Trends in Venture Capital and innovations in technology w/ Joe Lonsdale founding partner at 8VC

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Ryan:

Thank you for joining us today on the Wentworth Leadership Series. Today we talked about the importance of culture, the importance of always innovating, and trying to figure out if there’s a better way. This episode will be put on our practice management website. If you’d like access to that please reach out to our concierge service desk. They’ll give you access where all of our digital content’s available for you and your team to watch on demand. Thank you very much, and we look forward to seeing you next time.

Ryan:

Today I’d like to welcome all of our advisors, employees, and our friends in the industry. We have a special guest today, someone I’m privileged to call a friend. He’s a thought leader, an innovator, an entrepreneur, and a stand up leader for this country, has done a lot of good work to support the creation of tremendous American companies. Joe Lonsdale, founding partner of 8VC, and founder of a lot of things that you all know about. Joe, welcome to the Leadership Series. Thank you so much for coming on today.

Joe Lonsdale:

Thanks Ryan. Glad to be here.

Ryan:

So Joe, we’re doing a leadership series for the community. And your story really resonates with me. I’ve been fortunate to watch you grow, your career, and all of your companies. One thing that stands out to me is that every time I’ve ever visited the west coast, Palo Alto, and now new places like Austin, there are big leaders thinking about big ideas and creating big solutions to change the way we live and we do work. Can you talk to us today a little bit about your views on leadership? How you look at solving big problems, and how you look at building your teams.

Joe Lonsdale:

Sure. Well, I’ve been lucky to be involved with some great leaders, obviously, in Silicon Valley when I first was working out of Stanford Computer Science, I was with the guys at PayPal. Which of course, Elon Musk and Peter Thiel, each started companies, they merged, they became PayPal. And so I kind of got to see firsthand how a top technology culture works.

Joe Lonsdale:

And I’d say from my experience in these things, there’s the macro question, which is, are you doing something that’s hard, and worthwhile, and is addressing a big gap in the world, where the way it should work is very different than the way it works now? You have to go after a big hard macro question, otherwise you’re not going to attract the best people. And then, on the other side of it, are you empowering talented people and letting them be in charge of their areas? Are you giving them ownership?

Joe Lonsdale:

The ownership culture to me is a really big part of it. I haven’t seen really great companies that don’t give really talented people a lot of ownership, and a lot of freedom to create, that the idea of a great company is, you bring great people together, and they’re each able to self-actualize. They’re each able to explore and fight towards the answer to the best of their abilities in a way where they’re really using their best abilities and they’re open and able to do that.

Joe Lonsdale:

And so, a lot of times what that means is that you’re setting things up to serve them so that these really talented people can run as fast as they can. And you’re getting obstacles out of their way, and that’s really what a good leader’s supposed to be doing in these companies.

Ryan:

And so, as you guys look at, maybe stepping back, you’ve mentioned in the past, the fourth industrial revolution. How do you look at the problems in today’s world? And how do you guys take that from idea to total addressable market? How do you guys go through that process?

Joe Lonsdale:

I tend to look at, we talk about in 8VC, the world’s broken, let’s fix it. I tend to talk about fixing things that are broken in the sense that you encounter something in your everyday life, you encounter something in your business, or you encounter something when you do research on a space, and it’s just clear the way it’s working right now is not the way it would be working if it was using everything that was really possible.

Joe Lonsdale:

And all of us encounter this all the time. Most people are trained to just be patient, and put up with incompetence. I think what makes an entrepreneur is if you’re not that patient, and you won’t put up with incompetence, and you won’t put up with something that’s not as good as it could be. And this could be anything from the fact that you just had to wait four months to get a DMV appointment here in Texas, which I’m planning to fix by the way, that’s unacceptable. And Texas is great, and I’m a big fan of how I moved here, but this is not acceptable, this is not how any competent organization should work.

Joe Lonsdale:

So it could be something as banal as that, which there’s actually really good answers for how to fix that, and how to use competition to fix that, to something as complicated as where I’m starting my family office 12 years ago, and realizing, “Wow, this technology’s really bad. Why isn’t this fixed?” I mean, you have to see what’s broken and you figure out how to fix it.

Ryan:

And when you’re looking at building out these teams, you’ve picked some amazing CEOs in the past. What do you look for in a CEO? And how do you build the team around them to maybe compliment some of the maybe skill gaps or personality issues? How do you look at staffing the executive team of a company as you start?

Joe Lonsdale:

When you’re building a startup I’d say… And a technology startup has four key areas. There’s the two areas the CEO has to be touching and has to be good at. One of them is product, design a product. And one of them is what we call marketing. Marketing, by the way, in a company like this, in a great tech company, it’s not like what you use to describe it. Marketing is your battle plan and battle strategy that maps out the total available market for your sales team.

Joe Lonsdale:

And so product maps things out and helps your engineers know what to do, and then your engineers get feedback on it and help shape it. And so engineering obviously is the area next to product. And sales kind of is mapped out by marketing, and then sales help give feedback to shape marketing. And then in a great company, marketing and product both are shaping each other, right?

Joe Lonsdale:

And so the really hard thing for a CEO to do is be both good at marketing, and the battle plan there, and understand what types of customers there are and what they need, and the product plan, and what’s possible to build. So the standard east coast… Sorry, I’m going to use east coast, I’m in Texas now, but from the Silicon Valley, we use east coast to mean these institutions that don’t know what they’re doing, which is probably very unfair. But the standard east coast way to approach these tech companies is you get a CEO who’s a sales guy who probably was president of his fraternity, he’s really good at sales and marketing, and he tells product what he needs, and he yells at them when it doesn’t work.

Joe Lonsdale:

And that’s why none of the technology companies generally get to be nearly as big when they’re built in that style. Because actually, it turns out, you need to deeply understand what’s possible on the product side, what’s needed on a product side, what’s possible on the engineering side. And in a great tech company, product kind of shapes marketing as well, and tells marketing what’s possible, and therefore marketing reacts to that. So really, both of those need to very strong. And these companies need to be balanced between product and market.

Ryan:

That’s very astute. It seems like the west coast startup community has always been founded by people who’ve got engineering and tech backgrounds and-

Joe Lonsdale:

It’s a key thing, because it’s a substance, right? So when you start a company, you’re asking what do I do when I start a company, I focus on the build side to start. Because that’s what’s actually solving the problem, or identifying there’s something broken in the world. It doesn’t matter how good I am at sales and marketing, what actually matters is what you’re building, right? It actually matters that you’re solving a problem.

Joe Lonsdale:

So the core DNA of the company, especially the first few years, has to be product, has to be engineering. A really good product has engineers helping run it, has engineers help tell it what’s possible. They’re really integrated that way. And then of course, you need to understand the market, you need to be talking to the market, you need to be getting feedback from the market to shape your product, or you can just build in isolation. Get a bunch of tech guys and do really stupid things and waste a lot of money.

Joe Lonsdale:

But, getting that tech culture to be really strong at first, and then getting a CEO who’s able to be of that tech culture, but then also of the marketing side, that’s a very hard thing to do, right? And that’s what you have to do to make these enterprise software companies work.

Ryan:

And so what are some of the secrets from Silicon Valley that relate to, how do you keep a top tech team happy? Is it the type of coconut water? Is it the freedom to work the schedule they want? What are some of the best practices that you’ve seen?

Joe Lonsdale:

So engineers in Silicon Valley are artists. That’s the best way to think about it. If you try to run artists like you would run a military unit they are going to rebel and they’re not going to do their art. And as much as I would like, at times, to stand them in a line and scream at them, that does not work. It’s just a bad idea. Now, at Palantir, we did have operational staff who were run like a military unit, by the way, that we interacted a lot with the military, had a lot of things that we did with special forces guys. And our office teams were very, very serious. They were military unit. Everything had to be on time, everything had to be operationally 110%. And we’re really proud of the office teams at Palantir.

Joe Lonsdale:

If we had run the engineering teams like that, obviously it wouldn’t have worked. So engineering teams, how do you manage artists? Well obviously, it’s an art to manage artists, it’s difficult, it’s hard. You have to respect the fact, to start with, that you’re already dealing with artists. And so what do you do? First of all, you give them ownership, you make them feel like owners. The way you feel like an owner is that they’re involved in seeing everything going on, they’re involved, themselves making the decision, or engineers around them with that ability who are leaders, or are involved in leading the company.

Joe Lonsdale:

So they actually see the engineers as part of the leadership of the company. It’s helping guide it. Engineers will very, very quickly get disenchanted with leaders who are leading the company that they can tell these leaders don’t understand what’s going on on the engineering side. You cannot have leaders of these great technology companies that don’t have a really good understanding of engineering as well, or at least somewhat. And you at least are being guided by people who do, who they’re listening to.

