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Lux Capital -> LP Letter Q2-2023.html
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Lux Capital -> LP Letter Q2-2023.html
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<h1 id='Lux Capital -> LP Letter Q2-2023'>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">
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</svg></span> LP Letter Q2-2023</h1><br>
<h2 id='Drifting Ever Upwards'>Drifting Ever Upwards</h2><p>Quarrelsome questions abound. Are we facing an imminent recession or have we improbably dodged one? Have markets corrected from the excess of excesses of recent years or are they amnesically ascendant again? Is labor poised to combat capital and demand higher wages, benefits, and healthcare?</p><br>
<p>Is the world uniting against resurgent and revanchist threats or once more divided? Is America's comity crumbling under the coarse caricatures of our politics or are we finally healing to fight against exogenous foreign threats? Will Al turn into another punctuated hype cycle, accrue influence to tech's imposing incumbents, ushering in insurgent upstarts and a changing of the guard, or yielding a runaway existential threat to us all?</p><br>
<p>Yet our recent winter of discontent has transformed into a heedless summer of love. The wanderlust of free-spirited souls have surged into airline cabins and hotel lobbies, boosting travel to vertiginous heights. Market investors, once weary in the warrens of winter, have assembled themselves into a passionate phalanx of purchasing, pushing indices to year-to-date highs. The dreary doldrums of the recent downturn in venture have once again resurrected into the rapid resurgence of reckless risk.</p><br>
<p>It is easy to get lost in these peaks and troughs, longing for a glassy sea. But we must remind ourselves that human progress does not come from equanimity, but rather in the untamed and riotous competition of ideas on the very edge of human intellect. Yes, all things - in markets and in life, alike - wax and wane, but there is always an arc of progress. Stock prices are difficult to predict, dancing like gas molecules to a Brownian beat - but we do know they move with a positive upward drift. We humans may always be at war with ourselves - but despite that, we too drift upwards: relentlessly charging forward, our innovations making yesterday's best into tomorrow's commonplace.</p><br>
<p>While it's a cliché that those who don't know history may be condemned to repeat it, the corollary is that those who don't know history are mistakenly nostalgic or ignorant of how awful most of it was. A lower-income high school student in the U.S. today can live a better life than Cornelius Vanderbilt and the robber barons of yesteryear. To punctuate the point in one word: dentistry. But more seriously, the former has a higher quality of life and lower odds of suffering from a fatal illness like measles, leprosy, smallpox, and tuberculosis; she enjoys the material comforts of flushable toilets, clean water, climate-controlled rooms, and always-available and dimmable electric lighting; plus, she consumes a wider variety of foods while using labor-saving appliances like microwaves, fridges, freezers, and gas or electric stoves. The benefits just keep arriving. She has access to swift emergency responders, more informed doctors and nurses, greater justice and public accountability, as well as superior choice for materials and comfort in clothing. She can use previously inconceivable vehicles to safely and quickly travel thousands of miles, learn nearly anything in the palm of her hand, access the world's store of knowledge, watch endless entertainment while accessing all of history's static and dynamic art in paintings, photos, television, movies and music. Perhaps most importantly, she has the ability to instantly communicate with anyone in the world —to see and be seen. From 90% of the world living in extreme poverty, now less than 10% do.</p><br>
<h2 id='The Pox of Pessimism —Or Why Stuff Always Seems Worse Than It Really Is'>The Pox of Pessimism —Or Why Stuff Always Seems Worse Than It Really Is</h2><p>Like countries, the past and the future are places, and the great measure of their desirability is whether more people are trying to move there or leave. Against a backdrop of rising rates, declining markets, falling valuations, rising illiquidity, struggling funds, retrenching limited partners, and trenchant turmoil overseas, our last letter struck a surprisingly forthright note of optimism. We spoke of the prosocial, conditionally optimistic “future-forming” that our founders and we at Lux do every day, activities that drive a long arc of possibility.</p><br>
