Riskgaming

Shredding the endowment investing playbook playbook with Scott Wilson, CIO of Washington University in St. Louis

Description

University endowments are one of the key nexuses by which finance influences the future of science, tech, and the human condition, and what happens at endowments and other limited partners (LPs) matters deeply both for their clients but also the wider VC asset class. Washington University in St. Louis Chief Investment Officer Scott Wilson, who drove the university’s record-breaking 65% return last year and is also a Lux LP, joins the podcast to discuss how he redeemed $3.6 billion in assets his first week on the job in 2017, his origin story in rural Alaska, and WashU’s strategy of direct investing alongside its GPs. We then also discuss the global macro environment, crypto markets, the future of healthcare investing, as well as some book recommendations.

Transcript

This is a human-generated transcript, however, it has not been verified for accuracy.

Danny Crichton:
Hello, and welcome to Securities by Lux Capital, a podcast and newsletter dedicated to science, technology, finance, and the human condition. I'm your host, Danny Crichton, and today we have a very special episode for you. University endowments are one of the key nexuses by which finance influences the future of science tech and the human condition, funding the path breaking research in the scholarships for students who will one day transform our world. What happens at endowments and other limited partners doesn't just affect our clients, but also the wider world of venture capital where heavier or lighter investments can dramatically shape the future of the asset class.

For that reason, I'm excited for today's episode with Scott Wilson, the chief investment officer of Washington University in St. Louis, and a Lux Capital Limited partner. Last September, Wilson and the university announced a 65% annual return on the endowments managed assets, one of the best performances among many managers last year. Wilson, who came to WashU in 2017 didn't come from his previous position at Grinnell College in Iowa with a passive management philosophy.

As we'll hear on today's podcast, on his first week on the job he called in redemptions of 3.6 billion of assets, and jettisoned 36 out of 37 hedge fund positions. It was a bold move and one whose profit has led WashU to announce for the first time last October that the university will move to a need-blind system of undergraduate admissions.

In today's episode, Scott is joined by Lux's Josh Wolfe and Alex Nguyen, and they'll discuss a whole range of topics including Scott's origin story in rural Alaska, his migration to Wall Street in the heady days of the 1990s, what he learned at Grinnell's endowment, and how he rebuilt the WashU asset management philosophy, direct investing alongside GPs, the current global macro environment, what his LP nightmare is, his approach to the crypto and healthcare industries, and finally, finally, to top it all off, some book and cultural recommendations. Wow, that's a lot to get going. So let's dive in and let's get started with Josh Wolfe.

Chris Gates:
Ready? 3, 2, 1.

Josh Wolfe:
Scott, good to be with you, man.

Scott Wilson:
Yeah, thanks for having me.

Josh Wolfe:
Let's start with your path. Your career is sort of unique and what you're doing at WashU is unique, but give me the start from rural Alaska to today.

Scott Wilson:
Yeah, well, I'll try and summarize as quickly as I can. But yeah, I grew up in a small town in Alaska, neither of my parents went to college, was a pretty good student and played basketball in high school and college, I guess. But back then you just got out the guide books and I was trying to figure out where I wanted to go to school. I had a couple of basketball scholarship offers, but it was pretty clear I wasn't going to make it in the NBA. So I ended up at Grinnell College, played basketball there, studied math and econ.

When I started I thought I wanted to be an engineer, if you grow up in small town Alaska, the guy who has the big house at the end of the street, he's probably an engineer for one of the oil companies, but switched over to finance and started to learn about finance through a friend, who's still one of my best friends, and he went off into investment banking, he was a couple of years older than me. I decided I wanted to do the same thing, at first Boston, right out of school, did that for a couple of years-

Josh Wolfe:
And this is late '90s?

Scott Wilson:
This is late '90s, kind of the tech bubble back then, the original tech bubble, I'll say, for clarity. Spent, I guess, better part of four years doing that, and then decided I wanted to do something more quantitative, went back to graduate school in math, and got a job on a derivatives trading desk.

Josh Wolfe:
This is late '90s, everybody's going crazy about internet.com, optical networking. You had day traders that were going bananas.

