Tech Investing, Tesla, and the Bubble in Stocks & Venture Capital (w/ Mike Green & Josh Wolfe)

MIKE GREEN: Well, you can tell by the smile
on my face, I’m happy to be here. I’m sitting down with one of my best friends,
Josh Wolfe, so excited to be back here in New York and chatting with you. Welcome back to Real Vision. JOSH WOLFE: Symmetrical happiness. Always thrilled to be with you. MIKE GREEN: Every time you come on the show,
we get to talk about a new success. Last time, we talked about the magic. You were so excited about CTRL-labs, and pushed
you on the idea that maybe you were falling in love with something and where’s my sales
commission? JOSH WOLFE: Man, we got to do these interviews
more often. It’s been a streak of good luck. MIKE GREEN: With CTRL-labs, now, you sold
it to Facebook. Remind people what CTRL-labs is, remind me
why you’re begrudging in the sale. What do you think Facebook wants to do with
something like this? JOSH WOLFE: The thesis behind CTRL-labs which
led to three nights of sleepless nights in pursuit of this entrepreneur, Thomas Reardon
and Patrick Kaifosh, his co-founder, was premised with this intercepting phenomenon that I call
these two arrows, one of inevitability, and one of the perception of the impossibility. Inevitability is this directional arrow of
progress where it doesn’t necessarily tell you who the entrepreneur is or what the company
is but there’s this inevitable high probability that this is the way that technology is trending. The impossibility is when everybody else in
the field, peer VCs, just don’t see it. They think, oh, that’ll never work. It’s impossible. Impossibility ends up dictating low prices
or less competition and inevitability raises our confidence and conviction. In this case, the arrow of progress, the inevitable,
was the idea that something we call the half-life of technology intimacy. This buzzword that we coined but basically
50 years ago, you had a giant ENIAC computer, you physically went up and pulled some plugs
and buttons. First half-life, 25 years ago, you have a
personal computer and you’re tickling the keys, you’re touching the monitor, you’re
flipping the power switch on the back. 12 and a quarter years ago, the next half-life,
you have a laptop, physically touching your thighs, becoming a little bit more intimate
with you, you trade the mouse for a trackpad. Six and a quarter years ago, now you’ve got
your phone cradled in your hand. First thing you touch in the morning, last
thing you touch tonight, separated from your body only by a thin film of fabric. Three and a half years ago, your iWatch. 24 hours a day on your hand or 18 hours a
day. A year and a half ago, AirPods with a computer
inside for voice recognition. That directional arrow of progress, the inevitability
was computability was becoming more and more intimate and close to you. We shared that thesis with a lot of people
and then we ended up meeting this researcher at one of our other companies, Charles Zucker,
who’s a PhD neuroscientist. He said you got to meet this guy, Reardon. Reardon was the inventor of this technology
that we use called Internet Explorer when he was at Microsoft as a young guy. He was one of 17 kids, 10 biological, seven
adopted. Just insane family situation. Bill Gates taps him, he goes and works at
Microsoft for a decade from ’90 to 2000. He’s also Bill’s right hand guy during the
monopoly DOJ trial. Then after making a lot of money and being
technologically renowned and reasonably wealthy, he does what anybody would do in his shoes,
he starts another company, Openwave, which ends up creating a mobile browser that we
all use and then goes back to college and gets a degree in Classics in Latin. Then spends the next near decade getting a
PhD in Neuroscience, where the thesis he was working on is this myoelectric response. The idea that you could detect from the surface
of your skin, the roughly 15,000 neurons, that innervate roughly 14 muscles in your
hand, which is important because if I’m typing, my brain is telling my fingers to do something. If I am turning a knob or switch or a lever
or doing anything, my brain is subconsciously telling my hand to move. He figured out how you could take that signal,
detect it and map it to the technological devices we use. Instead of having to type on a keyboard, instead
of having to type a switch, instead of having to turn a thermostat, I could effectively
either do that motion in free space, or, and this was the crazy part, think about making
that motion and I can control the devices. MIKE GREEN: We talked about this last time. You highlighted that even if we go back and
look at the Tom Cruise film, Minority Report, where he has this dynamic and he’s moving
this, he’s wearing gloves, he’s making the gestures, et cetera, what Thomas Reardon figured
out was that that subconscious thought was actually sending a signal that they are then
restricting and so the process of learning how to type on Mavis Beacon is actually just
your brain sending those signals to your fingers, your fingers then figuring out how to do it,
and you’re training that interface back and forth. CTRL-labs basically shortcuts that process. JOSH WOLFE: In fact, they had a maddening
demo, which we may have talked about, where you try to hit the button before the device
knows that you intend to hit the button and you can’t do it. MIKE GREEN: That’s amazing. JOSH WOLFE: It can detect your intention to
fire your muscle and move it before you actually move it, which makes that, because if you
have 1000 neurons that are activating a single muscle, if there’s 100 of them, and if you
were to do this now and you think about just moving a finger, you get the sensation, this
feeling of that finger, and it can detect that. I became obsessed with the entrepreneur, I
lost sleep in pursuit of the deal for three nights. My wife, when she finally met Reardon was
like you, you’re responsible for this household duress. It was an amazing experience, but it was too
short. It was too short. It was about a year and a half, almost two
years and Facebook made an entry on the company, which we rejected. Zuckerberg came back and made a more persuasive
entry. These founders, some of whom, unlike Reardon,
had never made money before. It was very compelling, the amount of capital
that Facebook was going to invest into the company on an ongoing basis, as well as the
liquidity that people were going to get now. I wish we would have held it longer. I truly think this would have been a $10 billion
business instead of something a little under a billion dollars, but it was a great outcome
for our investors and a thrill to be part of what I think is going to be a historic
technology that we will all be using. MIKE GREEN: Now, I want to come back to this
but this also brings up another topic that you and I’ve discussed before, which is basically
the concentration of capability inside companies. What we have very clearly seen are companies
like Google and Facebook, Apple, Microsoft, have become very acquisitive. They have an extraordinarily low cost of capital
and have been able to buy these. Do you think for Thomas Reardon as he thinks
about going inside Facebook, that that creates a limitation or that that changes the trajectory
of the technology versus its original vision? JOSH WOLFE: I’ll give you two answers because
I tried the no answer. I tried the moral suasion. I tried– and this was at a time when Zuck
was in front of Congress being lambasted as a poster child of technological excess and
election meddling. I’m trying to make the case, my God, you are
going to take a technology that can capture your neural intention and give it to Facebook? You’re going to spend the next two years in
front of Congressional committees yourself. I tried emotional suasion with my kids, saying
