-
Notifications
You must be signed in to change notification settings - Fork 0
/
Lux Capital -> LP Letter Q1-2023.html
198 lines (183 loc) · 62.6 KB
/
Lux Capital -> LP Letter Q1-2023.html
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152
153
154
155
156
157
158
159
160
161
162
163
164
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
<!DOCTYPE html>
<html>
<head>
<title>Lux Capital -> LP Letter Q1-2023</title>
<meta charset="utf-8" />
<meta name="viewport" content="width=device-width, initial-scale=1">
<meta name="bear-note-unique-identifier" content="217C26EB-25EC-4A52-AFC1-EC8B6D448030">
<meta name="created" content="2023-08-24T21:41:52-0400"/>
<meta name="modified" content="2023-08-25T09:46:05-0400"/>
<meta name="tags" content=""/>
<meta name="last device" content="ARJUN’s MacBook Pro"/>
</head>
<style>
body {
--base-background-color: #ffffff;
--document-background-color: var(--base-background-color);
}
.document-wrapper {
/* Constants used to transform theme values to CSS */
--transform-line-height-factor: 1.17;
/* From template */
--base-text-color: #444444;
--base-text-secondary-color: #888888;
--base-text-tertiary-color: #d9d9d9;
--base-background-color: #ffffff;
--base-background-secondary-color: #F3F5F7;
--base-background-tertiary-color: #E4E5E6;
--base-stroke-color: #d9d9d9;
--base-stroke-secondary-color: #d9d9d9;
--base-accent-color: #DD4C4F;
--base-highlight-color: #D3FFA4;
--document-background-color: var(--base-background-color);
--document-text-color: var(--base-text-color);
--document-text-secondary-color: var(--base-text-secondary-color);
--document-text-light-color: var(--base-text-secondary-color);
--document-accent-color: var(--base-accent-color);
--document-cursor-color: var(--base-accent-color);
--document-link-color: var(--base-accent-color);
--document-list-marker-color: var(--base-accent-color);
--document-marker-color: var(--base-text-tertiary-color);
--document-selection-color: var(--base-selection-color);
--document-selection-inactive-color: var(--base-background-tertiary-color);
--document-text-font: "AvenirNext-Regular";
--document-text-size: 15px;
--document-line-height-multiplier: calc(
1.5 * var(--transform-line-height-factor)
);
--document-headers-text-color: var(--base-text-color);
--document-headers-font: "AvenirNext-Medium";
--document-headers-modular-scale: 1.125;
--document-headers-line-height-multiplier: calc(
1.3 * var(--transform-line-height-factor)
);
--document-headers-add-top-bottom-padding: 1;
--document-headers-padding-top-multiplier: 0.5;
--document-headers-padding-bottom-multiplier: 0.3;
--document-code-text-color: var(--base-text-color);
--document-code-border-color: var(--base-text-tertiary-color);
--document-code-background-color: var(--base-background-secondary-color);
--document-code-font: "Menlo-Regular";
--document-code-text-size-multiplier: 0.91;
--document-code-syntax-highlight-comment: #65798c;
--document-code-syntax-highlight-constant: #0095c9;
--document-code-syntax-highlight-number: #0095c9;
--document-code-syntax-highlight-string: #d12f1b;
--document-code-syntax-highlight-entity: #4a838b;
--document-code-syntax-highlight-keyword: #ad3da4;
--document-code-syntax-highlight-function: #4a838b;
--document-code-syntax-highlight-variable: #4a838b;
--document-task-background-color: var(--base-background-color);
--document-task-border-color: var(--base-text-secondary-color);
--document-task-check-color: var(--base-text-color);
--document-tag-background-color: var(--base-background-tertiary-color);
--document-tag-text-color: var(--base-text-color);
--document-tag-marker-color: var(--base-text-secondary-color);
--document-highlighter-background-color: var(--base-highlight-color);
--document-highlighter-text-color: var(--base-text-color);
--document-file-fold-color: var(--base-background-tertiary-color);
--document-file-background-color: var(--base-background-secondary-color);
--document-separator-border-color: var(--base-stroke-secondary-color);
--document-table-border-color: var(--base-stroke-secondary-color);
--document-table-cell-background-color: var(--base-background-color);
--document-table-cell-alternate-background-color: var(
--base-background-secondary-color
);
}
.document-wrapper,body{background-color:var(--document-background-color)}.document-wrapper h1.setext,.document-wrapper h2.setext{border-bottom:calc(2 * var(--document-hairline-width)) solid var(--document-separator-border-color);padding-bottom:.6em}.document-wrapper blockquote blockquote blockquote blockquote blockquote::before,.document-wrapper blockquote blockquote blockquote::before,.document-wrapper blockquote::before{background-color:var(--document-list-marker-color)}.document-wrapper a:hover,.document-wrapper mark{text-decoration:inherit}.document-wrapper td[data-alignment="1"],.document-wrapper th{text-align:left}.document-wrapper :after,.document-wrapper :before,.document-wrapper a,.document-wrapper abbr,.document-wrapper acronym,.document-wrapper address,.document-wrapper applet,.document-wrapper article,.document-wrapper aside,.document-wrapper audio,.document-wrapper b,.document-wrapper big,.document-wrapper blockquote,.document-wrapper canvas,.document-wrapper caption,.document-wrapper center,.document-wrapper cite,.document-wrapper code,.document-wrapper dd,.document-wrapper del,.document-wrapper details,.document-wrapper dfn,.document-wrapper div,.document-wrapper dl,.document-wrapper dt,.document-wrapper em,.document-wrapper embed,.document-wrapper fieldset,.document-wrapper figcaption,.document-wrapper figure,.document-wrapper footer,.document-wrapper form,.document-wrapper h1,.document-wrapper h2,.document-wrapper h3,.document-wrapper h4,.document-wrapper h5,.document-wrapper h6,.document-wrapper header,.document-wrapper hgroup,.document-wrapper i,.document-wrapper iframe,.document-wrapper ins,.document-wrapper kbd,.document-wrapper label,.document-wrapper legend,.document-wrapper li,.document-wrapper mark,.document-wrapper menu,.document-wrapper nav,.document-wrapper object,.document-wrapper ol,.document-wrapper output,.document-wrapper p,.document-wrapper pre,.document-wrapper q,.document-wrapper ruby,.document-wrapper s,.document-wrapper samp,.document-wrapper section,.document-wrapper small,.document-wrapper span,.document-wrapper strike,.document-wrapper strong,.document-wrapper summary,.document-wrapper table,.document-wrapper tbody,.document-wrapper td,.document-wrapper tfoot,.document-wrapper th,.document-wrapper thead,.document-wrapper time,.document-wrapper tr,.document-wrapper tt,.document-wrapper u,.document-wrapper ul,.document-wrapper var,.document-wrapper video{all:unset}.document-wrapper{--document-inline-padding-top-bottom:0.25em;--document-inline-padding-left-right:0.25em;--header-1-font-size:2em;--header-2-font-size:1.6em;--header-3-font-size:1.27em;--document-hairline-width:calc(var(--document-text-size) / 15);box-sizing:border-box;color:var(--document-text-color);font-family:var(--document-text-font);font-size:var(--document-text-size);line-height:var(--document-line-height-multiplier);min-height:100%;max-width:48em;width:100%;tab-size:4;margin:0 auto;padding:0 2em}body{text-rendering:optimizeLegibility}.document-wrapper:focus-visible{outline:0}.document-wrapper .marker{color:var(--document-marker-color);display:none}.document-wrapper [data-direction="2"]{direction:rtl}.document-wrapper div.footnote,.document-wrapper div.link-definition,.document-wrapper p{display:block}.document-wrapper p.blank-line::before{content:" "}.document-wrapper h1,.document-wrapper h2,.document-wrapper h3,.document-wrapper h4,.document-wrapper h5,.document-wrapper h6{font-family:var(--document-headers-font);display:block;line-height:var(--document-headers-line-height-multiplier)}.document-wrapper h1{font-size:var(--header-1-font-size);padding-block-start:0.8em;padding-block-end:0.33em}.document-wrapper h2{font-size:var(--header-2-font-size);padding-block-start:0.66em;padding-block-end:0.27em}.document-wrapper