Joe Lonsdale:

And then, so aside from ownership culture, they actually have to be allowed to self-actualize, they have to be allowed to be working on hard problems, and hard problems have to matter to the business. If you’re not careful, the engineers are so eager to work on hard problems they’ll start working on these esoteric art problems that have nothing to do with what you’re doing, which oftentimes happens at big companies. They’ll tell you have technology debt, and they’ll spend a bunch of time solving problems that are quite irrelevant to what you actually wish they were doing, because there’s actually not a good connection between the business and the engineering side.

Ryan:

Well I think you’ve already taught me something that I hadn’t really thought about, that the engineers aren’t scientists, but they’re actually like artists. How do you project manage product development teams? Because you don’t want to put them into that kind of special forces mentality. But at the same time, you do need to have product delivery on date. How-

Joe Lonsdale:

So you need to inspire them. You need to expose them to problems. They’re still people, most of them still have spouses, or desire to have a spouse, and desire to have resources for their family. They still get excited if things are working. If they see a customer and a customer really needs something and they get it, that’s actually really motivating. They say, “Wow, I realize that we need to deliver this because these people need this, and I understand now what’s going on.

Joe Lonsdale:

So we did these things called tours of duty at our companies, where you’d bring the engineers out to the field, out to the people they’re working with, people who are using their technology, and they see it live. And they say, “Wow, I want to make it work for these people.”

Joe Lonsdale:

So I mean, an artist is still a human being with all of the positives and all the flaws. And you want to get them excited. You want to inspire them. You want them to see what actually matters. And you want to set a culture of senior people on their team who really do care about deadlines, and really are being responsible.

Joe Lonsdale:

So I think, as much as the engineers are artists, you do need to have engineering managers who are not artists, and assess that maybe that have some part of that personality that fits an artist, but they’re actually helping run the company. So getting really good VPEs, getting really good CTO, that obviously helps a lot with this.

Ryan:

And so, you have CEOs who understand the product side. They at least can get the respect of the team that’s doing that. What do you look for in a CTO in a company? Or is that the same thing to you?

Joe Lonsdale:

Yeah. It really depends on the stage. But a lot of times what you do is, the VPEs of engineering are kind of the ones who are running the trains on time, and kind of trying to keep things in order, and keep set goals, and be aware of exactly where the build is, and where it has to get delayed, and making the decision on where we’re going to actually do tech debt, and where we’re going to keep pushing forward. So VPEs tend to be more the management.

Joe Lonsdale:

CTOs, if possible, as the company gets a little bigger, are kind of like the spirit animal, where they’re just this really, really great thought leader engineer who other people look up to and are proud to work with, and they might help publish things to attract and hire talented engineers. They might help make big decisions on architecture, and big decisions on strategy for engineering. So I think a great company oftentimes has just really strong managers. And on top of that, a really impressive engineering leader as CTO.

Ryan:

That’s fascinating. So it’s almost like a chief academic from an engineering standpoint.

Joe Lonsdale:

A little bit.

Ryan:

Yeah.

Joe Lonsdale:

You definitely need some of that culture. You definitely need some of that culture in these companies as they scale to really work.

Ryan:

So, as you’re looking, people often say there’s a war for talent today. Would you agree with that? And how do you win that?

Joe Lonsdale:

Yeah. So when we were starting my first couple companies, I would have a presence at about 20 different universities, which we still have today. And so people on the ground at CMU, and Stanford, and MIT, etc. And we get to know a lot of the engineering professors, we get to know a lot of the students, throw pizza parties, [inaudible 00:13:21], we can throw pizza parties this year, but in general that sort of thing.

Joe Lonsdale:

And you pretty quickly get to know who’s the most talented, who other people think are the most talented, and we hire. We hire the top ten kids out of these schools, that’s how Palantir, Addepar have these top engineering cultures. The challenge was, is that Google and Facebook kind of picked up on this and started doing similar things, and they started giving $150k bonuses to these kids, 21 year old kids at a school, and they’re getting $150k signing bonus, $200k I’ve seen in one case, to go join these Silicon Valley companies. And that’s very difficult to compete against. We’re not going to be paying the same obviously.

Joe Lonsdale:

So, what I have found is that if I’m building a new company, I can oftentimes recruit these kids and give them a percent or two, or even recruit them as a cofounder, in a few cases, and that’s very promising. Being a cofounder is way cooler than just going to work for Facebook. So that’s one way I’ve fought back. But yes, there’s a massive war for talent. The big consumer tech companies have just hugely bidded up. It’s very, very expensive.

Joe Lonsdale:

The Bay Area, I’ll have people seven or eight years out of school who are important leaders in one of my companies, and I think one of them was making $300k, and we thought it was a high salary, but we needed this person there. And Facebook came and they stole him away for $640k. And they really loved our mission, they really wanted to be part of it, this was one of my government tech companies, I shouldn’t say which one, but basically, “Listen,” they go, “I talked to my spouse, this is more than twice what I’m being offered, I can’t stay here. It’s not responsible.” So yeah. It is very frustrating right now to compete against the top consumer tech. They have this wall of money they’re just spending on talent.

Ryan:

Oh, and that’s fascinating. I mean, the tech companies have been raising tons of cash. The stock market is obviously doing well for tech companies. I’d say that-

Joe Lonsdale:

Yeah. For the first time public markets are actually more highly evaluated than travel markets. It’s crazy.

Ryan:

It is an interesting period for the tech sector. Getting close to those 2000 earnings levels I think. Zoom’s got a p multiple of 565 times, which is insane.

Joe Lonsdale:

Yeah, my father-in-law is a chief guy who works, his firm, led the route on Zoom. So unfortunately, he now has a more [inaudible 00:15:32] mind. I thought of Zoom pretty well, I got a 10x fund, but that’s going to get a 40x fund, so. [inaudible 00:15:39] with that one.

Ryan:

Well, it’s all paper profits until the cash hits the account, that’s what I say, but-

Joe Lonsdale:

That one’s not paper profits. They’re distributing accounts.

Ryan:

Oh boy. Ring the cash register.

Joe Lonsdale:

It’s [inaudible 00:15:58] for someone.

Ryan:

That’s right.

Joe Lonsdale:

When you distribute shares, I don’t know. It starts to count a little bit.

Ryan:

Well, so as we’re looking at this, as maybe an education policy comment, we all have children, this next generation coming up, do you think kids should playing more games, learning to code at what age? How do we as a country compete with STEM given that India, China, other countries are seemingly doing STEM better than we are?

Joe Lonsdale:

I think games are a great way to learn. I’d love to see more games to get kids building battle robots. I think there’s all sorts of ways you can do all sorts of fun games. My brothers and I were each state chess champions as kids, and my dad was a big chess coach. And I think video games and all sorts of games are fine for kids to play, I think it probably does get into STEM, I’m sure there’s a limit where it’s too much if you don’t do your homework, but it’s probably just a positive thing overall.

Joe Lonsdale:

Yeah, I think there’s 80% of the graduate students right now in America in STEM are not from America. That’s obviously a hugely problematic statistic. And we got to be teaching it more in schools, we got to be evaluating it more in schools. I’m not an expert on education. But the areas of education that bother me the most, to be honest, is when the government spends money to try to help create opportunity, and it spends money on really shitty schools.

Joe Lonsdale:

And so our Pell Grants right now, we have 30 billion dollars a year on Pell Grants, and some of those go to schools that get kids great salaries, some of those go to schools where the only thing the kid can do when they come out of it is to be some kind of protestor because they just have no skills. And so I think we should only give money towards schools where people are coming out with higher salaries that we’re going to be trying to create opportunities. There’s things like that that are pretty obvious we can do.

Ryan:

Yeah. I mean, and that’s a whole other conversation we could get into, of people getting education, but then not having any way to productively use it in the economy.

Joe Lonsdale:

Basically being educated to being a Marxist protestor, but that’s a whole other conversation, so let’s stick off that one.

Ryan:

We’ll table that for later. Well, as it relates to building tech culture, and building winning culture, as you start to see success in the, kind of the scale up and the adaption of the new technologies that you guys have founded, at what point do you pivot, and start to run it less like a startup and more like a medium-sized enterprise? Is there a tipping point where you say, we now need to bring in a lot more operational infrastructure? Or more HR?