don’t sell, sending videos to the board. We don’t trust Facebook. I tried financial suasion to do a secondary
in capitalized business. In the end, I think Reardon actually had a
very rational view of this. Again, he worked for Bill Gates at Microsoft
when Microsoft was arguably the evil empire. His view was back then, Bill Gates was a lot
more powerful, and Microsoft was a lot more powerful than Facebook is today. Bill today is considered a president of the
world in many ways. He’s curing malaria, he’s taking on poverty,
he’s doing big global things in a way that many of our other elected leaders are not
and there’s no reason that you couldn’t imagine a decade hence, as hard as it is, that XOC
because of Chan Zuckerberg Initiative might find a cure to Alzheimer’s or something and
suddenly be in that same position. I think the idea that there’s going to be
the monopolistic power concentrated, he felt was overblown. The thing that I think was really appealing
to him, when you get bit by the bug of taking Internet Explorer from one person to a billion
users, the idea that you could take this technology and its ability to let humans express themselves
and control the world around them, from one person or in our case, a few dozen people
to 8 billion people, which is his goal, you want a platform like a Facebook. I think that the world will be better off
with this scaling and I think it will unleash many technologies in almost this moral imperative
case to invent so that genius can get unleashed and unlocked, that a lot of genius will get
unlocked as people start to use this and discover what they can create with it. Again, I just wish it was still in my hands
for a few more years at a much higher multiple. MIKE GREEN: I wish it was to actually, but
you didn’t try the physical violence approach, which might have been my return. Last time we got together, we had a similar
discussion. This time, it was John– that time, it was
Johnson and Johnson acquiring the robotic surgical company– JOSH WOLFE: Auris for just
under 6 billion. MIKE GREEN: Yes. Exactly. I haven’t had a robot operate on me yet. Do you keep tabs on how that progress is developing,
how that technology is developing and what the next stages are when you exit these vehicles
or just the bandwidth that that would consume? JOSH WOLFE: No, we continue to track that
because again, the thesis is sound and the idea that the skill of a human in the operating
room is the rate limiting factor to be able to scale surgeries, particularly if you are
a highly skilled surgeon. The ones that make the most money, they’re
the most sought after for the most sophisticated procedures. I think that that’s going to start to go away
and the sophistication of the surgeon will be embedded in the machine. We see that across the history of technology
where somebody that has manual dexterity, that has precision replicability, rather than
that being the implicit knowledge of the surgeon through many experiences, why should they
not be able to effectively download that into a machine so that that can scale and reach
many? MIKE GREEN: It’s interesting. Every time you and I talk, occasionally I
get shivers down my back. I’m reminded of a paper by Mark Koyama describing
the innovations that actually led to the creation of the Industrial Revolution. One of those innovations was actually the
transition from needlepoint in designs and fabric to printed fabric can go. What they did was they introduced variety
into the consumption basket of young women being courted by young men and that the young
men had to enter into the labor force to obtain dollars so that they could actually go buy
stuff dramatically changed the work habits of the world. When you say something like that, and you
highlight that type of technological development, I can only see the number of opportunities
that it expands in terms of the capability to lower the costs, increase the ability of
people to have the surgeries that they might otherwise not have in the United States, the
developing world, et cetera. Really excited to see how that moves forward. My next bet for the one though, that’s going
to be acquired, is one you just started talking about, which is the Variant Pharma. JOSH WOLFE: Yeah, this is early. It’s consistent with the theme which we follow,
which is the decreasing gap between science fiction and science fact. In this case, the inspiration really came
from X-Men and Professor X puts on this helmet called Cerebro and is able, from a call crowd
of mutants ridiculously, to spot the one in a million person who can shoot lasers out
of their eyes and conjure fire from their fingers. He got us thinking, okay, if there’s a one
in a billion chance of some super rare phenotype, a trait, which has [indiscernible], seven
people walking around that have extreme high oxygen saturation at high altitudes, they
get into an accident, their bones don’t break, they have extremely high metabolism, lots
of interesting traits, and you just have to go and find them. Now, the other interesting thing, and here’s
where there’s this arbitrage is the vast majority of money and effort and research and talent
has gone into sequencing, pale, male, stale white Europeans, people like us. Maybe not the stale part, but very few people
have gone to the outer regions of the world because those people don’t have money to find
these outlier traits in these outlier regions. I think that there is an absolute genetic
goldmine of these people who are quite literally mutants whose traits, and it’s really important
because the team here, the fourth or fifth person that they hired was a computational
geneticist but the second and third was a cultural anthropologist and an ethicist because
they want to get benefit sharing and have these people participate in both the economic
profits but also the scientific progress that comes from finding these unique individuals. You will take a minority mutant population
and end up helping find cures for the masses. I think it’s an area of medicine in genetics
that has never been explored. We started the company, filled a team, they
have now gone and it’s interesting we call them at the moment Treks. There’s a lot of thought– T-R-E-K, like a
trek. Which even they don’t really love that, they
killed the idea of a mission, because that has a connotation of expertise of your [indiscernible]. Lots of consideration about that even just
like how do we approach these populations who are rightly skeptical from having been
exploited in the past by big companies or explorers, or whatever. We don’t call them explorations, we don’t
call expedition. There’s a lot of thought into the etymology
of what we call these– MIKE GREEN: Extreme wokeness. JOSH WOLFE: Yeah. They’ve done a handful of different partnerships,
the ones that have been publicly announced, I’ve been with them, our recent New Zealand
who have really interesting metabolic traits. Pakistan, which is a genetic island population
and that Pakistan is not an island geographically, but there’s a lot of interrelated marriages
and cousins marrying cousins. Because of that, you get interesting traits,
which are likely or more likely to have a monogenic condition, a similar gene that goes
[indiscernible] and does something. Then they just went to Nepal and were with
the Sherpas and it was absolutely stunning. They brought back some video. They have a Nat Geo documentary person that’s
going around with them filming their treks. These Sherpas are going up with hundred pounds
on their back and they’re completely not out of breath and our team is dying and there
is a genetic predisposition for that. MIKE GREEN: You skipped one that actually
caught my attention, was just the Samoan populations. Very quickly, like from reading about the