<p>It's an arc that rests invisible behind the headlines—which sound like a new verse to Billy Joel's We Didn't Start the Fire: opioids, fentanyl, Trump indicted, Biden falls, polarized politicians weaponizing populism, suicides, and depression, culture wars in ascension, obesity, floods, and drought, everyone full of doubt! We've written in past letters on why news tends to be negative: finger-pointing politicians amplifying why everything is terrible; the evolutionary logic to pay attention to pain, which feels twice as bad as pleasure feels good ("if it bleeds, it leads"); the asymmetry of how long it can take for construction (slow) versus destruction (quick); and social-media technology behaving like momentum algorithms to intensify all of these things.</p><br>
<p>We like to say that front-page news reflects the cacophony of consensus and is almost immediately factored into capital market prices. It's why we prefer page B2 to A1, the short article tucked away with editors and readers alike missing its salience. While the front market pages parade a panoply of<br>
parameters and predictors like interest rates, inflation, currency movements, GDP growth and employment statistics, there is a rarely discussed metric we think everyone should and will know about and understand: time-price. It's a metric that captures human progression, irrefutable measures of optimism and productivity driven by invention, innovation and technological change.</p><br>
<h2 id='Introducing: Time-Price (measured not in dollars & cents, but in minutes & hours)'>Introducing: Time-Price (measured not in dollars & cents, but in minutes & hours)</h2><p>Back in 1798, Thomas Malthus looked at the geometric growth in population against the arithmetic rise in food production and famously (and wrongly) predicted an inevitable famine. The Club of Rome, 174 years later, predicted much the same as did Paul Ehrlich in his treatise The Population Bomb, forecasting that hundreds of millions would starve to death in the 1970s. Societal collapse has not only failed to occur, but our planet has remarkably not exhausted a single natural resource.</p><br>
<p>Measuring quantities is imperfect so a better measure is observing prices. Recall the famous long-term bet between Paul Ehrlich and Julian Simon that Ehrlich would be held correct if a basket of commodities picked by him would be more expensive (indicating scarcity) by the end of the decade, whereas Simon would win if the basket were less expensive (indicating abundance). Simon won. And he won because his opponent was measuring abundance or scarcity by counting stuff (how many crops we grow, oil barrels we drill, aluminum we extract). Simple counting, though, fails to factor in technological breakthroughs (the growth of knowledge) like those in genetics that led to larger harvests and yields on less land such as with the Green Revolution pioneered by Nobel Prize-winning agronomist Norman Borlaug. Counting also skips over substitutions (like gas for oil) or efficiency gains driven by incentives for owners and capital to do more with less (consider Coke cans which use far less aluminum today).</p><br>
<p>Simon, on the other hand, observed prices, with rising ones implying scarcity and falling ones, abundance.</p><br>
<p>Now, we all know that price is a market signal, information for producers to produce and consumers to express choice. The less interference with markets and prices, the more honest and useful the signal, and the more efficiently resources are allocated to the production of goods and services. But forget nominal price (what you see on shelves) or real price (when economists adjust prices for inflation —the devaluation of a currency— itself a widely reported, but impossibly imprecise measure). Both of these are money prices: measured in dollars and cents.</p><br>
<p>In contrast, time-price is measured in seconds, minutes and hours. To get a time-price, simply divide the nominal price of a good or service by nominal hourly income, and the answer is how long you have to work to buy something. While we notionally buy things with money, we are really conducting the economic alchemy of converting our time through labor (and thus wages) into goods. As long as your hourly income rises faster than nominal prices, time-price falls and abundance reigns over scarcity.</p><br>
<p>Every nominal price we remember as kids, from a pleasurable pack of saccharine Bubble Yum to the sensational schadenfreude of the New York Post (but we repeat ourselves), was way cheaper. But so were wages. Time-price normalizes this nonlinear complexity. Wages change over any individual's life (from what we earned shoveling high piles of snow as teenagers versus what we earned founding a high-tech nuclear-waste cleanup company as adults) just as productivity changes within collective society (capital creating technology to save labor whether on the farmstead or the switchboard).</p><br>