h3{font-size:var(--header-3-font-size);padding-block-start:0.53em;padding-block-end:0.27em}.document-wrapper code,.document-wrapper pre{font-size:var(--document-code-text-size-multiplier);font-family:var(--document-code-font),monospace}.document-wrapper h4,.document-wrapper h5,.document-wrapper h6{padding-block-start:0.4em;padding-block-end:0.27em}.document-wrapper h1.setext{margin-bottom:.45em}.document-wrapper h2.setext{margin-bottom:.2em}.document-wrapper .fenced-code *,.document-wrapper .fenced-code-content .marker,.document-wrapper .fenced-code-content .space,.document-wrapper .hard-linebreak-marker,.document-wrapper .image .space,.document-wrapper .image-destination,.document-wrapper .image-label,.document-wrapper .image-title,.document-wrapper .indented-code .space,.document-wrapper .link .space,.document-wrapper .link-destination,.document-wrapper .link-label,.document-wrapper .link-title,.document-wrapper .replace .text,.document-wrapper .setext-heading-marker+.line-ending,.document-wrapper .yaml-marker+.line-ending,.document-wrapper li>p>.space:first-child,.document-wrapper tr.delimiter-row{display:none}.document-wrapper ol,.document-wrapper ul{display:block;padding-inline-start:2.13em}.document-wrapper li{display:list-item;color:var(--document-text-color)}.document-wrapper .color-marker,.document-wrapper .entity-marker,.document-wrapper .fenced-code-content,.document-wrapper .fenced-code-content *,.document-wrapper .footnote-separator,.document-wrapper .link-definition-separator,.document-wrapper code.code-inline,.document-wrapper li>p{display:inline}.document-wrapper ul{list-style-type:disc}.document-wrapper li li li li li li li ul,.document-wrapper li li li li li ul,.document-wrapper li li li ul,.document-wrapper li ul{list-style:circle}.document-wrapper li li li li li li ul,.document-wrapper li li li li ul,.document-wrapper li li ul{list-style:disc}.document-wrapper li::marker{color:var(--document-list-marker-color)}.document-wrapper ol{list-style-type:none;counter-reset:custom-list-item calc(var(--data-list-start,1) - 1)}.document-wrapper ol>li{counter-increment:custom-list-item;position:relative}.document-wrapper ol>li::before{content:counter(custom-list-item) ". ";color:var(--document-list-marker-color);position:absolute;transform:translate(calc(-100% - .33em),0)}.document-wrapper ol>li[data-big-number=true]{margin-inline-start:-2.05em}.document-wrapper ol>li[data-big-number=true]::before{position:static;padding-inline-end:0.25em}.document-wrapper ol>li[data-list-type="1"]:before{content:counter(custom-list-item) ") "}.document-wrapper [data-direction="2"] ol>li::before,.document-wrapper ol[data-direction="2"]>li::before{transform:translate(calc(100% + .33em),0)}.document-wrapper li[role=checkbox]{list-style:none;position:relative}.document-wrapper li[aria-checked=true]{color:var(--document-text-secondary-color)}.document-wrapper .todo-checkbox{display:inline-block;margin-left:-1.7em;margin-right:.5em}.document-wrapper .todo-checkbox svg{display:inline-block;margin-bottom:-.3em}.document-wrapper blockquote{display:block;padding-inline-start:2.13em;position:relative}.document-wrapper code,.document-wrapper mark{padding:var(--document-inline-padding-top-bottom) var(--document-inline-padding-left-right)}.document-wrapper blockquote::before{content:"";position:absolute;top:.2em;left:1em;width:.13em;height:calc(100% - .4em);border:var(--document-hairline-width) solid var(--document-list-marker-color);border-radius:.33em}.document-wrapper code,.document-wrapper pre.fenced-code,.document-wrapper pre.indented-code,.document-wrapper pre.yaml{color:var(--document-code-text-color);background-color:var(--document-code-background-color);border-radius:.25em}.document-wrapper [data-direction="2"] blockquote::before,.document-wrapper blockquote[data-direction="2"]::before{left:0;right:1em}.document-wrapper blockquote blockquote blockquote blockquote blockquote blockquote::before,.document-wrapper blockquote blockquote blockquote blockquote::before,.document-wrapper blockquote blockquote::before{background-color:transparent}.document-wrapper hr{display:block;margin-block-start:calc(var(--document-line-height-multiplier) * 0.5em);margin-block-end:calc(var(--document-line-height-multiplier) * -0.5em);border-top:var(--document-hairline-width) solid var(--document-separator-border-color)}.document-wrapper pre{display:block;white-space:pre-wrap}.document-wrapper pre.indented-code{padding-inline-start:2.13em}.document-wrapper pre.fenced-code,.document-wrapper pre.yaml{padding:0 .5em}.document-wrapper .fenced-code::before{content:"\200B"}.document-wrapper code{font-weight:400;font-style:normal;display:block}.document-wrapper mark,.document-wrapper mark code{color:var(--document-text-color);background-color:var(--document-highlighter-background-color)}.document-wrapper em,.document-wrapper i{font-family:AvenirNext-Italic}.document-wrapper b,.document-wrapper strong,.document-wrapper th{font-family:AvenirNext-Bold}.document-wrapper mark{unicode-bidi:embed;border-radius:.25em}.document-wrapper u{text-decoration:underline;text-decoration-color:var(--document-accent-color);unicode-bidi:embed}.document-wrapper s,.document-wrapper strike{text-decoration:line-through}.document-wrapper a{color:var(--document-link-color);unicode-bidi:embed;cursor:pointer}.document-wrapper .wiki-separator-marker{display:inline;color:inherit}.document-wrapper .link-definition-title{color:var(--document-text-light-color)}.document-wrapper .footnote-ref{font-size:.9em;vertical-align:super}.document-wrapper span.entity{direction:ltr;unicode-bidi:embed;color:var(--document-code-syntax-highlight-entity)}.document-wrapper span.escape{unicode-bidi:embed}.document-wrapper .color{font-family:var(--document-code-font),monospace;font-size:var(--document-code-text-size-multiplier);padding-inline-start:1.2em;position:relative;direction:ltr;unicode-bidi:embed}.document-wrapper .color::before{content:"";position:absolute;width:.9em;height:.9em;left:0;bottom:0;transform:translateY(-15%);border:var(--document-hairline-width) solid rgb(0,0,0,.3);border-radius:.9em;background-color:var(--data-color)}.document-wrapper .hashtag{color:var(--document-tag-text-color);background-color:var(--document-tag-background-color);border-radius:1em;padding:calc(var(--document-inline-padding-top-bottom) - 2 * var(--document-hairline-width)) calc(var(--document-inline-padding-left-right) + .3em);unicode-bidi:embed}.document-wrapper .hashtag>.marker{display:inline;color:var(--document-tag-marker-color);padding:0}.document-wrapper table{display:block;max-width:fit-content;overflow-x:auto;border-collapse:separate;border-spacing:0;border:var(--document-hairline-width) solid var(--document-table-border-color);border-radius:.33em;margin-bottom:calc(var(--document-line-height-multiplier) * 1em)}.document-wrapper table[data-direction="2"]{margin-left:auto;direction:ltr}.document-wrapper tr{display:table-row;background-color:var(--document-table-cell-background-color)}.document-wrapper tr.header-row,.document-wrapper tr:nth-child(odd){background-color:var(--document-table-cell-alternate-background-color)}.document-wrapper td,.document-wrapper th{box-sizing:border-box;display:table-cell;padding:.37em .75em;min-width:5em;border-right:var(--document-hairline-width) solid var(--document-table-border-color)}.document-wrapper td:last-of-type,.document-wrapper th:last-of-type{border:none}.document-wrapper table[data-direction="2"] td{margin-left:auto}.document-wrapper td[data-alignment="2"]{text-align:right}.document-wrapper td[data-alignment="3"]{text-align:center}.document-wrapper .code_comment{color:var(--document-code-syntax-highlight-comment)}.document-wrapper .code_constant{color:var(--document-code-syntax-highlight-constant)}.document-wrapper .code_number{color:var(--document-code-syntax-highlight-number)}.document-wrapper .code_string{color:var(--document-code-syntax-highlight-string)}.document-wrapper .code_entity{color:var(--document-code-syntax-highlight-entity)}.document-wrapper .code_keyword{color:var(--document-code-syntax-highlight-keyword)}.document-wrapper .code_function{color:var(--document-code-syntax-highlight-function)}.document-wrapper .code_variable{color:var(--document-code-syntax-highlight-variable)}.document-wrapper img{max-width:100%}.document-wrapper .pdf_preview{display:inline-block;width:100%;height:500px;background-color:#fff;overflow:hidden;padding:0;margin:0;position:relative;border-radius:4px}.document-wrapper .arrow svg #body,.document-wrapper .arrow svg #head{fill:var(--base-text-color)}.document-wrapper .todo-checkbox svg #body{stroke:var(--document-task-border-color)}.document-wrapper .todo-checkbox svg #check{fill:var(--document-task-check-color)}.document-wrapper .todo-checkbox.todo-checked svg #body{opacity:.35}.document-wrapper .todo-checkbox.todo-checked svg #check{opacity:.4}