Joe Lonsdale:

I don’t know if you’re referring to it on purpose, but there’s an essay we wrote called Bring in the “Adults”. Which is what we say at a certain stage. But yeah, I definitely think there are different stages of these companies. You never want to stop innovating, but at some point when you have early product market fit, there’s these things that have been done by people thousands of times. Which is, how do you set up the right kind of sales culture? How do you measure CAC to LTV? How do you scale the sales machine? How do you scale the customer support machine? How do you deal with all sorts of receivables?

Joe Lonsdale:

And there’s just all these things companies do that there’s machines that are very good at this. And these machines need to be scaled aggressively by people who know what the heck they’re doing. And so, if you take the 24 old, she’s spent the last three year to innovatively this product, they’re usually not the right person to run this sales machine that someone else has done so many times before. So you definitely want to make really key hires on the sales and marketing, and related sides. And just bringing a bunch of these adults who know what the hell they’re doing, who are probably, oftentimes, 10, 20, 30 years older than the people who actually came up with the technology.

Joe Lonsdale:

And that’s really important to have. These companies are almost always… These companies, because they had to do things themselves differently, and because they were basically skewing everything they were being told about how to build, and now they usually try to also ignore advice on sales, and they just waste a year. And so these companies never bring in adults fast enough on the sales side, and it’s not something we really push hard to bring in the right types of leaders there when it’s time.

Ryan:

And what’s your bias typically? Do you prefer to invest in a startup? Or do you guys like to kind of found companies from the ground up and get in the seed? Where are you thoughts on where the-

Joe Lonsdale:

About, just over a fifth of our funding goes towards building new stuff. So we’ve created, this year we created a new biomanufacturing company, we created a new defense companies, EMP, created new logistics companies, building stuff in alternatives, you’re not probably working on together.

Joe Lonsdale:

But most of what we do is just investing in others. And the way we’re investing is, you’re looking for the very, very top technology cultures. It’s very hard to be a top technology culture. Once you have a top technology culture where the engineers are inspired and you attract top engineers, and they’re also working on a problem where there is a good gap in the world, that to me is just the best thing to bet on. And without having to bet [inaudible 00:20:41] if we get the right price.

Joe Lonsdale:

Because if you really have a great team, and it’s really a big gap, these things are oftentimes worth billions of dollars. And so whether or not… As long as it’s looking right, whether or not I’m paying 10, or 50, or 300 million dollars for it, if it has that right setup, and it’s very clear how it gets to be worth billions of dollars, that’s usually a good thing to do and venture.

Joe Lonsdale:

And obviously, depending on what you’re paying you have to look at the metrics, and you have to look at teams, and you have to look at the business goals in the next two or three years. But yeah, the high level stuff matters [inaudible 00:21:10].

Ryan:

And are there any pockets of innovation that you’re surprised about? You recently have left California to go to Texas. But are there parts of the country that you’re saying, “Wow, there’s some pretty amazing technologists or engineers sprouting up?”

Joe Lonsdale:

There’s super talent everywhere. We have a business in Chattanooga, and Iowa, and Utah, we have all sorts of new investments we’re making around the country. The thing I will say, is that all parts of the country, even though they may have new [inaudible 00:21:40], and they may have a really smart person, they oftentimes have no fricking idea how to build these companies. And it’s very frustrating.

Joe Lonsdale:

So oftentimes, we’ll start something, we’ll get some breakthrough there, but then we’ll have to, at the very least, the one is Iowa [inaudible 00:21:51] in Austin, Chicago, to find the right people. There just weren’t people in Iowa, or ready to move to Iowa, who could scale this company as a med tech thing, it’s quite impressive. There’s great people there, just not enough depth in that industry. And same thing with Chattanooga. There’s great logistics talents, and there’s good people they’re, but we’ve also had to open our offices elsewhere in order to scale it up.

Joe Lonsdale:

And there is a certain intensity in Silicon Valley, of just work ethic, and how to do things, and the [inaudible 00:22:16] to put up with BS that’s quite good, it’s evolved over time. And I think the rest of the country is definitely seeing a lot more innovation everywhere, but there’s definitely still a lot to learn from the culture that’s built most of the big companies, which is Silicon Valley culture. Silicon Valley culture has all sorts of problems, has all sorts of weird stuff. We can go on and on about the woke broken stuff. But it also has a really, really functional part of it as well, where there’s a lot we should be taking from that.

Ryan:

Yeah, fantastic. So one question I have for you is, the venture funding marketplace has changed a lot. I think a lot of capital is flowing, maybe to earlier stage. Venture funds are getting bigger. What are your thoughts on the venture market today, and how is it changing?

Joe Lonsdale:

What you see most notably is a lot of money coming down from the high ends. You’ve seen great groups like Tiger, and [inaudible 00:23:11], and General Atlantic, and a bunch of others who used to maybe do more series D and E, and pre-IPO type stuff. And you’re seeing them now doing lots of series B and C. And they’re cost of capital’s different than the cost of capital for most venture capitalists. Venture capital firms, at least at the very high end, are going for the 30% plus IOR. You’ve seen a lot of them consistently get into the mid-20s and mid-30s.

Joe Lonsdale:

These other groups, they’re run very well, and are impressive groups. But they’re oftentimes going for 10 points less, which means they can pay three times more for series B. So that’s definitely shifting things up a little bit, and it’s pushing some of us earlier, or probably slightly lower returns for the bigger funds in our space, although the big funds still do quite well.

Joe Lonsdale:

And then, you have a lot more small angel funds started. So we built this system called Afinity, that most of the venture capital firms use. There’s 400 firms using this. And then we map out our network on it. And last time I checked it, we had 181 angel funds, early stage funds, that my partners were in touch with. So each partner [inaudible 00:24:14], 20 years or whatever.

Joe Lonsdale:

And that’s obviously a lot more than they’re were a decade ago. So there’s just a lot of small investors wanting to back people, and back CRMs, this is great for the country. You get yield end yields, it’s easier to get back to, but [inaudible 00:24:27] there’s a lot of capital in the space. And so I think the scarcity’s really become challenging.

Ryan:

Well, and that’s an example of you, I think finding something you didn’t like in a CRM and then creating one, right? Affinity is a venture CRM platform.

Joe Lonsdale:

There’s no good CRM for venture, and now there is. So we just, it’s all run well. Yep.

Ryan:

Yep. We use it out of the Iron Gate, and we also use Salesforce at Wentworth, and I’ll tell you, Affinity’s fantastic. Well, so as the marketplace is changing, and you’re getting a lot more capital coming in, how does that change? Does it change your investing aperture? Or do you find that a good deal is a good deal, and that’s never changed over time?

Joe Lonsdale:

No, it doesn’t mean you don’t spend quite as much time on certain types of series Bs and Cs. And you’re never going to be shopped out to the big guys, because you’re just not going to pay twice as much as what it paid before. So there’s certain things where you spend more time on the As, more time on the early Bs. And really, well actually the later stage ones, if there’s a particular advantage you have, or a particular reason why you think it’s still going to be a 50 or 100x, then maybe you’re more aggressive on it.

Joe Lonsdale:

And just, in general, I think the most important question is still, what’s possible now that was not possible three, four, five years ago? And having a good answer to that question, and looking in these areas around that, and really aggressively and really early, that’s probably the most important thing to do as a venture investor.

Ryan:

And what’s fascinating to me is, a lot of these P firms, or a lot of these big asset managers are starting to come down into the venture space. And I think, I know, it’s keeping companies private longer, typically 10, 20 years ago, a company would’ve gone public earlier. If you look at Google, they went public way earlier than Facebook in its life.

Joe Lonsdale:

Yep.

Ryan:

So what does that mean? I think it’s almost by design. I think you guys have studied, if I have to say, Silicon Valley studied Wall Street and realized that there was too much enterprise value being given away. And so my perspective is, you guys are keeping companies private longer so that the management teams and the employees capture some of that value.

Joe Lonsdale:

Yeah I think it has to do with [crosstalk 00:26:38]-

Ryan:

Is that inaccurate?

Joe Lonsdale:

… valley. It’s been good for some of the valley to keep them a little bit longer. That said, you’ve seen a lot of evidence recently of companies really innovating and performing really well still in public markets, and it’s very possible to do that. And I think Palantir stayed private too long. It took 17 years until I started it to go out. These things probably should just go out after 10 or 12 years.

Joe Lonsdale:

And I guess the argument counter I have is, there were certain things that were very important, they wanted to prove in order to get the right public evaluation, and improve the things quite well in the last few years. So I guess that there is an argument to that way too.

Ryan:

So, Joe, do you mind talking a little bit about Palantir’s direct listing as a case study? It’s been preforming very well since it’s gone public. Morgan Stanley just issued some positive view long term. Can you talk a little bit about why the direct listing made sense?