Scott Wilson:
It was crazy.

Josh Wolfe:
And so was there some instinct that was like, "Everybody else is doing this, let me do something that's more sophisticated, more rare that other people are not doing," or was it more random?

Scott Wilson:
Yeah, it was probably a little bit more random. It was just more interesting to me looking at these options and derivatives market. I was just fascinated by the mechanics of it and the immediacy of it, trying to build a better mousetrap to add value. I think I was naive at the time, but I thought I could carve out a niche for myself.

Josh Wolfe:
I always think naivete is actually a great asset that is underrated because it's why people charge full speed ahead, they just don't know. The older guard is like, "Why would you ever do that?" Younger people are generally like, "Why would you not try?" So you end up in Japan, and then you come back to the Street?

Scott Wilson:
I was in Japan, started as a junior trader, and trading mostly interest rate derivatives, but some FX, and multi callables, and exotic options.

Josh Wolfe:
Psychologically, growing up rural Alaska, then going to school in Iowa and then coming to the Street where it's crowded. There's always this story about Buffett who being in Omaha was this psychological advantage because he didn't care about being with the Street. Was there anything about regional disposition, being from small town? Did you roll your eyes at the big city kids, or were you attracted more to the small town people? What was the psychology of that?

Scott Wilson:
I think it was an advantage coming from a small town and just having the background that I did, I worked in construction every summer. And getting to Wall Street, you just think most of these people are pretty soft, they don't want to work that hard-

Josh Wolfe:
They haven't lifted things.

Scott Wilson:
Yeah, kind of, I guess. They tend to whine and complain, and that's just not the upbringing that I had. It's kind of, "Hey, roll up your sleeves and get after it," and that was certainly helpful throughout my career.

Josh Wolfe:
So then this path from traditional Wall Street investment banking and then doing more exotic things, how do you end up at an endowment?

Scott Wilson:
Yeah, it was randomness and opportunity, as you like to say, but somebody called from Grinnell College and I obviously went there as an undergrad. On paper, ticked some boxes, I'd worked in equities, I'd worked in fixed income, I had international experience. And Grinnell was a small team, but I had no idea what an endowment does really.

Josh Wolfe:
And run classically, was it just 60/40 equity/fixed income or was it trying to mimic some of the Swensen endowments fund?

Scott Wilson:
No, I think Grinnell would say they started investing in privates before Swensen was even at Yale. And the most famous investment would've been Intel, which-

Josh Wolfe:
As a direct?

Scott Wilson:
As a direct investment, yeah. So they were one of the original seed investors in Intel, I think owned three of the original 10 shares or something. So Buffett was on the board back then at Grinnell, and the story goes that Buffett didn't want to do it, he hated tech back then, didn't understand it. So this guy named Joe Rosenfield said, "Screw it. This guy, Bob, is uniquely talented." Him and another trustee essentially put up the money and just donated it to the college.

Josh Wolfe:
For the college to invest directly.

Scott Wilson:
Yep.

Josh Wolfe:
Interesting. Okay, so you join, they've got some direct investing, and then did you come in and say, "Okay, I'm going to take us into exotic stuff and I'm going to go international or I'm going to start to increase or decrease the number of managers"? What was the first framework?

Scott Wilson:
Ultimately, I think Grinnell took a very pragmatic approach. If you think of Grinnell's philosophy, it was very kind of Buffett-like, "Hey, let's find really interesting companies, really interesting people, put as much capital we can in their highest conviction ideas, and let's compound with them over really long periods of time." And that never really changed since Buffett and Joe handed it off to David. And I was super fortunate to work for David as I started because he was just such a, I think, thoughtful guy and a very pragmatic teacher.

Josh Wolfe:
So you're at Grinnell, and what years are you there?

Scott Wilson:
2010 to 2017

Josh Wolfe:
And then you get a call and there's a new job, and here coming in, team is in place, and what's the first thing you do? What was those first, almost presidentially, those first 100 days like?