Varian Pharma website, resistance to diabetes in the Samoan population run something like
30%. As a result, the statistics was to replicate
a Variant Pharma study that required only 10,000 people in Samoa, would require roughly
10 million, if I got those numbers correct, in Europe? JOSH WOLFE: Yes. Because you already have the traits manifest
in the people. You’re not searching for all this needle in
haystack, you have all the needles. MIKE GREEN: It’s just absolutely incredible. I don’t think people can fully appreciate
the revolution that’s in front of us from this standpoint. I have a number of friends that are in the
biotech space. One who is going to join us tonight to drink
after this event. They are highlighting that there’s just this
extraordinary advances coming in the biotech space as people approach things from a standpoint
of how do we change the way we study it, not necessarily how do we change the tools? The ’80s and the ’90s were largely about innovations
in terms of what are the tools? JOSH WOLFE: Sequencing. MIKE GREEN: Right, exactly. Now, you’re talking about the redesign of
the actual process of how do you think about the problem? JOSH WOLFE: Exactly. In fact, the way that we think about it is
search is really, arguably the first competitive advantage because you’re trying to find and
identify these populations, some of which they’re not publicly disclosing. I’ll share one with you, not where it is but
what the traits are. Sequence, which is relatively as you point
out, because the technological curves in this are commodity, then you want to go and basically
develop and you’re either going to partner with Big Pharma, or in some cases, develop
your own clinical trials, and that’s a lot more money. It’s really the search of how do you partner
and develop a competitive advantage. Arguably, the most important competitive advantage
is trust, with the reputation that you have, how you’re contracting with local researchers,
how you’re treating the local population, how you’re prioritizing them, how you’re deprioritizing
them, if that might be the case and what legacy you leave. One of the populations, South America, nine
people were mean. This is like a tiny group of people who have
extremely high metabolic rate that spikes at night. Adaptation to the environment, temperature
precipitously drops, they almost have like a Heat Shock Protein that raises their body
temperature. Now, if you think about this, if that proved
and I don’t know if it is, but if it proved to be a monogenic condition, the gene makes
the protein that raises the body temperature at night and that was a targetable drug, you’re
talking about a pill that you take a night–? MIKE GREEN: Makes you skinny. JOSH WOLFE: I don’t know if it makes you skinny,
but you’re definitely burning fat while you’re sleeping and with the obesity epidemic in
the US, it would be pretty interesting. MIKE GREEN: That really is just fascinating,
fascinating. It is my bet for the next one by the way. I don’t know everything in your portfolio,
but that is one that strikes me as just an instantaneous. JOSH WOLFE: Well, if we keep this pattern
going, then the next time we sit down– MIKE GREEN: I know, who wants to talk about the
sale of Variant Pharma? You have been begging them not to sell. One of the other companies you talked about
that got away from you, and I think you actually became involved, Zoox. This is in the self-driving space. There was big announcement from General Motors
or Drive more accurately in the past– JOSH WOLFE: Cruise. MIKE GREEN: Cruise, absolutely. Correct. Can you talk a little about what’s going on
in that space? JOSH WOLFE: Cruise was actually the one that
got away from us. We had offered Kyle $20 million at a 40 million
pre-money so 60 million post and somebody else did it, another great VC, at 80 million. We thought that was double the price that
we were in. We were being priced disciplined on this. Then we introduced Kyle to GM. GM bought them nominally $4 billion, a little
bit less. Yeah, so that would have been 11x in nine
months or something. That was a big error of omission in hindsight,
and that is an amazing team. I think that they are serious. I think that Aurora, which is another competitor,
is serious. I think that Zoox is the most serious, obviously
biased, we’re invested but we only full stack autonomous vehicle driving highway city in
San Francisco, in Nevada, elsewhere, actually doing robo taxi rides in Vegas. Tesla, as you know, if you follow me on Twitter
at all, that is mostly BS when it comes to autopilot. It’s actually dangerous that this is even
on the road but the level of sophistication that you have on everything from solid state
LiDAR to the software simulation to being able to navigate double parked cars, pedestrians,
right hand turn, left hand turns, multi-coordination, intersections, it’s really complex. It’s still going to take a very long time
for all of these things to see the light of day, billions of dollars will be invested. My hand to my heart, I actually think that
the first real application of this, which is another interesting phenomenon and trend
that I think is going to play into cities in a big way and it’s going to touch everything
from Amazon to the smart home, I think you will see self-driving cars first manifest
in right hand turn lanes in certain city districts where just like bike lanes, you are making
multiple rights and doing a traveling salesman problem trying to figure out how you navigate
from neighborhood to neighborhood, 24 hours a day delivering things, not people but things. Even Zoox is focused on people and Cruise
is focused on people. There are some others that I think are thinking
about commerce and goods. Now, if you think about just the trend, again
in a directional arrow progress, we are used to our phone as a remote control where you
press a button, you get your stuff. Amazon Prime has primed us for one-hour delivery
or two-hour delivery. You press your button, something comes from
a warehouse in New Jersey, using New York as an example. There is an autonomous vehicle that runs a
route, gets to New York, has a human in there to do the last mile delivery, which eventually
might see robots that are people that are trying to do that but I think it’s too many
variables situations coming out of a vehicle into apartment buildings and others that you’ll
see that but human will come out like a FedEx Delivery person. Then the next thing that they will need in
this value chain is access control. I actually think that you’re going to see
a whole suite of industrial blocks and cameras, some of which you’re seeing early incarnations
of, we have one called Latch Access, Amazon bought a camera company called Ring. There’s going to be many others in the space,
but the ability to give trusted access to complete strangers to enter your home and
treat your cupboard, your medicine cabinet, your fridge or closets in the same way you
might give somebody trusted access to access or deposit a file into a box or Dropbox or
Google Drive. This idea of access control, I think it’s
this next phase. From pressing a button on your remote control
for the thing you want, to an autonomous vehicle delivering at 24 hours a day, to a human entering
your home, because you’ve given the trusted access. Again, this is almost like if I would say
10 years ago, you’re going to get in cars with strangers, you’d be like, no way. Today, because you mostly trust the brand,
and the accountability and the choke point of an Uber or Lyft, you get into stranger’s
cars. I think you’re going to be letting strangers
into your home to do this last quarter mile of cars. MIKE GREEN: I actually very much agree with
that vision, that we are ultimately moving to an environment in which trust becomes the