Joe Lonsdale:

Yeah. Sure. Palantir I think should’ve probably gone public earlier if it could’ve. 17 years is too long. But there’s been a really, really lot of success there with Foundry the last three years, it’s really proved its markers are going up. And so it definitely made sense to get it out by now.

Joe Lonsdale:

It’s interesting, I think the direct listing worked well enough, because it had so many shareholders, and had been known by so many people in the financial world, because it had been private for so long. That said, if you’re actually asking me what would’ve been best, I actually probably would have had it not do a direct listing, just because it is a pretty complicated story, and I wouldn’t have minded to explain this in more depth to another few hundred people on a roadshow.

Joe Lonsdale:

I think that probably would’ve been the thing I would’ve done if I was in charge of it. I started it 17 years ago, I’m not running it anymore. Karp’s a great CEO. He and I debate some things, but we get along very well overall, I’m actually the one who hired him, convinced him to join along with Stefan 16 years ago. But he’s a really, really wise person.

Joe Lonsdale:

But I think partly, he just doesn’t like talking to people on Wall Street. It’s not his focus. He’s a philosopher with some more progressive views on some things, so he’d much rather spend time running the business, and doing his philosophy and his tai chi. I think if we wanted to optimize the stock prize it’d probably be 10 or 20% higher in my view, if we had done a roadshow where we really taught people about the details of the company.

Ryan:

And, that’s fascinating. I think it is going to, I think, give entrepreneurs another quiver in their toolbox if you will, to go ahead and try to find new ways to go public. So I think it’s very newsworthy for our industry, for folks to take a look at what happened with the Palantir case study. And it’s very important technology. So you’re also the founder-

Joe Lonsdale:

Eliminate thousands of terrorists, and prevent tens of attacks on the homeland. No one appreciates running attacks when we don’t have them, but we’re proud of what we do.

Ryan:

And it’s fascinating, because there’s a lot of use cases too for finance, right? You guys, Palantir also was doing some stuff with hedge funds, and the finance community as well.

Joe Lonsdale:

Yeah, well basically, the way I think of Palantir is, we took a lot of things that you’d call IT services, whether it’s data integration, search discovery analysis, knowledge management, a place of collaborating on these mounds of data, and we productized them with the platform. It helps you do that out of the box. And so the really good example of Palantir actually, of course, it supplies all sorts of financial analysis.

Joe Lonsdale:

But a really good example this year is, you needed a common operating system in about 35 countries where you had hundreds of sources of data from hospitals, and from governments, and from various other players in the ecosystem, to have it come together, and it had to be delivered to the head of state to make decisions on PPEs, and make decisions on lockdowns, and etc.

Joe Lonsdale:

And whether or not they made the right decisions, that’s a thing we could debate about quite a lot separately, but 35 countries all chose Palantir, because Palantir was able to, right out of the box, safely and securely, with the privacy, and bring all the data together. Make sure only people who have stock in it are allowed to see, and create a common operating picture for the leaders. And so, Palantir really kind of showed off this year what it could do that no one else could right away when that crisis dropped.

Ryan:

No, it’s a fascinating software. And I think a lot of people in the general public hasn’t seen graph theory being used to create this linkage analysis that creates new insights. And it is changing, I think, a lot of the way organizations think about solving problems. You’re also the founder of 8VC, which has some awesome portfolio companies. Can you talk a little bit about running a venture capital firm and what it takes to A, raise the capital, because that’s always hard, raising capital, and B, what you guys are focused on?

Joe Lonsdale:

Yeah. Well the first funds are always hard to raise, unless it goes well. Then it becomes not as hard, obviously. We just closed our fifth fund earlier at the beginning of this year. The big thing in venture capital is having talent networks. I don’t think anyone has a response that should be running a venture capital firm and hasn’t helped build a few of the big companies, at least one or two of them.

Joe Lonsdale:

And so we have talent networks where we know who a lot of those people are, who know how to build these things. And we know how to measure them, we’ve done a lot of time with people work. And then you spend a lot of time going deep on industries, getting advisors who are running things in big industries, and asking them about ideas, asking about new possibilities, getting their feedback, kind of building your own judgment on what’s possible.

Joe Lonsdale:

And so, our firm has about 70 or 80 advisors who are, the guys used to run logistics for Walmart, or used to run UPS on the logistics side. The people who used to be CEO of GSK, or who [inaudible 00:32:09] United Healthcare. Just these people, depending on the industry, people who are running it. And then you need to be able to take the new good ideas and get their feedback, and get their help when something is good, pushing it and going to the right people.

Joe Lonsdale:

And the biggest thing with a venture capital firm as anything else, is your people. So I have nine amazing partners, the investment team is really strong. I have all sorts of operational people who support us in different ways, and help us make sure we’re inviting people we need to see, and connecting to the deals we need to see. And just having amazing partners who themselves are entrepreneurs, themselves know these spaces really well, and are respected, and are asked for help. That’s what you got to do with [inaudible 00:32:45].

Ryan:

And you’ve told me you’ve once in a while been on the golf course with Mr. Schwab. Who’s a better golfer? You or him?

Joe Lonsdale:

Oh, I’m not to close to him. He’s a senior champion, and over at Cyprus I noticed about five of the last years, which is a way ahead of where I am right now. But I did get a few birdies last time I played there.

Ryan:

Well, you started a company called Addepar, which has become a big player in the RA space. Can you talk to me a little bit about what you saw to want to go into that business? And how has it changed over the years?

Joe Lonsdale:

Oh, well you know this better than me, almost all of the solutions have people frustrated with them. We have all sorts of problems. And I realized that there hadn’t been a Silicon Valley tech culture, going after this space. And getting into it, didn’t know how hard it was. It was a lot more messes. Speaking to Schwab, when we first hooked up our solution to Schwab about, gosh, must have been almost a decade ago now, and we were starting to do the reportings. And ah, there was all these errors we must have screwed up.

Joe Lonsdale:

And then we realized, after triple checking things, actually Schwab was sending some bad data. And we said, “Wait a second. How did Schwab send bad data? What’s going on? This must be an exception.” And then it happened with the others too. And it turns out, Schwab’s a great company, Fidelity’s a great company, the data in this space is really messy. So you have to have all sorts of layers of checks, and fixing your costly fixing. And obviously, those guys send bad data, you’d imagine there’s 7,000 custodians, a lot of other ones are sitting on a lot of worse data. [inaudible 00:34:10] are often a mess.

Joe Lonsdale:

Getting all your reporting in one place, which is multiple different reports with errors, it’s a huge problem. It seems like RAs spend tens of hours double checking these things when they shouldn’t have to. And if an RA wants to ask a good question, yeah, it’s kind of similar to what we did with the government space is, in the government space we wanted to know what you’re spending on police and fire, you’d have to pay a consultant $2,000 to go run a report for you. Well, to compare it to other places, and to see what you’re doing yourself.

Joe Lonsdale:

It feels a little bit like that in the RA space where it’s really going to report, and that’s an interesting question. You have to hire someone who just meshes it together with Excel spreadsheets for hours, which is ridiculous, you should be able to ask interesting, complex questions of everything, including alternatives. And that was a really big thing for me lately, with Addepar, is how do you move the alternatives toward the digital world? So there’s about 2.2 trillion dollars on Addepar right now, reported through it, about 35% of that is in the alternative space. So that’s getting over, it looks like over 700 billion dollars in alternatives.

Joe Lonsdale:

And right now, there’s just not really a clear winner there. So we’re really investing to make that easier to understand. The other thing I really like is, we have aggregate data, we should be able to teach people things in aggregate, so we’re trying to launch things with investor sentiment stuff, which I’m really excited about. But I mean, just in general, as you know, the volatility, and everything going on in the world, you need the best cloud-based solutions there. So that’s what we’ve been working on.

Ryan:

No, it’s critical. Especially with everybody working from home these days. Speaking of working from home, what are your thoughts on people working from home? Google says they’re going to stay at home until sometime in Q3. Do you think that’s necessary? Or do you think it’s not a big deal?

Joe Lonsdale:

Oh, well I think there are people who have older people in their lives, or who are vulnerable, they definitely should be working from home. I think that if you have a company full of people in their 20s and 30s and 40s who are healthy and who are not interacting often with their parents or with the elderly, there’s probably nothing wrong with those people going in. And there probably is some kind of [inaudible 00:36:09], it’s not the worst thing ever. But you got to be careful.