</style>
<body>
<div class="document-wrapper">
<h1 id='Lux Capital -> LP Letter Q1-2023'>Lux Capital <span class='arrow'><svg width="12px" height="12px" viewBox="0 0 12 12" version="1.1" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g id="Arrow" stroke="none" stroke-width="1" fill="none" fill-rule="evenodd">
<g transform="translate(0.000000, 0.500000)" fill="#444444">
<rect id="body" x="0" y="4.5" width="10" height="2"></rect>
<path d="M7,0 L11.7928932,4.79289322 C12.1834175,5.18341751 12.1834175,5.81658249 11.7928932,6.20710678 L7,11 L7,11 L6,10 L8.5,6 L8.5,5 L6,1 L7,0 Z" id="head"></path>
</g>
</g>
</svg></span> LP Letter Q1-2023</h1><h2 id='The ∞ frontiers of futureforming'>The ∞ frontiers of futureforming</h2><p>This quarterly letter is about the future, and specifically the act of "futureforming" —a term we coined to describe what the most audacious, aspirational founders do: take the combinatorial possibilities of the here-and-now and transform them into the soon-and-will-be. These founders forge the inevitable from the infinite - against what others deem impossible. They are the few with the will to build the world that the many will want to live in.</p><br>
<p>Futureforming is an act rooted in optimism: the transformation of a foreboding future into one that's ablaze with individual freedom and progress. The grand sweep of history isn't drafted in broad brushstrokes, but instead written by the infinite quotidian decisions each of us make in our daily lives.</p><br>
<p>Infinity or ∞ is fittingly a 90-degree rotation of the number 8, a number with a prosperous reputation across the world that also evokes the 8 bits in a byte that are the foundation of Silicon Valley. And it's the prospect and prosperity of infinite progress that will futureform the world - and also Lux - forward.</p><br>
<p>Last month, Lux announced its single largest fund to date with the successful closing of Lux Ventures VIlI (Lux 8), an early-stage focused venture capital fund with $1.15 billion in LP commitments. With Lux 8, we will invest in and fully fund the most ambitious founders building hard science and deep technology companies. Our team now manages more than $5 billion in committed capital entrusted from leading philanthropies, foundations, endowments, and children's hospitals, among others. Success for our founders means success for these mission-driven organizations as they investigate the frontiers of science, fund scholarships, tackle disease, eradicate poverty, as well as advance human rights, ocean protection, environmental preservation, educational equality, and health equity.</p><br>
<p>With Lux 8, we will invest at any stage, from inception and early incubation all the way through expansion and exit. We're equally comfortable writing a founder's first $100,000 check, where we believe before others understand, as well as doubling down with a war chest-building $100 million high-conviction investment. We're emphasizing early-stage activity and many of the same themes we have previously referenced, including: inner space (breakthrough biology +technology), outer space (manufacturing +aerospace +defense), and latent space (the magic of Al models +computational infrastructure).</p><br>
<p>Lux is now investing through its third market downturn, with proven playbooks and strategies for our founders to help them navigate whatever challenges lie ahead. The optimistic ambition to futureform doesn't mean full-spend ahead for Lux family companies. In fact, from the trivial to the serious, sometimes pulling back helps push ahead. Optimism requires optimization. In track and field, runners might use a strategy of "negative splits" to intentionally hold back in order to sprint ahead; in car racing, a pit stop strategy known as the "undercut" slows and stops earlier than competitors to change tires and refuel to overtake opponents; in chess, a player might make a"gambit" of a temporary sacrifice to take a better position on the board; and in war, a general might make a strategic retreat to regroup, reinforce ranks and drive to ultimate victory. Similarly, we urge our Lux-family founders to "spend" to save: spend the time and effort now to save an additional 10-15% of costs, spot and eliminate weakness (and weak talent), sharpen strategic focus today amid any headwinds and confusion to set yourselves up to take the market—with full force.</p><br>
<p>Let's turn now to our own direction of progress in this letter. First, we’ll consider the "scenius" of optimism as we urge all to Occupy The Future, explore the infinite questions left to be answered in science and technology, and discuss the accelerating diffusion rates of technology and the democratization of tech. While Lux is optimistic by nature, we will end with an afterword on risk and a new initiative we at Lux have been honing on "riskgaming" (see Appendix).</p><br>
<h2 id='The optimistic scenius occupying the future'>The optimistic scenius occupying the future</h2><p>Futureforming requires not just science, technology and engineering—it also demands a prosocial philosophy.</p><br>
<p>Consider terraforming. It's a term pregnant with possibility, holding humanity's hunger to harness the heavens for a newfound home among the stars. It would entail conducting a symphony of orchestrated changes, rendering a barren wasteland into a thriving Eden: finessing the fickle fabric of the atmosphere, blending gasses for breathable air that nurtures not chokes, liberating ice from its slumber to yield serpentine rivers that transform a void into a vital land of verdant life.</p><br>
<p>Romantic, isn't it? We reject it. Most people don't want to occupy Death Valley, let alone Mars.<br>
Terraforming is for The Leavers & The Fleers-playing god, abandoning our planet to settle another with hopefully better results. Instead, we count ourselves among The Stayers & The Stewards, re-embracing what it means to be members of an incredible community on this Pale Blue Dot. Instead of pursuing utopia, we would be wise to strive for persistent progress, accumulating incremental improvements, endless combinations, adaptation and transformations, and on occasion, a few giant steps. That's where futureforming and terraforming depart. Terraforming is about recreating the paradise of Earth on other worlds, whereas futureforming is about directing us to a better one right here. Think of the future as a place. We want to fund those who want to develop it into a desirable destination. Оссuру The Future.</p><br>
<p>Today's darkness doesn't descend from ignorance, but rather from the waves of infinite information that break upon our thinking. We really do live now in Borges' The Library of Babel, with the same level of induced lunacy from the volume of volumes that surround us. Futureforming first requires that we look inward: how do we cultivate our own sensibilities and reasoning to sift through the knowledge that's constantly thrown our way? How do we develop a moral core to be able to stand resolute amid chaos and act as a radiant lighthouse guiding the decade ahead?</p><br>