<p>As we will see shortly, if we take almost any category and view it through time-price, it is hard to refute the continuous improvement in humanity's quality of life over time —a positive upward drift driven by productivity gains. That's because new knowledge, new technology and new innovation lets people produce more with less. Time-price captures the impact of innovation in a novel way occluded by money prices. Forget CPI, PPP, GDP, Beige Books or any other complicated and imprecise measures. Time-prices allow us to calculate universally over space (between any cities or countries) and over time (between any year, past and present). Compare bananas in The Netherlands in 1850 and bananas in New York in 2023. And best of all—unlike currency or economic figures time is a universal constant that flows in one direction, can't be inflated or cheated, is applied equally to all of us and is independent of what people do.</p><br>
<p>The idea of time-price is as elegant as it is maddening that it was only recently put forth by Marian Tupy and Gale Pooley. The two were building on the work of Nobel Prize-winners Bil Nordhaus and Paul Romer, which was furthered by two Lux friends, Cesar Hidalgo and George Gilder. The latter simplified the idea into a great reframing of economic concepts of wealth, growth and money: wealth is knowledge, growth is learning and money is time. These thinkers have collectively shown that the world isn't just an arrangement of zero-sum atoms that we will exhaust, but instead that there exists endless combinatorial possibilities of arranging those atoms that only comes from knowledge and learning-positive-sum ideas. An hour of work today affords far more than any other time in the past, and that is because human ingenuity created innovations that increased productivity, which allowed all of us to consume more for less and free up more time to generate even more new ideas. This is an arc of progress: we drift ever upwards.</p><br>
<p>Time-Prices Reveal A Compounding Cascade of Creativity & Progress<br>
In Nordhaus's words:</p><blockquote>
<p>One modern hundred-watt incandescent bulb burning for three hours each night would produce 15. Million lumen-hours of light per year. At the beginning of the last century, obtaining this amount of light would have required burning seventeen thousand candles, and the average worker would have had to toil almost one thousand hours to earn the dollars to buy the candles. In the modern era, with a compact fluorescent bulb, the 1.5 million lumen-hours would need twenty-two kilowatt-hours, which can be bought for about 10 minutes' work by the average worker.</p>
</blockquote><br>
<p>Now consider: if one bunch of bananas costs 50 cents per pound and you make $10 per hour, it costs you $0.50 / 10 = 3 minutes. If bananas rose in price to 60 cents but your wage nearly doubled to $18 per hour, now it would cost you $0.60 / 18 = 2 minutes, so the time-price of bananas is now cheaper by 33% even as nominal (and presumably inflation-adjusted real prices) increased. All kinds of other calculations follow that show not just increasing abundance for individuals, but entire populations. Ehrlich was right about collapse, but wrong about the subject. Society didn't collapse-time-prices did.</p><br>
<p>This new accounting of abundance is true of nearly every product category one might investigate. From hammers to bikes to shipping: a hammer from Sears in 1902 cost 53 cents or four hours of hard labor, while today a hammer is a whopping $6.50 but only 12 minutes of work for the median wage- earner. A $100 bike on Amazon costs ten-fold more than a bike a century ago, but hourly wages skyrocketed 185-fold over the same time, so the time-price has fallen more than 90%. Take the 1979 Sears catalog, and look up any item's price then and compare it to the 2019 prices for those same items from Walmart. Then divide both by the respective hourly wages of average U.S. blue-collar workers ($8.34 in 1979 and $32.36 in 2019). Every product's time-price plummeted: coffeemakers (-65%), toasters (-75%), blenders (-79%), vacuums (-83%), dishwashers (-62%), shavers (-74%), hairdryers (- 67%), sneakers (-67%).</p><br>
<p>Pickup trucks and most vehicles dropped by half in terms of time-price. What about air conditioning? A/C was first invented in 1902 in Brooklyn to solve a problem with the sweltering summer humid heat in the building of a local publisher. Fifty years later in 1952 and no longer an industrial luxury, the average cost of an air conditioner was $350, and with average wages prevailing then at $1.72, workers had to toil 204 hours to afford one. Jump forward 67 years, and Walmart's quiet, remote-controlled, energy-efficient unit cost $178 and workers earning the average wage of $32.36 would have had to work a mere 5.5 hours to afford it, meaning access to A/C fell 97% in time-price between 1952 and 2019.</p><br>