Scott Wilson:
Yeah, it was rough the first 100 days, that's what I would say. Anyway, we're still probably not popular in certain circles. We pretty much cleaned house. We changed the team around. We changed the team dynamic, we went from a siloed asset class approach to a generalist model.

Josh Wolfe:
And siloed asset class, meaning individual people on the team that were focused on equities or fixed income or currencies or macro, whatever it might be.

Scott Wilson:
Right. And it was very typical endowment model. This guy's doing private equity and venture, this guy's doing real estate and real assets, this guy's doing public equity, this person's doing hedge funds. They're basically teams, and we kind of threw all that out.

Josh Wolfe:
So you come in and say, "Ripping up the playbook."

Scott Wilson:
Totally ripping up the playbook. We're not even going to think about that. You have this guy doing private equity and this guy doing public equity. This company goes public one day, it's in this asset class bucket. Like I told the board, "The primary difference between public and private equity is how often something's marked to market. And if you say you have a 20-year time horizon, should you give a shit that this is marked to market quarterly and this is daily? I don't think so."

Josh Wolfe:
So you come in and you inherit, I don't know how many managers, but one of the key things that I think you're known for is really calling it down. And like you said, that must have been a very unpopular and painful thing, but it seems like it was the rational and logical and empirically resulting thing to do.

Scott Wilson:
We put in that was $3.6 billion worth of redemption on the first... well, in the first week.

Josh Wolfe:
And those were public hedge fund managers, fixed... everything.

Scott Wilson:
Yeah. So I think the initial, it was 36 out of 37 hedge funds, and ultimately all 37 and didn't stay in the portfolio. And look, these are good firms and good people, it just didn't fit what we were trying to do. Their returns could have been good as well, it's just as a portfolio-

Josh Wolfe:
I'm picturing the scene from Game of Thrones, the red dinner or whatever, it was this just great massacre of managers. Okay, so you get through that, and that must have been a shock to the system, but it also let people know, "New sheriff's in town, we're going to think about doing this differently." And then what was your process? Obviously, we met during that process. But what was your process for finding managers?

Scott Wilson:
So we don't have a tough rule book or a checklist that we look for, but generally we look, first and foremost we want people who we think are great investors who are trying to do something different, who are building a portfolio that we think is idiosyncratic and orthogonal to anything else we have in the portfolio. And that's really hard to find. And everything looks good on paper, but when you dig down in it what is really the process that drives their portfolio construction?

Even our portfolio construction, it tends to be a little bit random in that, "Hey, we did a lot of work on this and we met this." It's almost like... I remember one of our first conversations, I'm like, "Josh, how do you guys source ideas?" And that's pretty similar to how we do it. I thought it was a great answer in that, "Hey, logically it doesn't make sense, but there are links in the chain everywhere." And I think hard work and randomness creates lots of opportunity. And I'd say the other, maybe, different thing is we're always looking for people who we can have a very close relationship, so we matter to our partners and our partners matter to us.

Josh Wolfe:
So let's jump forward to last year, which I think you were one of the top three performing, maybe the top of one, two or three performing endowments in the world, just absolutely incredible, north of 60-plus percent performance.

Scott Wilson:
Yeah, we were just over 65% last year.

Josh Wolfe:
Just incredible. I know you are a student of process versus outcome, incredible outcomes that are attributable to process that was put in place probably back in 2017. So what was that process? What did the portfolio look like in delivering those returns? As we look at a changing world, heightened geopolitical risk, markets are changing, how are you starting to think about the next evolution of what that construction portfolio construction's going to look like, and over what timeframe?

Scott Wilson:
Yeah, so I guess the first thing on that is although it's a big year, and obviously you'd rather be at the top of the group than the bottom of the group, but I can't even tell you what the one-year return is for any of our underlying partners, nor is it something we even look at. It's an interesting byproduct, but we don't even really care, I'd say. None of our peers have a one-year strategy, we don't have one-year strategy.