underlying dynamic. We’ve talked about this occasionally in the
dynamic of crypto or various other things that trust is becoming a feature that is embedded
into the application layer. JOSH WOLFE: It’s actually the one feature
that I’ve joked with Facebook Portal, is totally absent. I always said that. Facebook Portal just got this great design,
but it’s missing the one feature which is trust. MIKE GREEN: Also my pushback on companies
like Uber and Lyft actually has been the days are going to suffer from a first mover disadvantage. They have had to address the issue of how
do I transport people by “hiring” millions of people? The process of shedding those employees is
actually going to be far more difficult than they think. That actually sets up a dynamic in which a
company like Zoox or and others who has built themselves purposely, not to establish an
app and get the app installed on the phone, which is actually remarkably easy, although
the trust layer becomes an important component of it. They’ve cut out the labor component that the
separation there was going to create a bunch of social anxiety and potentially lead to
far more enforced regulations. We’re already seeing this in California, where
they’re being forced to treat them as employees as compared to contractors. JOSH WOLFE: They’re trying to say, look, we
are just layered to match a driver and rider and we don’t want to employ or be responsible,
but you’re right. The regulatory aspect of this is going to
apply pressure to labor. MIKE GREEN: Yeah, I think that’s ultimately
right. Now, you mentioned this idea that we’re going
to take things, so I understand what you’re saying. I wonder if the challenge there is the person
who has to be there to take the delivery. JOSH WOLFE: I think that there will be a designated–
and I’ve actually seen privately some of the apps that some of these companies have, that
are almost like an augmented reality thing that when, let’s say a UPS delivery person,
or if it was an Amazon Prime delivery person, they look at their phone, they’re given a
provision code to enter the apartment. It takes a picture so it knows who’s there,
knows what they’ve entered with. They enter and they see this augmented reality
thing of where they should– it might literally be X marks the spot that they’re looking on
the phone, put this here, or might be when they go over the fridge, put this here. They literally use that as a layer, which
itself is another interesting thing I want to talk about but the simulation layer to
place things in certain places. It may not be that you’re trusting them to
come into your bedroom yet, for your bathroom yet. People will trust an Amazon Prime to come
in and load their fridge and put away all their groceries. We get fresh, direct delivered on a weekly
basis, and what do they do? They come into our home, and they lay down
all the bags. Then my wife and I and the kids put everything
away. There’s no reason that I wouldn’t pay another
$5 during that delivery fee to have them put everything away for us in a consistent predictable
way. MIKE GREEN: Yeah, that consistent predictable
way is actually a great distinction. We have people who help maintain our home
and when they unload the dishwasher, I’m constantly saying, where the hell did they put this? The ability to actually have that enforced
in a consistent manner, I completely agree with you, and I actually share your– JOSH
WOLFE: We’ve read your head style, everything in its right place. MIKE GREEN: Everything in its right place,
which sounds terrible in a lot of ways. We all see those homes with the– I think
the condo stuff is what it’s called, Marie Kondo, where everything’s labeled and it’s
got its own specific place. I think you and I look at that, like, oh my
God. JOSH WOLFE: That stresses me out. MIKE GREEN: That would drive me insane. There is a component of predictability that
you want to life hack, expend the minimal amount of energy saying, hey, where’s the
rolling pin today? Where is the measuring cup? When I think about that question that we started
to address in terms of this self-driving capability and you referred to the Tesla solution as
being dangerous, which I share your concerns. The challenge of self-driving, as I understand
it, there’s certainly as it is presented is this idea of miles on the ground. How many miles do you have to travel to solve
every possible permutation? That seems like such a flawed model to me
it, what’s your reaction to that? JOSH WOLFE: I think it’s going to be a combination. It’s going to be a combination of simulation
where you’re trying to predict every scenario from a human walking out, three humans walking
out, old person, young person, ball coming across, horse, dogs, different weather situations,
potholes. Why? Because in any model, including what I would
argue in human consciousness, you have this prediction, memory prediction framework. The computer basically has a memory based
on either simulation or reality of what the thing ought to be. Then it experiences in real time what that
reality is and maps it. If it confirms to what the memory is, then
the prediction, there’s no surprise. This is the same thing I think that we experience
in human consciousness. I see you, I see if you see my funky shoes,
you predict, hey, that’s Josh. If you were looking at somebody else, and
you saw this funky shoes and you– hey, that’s Josh, but then it was Steve, you’d be like,
oh, surprised. Then you have this emotional salience that
updates your prior, updates your model. Computers are the same way. These simulations in the self-driving cars
and robots are the same way. There’s a prior, whether that is through experience
for programming, and the programming could be from simulation. Then there’s the actual experience. Then when those map and conform, there’s no
surprise, you don’t have to update the model. If you think about all of the permutations
that occur in reality, it’s infinitely complex. You’re going to need a mix of models that
are mapping onto the real world, and then the ability to quickly discern. In Zoox’s case, when you watch some of these
videos online of the situations that they’re able to navigate, in many of the cases, there’s
no programming of those situations. Having a double parked car, followed by a
biker coming out of nowhere and a pedestrian, every one of those things has to be almost
consciously recognizing objects, and then classifying those objects as humans, as bikes,
as cars, as static objects. Then intuiting what an intention might be
and making a prediction about that. It’s super complex, it’s going to be years
of iteration. I do think that these things are still very
dangerous. The idea of putting cars out on the road and
calling them autopilot and giving people this false sense of confidence is super dangerous. It’s irresponsible. It’s an accounting trick being used to book
revenue and pull it forward, but this will happen. We will be in autonomous vehicles. MIKE GREEN: It’s interesting, actually, because
what you described as a very complex system has features that I think are actually that
overlay with some of the work that I’m doing and I think you know this but I’m involved
in some– my first machine learning projects and there’s this issue of tractability, what
can actually program. Ironically, the transition to self-driving
is the most difficult. Because you have the unpredictability of human
beings that may or may not conform to the laws, that may or may not conform to these
components. Balls will always be there, children are always
run out into the street. The car driving itself, somebody double parking
and behaving in a manner that’s not consistent, having no mechanism to communicate that to
