-edge biotech, aerospace and defense, and Al

Make no mistake-of course we need creativity and imagination to debunk that which seems impossible and make it inevitable. We long conjectured the celestial expanse of stars well before we had the telescopes to peer right into it. The euphony of techno-utopianism can act as a lodestar, but it is not the star itself. We need informed foresight to see what is not yet, but will be. Yet first, we need clear vision and clear thinking or else vision becomes delusion. 

A clarity of errors 

Clear thinking is holding logically sound if sometimes contradictory ideas based on ever closer approximations of instrumental objectivity, which is to say reality. We can fool ourselves, intentionally and unintentionally. Neuroscientists remind us that, whether through behavioral experiments or optical and audio illusions, our senses tend to see what we believe rather than believe what we see. Our brains constantly make unconscious microsecond predictions (from estimating the amount of force your muscles should use to pick up a coffee cup to the letters and sentences and wards you just misread) and then adjust to reduce error. 

But while we can and do fool ourselves, more and more antagonists also endeavor to fool us for their own benefit. Defending our clear thinking requires error correction, and error correction requires open systems. Institutions with norms and expectations for adversarial accuracy like investigative journalism and science trend to truth, arrive at ever better explanations, and update prior erroneous ones. The end result is instrumental objectivity. Yet, all of these institutions will have to improve, for the democratization of ever-improving generative Al models will make provenance and veracity harder to discern, to determine what is real. Standard features on new phones allow users to instantly alter reality by removing objects or people from photos that were there-features that Stalin's censors could only dream of. Disinformation—whether silly by selfies or serious by states-devalues the truth, and devalues reality. The continuous fight against disinformation requires the praxis of open systems, deception detection and error correction. Closed, siloed, and centralized systems trend to authoritarianism, whereas open, evolving, adversarial and error-correcting systems (think: Lux-family company Hugging Face, which allows weights and biases in Al models to be error-corrected by an open community of globally distributed machine learning researchers) trend to truth. Open systems are a threat to the fictional Ministry of Truth of Orwell's 1984-and to the nonfictional ones of 2024. So long as we can freely debate the evidence we see, falsehoods will be questioned and instrumental objectivity will reign. 

Antagonists have another strategy in their arsenal though: unleashing a flood falsehoods and overwhelming our ocular organs. Limited by time, we cannot debate every image and fact that we see, and in fact, even with the benefit of time, we often can't reach consensus. ATP is the chemical energy workhorse of the human body and yet even today, there are debates about how it precisely works in different pathways and thus the fundamental laws of biology and life itself. Falsehoods demand our attention, because the very optimistic human instinct is to correct any illogical and contradictory observations we make. 

The counter-strategy is to step away from social media and never-ending news alerts, all of which are designed to prey upon your attention by enraging you so as to monetize you and your time. Instead, take an attentive walk outside in your city. People are hustling about conducting unchoreographed commerce, exchanging their demands and supplies, their money and time preferences and interests, paying to avoid inconveniences or getting paid to incur them. The news and its amplification would have you dreading zombies on NYC streets and subways-the reality is different with trains running on time and people going about their day; social media showcases San Francisco cesspools-the reality is different with thriving communities of productive knowledge workers amid a diverse and vibrant city. Polarizing confrontations on cancel-culture at campuses would have you grabbing your rally sign and joining or shouting down social justice warriors-the reality is different with idyllic well-manicured campuses and masses of brilliant ambitious students who are our future. Famed urban life advocate Jane Jacobs noted that the openness and diversity of cities give birth to "an intricate ballet in which the individual dancers and ensembles all have distinctive parts which miraculously reinforce each other and compose an orderly whole." Digital depictions disconnect and dehumanize us, exaggerate the extremes and the outlier events that are so sensational that they subsume our clear thinking, subjecting our objectivity to negativity and echoing Plato's concern of transitioning from light to dark and back again. Reality is different. Every day there are incremental improvements unworthy of head-turning headlines, small unappreciated acts of pay-it-forward kindness and unseen cascades of civility. Hidden behind screens feverishly firing off missives from keyboards we're really not our best selves-in person, people are better people. 

The objectivity of existence 

In our prior letter, we coined the term futureforming-taking the combinatorial possibilities of the here-and-now to transform them into the soon-and-will-be. Danny Crichton summed up futureforming's possibility in a recent Lux essay, "How to construct an optimistic existentialism," in which he wrote: 

We face the greatest challenges humanity has faced in a generation. But we have a new generation of humans brimming with ideas and expertise ready to usher in the next set of solutions. Like a magnet, the positive ambitions of builders are attracted to the most negative of events and want to bind with them to the very fiber of their existences. That's not optimism, but merely the fundamental physics of human experience. 