Joe Lonsdale:

My friend, she just look her uncle last week to this disease. And there is definitely still… All of us are touched by it in different ways, and I would be really careful right now. So, yeah, for young people going in, I think it’s fine. But I think there should be no shame if people want to work from home. I’m personally pretty burned out on all the Zooms from home, but it is what it is right now. We haven’t really gotten a lot done this year, just not having to travel as much.

Ryan:

Yeah. No, it’s been surprisingly low travel season for all of us. But I think we’re finding new ways to get things done. Well, I’ll ask you, so you guys opened up OpenGov as well. And you’re addressing something that may not be top of conversation today, but for sure in 2021 it’s going to be a huge issue. I think the municipalities and states are having tremendous budgetary pressures that will start to really play out next year. Why did you guys open up OpenGov? And what are your thoughts for its future?

Joe Lonsdale:

Sure. Well I think OpenGov, like I was saying, OpenGov and Addepar kind of relate to each other a lot in two different spaces. When we were first pretty successful at Palantir, I was doing some of my first non-profit work in government. And I wanted to understand how California government worked, and why it needed to tax us so much. And so we kind of filed all these information requests, and we got them to make all that stuff transparent, where they were spending money. And they put it all online, it was called California Common Sense, and US Common Sense.

Joe Lonsdale:

And we basically mapped out, and it was very [inaudible 00:37:35]. And we realized that the government was actually quite efficient in some areas, and in other areas it was spending two or three times too much. And no surprise, the areas where it was spending so much, it often had government unions and other special interests, right? Who were kind of distorting how they did things.

Joe Lonsdale:

And so we put this online, and a lot of controversy. But we got over 1,000 news articles on it over a period of months, and we kept putting out new data. And a bunch of cities contacted us. And they said, “Oh, this is really interesting. Can you do this study for us? Where are we spending money well? And where are we spending money badly?” And I said, “Oh, this is great. Just send us your data.” And they said, “How do we send you the data?” And we said, “What do you mean how do you send us the data?”

Joe Lonsdale:

And we looked into it, and most cities were running off these 20 or 30 year old black and white, black and green screens. And if they wanted to send data they had to pay an IT consultant, and they couldn’t access their own information. Usually cities have a city manager, and a city council. The city manager just didn’t really have access to the data at her fingertips, nor did the council. So it was just like, “Wow, this is a mess.”

Joe Lonsdale:

So we decided, let’s start a SAS company with modern technology to stay on top of all their data, and to make it available to them for processes. And OpenGov now has over 30 software packages, and helped them on their budgeting, helped them on their transparency for citizens, helped do their permitting and licensing, just all sorts of things we’re doing for cities now. And kind of rewriting the core of the city, and make it work more efficiently in the cloud. And that was just obvious, an obvious gap. The only firms that existed were really old ones that private equity had [inaudible 00:39:01], and weren’t really innovating on. So we decided there was a role for us there.

Ryan:

Yeah. I mean, state and local governments to perform more efficiently, that seems like that’s a very bipartisan issue.

Joe Lonsdale:

Seven or eight trillion dollars to spend. It’s bipartisan, except for the people who are making money off of the inefficiency. So, it turns out there’s a lot of special interests who don’t like when you go in and try to fix these things.

Ryan:

Mm-hmm (affirmative). [inaudible 00:39:24].

Joe Lonsdale:

I noticed that in a lot of big family offices, and a lot of big areas have the same special interests. There’s eight or nine tech guys they’ve hired over the years who have kludged things together. And they are super threatened by something coming in from the outside. So [inaudible 00:39:36] both have their proponents and their opponents, depending on who they are. Yeah.

Ryan:

Yeah, I mean competition, some people that are fat and happy don’t like the competition coming in. But I think you always need to look at two things today in the wealth management space. One is, what’s the conflict of interest of some of your supply chain? And then two, is it the best solution? Like as you said earlier, what’s possible today. And we owe it to our employees and our clients.

Joe Lonsdale:

Well, that’s a hard thing to do to overcome special interests around you, because they’re very comfortable. And they make your life very miserable for a while as you fix it.

Ryan:

Absolutely. So, let me ask you a different question. So you’ve been on op-eds, and you’ve participated in many conversations about a problem that I totally agree with, which is that, and maybe I won’t frame it exactly as you would, but from my optic, folks in Silicon Valley don’t want to really… Not everybody wants to work with the military, or the intelligence community. How big of a problem is this? And how should the country address it?

Joe Lonsdale:

Sure. Well you have a lot of people who are very, very progressive, who don’t really see themselves as US citizens, they see themself as being here because it’s where the center of their tech job is, but they’re globalists, and a lot of them are… I think I equally see America as a force for bad and a force for evil and a force for problems in the world. And so of course they don’t want to work with the government based on that.

Joe Lonsdale:

And I think it’s a huge problem, because the best of the technology world in general has been very disconnected from our military industrial complex now, for a few decades. And Americans are just so used to be so dominant, we have so much evidence of all the money we spend on it, how much we crush everything in the Gulf Wars. And just, we just assume that we’re the best in the world at this stuff, and we don’t realize that there’s innovation going on in China, in Russia, even in Iran, that in some areas they have some of the innovation that we have.

Joe Lonsdale:

It’s just, it turns out that in WWII, in that era, it really was about how much money you spent. You could spend the most money, innovation was very expensive. The best people would go along with spending the most money, and you could pump out more tanks, and pump out more planes, and you could just be the best in the world. And the American economy itself may be the best in the world.

Joe Lonsdale:

That’s not how military stuff works anymore, this is a huge paradigm change that the average American just doesn’t understand, hasn’t had time to think about. And what really matters now is the asymmetric nature of warfare, where the very, very best innovators, the small teams, come up with ideas and come up with systems that are faster and smarter, and able to outmaneuver others.

Joe Lonsdale:

And whether we’re talking about electromagnetic pulse systems to turn off electronics in the battlefields, whether we’re talking about hypersonic missiles. We still spend 13 billion dollars on these beautiful aircraft carriers that a handful of hypersonic missiles could just wipe out very easily. [inaudible 00:42:29] is actually very naïve. If there’s any conflict with China the aircraft carriers are a joke. We need submarines and we need space-faced weapons. And we need the [inaudible 00:42:37].

Joe Lonsdale:

And it just is a whole different military we need right now. And so, yeah, I think it’s a huge problem. There are some of us, my friend Palmer Luckey, he started Oculus which [inaudible 00:42:47]. He just raised money at two billion dollar evaluation for a new defense company that has nine figures of revenue and is crushing it. I’m building a new company in the P space that I feel very strongly about with top talent with… Turns out you can do things with the chips, and AI, and stuff now, you couldn’t do 10 years ago. It’s very important.

Joe Lonsdale:

So yeah, definitely trying to do more on the defense side to keep us ahead of China, ahead of Russia, ahead of our adversaries. And I’m definitely horrified by the hundreds of billions of dollars we waste in defense that we call defense spending that’s actually more like cronyism and jobs programs.

Ryan:

Well, are we behind China today in the tech arms race?

Joe Lonsdale:

No. So, I mean, there’s lots of different parts of this. We are still overall ahead of China. China is gaining very quickly. There’re certain areas where they have things we don’t have. There’re certain areas where they have answers to our stuff where they can very easily wipe out things we spend 100 times as much money on, whether it’s our craft carriers and ships, or other different scenarios right now that they’re very thoughtfully able to counter us.

Joe Lonsdale:

Is the average IQ of the Chinese military leadership higher than American military leadership? Probably. Because they force the very best people to go into it, and because they scour, they have a billion people to choose from, and they bring new men. Is it possible we have some better strategists? Of course, it’s very possible. But the fact that they have their best people going into the innovation part of this, that they have their best people working on these issues, it’s a very big challenge for us.

Joe Lonsdale:

And there are some great people on American defense as well. Not having the best and the brightest from the tech sector go into it for a few decades is a huge problem. The people running the NSA now have no idea how their engineers are, they’re not nearly as good as they should be, they’re not nearly as good as my engineers. I can run circles around the people who run the CIA and the NSA, that’s why I started a 20 billion dollar company called Palantir that fixed some of their technology. But it’s just still a crisis today. They’re still hiring number three, number four people.

Ryan:

And as a technologist, do you think Space Force is going to be an impactful moment in history? Or do you think it’s just political maneuvering?

Joe Lonsdale:

Well we definitely need something like Space Force, whether or not we… I mean, I think the two dollar bill is pretty cool, with the Space Force logo on it, I don’t know if you guys have seen those. But I have one of them behind me.

Ryan:

No.