you other than the very rudimentary signals that come from brake lights, hazard signals,
turn signals, et cetera, that’s ultimately going to give way to a much more tractable
problem as you have more and more machine-driven vehicles on the road. JOSH WOLFE: Well, especially as vehicle to
vehicle protocols start to communicate the intentions with each other. Humans have this where if you and I are walking
on the sidewalk in New York, and we come into each other, you have that awkward Larry David
like moment where you’re going left, I’m going right then we make a mistake and the coordination
problem. Coordination is a function of both prediction
and communication. I do agree with you that you will have all
kinds of layers of protocols where self-driving cars and other robot systems, autonomous systems
will have this coordination communication protocol. MIKE GREEN: Well, and we tend to take for
granted the human’s capability to do that. We all have the experience of making eye contact
with a pedestrian crossing the crosswalk and– JOSH WOLFE: You do a little dance and– MIKE
GREEN: Well, even a car driver. It’s just all it requires is that eye contact
that allows people to be aware that you’ve actually seen them then you can proceed under
conditions. It would be the rare assumption that you would
make eye contact with the driver, enter the crosswalk, and they would run you over. We are very much programmed. It’s built into our capabilities to understand
when somebody has actually seen us. That flash of recognition of this is a human
being like it’s very much built in there. We tend to take that for granted. Machines don’t have that capability yet, or
they’re developing it, as you’re highlighting the Zoox, but once they have, then they’ll
have their own native protocol as well that makes this problem so much easier. JOSH WOLFE: That, by the way, is one of the
hallmarks just generally of human intelligence and relevant entirely markets, which is I
know that you know that I know. Then it’s how many layers is that? One of my kids I think, is very savvy. She knows that I know that she knows that
she’s like four layers whereas one of my other kids is like, I know. MIKE GREEN: Well, since we’re now crossing
over to the virtual world, you introduce your Twitter handle. My character is the Vizzini from The Princess
Bride. I always focus on that– JOSH WOLFE: Inconceivable. MIKE GREEN: Inconceivable, but the most important
part for me of that character is actually the iocane powder, where it’s a game being
played but people are actually not aware with it. He believes he’s outsmarting somebody, but
he doesn’t actually know the game that’s being played involves poison in both cups. It’s like immunity condition. Which brings us to actually a discussion of
a game that I’ve had with a number of people, and one of our mutual friends, Mike Mobizen. We’re going to transition into discussing
public markets for a second here and Mike has written several books and he’s talked
often about the dynamic of skill development in markets and how markets are becoming more
challenging. The alpha degradation that we’re seeing in
public markets he attributes to an increase in skill that is being accumulated in the
market. I think Michael actually misunderstands the
game that’s being played. He uses the poker analogy. He says, we saw this online, there was a game
of poker. As poker moved online, there’s an explosion
of players. Initially, they were a bunch of Patsy’s that
decided that they had been good at their local games, got online and the pros were able to
basically fleece these players and take their money away. Eventually, you’re left to the game in which
only pros are playing pros. JOSH WOLFE: Skill level has leveled up and
a lot of the variance is more attributed to luck. MIKE GREEN: Correct. The stock market is the extension of that
analogy for him. I think it’s a flawed analogy, and I wanted
to get your reaction to that. The way I look at it is poker is a fixed game. It’s ergodic in nature. We know at every point that the number of
cards is going to be unchanged, there’s the probability of a hand is going to be unchanged. The configuration of the river or what you
have in your hand can influence your perception of those probabilities, but the odds really
don’t change. Stock markets or any form of market for that
matter, is nonergodic. We have no knowledge about what the distribution
of the possible configurations are in the future. I actually think that he’s improperly framing
the question, I think he’s using an ergodic game to make an analogy to a non-ergodic game,
in which the idea of skill development really can’t exist. JOSH WOLFE: I think Michael would agree that
markets are complex adaptive systems. There’s punctuated periods where there is
a game, there’s a recognition of how that game is played, then people level up to that
game. Then at some point, they may not be aware
that the game is changing, but I think during the period where people understand what the
game is, the skill level is rising and so the variation between investors is increasingly
attributed to luck, but then, like you say, the undulating landscape changes and suddenly
the game that you thought you were playing, you’re no longer playing. You see this all the time. Hedge fund guys before ’07 didn’t care about
macro at all. They were just bottoms up stock pickers, long
short equity, short always overvalued, be long, it was undervalued. All of a sudden, everybody came, all the quarter
letters, while the top value guys were suddenly talking about macro. They were pledging, oh, well, we didn’t because
the game changed, macro mattered. I think that at any given point in time, now
you could argue it’s people that are getting smart to the structure of the market as you
are about passive indexation and inflows and incremental flows and how that is changing
the game. I think Michael’s point is markets are complex
adaptive systems, people can get wise to what the game is. They may not realize that the game has changed,
but as long as there’s a general agreement about the game, skill level rises and variance
is more attributed to luck. MIKE GREEN: That’s fascinating insight in
terms of the way I’ve been thinking about it, because it resonates with me, a discussion
I had recently with a legendary investor from the 2000s who I’m not going to name, said
to me, Mike, I was meant to invest in the 2000s. The game that is being played today, I don’t
understand. I’m at this point too old and too rich to
try to figure it out entirely. It’s really interesting to think about it
in that context. Because it becomes a question of are those
who have been so successful and accumulated the– JOSH WOLFE: Half listening and half
thinking about who I think it is, and I think I know who I think it is. MIKE GREEN: Do you think you know what I think
I know? JOSH WOLFE: Inconceivable. MIKE GREEN: Exactly. That actually becomes a really interesting
question, though, because it then raises the issue of have we allowed that concentration
of wealth, have we allowed that to blind ourselves to the potential that the game has completely
changed, which certainly what my research would lead, that the market is no longer the
market as people think about it? There are exploitable phenomenon, but it requires
a complete rethinking of how you approach the problems. As phrased in those terms, I completely agree. I think that will still lead me to say that
it’s actually not skill development. That would be a cyclical phenomenon that would
show up slightly differently, the tools that were developed for how we manage markets,
how we think about them were largely created in that time period. The assumptions that we make in the use of
those tools, things like alpha, beta, Sharpe, et cetera, I think are actually improperly