<p>Contrary to conventional wisdom, we don't believe in geniuses. Innovations and inventions are not immaculately conceived from uniquely gifted individuals. There's much work to be done, and that work is rarely done in a silo. Ambient audio auteur Brian Eno crafted the concept of "scenius" (a portmanteau of "scene" and "genius") to capture the collaborative creativity that blossoms when brilliant minds mingle. Scenius incorporates surroundings, culture, and camaraderie that combine and compound into breakthroughs. These sceniuses are sprinkled throughout history, but always have an impact far beyond their often ephemeral moment. Think of the Italian Renaissance's flourishing of art and science in Florence; the Scottish Enlightenment that shaped Western thought around humanism, rationalism and capitalism; London's Bloomsbury literary clique and the German art school Bauhaus shaping European literature and architecture; the Manhattan Project bringing thousands of American and soon-to-be American scientists into a critical mass; and of course, Silicon Valley, that magnet of optimistic technological progress. While some sceniuses enter the history books as era-defining moments, others are fomented at the fringe like the Beat Generation, Andy Warhol's Factory, the Summer of Love, Burning Man, and the Punk, Cyberpunk, and DIY Steampunk movements. Today's scenius can be found amongst gamers, coders, creators, quirky scene sculptors of subcultures, emerging physical and digital hackathons, and maker spaces in tech and bio. What they all share is openness and curiosity and asking endless new questions, breaking boundaries and combining ideas.</p><br>
<p>We think a lot about crafting Lux's own scenius, always seeking to invite more multi-dimensional people into our community. Sometimes they are the next unyielding founders creating entirely new markets de novo. Sometimes they are scientists and engineers investigating the intricacies of the unknown and developing novel and brilliant ways of understanding how our world works. And sometimes, they are just people who are attuned to a different wavelength, who perceive reality uniquely, casting aside the vagaries of society as the bizarre phantasmagoria that they really are.</p><br>
<p>Consider just some of the founders in Lux's scenius. We have always partnered with extraordinary, multidisciplinary founders at the earliest stage, who are futureforming at the intersection of disciplines where few others are. Who are some of these polymaths? In Al, we think of some of the longstanding Lux family founders we've backed since their earliest seed or Series A rounds, such as Clem Delangue of Hugging Face, the largest platform for open-source Al/ML-creating a future that democratizes access to the most cutting-edge models. Cris Valenzuela of RunwayML, which co-invented Stable Diffusion, is building the future of generative video. Storytelling is a timeless human endeavor that bonds us together, and we clearly see a near future that democratizes the production of entire films through nothing but text prompts, allowing anyone to envision lighting and styles and synthetic actors indistinguishable from real ones. Consider Naveen Rao - whose first company we backed, Nervana Systems, was quickly acquired by Intel - now the founder of MosaiML, in which we first invested in 2018. The company allows customers to easily train and deploy generative Al models on their data in a secure environment, laying the foundations to futureform cloud access for cutting-edge Al models. Then there's Qasar Younis of Applied Intuition, who was tired of stunted efforts in the auto industry to build autonomous vehicles with insufficient simulation software and got to work building the software infrastructure to futureform computationally-guided transportation. Lux's scenius also includes preeminent executives in biotech like Nancy Thornberry of Kallyope, which is pioneering our understanding of the gut-brain axis to deliver a future with medicines better addressing obesity, metabolic and brain disorders. Roger Perlmutter at the helm of Eikon is accelerating life-saving drug discovery with Nobel Prize-winning microscopy and Al. And finally, our scenius also includes the next-generation of defense and aerospace titans like Laura Crabtree of Epsilon3, creating the operating system for spacecraft and complex operations; Chris Power of Hadrian, which is building highly automated precision component factories; and the five brilliant founders of Anduril, which is transforming the future defense capabilities of the United States and its allies.</p><br>
<p>While we consistently partner with early-stage founders, we also futureform by creating entirely new advanced science and technology ventures from scratch that should exist but don't yet. Through our internal Lux Labs program, we creatively imagined and have concretely incepted dozens of new companies across a wide array of emerging technology areas and brought them to market, most recently with key elements of the breakthrough platform for delivering gene therapies at Aera Therapeutics, founded by CRISPR-Cas9 pioneer Feng Zhang. We also recently co-founded Osmo, a company digitizing smell, with ex-Google Brain director and researcher Alex Wiltschko. And with new dedicated teammates and entrepreneurs-in-residence at Lux Labs, we will continue to found and fund companies that focus on the intersection of cutting-edge fields like Al xBiology, Manufacturing xSpace, Scientific Tools xAutomation, and many others.</p><br>
<p>Creative collaborations and communities begin with the boundless energy and brilliant eccentricities of their members, and Lux's scenius is no exception. Our community has certainly expanded over the decades, but it always has and continues to attract people with the same core mission: to use the infinite potential of the human mind to overcome the greatest challenges humanity faces.</p><br>
<h2 id='Infinite questions, finite answers'>Infinite questions, finite answers</h2><p>All new things come from combinations of old —from everyday analog examples (roller suitcases, sticky notes, combination locks, adjustable wrenches and Swiss army knives) to complex technical ones (the now anachronistic term 'smartphone' was the original electronic Swiss army knife combining phone, camera, music player, and computer). Every major breakthrough today too is a combination of practical and theoretical prior art. Today's modern rockets-that launch satellites allowing us to precisely observe centimeter resolution on Earth and navigate street by street all while streaming infinite variations of movies and music - depend upon the 9th century Chinese invention of gunpowder, Newton's 17th century conception of universal gravitation and the resulting orbital mechanics, the combinatorial chemistry of alloys and composites, theories of thermodynamics, and Goddard's inspired reading of H.G. Wells in 1890s that led to the pursuit of rocketry and the first use of liquid fuels. Not to mention the competitive animus of two warring ideologies between the U.S. and the U.S.S.R. which motivated the pace of development. This idea of frontier technology as combinations of prior inventions extends to the most pervasive technologies in the world: from radio to radar, televisions, transistors, Teflon, microwaves, sonar, lasers, electric guitars, gene editing, augmented reality, electric cars, and of course A.l</p><br>
<p>All inventions, many of which we now take for granted, start with endlessly questioning what is and what could be? Many of the answers to present pressing questions are found in the minds of future founders. For anyone with abundant curiosity (or a few kids), the supply of questions is infinite. How do we want to futureform what we see around us? How should our cities change, our food systems, our infrastructure? How should medicine adapt given our shifting understanding of the human body and health? How do we develop the world to account for climate change and the increasing claustrophobia of our dwindling verdant lands? These are just some of the many, many questions being answered across Lux's scenius of founders today.</p><br>