So it's interesting and it is a byproduct of what we've done over the last five years, but what we really care about is the 5, 10, and ultimately, 20-year numbers. And we have a strategy that takes a lot of tracking error, is what I would say. Our mandate from the board is, "Look, you have to beat your primary benchmark, which is just 70/30 passive. We want you to produce, hopefully, double-digit returns, and we want you to beat your peer group." And I would say if you want to beat your index or your peer group, the first thing you have to do is not look like your peer group.

Josh Wolfe:
Getting initial access to a manager, and then coming to them and saying, "Hey, we can be a trusted partner, be a side pool of capital, invest alongside you. We're going to do our diligence, we trust your diligence," and then you can double down on some of the best ideas.

Scott Wilson:
That's absolutely right. We spent a lot of time going out and saying, "Hey, Josh, who do you think the five best companies in your portfolio are?" I remember talking to Peter about that in San Francisco last time we were out there like, "Who do you think the breakout companies are?" And when we can, we'll just go out and meet those companies. We'll start doing our own work and ultimately we call it a prepared mind, if and when something interesting happens with that company, we can take advantage of it. And we do that in public markets as well.

And if you think about it, a lot of time when people are calling capital or particularly in public markets, when the opportunity set gets interesting, it's typically because one or two names that they really like and have strong conviction in aren't working, for whatever reason, the market doesn't agree with you yet. And rather than add money to the entire fund where you get diluted by all these other positions, we'll just step in and say like, "Yeah, we'll take another $100 million of just this one name," and that's how we'll rebalance.

Josh Wolfe:
The ability to put money to work into private deals is obviously in a sense limited relative to what you could do in the public markets. The reversibility of the decision in the latter is higher, the potential upside in the former is higher. How do you think about the sizing of that when you're doing directs in a private deal as a co-invest alongside us or someone else, and when you're doing it in the public markets?

Scott Wilson:
To be honest, most of the time... we've gotten big enough, we don't have enough conviction to put 1% of the portfolio, and I think we probably don't have enough conviction to do the investment, but most of the time that's $150 million, most of the time it's hard for us to get that much capacity anyway, so usually the sizing is determined by how much access we can get. It's not really on our side, it's, "Hey, there's only 50 million left where you're here," which is fine, we've had most of the situations where we've had really interesting investment opportunities, we asked for 100 and we got 60.

Josh Wolfe:
There's a little bit of this Buffett lineage in your own history, and one of the things that Buffett has been able to do through many times of crisis was be this capital provider and to be able to do it quickly and in size. I'm curious right now in the current environment, we went from raging bull market in both PE and venture and public markets and growth equity, to something that doesn't look like that. You're seeing capital constraint, you're seeing a rise that went from passive indexation to suddenly being dollar-in indiscriminately buy to dollar-out indiscriminately sell. Maybe you'll see a return of native individual long/short stock pickers and more concentrated portfolios.

But there are people that are panicking. There are people that are seeing big drawdowns, there are people that are over levered and seeing assets decline. Are you looking at this moment as, "We're going to stay the course in and most of what we're doing. We have capital and cash and we're prepared to pounce on special situations, we're reallocating..." What is the mindset as you start to... if you agree with the world is changing.

Scott Wilson:
Yeah, absolutely, I agree. To me, these are the best times to invest, and we want to be aggressive. So if you think about 2020 when we had that big drawdown and we were seeing access to companies and securities that were downside protection, these convertible preferred, and we did several of those that we made five to 10 times our money in a year, those are always the best times to invest.

Right now, I would say we're trying to rebalance the portfolio, so we're looking to sell out of some of this late stage growth that still hasn't probably remarked like it should like the public markets have and rebalanced into stuff that we think has a better risk reward over the next five, 10 years.

Josh Wolfe:
Do you see a natural domino effect? So you had excess growth equity, there were the marginal buyers in some of the private markets and the price setters. You went from having one large [inaudible 00:15:33] which was SoftBank to lots of crossover funds and then dedicated growth players. You had the same sort of phenomenon in private equity where people were basically just multiple flipping to each other. One guy would buy it for eight times, sell it to the next for 10, he'd sell it to the third for 12. I think 50% of PE transactions were basically between people in your portfolio that you're-

Scott Wilson:
Yeah, it's a LPs nightmare, right? You own the same thing, you just have a higher cost basis and you just paid a big carry-

Josh Wolfe:
Okay, so you start to divest. What is the next domino that falls, say, like in the late stage growth equity folks? They're not providing capital. A logical trickle down would be, "Okay, suddenly series B and series Cs that thought they could rely on the benevolence of strangers who were going to be providing cheap equity capital. Suddenly that cost of capital is getting more expensive." What's the trickle down or domino's effect that you see?