Joe Lonsdale:

No, no. So those are pretty awesome. But whether or not we’re going to celebrate the Star Trek like logos, I don’t know if that really matters. I mean, what does matter is that we start investing more in the types of things that are going to be fired into space, and they’re going to be fighting for the top of the ground as well, and they’re going to be protecting satellites. And I just, the time that’s up in space, we have to get right.

Joe Lonsdale:

So yes, in as much as we’re doing defense technology, I’d much rather have 15 less spaces in the US that are bounce programs, and 40 less giant ships that are easy to destroy for adversaries, and take all of that money and put it into things like Space Force, sure. That’s probably a better use of money.

Ryan:

Well, at this point, I’d like to ask you the six questions we’ve been asking everyone in the second half of this year, just kind of taking a survey and a pulse. It’s called the human factor. And they’re usually yes or no questions, kind of first thing that comes to mind. And if you want to expand on any of them. But, here we go. It’s, first question is, if there was a COVID vaccine today would you take it, yes or no?

Joe Lonsdale:

I probably wouldn’t take it right away, I’d wait and see a little bit longer.

Ryan:

I’m with you on that. I’m with you on that. Who do you think wins the election in November?

Joe Lonsdale:

Oh gosh. I don’t know. It seems like the left has a bit of an edge, right? But these polls are so hard to tell.

Ryan:

Yeah, it is close, very close. What type of shape of economic recovery do you think we’re in today?

Joe Lonsdale:

I think we’re just throwing massive amounts of money at the economy. So it’s really unclear what’s going on. And it’s probably to healthy have a recession for a few quarters at some point in the next year or two, to clear out a lot of the now investment.

Ryan:

Totally agree. Is there anything that you’ve achieved this summer when you’ve been on quarantine that you’re particularly proud of?

Joe Lonsdale:

Other than welcoming our third daughter, I started quite a few more companies than usual this year, since I’ve had extra time. We just raised 700 million dollars into a [inaudible 00:47:03] at 750 per 80 that we started this year. So that’s pretty cool to create a company like that in less than a year in this.

Ryan:

Just an extra month you had on your hands. That’s amazing. On there any silver linings that you see in the economy for 2021?

Joe Lonsdale:

The way these things work is that you probably want stuff that’s just not sustainable to go away. And if we’re going to have a healthy economy, we probably need a recession. I guess, unless people are just hoping for not a recession, and that’s the main focus. For me I just, I care about the fact that we’re running our industries efficiently and not being wasteful. And overall, if you do have a recession, you probably clear out a bunch of stuff, and you make the economy probably back to a point where it’s healthy, and where it can sustain lower unemployment for a long time.

Joe Lonsdale:

So I don’t have any strong opinions on different sectors right now overall. I think it’s pretty obvious there’s just massive demand for vocational work that’s going to increase. You’re going to have a ton of demand for jobs. And anyone who’s not lazy is going to be able to get a job in America over the next couple of years, is my view, as long as we don’t really screw up the policy.

Ryan:

Agreed, agreed. Is there anything that you’re watching right now, listening to, or reading, that you’d like to share with our listeners?

Joe Lonsdale:

What have I been reading lately? I have something right here actually. I’ve been reading a bunch of Churchill’s writings, which has been pretty fun recently, his first World War. And a bunch of Churchill and Niall Ferguson. But those are just the usuals, you guys probably already read all that. But it’s been very entertaining recently. And then, I’m doing a bunch of science papers on self-therapy, but I don’t know if the listeners are going to be interested in that.

Ryan:

On, you said, self-therapy?

Joe Lonsdale:

Yeah. There’s all sorts of different things going on there, they’re pretty interesting.

Ryan:

Interesting, interesting. Yeah, we’re really focused on, I think, wellness and health. Because a lot of the folks in wealth management are a little bit older. And as they’re enjoying the fruits of their labor, building businesses-

Joe Lonsdale:

I’ll give them a quick take on something if you’re a little bit older. So there was a Nobel Prize level discovery by Yamanaka, where you could trigger a certain part of the genome and it changes cells back to age zero. And using their genetic information to remember. And it’s just a pretty crazy fact. It basically turns them to pluripotent stem cells, which can become anything.

Joe Lonsdale:

And they more recently figured out, this is probably the same thing triggered during fertilization. So when a sperm and an egg meet they have to go back to age zero. And it’s just a crazy fact. Because if you think about cloning, like a sheep, you take the cell from the adult sheep, you can trigger the same type of process, and you clone it. And then the clone, the animal lives a normal healthy life. And so that basically implies the information was already in that cell to live a whole four more healthy lives. The cell already knows how to be young again.

Joe Lonsdale:

And so it’s pretty clear from all these studies that aging was, in some ways, was evolutionary choice. If we didn’t age, [inaudible 00:50:10], but either way, if we didn’t age it’d be problematic for populations, and they’d take up the resources and die out, so aging is an evolutionary thing that’s kind of built in. But therefore, if you want, you can actually eliminate aging by using these things.

Joe Lonsdale:

And so, one of the applications of this in cancer is, you take your white blood cells that are older, you turn them back into pluripotent stem cells, turn them back into white blood cells, and very quickly are able to kill a lot of cancers, which is something a lot people are doing right now in the lab. And different, with animals and stuffing, and testing. And but this technology seems quite promising, not only for killing cancer but for reversing aging. So there’s some pretty crazy stuff going on right now.

Ryan:

Yeah. I really feel like we’re at this tipping point where the world is going to shift tremendously, and quickly, from bio-life sciences. I’ll ask you, I’ll leave you with one final question. What is your view on artificial intelligence? Does it ever become aware? And do we have something to be afraid of as the human race, to compete with the machine overlords?

Joe Lonsdale:

Well, I’m very optimistic on the next 30, 40 years. There’s obviously ways we can manage to embrace socialism, and kill investing, or embrace getting into war with China. There’s all sorts of bad things that can happen. AI to me is not nearly as scary, because as AI gets better, it actually, I mean, you already see all the [inaudible 00:51:33] people hate AI, that’s how you know AI’s not so scary, because AI will do things that the [inaudible 00:51:37] don’t like, because it just actually reflects reality back to us.

Joe Lonsdale:

And so, and as much as AI is a realist, and it can figure out better ways of doing things, and it can figure out ways of augmenting us, which I think is the most likely thing, it’s not something that bothers me a lot. You’re not going to get… Most people when they think of something they don’t like they think of a stupid person in power, or they think of an annoying person in power. But, I think if AI helps us run things in ways that are just really wise, because it does get to the point, at some point where it has some aspects of these wisdom, to me that’s a lives thing.

Joe Lonsdale:

So obviously, there’s lots of dystopian ways you can imagine what happens here, but I actually think it’ll create a huge amount of wealth and help a lot of people. And that, if there’s a future of humanity, it’s actually quite bright, if we keep embracing innovation, and keep embracing a bottom up society where everyone’s in power to contribute.

Ryan:

Well Joe, welcome to Texas. Thank you for being on today with us and sharing your thoughts. And always, keep making America great. I appreciate you.

Joe Lonsdale:

You too. Thank you Ryan, appreciate it. Thank you.

Ryan:

Thank you for watching Non-Beta Alpha. And before we go, please remember to like and subscribe on Apple Podcasts and our YouTube Channel. This is Non-Beta Alpha. And now you know.

 

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Ryan Morfin: Welcome to Non-Beta Alpha. I'm Ryan Morfin. On today's episode, we have Pini Althaus, CEO of USA Rare Earth, talking to us about the supply chain glut in rare earth minerals. This is Non-Beta Alpha.

Ryan MorfinPini, Welcome to the show. Thank you for coming on today.

Pini AlthausThank you for having me, Ryan. Good to be here.

Ryan Morfin: So you're an investor and a miner in rare earth minerals. Can you share with our listener base, what are rare earth minerals? Why are they important and why is there a geopolitical race going on globally?

Pini AlthausYeah, I mean, rare earths are an extremely ubiquitous part of all advanced manufacturing or technology manufacturing today's day and age. Several years ago, I had not heard too much about rare earths myself. I was not that familiar with it and being involved in this sector, in this company, for the past few years has given me an education of course. And I mean, I was sad to hear that 50% of all imports into the United States contain are earth elements and it runs the gamut from consumer electronic devices that we use every day. Our cell phones, our laptops, most communication devices, medical equipment. So there's a tie with COVID, which we can touch on at your discretion. Electric vehicles, defense equipment. So pretty much anything or everything high tech today has a rare earth element or critical minerals contained within them.

Ryan MorfinAnd what are some of the names of some of the more important rare earth? I know there's lithium for batteries, but what else is considered in this category, critical?