<p>On questions of energy and futureforming the grid, consider Lux family company Impulse Labs founded by Sam D'Amico (previously of Google and Meta), who intends to reshape our power grid through combined electric power storage and disbursement in everything from stoves to water heaters. There is an inevitability of more efficiently unleashing electrons through the electrification of everything (our homes, our appliances, our vehicles, our supply chains) with enormous societal implications from regulation (what's the future of a public utility commission?) to shifts in peak power distribution and the second-order effects on the energy mix of our economies (will we still need oil and gas or will nuclear, solar and wind offer us a triad of energy abundance?).</p><br>
<p>Let's talk about some of the most ambitious questions in an extended example: How will Al develop from here? How should we incorporate the development of Al into our labor markets, our daily lives, and into our entertainment? Over the past five years, we have made investments into companies providing Al infrastructure and open-source platforms. These prior investments are paying of today with rising enterprise values, exclusive inside insights and early signals of other rising entrepreneurs in their networks. Our early and contrarian conclusion: in the battle between large, centralized Al companies and specialized, open organizations, the latter will take the lead in the years ahead.</p><br>
<p>Consensus wisdom has been that the cost for training large language models (LLMs) will continue to grow from $10M to $100M to $1B with only the largest tech and cloud players (Amazon, Google, Meta, Microsoft, Oracle) able to afford the primarily Nvidia-designed GPUs (ranging from $10,000 for A100 chips to $40,000 for cutting-edge H100 chips). We hold a contrary view expressed in our investment in Together, founded by Vipul Prakash (who previously sold his last company to Apple), where we made a bet that distributed computing resources (maybe even some overbuilt for crypto coin mining) would be able to train foundation models at scale and at a fraction of the cost of centralized clusters—and so far so good.</p><br>
<p>Wikipedia confounded people in its distributed, open-source approach that destroyed the proprietary encyclopedia industry even faster than digital Encarta blew up the Britannica volumes that once populated bedroom shelves. The frenetic advancements within Al have been driven by computer scientists and researchers openly publishing papers and sharing repositories of code. Our early investment in Hugging Face has opened our eyes to a few key trends: machine learning is already core to programming and developing code. Today, every company increasingly has its own code repository. Tomorrow, every company will have its own Al models. As machine learning becomes the default way to build technology, will companies want to outsource their own Al capabilities - or will these capabilities, developed in-house with the aid of open-source platforms, become the key way they differentiate themselves to customers? There has been a race for larger foundation models (with parameters in the hundreds of billions), but the future is likely to be specialized, fine-tuned, faster and much cheaper smaller models for each individual business use cases. Instead of one monolithic "Swiss Army knife" Al model, companies (or people) will have a portfolio of Al agents working, in some cases together, on their behalf-each optimized for their specific task at hand.</p><br>
<p>Contrast this open approach with the misleadingly-named OpenAl, which is effectively though not formally captive to Microsoft. Microsoft's investment was a clever and highly structured deal that evaded the inevitable antitrust scrutiny of a plain vanilla acquisition a lesson the company is learning in real time through its intended tie up with Activision). It was a smart deal that added some fire to Microsoft's threat to Google Search while also adding some superpowers to Office. But there are other important social implications of OpenAl's technologies-it ensures that almost every communication and piece of work you receive is likely to be augmented or outright produced by a bot. We're all used to checking spelling and grammar using built-in functions, and these days, many apps like Gmail offer Al-assisted autocomplete suggestions for easy, one-click responses. The next steps though really push our imagination. Shortly, you may allow a personalized doppelgänger bot to negotiate on your behalf—likely with someone else's bot in a new form of "Al market making." In the most optimistic vision, the Kafkaesque bureaucracies we regularly encounter will never again be seen by humans at all.</p><br>
<p>We've learned over decades that technological progress in society is rarely monotonic, and instead can change society in complex ways-both good and bad. Witness: voices being cloned, not just for Drake and Kanye songs, but for scamming family members or deceiving finance teams into authorizing wires; images already easily photoshopped and now "midjourneyed" to shock and libel; and bot farms generating entire news sites, niche Substack newsletters, Twitter feeds and perfectly replicated podcasts.</p><br>
<p>Now consider how the "slow food" movement returned the story of the farm back to our tables as a way to rebel against bland "fast food" factories, as well as how digital music from MP3s to streaming provoked a rush of audiophiles to revert to turntables and vinyl. Might all our current tech development ironically and counterintuitively provoke a backlash with some subset of people "air- gapping"-disconnecting and insisting on in-person, non-virtual, non-remote, device-free, authentic human connection? Comedians, musicians, and many stage performers already ban devices, a move to control their material but more importantly, to insist on the rapturous presence of their audience and embed exclusivity into their ephemeral experience. Might we see more private, members-only clubs inspired by Ben Franklin's Junto to ensure the conversation among fellow humans is exclusively that?</p><br>
<p>Moving beyond the realm of software, how fast will science progress when it is being conducted 24/7 with prompts from humans that send instructions to automated labs with robots? With the likes of Benchling, Strateos, LatchBio and many future investments Lux will make in the coming years, ambitious scientists will perform experiments across workcells-and then instantly compare repeatable results with archived scientific papers to find correlations and propose new experiments, reverse prompting human scientists to tweak variables and authorize new experiments. A scientist's tools of discovery today are sequential, but they will soon be infinitely parallel, ushering in a new scenius of progress that might one day be as historically potent as the Renaissance was with that singular tool of discovery, the printing press.</p><br>
<p>How will manual labor continue to be augmented with the "cobots" of Veo, the robot workforce of Formic, the synchronous warehouse robots of Instock or the automatic electric car calibration tools of Kinetic? How will a whole new generation of productivity-focused robots or the automated factories of Hadrian change the face of American manufacturing?</p><br>
<p>How will digitizing our senses help us better understand them and reshape industry structures? As we recently wrote in an issue of Lux's newsletter "Securities":</p><br>
<blockquote>