Scott Wilson:
Yeah, I think we're still early stages, but there's going to be a lot of these firms that don't make it. There's going to be just a whole swath of companies, I think, that don't make it because capital's going to be dear and people who are investing and then burning through cash... And then there's a lot of, I think, really shitty businesses out there that ultimately the profit pool isn't big enough to support all the market cap that's already in those industries, and this is both public and private, and there has to be some consolidation and rationalization both in the capital markets and on the company side.

Josh Wolfe:
I want to talk about how your team makes decisions because the stuff that you talked about before, South America, Africa, Eastern Asia, it's all over the place, and yet you are a team of generalists, like we are, and people are covering a lot of ground. How do you source these opportunities? How do you diligence them? How do you feel you have enough depth in any one area? What are the signals? And then ultimately how does the decision get made?

Scott Wilson:
It's a little bit of organized chaos. So the team spends a ton of time on the ground in the various markets that we invest in. So I've got a team in Brazil this week, Adam and I are here in New York, we were in London two weeks ago. And most of those, we're meeting individual companies. We will meet with our core partners, but we spend the vast bulk of our time looking at these underlying investments or securities.

Josh Wolfe:
And the underlying investment might be somebody that's already in a portfolio of a manager that you're allocated that has said, "This is one of our winners."

Scott Wilson:
Yep. So if Adam found something that he thinks interesting, the next Monday meeting he would say, "Hey, I did this call and I met this management team. We think this is a super interesting company, heres why." And then we'd say, "Okay, can we diligence it? Do we actually have the skillset? What resources can we do? How much do we believe the thesis? How much can we actually channel check and verify in-house, so to speak?"
And then we would just start attacking that as a team. It may be an investment where we have to make a decision in six weeks or six days, and it may be a long-tailed thing that "Hey, we would want to follow this company and make sure we're up to speed and see if we can insert ourselves on the cap table at some point."

Josh Wolfe:
The pace of investing has accelerated, you had more money going out across the world. You had more people putting that money to work at an ever faster pace. One of the corresponding consequences that we saw was diligence from some of the later stage firms which you've keyed in on, was scant. People were just writing checks, in some cases a check a day, to companies, and almost building an index strategy for private equity, which was super unusual.

Scott Wilson:
Yeah.

Josh Wolfe:
What are you seeing about the pace of managers coming back to you saying, "We're raising our next fund," or the deployment of the capital to the extent it's measured? What are you seeing that is changing, the second derivative of the pace?

Scott Wilson:
Here recently it was slowing. We had to make a lot of decisions, people we probably normally would re-upped with, we've said, "No, hey, we can't do it. Coming back to market every nine months doesn't work for us."

Josh Wolfe:
I shared this anecdote where one of our LPs had a whiteboard and they kept a few names on the whiteboard and then I was like, "How are things going?" He's like, "Man, right now my whiteboard looks like... it used to be six or eight names. Now it's a scene out of a Beautiful Mind, and every damn square inch is covered. And people are coming back and they're launching sector funds and they're launching growth funds." And he's like, "I just have indigestion. It's not that I don't want to invest, I just can't." And that keyed off like, okay, the secondary guys are going to start to crush it.

Scott Wilson:
Yeah. And you think of why they do that. Ultimately the tension where if you have a limited pool of capital and so your best ideas have to compete for that capital. But what happens is they just raise bigger and bigger funds and they come back to market, and really they're just not saying it. They need to raise the bar and say no to a lot more stuff rather than just raise funds that are ever bigger and ever bigger.