suited for the current environment but that brings us then into the general discussion
of public markets, which is, let’s talk about how you see the world of public market’s valuations,
and how you think about how that is either influencing or being influenced by the private
markets as you primarily participate in. JOSH WOLFE: I just had a dinner with also
a very prominent and maybe the most prominent CIO in the endowment world. I asked him, do you see risks about liquidity
and illiquidity in both public markets and private markets? In the public markets, is it a function of
passive indexation and inflows and whether it’s Fed, algos, momentum, whatever it is,
dollar and by everything rising, what happens if there are withdrawals and everything comes
down? His view on that was with passive roughly
20% of market structure today? MIKE GREEN: It’s about 35%. JOSH WOLFE: Okay with but I think you’ve made
the point that something like 80% or 90% of the incremental dollars are going into passive? MIKE GREEN: Far more than 100%. JOSH WOLFE: Okay. His view was when it got to like 90%, he would
be worried and I recalled and actually raised you as an example, I said, I have a smart
friend who mathematically has shown actually when it gets around where we are now, 35%,
I thought it was for, that’s when you get the structural runaway risk on liquidity side
of passive indexation. That was on the public side. On the private side, he has done something
interesting, which was, he never wants his illiquid portfolio to be more than 50% of
the endowment. What he’s done because of who he is, has gone
to the underlying GPs and said, give me your hand to the heart mark of what you think this
is worth, not the fast 157 mark based on accounting basis. Historically, when he did this, in 2000 and
in 2007, or ’08, both saving them from substantial drawdowns during the crisis. It was somewhere between 25% and 30% discount
to what any given company that ended up exiting in that year, proved to exit at. There was a level of conservatism that the
managers expressed because they valued the relationship with this particular CIO. They said they were going to be super honest
and ethical about what their hand to the heart was because they wanted to continue to be
hired as a manager. Today, he says it’s between zero and 10%,
so elevated valuations on the private equity side. If you look at the total amount of PE money
today– MIKE GREEN: Well, just to be clear what you’re saying. What they are saying is they see no discount
to where they’ve marked it in the event that they would have to sell under distress type
conditions? JOSH WOLFE: Correct. MIKE GREEN: That’s astonishing. JOSH WOLFE: $1.5 trillion of PE assets are
sitting on the sidelines right now, so there’s an enormous amount of dry powder. Now if you’re a public market investor, maybe
that’s a positive thing. MIKE GREEN: Well, wait a second. Again, I want to be clear, when you say PE
assets are sitting on the sideline, this is the cash that has been raised but not yet
deployed? JOSH WOLFE: Correct, by buyout funds and venture
funds. Venture is a mouse to the elephant here, but
1.5 trillion globally, 800 billion of that is North America. That’s about two times the level of what it
was 10, 11 years ago going into even then a PE crisis 2007, ’08, ’09. VC itself has raised about 50 billion across
250 funds in each of the last two years, which is four times what it was 10 years ago. Again, we’ve talked about this in the past,
but the number one thing that is predictive of returns is not the BCG McKinsey, whatever. It’s the amount of capital that’s flooding
in. The amount of capital that’s flooding in is
undeniably high. You look at some of the surveys for LPs, they
will say 80% of them feel unequipped in a downturn that they’re well-positioned, yet
two thirds of them are continuing to increase their allocation to PE notwithstanding the
numbers that I just gave you. When there was a downturn, and you had this
denominator effect, again, 10 years ago, two thirds of those LPs were not making any new
commitments to new funds on a private equity side. They anticipate that they’re not quite there,
but they can’t help but continue to allocate and I think that’s setting up a problem. You had public markets to your point up 32%,
33%? MIKE GREEN: 31% last year. JOSH WOLFE: Denominator effect. If that were to continue, great, everybody’s
portfolio looks good. You got high marks on these private equity
for the other people that are not doing this more conservatively. If the public markets were to decline, you
have a denominator effect, what are people going to do with this PE portfolio? There’s going to be a race for secondaries
and liquidity. I think the secondary guys in the next few
years are going to be really well-poised, they might be sitting on cash for longer than
people expect. On the public market side, there’s really
interesting thing that Jim Grant had recently shown, PE on the S&P is 21, 22. The PE is of course market cap weighted on
the S&P 500, but if you market cap weight the E part, instead of just aggregating and
averaging as it is, you actually have a 32 times multiple. MIKE GREEN: Is the difference– the way it’s
calculated on the public indices is what’s called the harmonic median. Effectively, you are going through and it’s
almost like ignoring the outliers. JOSH WOLFE: Because each of the cases aren’t
you’re taking a multiple where you’re taking the PE of Apple times the weighting of Apple
and the PE of GE and the weighting of GE and just basically aggregating that. MIKE GREEN: Not quite. The details, we can walk through another point,
so it’s the calculation is actually what’s called the harmonic median. If actually, you’re going through the 50th
percentile type dynamic. You’re 100% right. The other point that I would raise is that
we’ve never seen a larger gap between GAAP, G-A-A-P, and the “operating earnings” that
make up that 21, 22 PE that you’re referring to. JOSH WOLFE: Well, and on top of this, you
have something like 95% of companies that are now reporting non-GAAP earnings. They’re making up funny metrics. Now, we saw this in WeWork on the private
side, when you had community adjusted EBITDA. Tesla is like ground zero of like ridiculous
terms like, what are delivery sales? What does that actually mean? There’s a lot of companies that are just using
funny language because in a bull market, people are less scrutinizing. I think that that’s really a ripe situation
where you have lots of non-GAAP accounting terms that are signifiers of risk. You have S&P growing revenue 3%, 4%, 2%, 3%,
4%? MIKE GREEN: Somewhere in that range, yeah. On per share basis, slightly higher, but yeah. JOSH WOLFE: Most of the 31%, 32% return over
the past year was mostly for multiple expansion because I’ve had– MIKE GREEN: More than 100%
actually flat to slightly negative earnings. JOSH WOLFE: For the past four quarters. People are paying higher multiples for lower
or negative growth. One interesting thing and this is a forming
hypothesis that is a little bit more wishful thinking from the venture side. If we are at peak earnings, and people have
been talking about peak earnings forever, but if we’re at peak earnings, and corporates
are looking and saying, okay, how do I actually maintain margins at a time where 60% of COGS
is labor, I think that there will be an increasing turn to technology. Now, I don’t know the timeframe. That’s not going to be like, okay, let’s quickly
implement the system and lay off a bunch of people and maintain our margins again. I do think that some of the things that we’re
investing in, whether it’s metal 3D printing or certain technological systems for efficiency,
you have the opportunity for at least margin stability against a situation where revenues