<p>While the natural world is fecund with a dazzling diversity of smells, the landscape of scents in our daily lives is far less organic. A handful of tightly-held fragrance companies and an extremely small guild of perfumers carefully craft the scents that go into every product we purchase, from the scent of clean laundry in our detergents to the orchestrated beauty of scents that make up a modern perfume. Our memories are - without too much exaggeration - controlled by roughly 600 people globally.</p>
</blockquote><br>
<p>Will the likes of Osmo not only allow computers to understand scent, but completely transform what our entire world smells like? And what of the thousands of oils and other ingredients that produce those scents in dizzying supply chains-might whole national economies be forced to adapt as new synthetic smells replace climate-degrading natural ones?</p><br>
<p>In answering these and other new questions that arise, there are two needs. One need is the re-energizing of fundamental research in the hard sciences that has been waylaid first by the rise of financialization in the 1980s and 1990s and then by the software boom of the 2000s and 2010s. Our best minds should find discoveries on the frontiers of human knowledge both rewarding intellectually, and equally rewarding economically. For all the abundance of knowledge, there's still so much we don't know, particularly in domains like biology where the complex systems of the body remain arcana for empirical scientists.</p><br>
<p>Second, as those discoveries arrive in the years ahead, we need to cultivate them in our own lives and society the way we want them. Technology doesn't just materialize into our futures, but can be placed there deliberately. Futureforming and finding directional arrows of progress is not just about predicting advances in technology, it's also about incorporating the social and human dimensions, deciding which technologies to adopt or reject - shaping us just as we shape them. That doesn't mean yelling "stop" at Al, but it does force us to ask about responsibilities and duties: where should technology end and humanity begin?</p><br>
<h2 id='Diffusion Rates, Democratization of Tech + The Tech of Democracies'>Diffusion Rates, Democratization of Tech + The Tech of Democracies</h2><br>
<p>What are the implications of democratizing high-tech and high-priests? Hollywood VFX studios once had near monopoly control to do special effects. Now anyone with a phone and the right algorithm can do it nearly for free. Only governments could build MQ-9 Reapers and now any insurgent can equip off-the-shelf drones with GPS, object recognition and a weapon. Just 20 years ago, only governments could sequence a genome and today the average person can mail in their DNA for a few hundred dollars. Doctors had a scarcity of knowledge and expertise to heal and perform differential diagnosis that Al can arguably now do quicker and in some cases more accurately with fewer false negatives, leaving doctors to mostly focus on the care part of healthcare, performing interventions, being patient advocates and connecting human to human. The entire world's information and knowledge is available freely at every human's fingertips—and with new Al models now too the intelligence of interpreting that information. Journalists, artists, copywriters, marketers, and analysts were all valuable because their skill set might have been rare, and now many of those elite skills are being captured, modeled and democratized.</p><br>
<p>We should of course always worry about powerful new capabilities in the hands of bad actors, but for every scammer who will use Al to clone a voice and shake down the CFO or a gullible family, there are dozens of opposing researchers looking to use that same power to reduce human suffering. This is especially important as the diffusion rate of new technologies accelerates. Back in 1999, it took Netflix three and a half years to reach 1 million users; in 2004, it took Facebook 10 months; in 2008, Spotify five months; in 2010, two and a half months for Instagram; and just last year, ChatGPT did it in five days. What about 100 million users? Google Translate, launched in 2006, took six and ahalf years, Uber took just under six years and ChatGPT reached 100 million users in an estimated two months.</p><br>
<p>In many ways, technology can be thought of as both an alien and invasive species. There's an excerpt from a brilliant novel by Richard Powers, The Overstory, that talks about the different time spans experienced by trees in nature (in eons) and humans (in seconds). He takes it one step further to imagine an advanced alien civilization whose metabolism is so accelerated that to them, we humans seem like slow trees:</p><br>
<blockquote>
<p>Aliens land on Earth. They're little runts, as alien races go. But they metabolize like there's no tomorrow. They zip around like swarms of gnats, too fast to see-so fast that Earth seconds seem to them like years. To them, humans are nothing but sculptures of immobile meat. The foreigners try to communicate, communicate, but there's no reply. Finding no signs of intelligent life, they tuck into the frozen statues and start curing them like so much jerky, for the long ride home.</p>
</blockquote><br>
<p>This is important as the speed of this alien species we call technology is and always has been accelerating, while the speed of biology and human behavior, including the laws and regulations we come up with, are always playing reactive catch-up. The democratization of technology's marvelous powers is running into democracy's penchant for discourse over decisions. Democracies are supposed to give people power, but practically, people have proxies in the form of representatives, compressing the many into one, turning them into targets for regulatory capture. But this may be changing.</p><br>
<p>Optimistically, Romania's Prime Minister is using an Al bot to help surface sentiment and make better sense of public opinion and the will of the people, even as dictatorial leaders use Al to surveil and suppress and shape the will of the people. Some researchers have proposed a long-term vision of replacing politicians with Al (where every citizen has a voice and singular constructive ideas from anyone, anywhere can be inputs to a better society, not just the loudest voices). Recent papers report of scientists running in silico simulations of society (think The Sims on steroids) with agents interacting amidst conflict and cooperation and emergent social dynamics. Other researchers have designed fine- tuned models to ingest diverse and conflicting views on topics (the kind of heated emotions-run-high issues that can lead to violence) to unearth statements that could bring consensus and common ground. Optimistically framed, the better angels of our nature rest not upon metaphorically moral wings but our augmented neural nets.</p><br>
<p>We like to say that we invest in "matter that matters," which is increasingly important in today's chaotic times when every day brings new barriers against the globalized, open world that defined a generation. But that hasn't stopped the march of science, nor innovation, and certainly not founders. It is the founders and Lux's broader scenius who are the cause of our steadfast optimism - infinitely resilient, determined, and adaptable - pushing the frontiers of what's possible. And like the founders we back, we too have a forever chip on our shoulder, a constant reminder to maintain our scrappy roots with fiery competitiveness and heightened intensity to futureform and create the world we want to live in.</p><br>
<p>To the many who say "no" and "not possible", we insist on pursuing the prediction of that great nostalgic arbiter of fate: "Signs point to yes." Yes, yes, infinite yes.</p><br>
<h2 id='Appendix'>Appendix</h2><h3 id='Afterword: "Riskgaming"'>Afterword: "Riskgaming"</h3><p>Having shared our view of optimism and "futureforming", let's turn to our thoughts on improbable but possible risks to our worldview. We like to say at Lux that failure comes from a failure to imagine failure and our imaginations are reasonably active imagining downside scenarios, and to that end, we have begun a series of private, invite-only gatherings we call "riskgaming."</p><br>