Josh Wolfe:
When we came into this world, we were in incremental edition. I think there were 600 venture firms that ballooned to a thousand, and then they got called down to 500. And then I think going back a few years you had something like 900 venture firms that I think ballooned between the micro VCs and some of the late stage up to 2,000. Yeah. Any prediction? Do you think 10% get killed, 50% get killed?

Scott Wilson:
Oh, I bet it's closer to 50%.

Josh Wolfe:
Yeah?

Scott Wilson:
Yeah. It's hard to say and I think trying to predict exactly when that happens is a fool's game, but yeah, there'll be a lot of firms that don't make it. Yeah, you've been through it before, I've been through it before a couple of times now, it's not a fun process. I would say, ironically, for us, our unfunded commitments is at the lowest point it's ever been, so we're down to a super... some of that denominator's obviously gotten bigger, but we've also just been really disciplined about not re-upping just because they're raising in the next fund.

Speaker 5:
I really like your concept of the prepared mind, I think it's philosophically aligned with how we view the world here at Lux. March 2020, the world seems like it's ending, capital markets are in flux. You have made a lot of decisions that now [inaudible 00:21:20] two years later have looked, in retrospect, to be very wise investment decisions. If you're comfortable, would you like to speak to some of those? I know you guys were very aggressive during that time.

Scott Wilson:
Yeah, we were very fortunate because we had kind of a hunting list of companies. And so we would basically step back and say, "First principles. Okay, there's this horrible pandemic and lots of bad things are going to happen, but there's also going to be companies that benefit from this. What are the type of companies that we think could actually be beneficiaries of people working from home or whatever, this changing landscape?" And we were able to, even in those companies, the stocks originally just crashed, if you remember, everything was being sold.

We just started putting capital to work and we actually turned off the payoff to the university and said, "We're going to reinvest this and we don't expect to be right or pick the bottom or anything like that." Obviously, in hindsight, we should have been more aggressive, not less aggressive, but we were able to put a decent chunk of capital to work in stuff that we thought was going to be the beneficiary of this new normal, and that worked out really well over the next 18 months.

Speaker 5:
And the results seem to be unequivocal. I think Josh had mentioned you have among the best returns out of almost all institutional investors, not only on the one-year time horizon, but over the five-year time horizon. And I think in this industry it's very easy to abstract those numbers away. What is a 65% return besides being a number on a spreadsheet? But I'd like you to comment on what those extraordinary returns mean for your students.

Scott Wilson:
Yeah, for me it's a huge deal, obviously, I was a need-based financial aid kid when I went to college. And WashU, this will be the first year that they're able to go completely need-blind, which basically means kids are not admitted based on their ability to pay for their education. And that's ultimately why you do it, you have to buy into the mission if you want to work for an endowment. And financial aid is probably the biggest portion, but there's also dollars to go for medical research and faculty and staff, so it's a big deal. And if you look at what Yale's endowment has done for that institution, and obviously they've used the money super wisely, I think, over time, it's absolutely transformational.

Speaker 5:
And me, personally, I mean I think the figure is that David Swensen had contributed to $50 billion in distributions to the students, and I was a student on financial aid. And so I think the endowment mission is one that aligns with how Lux views our LP base. We're at a point where Josh likes to say, "We invest in matter that matters." And it's not only down to the portfolio company level, but it's also up to the LPs that we are grateful enough to call our partners, and a large portion of them are endowments because I think at Lux we view education being one of the greatest levelers, it's one of the biggest drivers of scientific progress, and it ends up being one of the things that humans can do to put the destiny of our human race in our hands, just becoming more educated and making sure that the next generations are more educated, so-

Josh Wolfe:
Why do you hate education so much?
One of the key attributes that we have here is disagreeableness, people love to debate. How do people debate ideas where somebody is clearly more highly weighted than biased, and somebody else is maybe either intentionally or just by disposition playing the red corner devil's advocate, and how do you surface that out of people?