<p>During the same period, electricity went from 1.8 cents per kilowatt-hour to 13.9 cents per kilowatt- hour, but with wages rapidly rising, the time-price of electricity fell 59%. The same calculations are available for televisions, DNA sequencing, plastic surgery, and even for the cost of calculation itself. The slide rule Buzz Aldrin carried on Apollo 1 in 1969 cost $10.95. Given an average wage of $3.72 per hour, it took nearly three hours of work to buy a tool capable of one calculation per second. In 2020, the iPhone 12 cost a whopping $699 with an A14 chip that could do not one calculation per second but 1 trillion. With average hourly wages having risen to $33.98, it would take 20 hours of work to afford it. Those same three hours of time in 1969 bought a scant single calculation a second, but by 2020 the same work translated to 1.4 trillion calculations-a compound doubling of value every 20 months.</p><br>
<p>And how did all that stuff get to the store in the first place? The first shipping container was conceived as a modular unit by maverick Malcolm McLean in 1956 and the first ship carried a total of 58 containers. Today's super-Panamax cargo vessels hold not just that big innovative entrepreneurial idea but 24,000 of them, drastically driving down the cost to move ever more abundant varied atoms in endless configurations from toasters to tablets around the world.</p><br>
<p>Nearly 30 years ago, an utterly improbable company named Cadabra was founded by a 30-year-old entrepreneur. This year alone, that company now known as Amazon will deliver over 1.8 billion items to Prime members in the U.S. either same or next day—and it takes just 11 minutes on average for a same-day warehouse to get an order out for delivery. A testament to humanity's progression, driven by combinatorial creativity, incentives, and competition.</p><br>
<p>Finally, consider the productivity, not just of making something, but of generating new knowledge and searching through it. Not so long ago, searching for information would have required a trip to the library, an hours- or days-long arduous search through an archive, and then fumbling around with a fragile and decaying medium like microfiche, all just to photocopy it. Today, you can instantaneously search, or even more instantaneously, query chatbots and large language models to receive well-sourced answers.</p><br>
<p>What we are now able to do in milliseconds has taken millennia of compounding knowledge in order to make sand sentient. The silicon of sand that we have transformed into ingots inscribed with precisely patterned circuits of intelligence contains the compounded know-how from chemistry to lithography and electricity to extreme ultraviolet lasers. It's human wisdom imbued into one of the Earth's most common materials.</p><br>
<p>The duo behind the research on time-prices, Tupy and Pooley, like to note that there are 12 notes and 8 keys in a piano, but they ask—how many songs are there in a piano? The answer is none—they are all in human heads.</p><br>
<p>Human ingenuity and the combinatorial possibility of ideas is the ultimate resource that drives time-prices lower across all categories. And that is a cause for conditional rational optimism. Unlike deer, humans don't freeze in the face of oncoming headlights hurtling toward them —instead, they hustle, invent, speculate, share ideas, try, fail, succeed, compete, and do it all over, again and again. It's how the Dutch over generations impressively future-formed ever-evolving engineered solutions to stave off fatal flooding—and surely how other countries encountering environmental risk today will do the same so long as similar systems of property rights, incentives, competition, and markets are also in place.</p><br>
<p>Human progress is best measured in time-prices. The most striking conclusion from all this research is that, contrary to doomsayers and de-growthers, more people on the planet has helped to decrease time-prices, because more people means more ideas and more possibilities for a one-in-a-billion insight that could improve our ability to do more with less. The bigger the population, the better the odds of discovering real genius or good luck. However, having more people is necessary but not sufficient—otherwise, we would have seen India and China exporting technology and knowledge to the rest of the world instead of importing American cars, chips, computers, and Covid vaccines. Progress requires a welcoming environment, one where people can freely come together to evolve ideas through conjecture, freely ask others to criticize those ideas, and for these entrepreneurs to be able to freely test those ideas in open and fair markets.</p><br>