are declining, prices are coming down. There’s another question about what happens
to input costs? Well, a lot of smart people are– and I don’t
know if you agree with this or not, but weak dollar, long commodities, long gold, higher
input prices, smaller margins. MIKE GREEN: Not on that account. JOSH WOLFE: You’re in the higher dollar camp? MIKE GREEN: I tend to think that we’re going
to have a higher dollar simply because the global system is ultimately set up on a collateral
basis and everything we’re describing in terms of high valuations and increasing risk is
actually touching that collateral dynamic. We’re concerned about the risks that the collateral
contracts. If the collateral contracts and the debt actually
becomes increasingly due, which means the dollar is under demand. I fall into the higher dollar camp, but–
JOSH WOLFE: Do you have a view on margin pressure? MIKE GREEN: I think the margin pressure is
likely to come actually from a couple of different areas. We’ve seen unequivocally the margin pressure. We’re allowing the system to increasingly
run with tight labor, whether that shows up in wages or not is heavily influenced by the
composition. When you have lots of old people, wages don’t
go up all that much because they tend not to ask for raises and that tends to conceal
the relatively rapid wage gains that we’re seeing in the younger generation. There’s a couple of good reports that I could
send you on that stuff. JOSH WOLFE: I do wonder if the wage gains
are happening taking into account the amount of new company formation. When you have a flood of capital into any
sector, if there’s a lot of company formation, those companies are competing with each other
for talent and so wages are rising. I do wonder if some of that capital inflow
starts to abate, that you would actually see more people consolidating, more supply of
talent going into fewer companies, and wage suppression. MIKE GREEN: What we’re seeing is actually
more on the opposite side. The rates cut– while you’re very active in
the process of business formation, I actually would suggest that many of the statistics
that we receive from the Bureau of Labor Statistics, the BLS, are inflated by the assumptions around
business formation. Actually, the data suggests that business
formation has fallen dramatically, not your type of business– JOSH WOLFE: The mom and
pop shops and independent contractors. MIKE GREEN: That type of business formation
has taken an extraordinary hit. That, in turn, actually weirdly increases
the potential for this to behave in a convex fashion because what you’re beginning to see,
and you’re seeing this very clearly in the data is as the economy has slowed in this
last cycle, we have seen overtime hours decline, we have seen weekly hours decline, which has
pressured some of the headline numbers in terms of the average weekly compensation that
people are receiving, you’re beginning to see this show up and stress in terms of credit
cards, et cetera. The early signs of some weakness are there. The primary dynamic that we’re actually seeing
is this issue of hoarding of labor. Companies are seeing decreased utilization
of their labor but because of the headline, finding new employees is so hard, they’re
resisting with every fiber of their being letting go employees that they currently have. We haven’t yet seen that turn and we may not. It’s very hard to know how that plays, but
the data actually suggested it’s heading in the opposite direction of the way that your
hypothesis– JOSH WOLFE: That wages will continue to rise. MIKE GREEN: We are at an inflection point
in which that could continue to tighten. That’s one of the risks that the Federal Reserve
may have created with reinforcing the cycle with the interest rate cuts. Only the future can actually tell us what
actually ends up happening. JOSH WOLFE: Demographics. Let me ask you, because I always love your
views. MIKE GREEN: I’m interviewing you. JOSH WOLFE: But your answers inform me. MIKE GREEN: I understand that. Nobody is interested in what I have to say
on this topic. We’ll talk offline on the demographics. I want to touch though on a topic that demographics
does influence that you and I both care fairly passionately about, which is politics, the
election that’s approaching. You and I have publicly sparred, you have
supported Bloomberg as a candidate, he wouldn’t be among my last choices. I’m interested to hear how you’re thinking
about it. I’m sure– JOSH WOLFE: Mine is very simple. These are debates that I used to get into
with Lauren, my wife, that I never really thought the president matter. I thought that all you needed was a good figurehead,
who mostly was the better looking person that conveyed all the evolutionary psychology appeals
of symmetry and dominance and that stuff. I think, in this case, I want the candidate
and this is something that Bill Gates who I serve on a board with said to my friend,
Andrew Sorkin at the [indiscernible] conference earlier this year, I just want the most professional
person that really resonated with me, I just want the most professional person. The rancor that I see, the debasement of the
office that I see with the current individual, maybe I have this false nostalgia of pining
for somebody that can set a level of behavior and that is presidential, one that I want
my kids to look up to and say like that is the way to behave. That is the way to make decisions. That’s the way under pressure or criticism
to react. My preference for Bloomberg is really in actually
thinking that unlike Trump, he’s actually a billionaire and he can’t be bought and that
the appeal that he has is more about legacy than short term gratification. I find him to be the most professional and
the most rational, but tell me your counter thesis. MIKE GREEN: My counter thesis would be almost
saying exactly what you’re saying, which is he perceives himself as the most professional
but doesn’t perceive himself as a statesman. Someone who’s meant to represent. You can actually see it in what he is describing
is his approach to the central office. He’s going to open it up, turn it into a bullpen,
he’s going to manage it. He’s going to manage the US economy like he’s
managed Bloomberg. That, unfortunately, is not the job of the
president. My fear is, is that he very clearly doesn’t
know that. JOSH WOLFE: Do you think with the management
of New York, which is a vibrant, complex, diverse economy, that he did a bad job? MIKE GREEN: I don’t I think that he did a
bad job, but I think that he was handed a gift. The inflation that we saw through the 1990s
created a revenue stream. We, unfortunately, are going to run out of
time here. We didn’t get to talk about China, which you’ve
also become very vocal on. You and I are both involved there. Let’s treat that for another time. JOSH WOLFE: I will say, to your credit, this
was something I was hyper bullish on in the idea that there were two Chinas, an old China
and a new China. You would say, Josh, you’re wrong, you’re
missing this. I got to tell you, you changed my mind because
I’ve come to see the evils and the skepticism and there’s an idealistic view about what
China could be and there’s a realist view of what it is today, and I become much more
in your camp. It’s a great example of something I’ve changed
my mind on because of you. MIKE GREEN: To your credit, you absolutely
have done that. I’m very excited to see that. My guess is we’ll get the same way with Bloomberg. Hope we don’t actually see the need for that
to happen once he’s in office. Josh, as always, such an amazing time spending
with you. The time flies by and we’ve run out of it
now. Look forward to seeing you again. Hopefully within a year. JOSH WOLFE: Thank you, Mike. Always good. MIKE GREEN: Take care, Josh.