Scott Wilson:
There's a ton of debate that goes on the team. We will talk about individual investments or partners like, "Here's who we like. Here's who we don't like, or whatever. This is what we change about the strategy, or this is what we don't like about this company's business model, or we think the biggest risks, competitive dynamics, unit economics," you name it, and there's a lot of internal debate on it.
And clearly people have their own internal biases, I'd say. We do a pretty good job of keeping things civil, but it is hard when you have one group that's done a lot more work on the underlying investment than the rest. And if they're not really hardcore champions of that particular investment, then there's just zero chance it makes it into the portfolio.

Josh Wolfe:
Going back to the curiosity point, and I think that's some of the reason that we all like to riff together is just the intellectual interest in a broad range of topics. What are some of the stuff that is on your mind right now that you're either curious about and you see opportunity, things where you're skeptical, maybe changed your mind on, things that you maybe have some increasingly hardened conviction, and you're like, "No way am I touching that, I think it's toxic"?

Scott Wilson:
Yeah. We're spending most of our time in public markets right now, I would say. I would've said three months ago we were spending most of our time in blockchain-related companies in the crypto world, and we did put quite a bit of capital to work there. But the kind of hype, I think, has surpassed... We were finding interesting things to do. We were buying companies at four times earnings two years ago in crypto, four times real cash earnings, and now it's like-

Josh Wolfe:
To the moon.

Scott Wilson:
... a hundred times some make believe revenue number five years out. And it seems like more of those companies are solutions looking for a problem as opposed to a technology that really solves one of today's... that's been tailor-made for an interesting problem. But we still think that that space is interesting. But in the public markets, we're doing a ton of work on Asian names that have been really beaten up, some of these South American names that are down 70, 80%, and are already profitable, fast-growing companies. So we think that's the primary reason the team is down there.

Josh Wolfe:
If we do a quick run through some of the sort of end sectors, we've observed this bifurcation where they basically come to the same end result but through two different paths. The first path are the right place, right time, probably Burning Man, had a friend who gifted him some crypto, told him to buy an NFT, they made a ton of money, and they're like, "This is amazing," they got hooked. And they start to question some of the existential things of the financial system like, "What even is a bank? What is money?" Some of that might be drug-induced.

Scott Wilson:
Yeah.

Josh Wolfe:
The other end are the hardcore mathematicians, MIT, Stanford, Caltech, PhD, computer scientists that are actually fundamentally questioning like, "There's got to be a better way for transactions and infrastructure and distributor processing and so forth." And so they both come to the same way, but these two different cultures.

And it reminds me of the things I've read about Stewart Brand in the '70s and the '80s, when the early computing revolution was happening that you had hardcore computer scientists and you had stoners that were hanging out in garages, but they ended up in the same place. We have trended more towards, you'll be happy to know, the infrastructure, of course.

What about healthcare? We had a huge boom, psychologically driven in part because of Moderna and the sort of long human ingenuity trade with COVID. Flood of capital has come in, it seems like a flood of capital is going out. We're seeing interesting pricing dynamics with biotech where the companies who are flush with cash are going to have a serious competitive advantage when the cost of capital for everybody else is going up and they're all sort of screwed. What are you seeing between tools, diagnostics, direct therapeutics, intersection between tech and bio?

Scott Wilson:
Yeah, we're super interested in that space. I would say for those types of companies, generally we don't do a lot of... it's a little different model for us, it's more just outsourced mainly because we're not smart enough and we don't have the skillset set internally to underwrite these... Ironically, Moderna was one of our early co-investments back in 2018 way before COVID, and obviously we had no idea COVID was going to happen, but we were able to use folks in our medical school and some of our partners to underwrite that company, so we had a small co-investment in Moderna.

The intersection made between healthcare and tech is just getting started, so we love that space over the next 10, 15 years. On the flip side, the capital base needs to be right-sized for the opportunity set, and there was a lot of proliferation in mega healthcare-related funds that I think that probably needs to be washed out before we really see great returns come out of that sector again.

Josh Wolfe:
Two other areas where obviously you're indirectly invested through us and in some cases co-invested trends around automation next generation to industrial technologies and then defense. What are your views broadly, whether globally or domestic US?