Pini Althaus: Yeah, so lithium is a separate category to battery material. The rare earths are 17 rare earths. The four, let's call it, key rare earths that we're focused on at our company, the four rare earths that go into the permanent magnets. And these are the magnets that are found, there are a number of them in your back of your cell phone or an iPad. But if you look at an F35 striker jet, you've got about a ton of rare earth magnets in those. And we've got two heavy rare earths and two light rare earths is part of the permanent magnets. You've got dysprosium, ytterbium are the heavies, and then you've got neodymium, praseodymium as the two light rare earths. So those would be key rare earths that are the focus.

Ryan MorfinAnd you use these in, I guess, in military applications as well, but historically, where has the United States sourced the rare earth for supply chain?

Pini AlthausYeah. And that's the shocking part. We've been securing those materials from China. So China controls the rare earth sector and has done so for the past 30 years or so. And it was a significant misstep on the part of the United States, allowing China to have this control. And actually this wasn't a question of China coming in and doing anything nefarious as far as stealing IP or anything. The US government made a conscious decision about 30 years ago to allow China to come to the United States and acquire the processing capabilities for rare earths. So just as part of some background, you've got the rare earth materials containing various mining projects, but once you extract them, you have to then process them and they go through certain phases before they get to the magnet phase. And China, the thought process was let China do the mining, let China do the processing.

Pini AlthausWe don't need to do that here. And we'll buy the materials from China cheaply and the premier of China at the time, Deng Xiaoping made the comment, he said, "The Middle East has oil. China has rare earths." And unfortunately we weren't smart enough to understand what he was saying. And the Chinese understood that the future of manufacturing is going to revolve around control of the rare earth and critical mineral supply chain. So if you think about it today, Ryan, we cannot build... Forget about consumer electronics and medical equipment. We cannot build the equipment that the US Pentagon or the US armed forces require, whether it's F35 fighter jet, Tomahawk cruise missile, communications equipment, without going to China and obtaining those materials. And it's obvious to all that this should be extremely alarming. We've seen China use this as a weapon, if you will, as far as how it interacts with other countries back in 2010, when there was a dispute between China and Japan on the East China Sea.

Pini AlthausSo China cut off rare earth exports from Japan for 40 days. Japan obviously being a significant user of rare earth elements for their high-tech manufacturing sector, that was stopped after 40 days. But in fact, it was President Obama that first made the United States aware of this, formed a division within the Department of Defense to handle this issue, but not much has happened. And we continue to be relying on China for these materials. And what has been made about trade war with China and whether the trade war is really the impetus for China withholding rare earth exports. And that is a huge misnomer. Whilst China had been talking or implying that they would cut off rare earth exports, the truth of the matter is that China, under it's made in China, 2025 mandate, its belt and road initiatives and others. And you seem to control the critical minerals and rare earth supply chain so that it can continue its dominance as a manufacturer or a global supplier of these materials and finished products.

Pini Althaus: It's the backbone of its economy. And in fact, China has become a net importer of rare earths from different countries like Miramar and others. So with that, they are decreasing the exports to countries like the United States, Japan and others.

Ryan Morfin: And was it ever a risk that the Chinese were going to turn off the exports of rare earth to the US during the trade war? How close were we to that? And was that ever some saber rattling that went down during trade negotiations?

Pini AlthausYeah, I think it was saber rattling. I think it would be paramount to an act of war. I can't say with any authority that that would not happen, but it would be probably, aside from war itself, it would be one of the most significant acts of war cutting the United States off from the ability to procure rare earths. But that being said, I mean, if you look at, as an analogy, the oil and gas sector and the reliance of the United States had for many, many years on OPEC countries to supply us with the oil. And we had embargoes and we had price manipulation by OPEC. This is far more significant given the ubiquity of where these rare earths go. And yes, we're always under the threat that China can cut off exports under the guise of a trade war or for any other nefarious reasons.

Pini AlthausBut I think even more importantly, to just as the natural run of the course of things with regards to their business and their desire to maintain themselves as the global leader in manufacturing and exporting of goods, China is in a position now where it actually requires these materials for their own domestic consumption and can legitimately cut off rare earth exports by stating that they need it for manufacturing and that would actually be somewhat correct. So we're in an extremely dangerous position here with this reliance on China. And it wouldn't just be China. If it was another country, it would be similar issues, not to the same extent, but reliance on one country for these materials is dangerous.

Ryan Morfin: And it's been mentioned in the past that in 2010, China flooded the market to really kill all the competitors in the rare earth mining industry. Where was the World Trade Organization during this period? And how did that play out and how does that set the chess board for China to run the tables?

Pini Althaus:

Yeah. So the WTO stepped in when China cut off rare earth exports from Japan, I think it lasted for about 40 days because the US and Japan protested the WTO, and they stepped in and China resumed exports. While I'm not an expert on these trade matters, one thing that I am aware of is that one of the reasons why China had to resume the export of rare earths was it did not legitimately need all the rare earths for domestic consumption. So therefore it was a nefarious act, if you will, to cut off rare earth exports. Now that has changed, which means China have to cut off rare earth exports today, they have a legitimate case to say that they require these materials. There's a shortage of these materials and they require them for their own domestic purposes. It is the backbone of their economy and there's very little we could do about this today, which is why it's becoming an even more urgent issue.

Ryan Morfin:

And the US government started stockpiling some of these after that incident. Can you talk a little bit about what DOD and DOE has done to start making sure that there's not a critical supply shortage going forward, and is it enough?

Pini Althaus:

Yeah, again, there is a national defense stock pile, and there are materials still that the United States needs to procure in order to shore up its stockpile. There are magnets, the finished magnet products as well, the United States government needs to stockpile. Again, there's a limited amount that the United States government has. It requires approval from Congress, whether it's in the NDAA or other approvals from Congress, to allocate monies for the national defense stock pile of these materials. That being said, there's no endless supply of these materials. And unfortunately, the apparatus, the way it's set up right now with the US government, it's going to continue to require having a secure supply chain of those materials for many, many years to come. So it's not a question of stockpiling for 10 or 20 years, and then this complacency and saying, we'll kick the can down the road. But keep in mind as well, Ryan, that US government accounts for low single digits of overall rare earth imports into the United States.

Pini Althaus:

We're talking about defense contractors, we're talking about the manufacturing sector. The direct impact this has on the economy, jobs, the automotive sector, and others is significant. So it's not just limited to the United States government. If you look at over the past couple of weeks, the sanctions that China have put on Raytheon, Boeing, Lockheed, et cetera. I mean, the question is where are they going to get those materials? And if we go beyond that, you need rare earths for the 5G network. Now that Huawei has been banned from installing the network, not only in the US but other countries, we have to have the ability to get a secure supply of these materials as well. Which currently, again, trying to control the hundred percent. So it runs across the board, both for government, defense and manufacturing in this country.

Ryan Morfin:

Well, and so help me paint a picture for our audience. Does China have all the mines for rare earth, or they're the only ones who started mining it? Or are their mines globally dispersed and nobody's been doing the actual infrastructure to do the mining?

Pini Althaus:

Yeah. So finding rare earth projects or rare earth elements is not the difficult part. It's finding them in significant quantities that makes a project economically viable. And part of that consideration are the environmental rigors that companies in the West have to adhere to. And China, even by their own admission, have had a complete disregard for mining these materials and even for processing these materials. And in fact, just the last week or so, the BBC did an expose on this, 60 Minutes has done an expose on this. But the Chinese have not denied this and have talked about cleaning up their act, but it has an effect on the bottom line for what the costs of mining and processing are if you have no environmental standards to adhere to. So China have exploited those rare earth projects they have, primarily in inner Mongolia, and have brought a number of projects online and quite quickly, and in a significant way, with a complete disregard for the environment.

Pini Althaus:

So it was seen as an environmental no-no in the West for many years. Now, what's happened over the past few years is you're starting to see rare earth projects in different parts of the world sprout up. You've got the Mountain World project in Australia owned by Linus, which is a producer of Nd and Pr, neodymium and praseodymium. So two of the light rare earths. They may have some heavy rare earths coming online at some point in time. And you've got Arafura, which is another company in Australia that we're working with to assist them with their processing so they don't have to send the materials to China for processing. But really these are a drop in the bucket for what the requirements are for the United States. And certainly what the requirements are for allied countries, the EU, et cetera. So there is a race, if you will, worldwide to start bringing projects online. The Chinese are very active in trying to secure assets outside of China.