<p>As we wrote in our newsletter "Securities" (with some minor edits):</p><blockquote>
<p>The world is more competitively constrained than ever before. Eight billion souls are now</p>
<p>breathing on Earth, nation-states are intensely clashing over resources, industries, and clout, and nearly every arena of human endeavor requires a ferocious fight for dominance. Victory requires more people with more skills and backgrounds to cooperate, and yet, miscommunications between scientists, technologists, entrepreneurs, policymakers, and others hinders collaboration on these pressing challenges.</p>
</blockquote><br>
<blockquote>
<p>That's why we're starting the Lux Riskgaming Initiative to help all kinds of leaders build up their expertise, risk-taking acumen and decision-making skills by confronting them with realistic but challenging scenarios on the frontiers of our collective understanding.</p>
</blockquote><br>
<blockquote>
<p>Wargaming has been a critical practice for military experts and field armies to encounter, contextualize, understand, and ultimately command complex defense issues. Unlike think tank memos or nonfiction books, the goal of a well-designed wargame isn't to convey statistics or make recommendations, but rather to transform participants into experienced leaders with a deep appreciation for the tradeoffs and limits that a scenario forces on its players. Fantasies and dreams are quickly replaced by the sober rationality that all competitive environments require.</p>
</blockquote><br>
<blockquote>
<p>Wargaming's history goes back to the 1800s, when the Prussian army used a newly-created game called Kriegsspiel to help officers and soldiers understand battlefield maneuvers. Since then, they have become a mainstay at the Pentagon and particularly at the Naval War College, and competitive simulations are now widely used across international relations, policy, business, and economic modeling to understand how individual players compete with each other to achieve their own objectives.</p><br>
<p>While the word "war" is present, that's really a synonym for competition, and we believe that wargaming should expand far beyond the remit of defense —hence "riskgaming". How will synthetic biology and the CRISPR economy change the organization of American healthcare? How do public schools compete with the prevalence of homeschooling in an era of social distrust? How will emerging markets compete in industries that require large capital outlays like semiconductors?</p>
</blockquote><br>
<blockquote>
<p>Scenarios don't provide answers, but rather offer something far more valuable: intuition. We want players to forego their present lives and motivations in order to inhabit new characters with different goals and behaviors. That creates distance between ourselves and the strategic questions on offer, and also deepens our empathy, allowing us to understand why people make the decisions they do.</p><br>
<p>While scenarios can indeed be quite sobering as the last three runs can attest to, the other</p>
<p>important half of riskgame is "game", and everyone has enjoyed the chance to act outside their normal boundaries, to try new strategies, and to experiment. Open-ended play is just as useful for learning in adults as it is in children, and a stimulating scenario is infinitely more interesting and memorable than a dry report prepared in some basement dungeon of an office. It's our hope that a combination of grit, wits and conviviality may just be the spark needed to invent the future and save us from the ominous chaotic hell that always seems to be just a few ticks of the clock away.</p>
</blockquote><br>
<p>When we look at the risk landscape today, markets are, as we've mostly anticipated, volatile and reminiscent of the post-dot-com hangover. Market strategists who have for over 20 years annually predicted the market to rise by a lot or a little instead predicted 2023 would start negative, especially pulled down by investor rotation out of tech. Predictions, often saying more about the predictor than the market, proved humbling yet again with the Nasdaq down 33% last year and up 17% so far this year with big tech rallying and Bitcoin up 77%, while few foresaw the banking contagion. Previously predicted LP indigestion has —as forecasted —followed overzealous overallocation. For GPs, much dry powder will prove "wet" with demands on it from existing companies with under-reserved investors on cap tables squeezed between facing large liquidation preferences and larger preference to avoid liquidations, recaps, cramdowns or shutdowns. Venture funds will stumble, struggle and shutter. Capital will get scarce. Valuations will go down and future expected returns will go up. Cycles come and go and come again. So do contagions.</p><br>
<p>Three years ago we survived a viral contagion, nearly three months ago a banking contagion (which may still be ongoing). The stimulus from the former contributed to the collapse of the latter. What other contagion candidates could cause chaotic disruption, currently under appreciated or overlooked? Let's take a look at the future of banking risk, credit risks, concerns that Japanese investors might pull back from global investing, and finally, the rise of militant labor organizing.</p><br>
<p>An aside on the viral contagion: we wrote in prior letters that in a short while, it would seem like a long time ago, and indeed, motivated to move on, many manifest minor bouts of amnesia from that major blur of time-loosely reminded only when a close colleague catches a cold and tests positive. The narrowly evaded near death of depositor cash at SVB and FRB shifted attention and concerns of contagion from risk of loss of life, to risk of loss of livelihood and in further preview we foresee risk of loss of our way of living —the everyday stuff and people we take for granted.</p><br>
<h3 id='Banking Risks'>Banking Risks</h3><p>To flog that lifeless steed: pandemic stimulus and persistent low rates and rear-view mirror return-chasing FOMO led to large inflows to VCs which led to large inflows to startups which led to SVB deposits tripling from $62 billion to $189 billion from 2019-2021. With so much cash coming in via equity and little need for borrowing via debt, SVB put some $91 billion of that cash into Treasuries and U.S. agency mortgages. Having signaled "lower for longer" after nearly 12 years of free money, the Fed then raised rates by 500 basis points in 12 months to slay inflation which led to the value of SVBs' assets falling which led to dropping confidence which led to a run on the bank with social media accelerating contagion ultimately leading to a third of SVBs' assets (around $42 billion) fleeing in a day. Signature Bank followed, followed by Credit Suisse to UBS and First Republic staggering for stability ultimately into J.P. Morgan's arms.</p><br>
<p>The FDIC and the Fed in the U.S. and FINMA in Switzerland by all accounts successfully stemmed the immediate crisis at hand. Depositors were protected, but for how long can the embankment hold up under the pressure? Can America's regional banking system even function in a world where assets can flow out in a matter of minutes based on rumors and perhaps geopolitically-induced synthetic media?</p><br>
<h3 id='Credit Risks'>Credit Risks</h3><p>Unlike the 2008 crisis, the trigger for SVB wasn't toxically packaged loans with subprime borrowers who would inevitably default speculating on ever-rising housing prices. Instead it is a generational shift from ever-declining rates to endlessly-rising ones to slay inflation.</p><br>
<p>When rates rise, asset and loan values fall, and that cascade of failure is growing most notably next in commercial real estate and possibly asset class du jour private credit. The Fed's new rescue facilities like BTFP (Bank Term Funding Program) were set up to buy Treasuries back at par over the next year so banks wouldn't have to take losses. But that doesn't cover commercial real estate exposure, which means the risk grows that a new bailout rescue facility may be needed.</p><br>