Scott Wilson:
Yeah, it's been a big theme in the portfolio for quite some time. I guess that's how we originally found Lux, was an overlap in one of those early automated manufacturing companies. There's so many industries that still haven't really been disrupted and are ripe for disruption, so whether that's traditional construction, manufacturing, a lot of these industries are ready for disruptive solutions to hit, and certainly I think a big global shortage of labor probably exacerbates that. We think it's important for the US to be a leader, clearly, in defense tech, and current events would say that, "Hey, this is really important for us to be a global leader in defense tech," and it's also just a huge market that I think we'd like to participate in over the next several decades.

Josh Wolfe:
Let's wrap maybe just talking about some of the intellectual influences, whether long-term things that you read that inspired you that changed your life, or talk you heard that changed your life, those big sweeping things to say grandiosely like, "I saw this one talk and it changed..." But something that... or compounded over time and then stuff that you're obsessed with now that you're finding inspiring, interesting, or again, confounding like, "I can't believe that everybody is watching Is It Cake or Not?"

Scott Wilson:
Yeah, I guess I'm obsessed with these broader valuations and mismatch, and I think all the hoopla that's going on in late stage. So we've seen some of that dissipate clearly over the last nine weeks. In terms of... I'm not sure... overriding philosophies or under [inaudible 00:30:58] was obviously a huge factor early on and I loved his framework and the way he articulates things, and I'm still that old school value-biased investor, and I want to know and understand what the return on invested capital is and what I think cost of capital is, and how this creates shareholder value.

I was super fortunate to have really great mentors and bosses starting with my first boss who's still a friend, and a lot of really smart colleagues that I've learned from over long periods of time. And now we have people like Lux Capital where we have an inside view, and can learn from some of the smartest people in the world.

Josh Wolfe:
Do not watch Is it Cake?

Scott Wilson:
Is it Cake?

Josh Wolfe:
Current cultural consumption? Stuff that you're finding whether mind-numbingly entertaining, or intellectually stimulating?

Scott Wilson:
Yeah, I guess on the mind-numbing side, I've got two teenagers and a 12-year-old, or almost 12 year old, so-

Josh Wolfe:
That, for those that don't, is portfolio chaos and...

Scott Wilson:
Yeah, that's where my culture comes from. I'm typically interested in whatever they're interested in. So with my oldest son, we've been watching Drive to Survive, F1, and he's super into that. And then my youngest is super into soccer and Premier League, so when I lived in London, I never made it to a game, but now three mornings a week I'm on the couch with my youngest watching.

Josh Wolfe:
There's a lot of oligarchs that might have to divest of additional soccer teams.

Scott Wilson:
Yeah, that is kind of a... There's a lot of these new firms that have... and we've looked at quite a few of them who are... and some of the big guys obviously are going after these professional sports teams. Interesting side note, if you look at the value of those... it tends to track the wealth gap between the 0.1% and the 0.0001%, it's the ultimate gift and good ultimate trophy asset.
I try and read a lot, I spend a lot of time on international flights, so I'm currently reading a book called Stolen Focus. Have you heard of this book?

Josh Wolfe:
No.

Scott Wilson:
By Johann. It's basically how social media is destroying the brain, and your phone, I guess. It has led to... and I'm not done with the book yet, but led to an attention span that used to be measured in minutes for most people is now measured in seconds.

Josh Wolfe:
My friend, John Haidt, just at NYU, just wrote this amazing piece in The Atlantic about why the past 10 years of American life have basically become stupid. And it's not a silver bullet, there's a panoply of different reasons, but a lot of it relates to social media and, specifically the incentives around social media, something that one of our, well, older portfolio companies that we sold to Facebook, CTRL-Labs, the founder, Reardon, used to say, "Social media is inherently good. Social media based on advertising is inherently bad because the incentive of the fast twitch short attention span and feeding you and keeping you in a siloed bubble is what corrupts it. Being able to be in touch with people that you love or interest groups around the world is a virtuous thing."

But yeah, Scott, awesome to be with you.

Scott Wilson:
Yeah. Well, thanks a lot for having me, I appreciate it.

Josh Wolfe:
Thanks for your partnership.

Scott Wilson:
Yeah, likewise.

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