63 thoughts on “Tech Investing, Tesla, and the Bubble in Stocks & Venture Capital (w/ Mike Green & Josh Wolfe)

  1. Get Real Vision Premium for only $1 for 30 days here:
    No more waiting for the content to make it here weeks or even months after it was shot and no missing out on insights and information that move markets. Better yet…. No advertisements! Join today!

  2. Unleashing IE on the World is NOTHING to be proud of. I am just one of many of its victims over the time it wasted a lot of developers' time because of MS's selfish, dominating, monopolistic approach to everything. And justifying a big payout from Facebook by rationalizing Bill Gates has gone on the be a Jesus figure is a total joke. Bill Gates was the worse thing that ever happened to computing and if I could go back in time and fix it, I would.

  3. Welcome to your slavery! All your thoughts and movements on these devices tracked. Now be a great Inmate in the prison your accepting.

  4. josh has a good ability to get you hooked like the first one is free but after following him for a week I can't agree with much he says Bloomberg, tesla, fashion, haircuts, china, talking like he is on adderall

  5. I follow this guy on Twitter, he is obsessed with Elon, still don’t know why. Jealousy? He is clearly highbrow but might Blackballed himself out of the SV elites circle. —of cult of personalities

  6. the logical conclusion of capitalism is a bunch of robots walking around doing stuff for other robots and all the people are gone because they weren't needed anymore, well except for a handful of assholes at the top. lets be honest here. for most people what this guy does means genocide and death….what a lousy empty world it will be in our future without people. these guys are replacing everyone and destroying the econ with no thing to replace what they destroy. so stupid.

  7. He's correct. Recall watching a documentary about the people who live in the high elevations in the mountains outside Tibet. Yes!! 13 mins in

  8. Bill Gates is not "curing" anything all over the world. Quite the contrary. He is a eugenicist. He's not interested in helping anyone who is not of his socio-economic class. The stated goal is not the real goal there.

  9. The debasement of the office of the president is his main preoccupation and yet he chooses Bloomberg. That last bit pretty much made me discard everything he had to say up to this point. And to his point about Bloomberg being unable to be bought, he is one of the candidates with the most worrying connections to China so it’s pretty ironic that he seems to be worried about the Chinese but doesn’t see that. Ridiculous.

  10. That's So Called Jesus Bill Gates that you submit yourself to without question is one of these most criminal Overlord on this planet!! And also responsible for the Coronavirus thank you Bill Gates for killing us all!!💘

  11. Who are they developing this for? Is there a point where people get funked off being lead by asshats with way too much money? Who wants to live in this world the are dreaming up with all this free money?

  12. I don't think people re going to allow strangers into their homes to put away groceries. Maybe people who constantly have people doing work around the house will. But most people won't. Dropping groceries in front of my door when I am home is fine. Or will invent something like. mailbox or a milk box to do this. That's already being done. And Amazon Fresh packs frozen foods with dry ice anyway.

  13. So, Josh wants a president that looks the part, and projects an air of professionalism. As if to say, we just need a figurehead, and us "smart"
    people will take it from here. These out of touch, very rich finance people are always hating on Trump, but look at the chart of the SP from the day of
    his election, uptrend still intact. Bloomberg is buying his way into first place among Dems with over 400 million in ad spend, this is his guy??
    Then says Tesla's AI is BS ???, he must be one of the butt hurt shorts.

  14. Skip the first 29 minutes and start at @29:12 – @47:35 Josh ask Mike about demographics, and we all are very disappointed. Josh needs to interview Mike.

  15. Democrats see no evil in a person buying up the the Presidency, and all those people who voted for the current president freely are immoral.
    But that is really a stretch of cognitive dissonance.

    Likely, you guys are going to have to deal with Bernie not with Bloomy.

  16. This guy's on crack.

    No one is going to be interested in Amazon putting away shopping instead of leaving it on a bench.

    Obviously it's unrealistic for Amazon to know where people want everything. People very often have specific places for items.

    His right wing economical mind (his narcissism) is assuming that people are going to be working 100 hour weeks and saying thank you for this kind of service. More realistically, there will be a revolution well before anything like that.

  17. Although Tesla's self driving is flawed it is necessary. Being the first to market will make you an angel to some and demon to others. No matter what, there must be a Lucifer. Human's require one.

  18. I'll have a prediction. People aren't going to allow people to deliver stuff into ur home. I trust people. But u can put that package on my porch buddy. Not my kitchen cabinet.

  19. 2 types of scientist. Most follow ego, curiosity and discovery without consequences. Few reserve research for when society is ready and for after the reset. Which group is wiser?

  20. Pharma is nonsense. How about eat healthy, exercise, create a world in which people aren't stuck at their desks, in traffic, miserable, sick, etc? We don't need pills to solve this.

  21. I don’t mind packing my own groceries but perhaps fridges and cupboards could be placed onto the perimeter of new builds and drones drop them directly into slots provided at the appropriate destination sites?

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