Humans can be selfish, exploitative, greedy, competitive, and vengeful but also have self-control, selflessness, and empathy as well as compassion, camaraderie and cooperation. As we wrote earlier, the future is a destination, which means we need to believe in ourselves and our solutions to arrive at the future we desire. 

That's not enough, of course. We all believe in ourselves, but what makes the open systems of America's and the world's scientific laboratories and innovation economies so compelling is that they allow each of us to believe in each other. And nothing is stronger than someone else believing in you—and giving you your shot. We never let Carlyle Group founder Bill Conway forget that we'll never forget him believing in us from our start. Today we have over $1.5B of dry powder, with the vast majority of our companies-and crucially, the most important contributors to fund value-extremely well-capitalized. Given present market conditions, lower valuations mean higher future returns. Fewer VCs means less competition, as does more VCs who are under-reserved and triaging or propping up existing portfolio companies. 

Layoffs and budget constraints at large tech and biotech companies mean a higher supply of experienced talent and the chance to spin-out brilliant yet underfunded divisions. In just the last year, we've spun out a team from Google that created Osmo (to give computers a sense of smell) and a team from Meta that created Evolutionary Scale (to use advanced Al for biology). As we chart the course of our future, the reality is that we are creating new companies-both de novo from scratch and also by spinning groups or divisions out of big tech companies-that are in turn creating new reality- unlocking secrets of neural circuits to influence libido and unlocking control of the immune system through the nervous system. We've also recruited over a dozen brilliant experienced leaders to Lux- family companies from Fortune 100 companies. 

Realism gives us so much to be optimistic about, and Lux is very well positioned from many of the investments our team made in recent years in bio, Al, and aerospace and defense. We highlight the Nobel-Prize-winning work behind Eikon, which is commercializing new drugs through a microscopy technique to see reality inside of cells in real-time and track individual particles and molecules, from proteins to drugs. Anduril is rolling very real engineered defense products off the assembly line against the reality of geopolitical aggression and counter-aggression now in multiple theaters. Those companies have become coveted leaders in their sectors, just like Hugging Face, RunwayML, Together and MosaicML (acquired by Databricks) have become in Al. These foundational companies are seen as the defining teams, technologies and cultures that matter to markets today and increasingly to geopolitics and the future of innovation. 

The word technology originates from two Greek words: techne (meaning craft or art) and logia (meaning study or discourse). Technology is thus the mastery of the scientific knowledge of tools, machines, techniques, and methods to very practically make and do stuff that solves problems. The reality is that technology is an instrument through which we unveil objectivity-the mechanics of the world around us from the tiniest molecule to the vastness of space. We've pierced the mystery of weather patterns, mastered the skies, and harnessed the speed of light itself for communication. We harness it, we hold it-like a power. And we can tell you the addictive power that Linus Pauling described of being involved in or around scientific discoveries: "I know something the world doesn't know and they won't know until I tell them.” We've emerged from Plato's cave into the light of day, no Tonger seeing shadows dancing on the wall but instead using our eyes and reason to view the real objective truth. That's the power to know-reality.

written by
Josh Wolfe
Co-founder and Managing Partner

Josh co-founded Lux Capital to support scientists and entrepreneurs who pursue counter-conventional solutions to the most vexing puzzles of our time in order to lead us into a brighter future. The more ambitious the project, the better—like, say, creating matter from light.

Josh is a Director at Aera Therapeutics, Cajal Neuroscience, Eikon Therapeutics, Impulse Labs, Kallyope, Osmo, Variant Bio, and helped lead the firm’s investments in Anduril, Echodyne, Planet, Hadrian, Osmo and Resilience. He is a founding investor and board member with Bill Gates in Kymeta, making cutting-edge antennas for high-speed global satellite and space communications. Josh is a Westinghouse semi-finalist and published scientist. He previously worked in investment banking at Salomon Smith Barney and in capital markets at Merrill Lynch. In 2008 Josh co-founded and funded Kurion, a contrarian bet in the unlikely business of using advanced robotics and state-of-the-art engineering and chemistry to clean up nuclear waste. It was an unmet, inevitable need with no solution in sight. The company was among the first responders to the Fukushima Daiichi disaster. In February 2016, Veolia acquired Kurion for nearly $400 million—34 times Lux’s total investment.

Avoid boring people. –Jim Watson

Josh is a columnist with Forbes and Editor for the Forbes/Wolfe Emerging Tech Report. He has been invited to The White House and Capitol Hill to advise on nanotechnology and emerging technologies, and a lecturer at MIT, Harvard, Yale, Cornell, Columbia and NYU. He is a term member at The Council on Foreign Relations, a Trustee at the Santa Fe Institute, and Chairman of Coney Island Prep charter school, where he grew up in Brooklyn. He graduated from Cornell University with a B.S. in Economics and Finance.

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Lux Q3 2023 Report

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