<h2 id='The Search For Progress'>The Search For Progress</h2><p>Humanity's positive upward drift doesn't occur by default. At Lux, we believe that science and technology are the only practical means by which we can ever hope to take destiny into our own hands. It is no surprise that Lux strives to back the founders pushing on the frontiers of scientific knowledge and understanding and who will ultimately drive us all forward. Consider Hugging Face, which is reducing the time-price of intelligence: democratizing machine learning technologies such as Large Language Models—once closely guarded by the high priests inside the walled gardens of large tech incumbents such as Google or Microsoft or OpenAl-by open-sourcing hundreds of thousands of models and datasets. Consider RunwayML, which is reducing the time-price of creativity: leveraging Al to dramatically lower the barriers to top-grade visual effects and animation, allowing smaller teams to create the biggest-budget film experiences. Consider Benchling, which is reducing the time-price of scientific research: transforming the productivity of wetlab scientists through an end-to-end data and collaboration platform designed specifically for research and development. Consider Anduril, which is reducing the time-price of national security: creating software and hardware products that are keeping America and its allies out of harm's way. Consider OpenSpace ni construction and Ironclad in legal services, which are dramatically lowering the time-prices of both blue-collar and white-collar services. Consider Eikon, Maven Clinic, Kallyope, and our other life sciences companies, which are reducing the time-price of healthcare by lowering the cost of care delivery or are bringing potentially life-saving drugs faster and more cheaply to market. Progress-measured by time-prices-has dramatically improved over the past century, and yet, when we look at the edges of what's possible, there are still so many defining innovations ready to be discovered —and funded.</p><br>
<p>The open and free search for progress is something we believe in deeply, and we feel fortunate to live in the United States where we are able to speak and invest freely in advancing the human condition while solving wicked and thorny problems. In addition to practicing what we preach every day at Lux, we also preach what we practice. Twice this quarter, Lux partners were invited to testify and did so before the U.S. Congress, first on artificial intelligence alongside Al leader and Lux-family company Hugging Face, and then on U.S. competitiveness in critical emerging technologies amidst rising conflict with the Chinese Communist Party —a rare source of bipartisan concern. Critically important, this is not conflict with China writ large, nor Chinese people and especially not Chinese-Americans. We hold great hope for receding hostilities and common ground for collaboration on technological, scientific and economic grounds. Alas, hope is not a strategy and we need a cogent strategy to contend with conflict so as to reduce it.</p><br>
<p>In the appendix of this letter, we include the full written testimony submitted for the Congressional record addressing a few key issues: the morality of our investing at Lux (that when we ship U.S. technology, we are shipping U.S. values; and when we import foreign technology, we are importing foreign values); the importance of technological sovereignty (de-risking dependence within our companies on sole-source suppliers, vulnerable or concentrated supply chains, especially ones that may seek to gain or use leverage in tit-for-tat escalation as we have seen with China's gallium and germanium restrictions as a reaction to restrictions by the U.S. on chip access for cutting-edge Al); and the necessity of attracting and retaining the best and brightest globally four country, our technologies, our companies, our economy, and our social fabric have all been built by immigrants. Talent, like capital, goes where it is welcome and stays where it is well-treated, and we ought to be the shining beacon on the hill for all). The progress that comes from investing in people inventing the future, as we do at Lux, is a source of competitive advantage—a driver of our economy, prosperity, and opportunity for others—especially in the U.S. but also the world over.</p><br>
<p>While many talk about a balance of powers, the falling of time-prices offers an even more important testimony about progress: the spirit of innovation is not zero-sum. The combinatorial frontiers are consistently and unwaveringly positive sum. The sun is always shining in the future. We drift ever upwards.</p>
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