<p>Failure comes from a failure to imagine failure. It isn't the thing that fails so much as it is all the things connected to the thing that fails. What ripple effects might we speculatively imagine? Either the banking failure contagion is contained or will continue. Credit is tightening, the cost of capital is higher, loan refinancings will cost more to refinance, defaults will rise, lenders who lent a lot will lose a lot. Commercial real estate from office space to data centers saw high vacancy rates in the former and high demand for the latter. Since the pandemic, the market knows and expects hybrid home-office work, with many workers refusing to return to offices, leading to stagnant rents, higher cost of capital and higher refinancing rates, square footage oversupply, gated redemption requests from 800lb gorilla Blackstone, rising risk of defaults, banks (especially small regional banks) having high exposure with $1 trillion of debt in just the office space segment alone.</p><br>
<p>If valuations in the broader markets decline further or if a recession materializes, it could cause wipeouts in private credit, which has grown from roughly $500 billion in 2015 to over $1.4 trillion at the end of 2022. It's an asset class that has become the darling of allocators, expected to double again over the next few years to nearly $3 trillion. It's said that over 95% of private credit firms started after the 2008 crisis when rates were low. Facing the threat of recession, companies with +7 turns of cov- lite leverage accumulated in low-interest rate environments may have to divert a growing proportion of their cash flow to servicing debt being refinanced at higher rates. Allocators to private credit may have had a recent run of great returns but if loans go bad (already defaults have gone from 2.2% to4.4% in a year), the ripple effect of the largely unregulated market of shadow lenders could domino in fast and unexpected ways.</p><br>
<p>There are more ripples, including a big impact on developers of new projects, loss of jobs in construction, less property tax for local governments, layoffs of public-sector workers, declining demand for now overstaffed service providers from architects to property managers to maintenance staff to interior design and legal services—and perhaps the many technology companies that sell into them in "prop tech."</p><br>
<p>What else could exacerbate a credit crunch? Japan. Over $3 trillion of Japan government bond buying to inflate the stagnant economy over the past decade sent Japanese investors on a global buying spree, becoming the largest buyer of U.S. Treasuries (suppressing our yields further), double-digit owners of the debt of many other countries (from Brazil and New Zealand to Australia and the Netherlands), and fixed income and large single-digit owners of global equities (from the U.S. to the U.K. to Singapore). The reversal of this flow back to Japan, whether swiftly or more likely slowly, risks removing marginal buyers of sovereign debt and putting pressure on assets and equities globally. The former would raise yields on fixed income adding to the broader credit crunch, the latter would add to earnings yields as equities fall.</p><br>
<p>Overall valuations fall, losses rise and returns fall, profits fall, unemployment rises-all of which sets up much better future expected returns. Wages are sticky, especially high salaried ones. Which means more layoffs are more likely as the corrective mechanism to over-hiring during the Covid-19 boom. While reasonable to counter that the following is renormalizing from abnormal pandemic stimulus, it is notable that recently - and for the first time in 90 years - M2 (cash, checking deposits, savings, money markets, mutual funds) declined. This is only the fifth time since 1870 where U.S. money supply fell by 2% or more, with three of the prior four followed by economic depressions and a panic and double-digit unemployment. Add to this the increasingly inverted yield curve the third most of nine since 1981) and the probability of a hard landing.</p><br>
<p>Let's riff on that to imagine an improbable but possible contagion few are talking about: a labor contagion. A curious stat caught our attention with important implications for the shape of the future. There's record high and growing support for unions today (70% of surveyed Americans) yet record low percentage of U.S. workers actually members of one (10% versus 20% 40 years ago). Consider also in 1983 at peak union membership, it was also the peak for interest rates. Might four decades of declining interest rates have coincided with four decades of declining union membership, and as rates rise, might this revert? Might a hard landing, downturn and recession ahead galvanize workers and catalyze a resurgent labor movement? Historically when unemployment and economic stress rose, more resilient industry sectors with more constant demand have been consumer staples, utilities (electric, water, gas), telecom and healthcare. fI we see a mass labor union movement fighting for better pay and benefits, healthcare and related services especially may benefit.</p><br>
<p>Let's continue the thought experiment with an eye towards disrupting daily routines. What would happen if nurses, hospital staff or healthcare providers, transit workers, electricians, teachers, ironworkers, truckers, warehouse workers, police, fire, city workers, and more went on strike?Technological disruption was the theme of the past two decades, but what if labor disruption becomes the theme of our coming era of unrest? Our Covid-19 and banking crises remind us how interconnected and vulnerable we are and how swift social media can exacerbate panic-turning a placid and pacific public into a forceful, furious and ferocious one.</p><br>
<p>As we write, writers are striking in Hollywood, slowing the flood of media content from blockbuster movies to late-night talk shows. That's no laughing matter as labor dissent is a contagion we have not seen in a while. The issue at hand is mostly an economic one regarding participating in streaming revenue, but the West and East Coast writer unions are also focused right now on banning the use of Al in screenwriting. Will a renegade showrunner break the picket line and use ChatGPT and Al script writers to make a point? Are writers the 21st century version of the Luddites of 1800s England or merely the vanguard for putting Al into its proper place? More broadly, will the ubiquity of Al cause increased labor unrest?</p><br>
<p>We need our fictions as they help us make sense of the world. We've written in past letters how art imitates life, considering the bookends in a period of excess that began with (2010s) The Social Network preceding and priming the public for the Facebook IPO—that arguably ended with widespread undisciplined FOMO in the past decade that created the conditions of The Dropout depicting the fraud of Theranos' Elizabeth Holmes (2022), alongside Super Pumped and WeCrashed, respectively on Uber and WeWork. Hollywood's writers are on strike, but if we were writing Season 247 of America, we'd cast as protagonist a modern-day Hoffa-like labor leader that takes the nation by storm signaling toughness, provoking fear and apolitical movement.</p><br>
<p>There are infinite combinatorial ideas waiting to be unleashed by the next generation of entrepreneurs ready to futureform our world, but there are also infinite risks that can accelerate or obliterate those plans. "Riskgaming" is our approach to encountering the unexpected so that we are unsurprised, all while remaining focused on where we need to be: taking the here-and-now and transforming it into the soon-and-will-be.</p>
</div>
</body>
</html>