Pini Althaus:

So in Africa. They have ownership of a project in Greenland. So there is somewhat of a race. The Australian government has stepped in and has started limiting the ability for China to own, or have ownership in, or off takes for the Australian rare earth projects. And that's part of the strategic Alliance between Australia and the US. Canada, similar thing as well. There are a number of projects that are looking to come alive, but these projects are, for the most part, will take many, many years to come online. We have to expedite the process. We have to assist with a [inaudible 00:14:41] supply chain and the domestic rare earth sector, because previously investors have been scared off by things like China flooding the market, which is not a possibility at this point in time, given that China can't actually afford to flood the market. They are already very heavily subsidizing their mine to magnet supply chain there.

Pini Althaus:

This is more now a case of being able to get production from non-Chinese sources so that the United States and allies have a viable, secure supply chain of these materials. And it's a concern worldwide. We speak to governments all over the world, and we're all facing the same issue. Some more than others, especially countries like Japan, that don't have their own rare earth projects there and are reliant on Australia where they've made some investments there. And in the United States, they've made an investment recently in Africa. So there is this race, if you will. And I think we've got a five-year window here to at least stand up a few projects worldwide. Otherwise we've lost this race and we will be dependent on China for many, many years to come. And Ryan, it's a bit of a hypocrisy. If you look at it where you've got materials going through clean, green energy applications, like electric vehicles, wind turbines, et cetera.

Pini Althaus:

That we're sourcing these materials from China, where they've, again by their own admission, has been complete environmental devastation to water bodies around these mines and processing facilities, to the communities. People have been getting sick around these projects yet we're putting these materials into our electric vehicles or wind turbines. It makes no sense at all. And people are starting to wake up to this. And that's why the sector is starting to see a lot of support come out of Congress and bi-partisan support. And in fact, it's one of the only bi-partisan issues right now in Washington. And it's good to see that some things decided to move in the right direction.

Ryan Morfin:

And is there a special process? You talk about the expense, is it really difficult to mine these? You have to go through a special chemical process to extract and clean and purify. Is it a lot harder than, say, gold or silver or some of the other, we'll call, more traditional elements?

Pini Althaus:

Yeah. It's all about the processing to some extent. So if you look at MP Materials in California, which used to be Molycorp before they went through their bankruptcy. They are a miner of Cerium and Lanthanum, which are two of the light rare earths, the lower valued light rare earths. Given that they do not currently have processing technology, they are sending those materials to China for processing where China is tariffing those heavily. Linus is also, they're doing their processing work in Malaysia and elsewhere. So it's really about the processing at this stage. One of the things that we've done, after we put out our PDA last year with our upgraded resource, which now includes a significant amount of lithium. We make a decision that, based on the test work that we had done around our processing methodology, that we were not going to send our materials to China. That it's paramount for us to do this work in the United States and in a collaborative effort as well.

Pini Althaus:

We've been asked by some of our investors, "Well, why would you be looking to help other projects with their processing?" And the answer is simple. There's no one project or one company that's going to put China out of business or make a dent, or somehow be able to take care of the overall demand worldwide for rare earths and critical minerals. And it's very important for us to have processing capability in the West. So that was the impetus for us opening up our own rare earth and critical minerals processing facility earlier this year, which we did in Wheatridge, Colorado. And in fact, we've made some significant progress on the method that we're using for this. And we're starting to collaborate with Australian companies, Canadian companies. We're currently talking to a group over in Europe as well, because this has to be a collaborative effort.

Ryan Morfin:

How does Europe solve for these problems? Do they have this better under control than the US?

Pini Althaus:

No, they're in a far worse position than we are. The EU commission recently put out a report, I think, a couple of months ago that the requirement for rare earths is going to increase tenfold within a short period of time. Lithium 18 times. They don't really have rare earth projects. Again, there are the Greenland projects, which people have heard in the news recently. Those need to further development work so they don't have rare earth projects ready to come online there. There are a couple of lithium projects that are spread around Europe, but for the most part, Europe is in an even more precarious position. If you look at Germany with the auto manufacturers, you look at the big companies like ThyssenKrupp and others, all these countries and companies are looking for alternatives to China, because we've already seen in the news about China withholding or reducing exports of some of these rare earths that are required for these industries.

Ryan Morfin:

And you mentioned earlier the regulatory posture of the US makes it difficult to mine. Is it becoming a more bi-partisan issue that we need to maybe relax some regulation around the mining exercise, to incentivize private sector to come in and start producing this? Or is the Republican party versus the Democratic party on two separate pages of music?

Pini Althaus:

Yeah. Good question, Ryan. I mean traditionally the Republican party is obviously being more pro-mining and in favor of less regulation when it comes to these things. With regards to our project, we're on Texas state land. So we don't trigger federal environmental permitting at this point in time. And obviously Texas being Texas, a mining state and oil and gas state, things are a lot easier in Texas than they are on projects on federal land where the Bureau of Land Management controls the environmental process around that. But the thing is here, and I don't want to step into what other companies are doing, et cetera, but we do need to be reasonable about allowing projects to come online if they're adhering to environmental standards that are acceptable worldwide. And what we do know, is that China is destroying the environment and cities and water bodies around their mines and processing facilities.

Pini Althaus:

We have standards here in the United States, and I think what we need to do is make it easier for companies to mine, while at the same time protecting the environment. And there are ways to do that. And we're definitely seeing buy-in from Congress, from both sides, with regards to looking how we can stand up a secure supply chain. And, obviously under the Obama administration, they had very strict regulations when it comes to mining. And that's changed under the Trump administration. Hopefully what we start to see is some normal middle ground that'll allow other projects to come online.

Ryan Morfin:

And typically in these rare earth mines, is it amalgamation of different minerals that are all consolidated together and you have to separate them out? Or do you ever find pure play, Europium, I can't even pronounce some of these. Gadolinium, Cerium. I mean, are they all mixed together and you've got to filter and sift them through, or are they pure play mines?

Pini Althaus:

No, they're generally they have a mix. So they're polymetallic projects. They have a number of different materials. Some projects, you more to what we call the light rare earths like MP in California or Linus in Australia. Our project is actually on the opposite end of the spectrum. We have a very high concentration of heavy rare earths. That being said, we do have to go through a process of separating these materials. But the case of our project where we've got 30 materials. We're not going to produce 30 materials. We're not going to market 30 materials. So what we're doing is we're focusing on the key materials that are marketable, that we need for permanent magnets, lithium as well, and working on the separation and the optimization of those materials in particular. But we're all faced with the same processing challenges and that is something that can't be set.

Pini Althaus:

There's no easy way to do this. There are different technologies that have been used in different parts of the world. So predominantly there's a process called solvent extraction, but it's big, it's bulky, it's not benign. It's a bespoke solution for one particular project. So it doesn't work for feedstock from other projects. What we've done is we're using a processing technology that's actually been around since the 1940s. It was part of the Manhattan Project. It's called continuous ion exchange. In fact, the Chinese use it to increase the purities from 99.99 to four nines, five nines, and even six nines. So for some applications you require higher purity levels. It's a far easier processing method to scale up and to take feedstock from other projects. In fact, we've demonstrated for the Department of Energy that we can take coal waste from Pennsylvania and do high purity separation of rare earths using our processing methods. So it's not a step that can be skipped unless one needs to send it to China for processing, which is not going to help us with our objectives here.

Ryan Morfin:

How many other, we'll call it, going concerns on any other businesses that are doing this, that are trying to, I guess, start the development of these mines. Are you guys one of a few or are you one of many? And is it an international or just a US game? Who's leading the charge at going after this?

Pini Althaus:

Yeah, well, I'd say the Australians are leading it outside of China right now. You've got some really good projects in Australia. Again, more skewed toward the light rare earths. There's one more heavy rare earth project in Australia, which is not yet producing. The United States, you've got MP Materials, you've got Ucore in Alaska, you've got the Bear Lodge project in Wyoming, which is also another light rare earth project. So as far as a heavy rare earth project that looks like it will come online in the near term, that would be our project. In Canada there are a couple of projects there as well, and again, more skewed toward the light rare earths. But we really need to get as many of these projects online as possible. Because again, I don't see it as competition. We all have a problem doing supply agreements or offtake agreements for our materials.

Pini Althaus:

In fact, one of the things that we're going to have to consider is looking at potentially scaling up our production, based on the demand that we're already starting to see. And I think other companies would find that as well. So it's all about the economics of the project. You have projects that were economically viable back in 2012 or rare earth prices with 35% or so higher than they are today, and are not necessarily viable today. So that's the challenge as well, economically viable projects. And we've got to get as many of them online as possible. It takes many, many years. I mean, our project has had over $70 million put into it to get to where we are today, and we're close to getting to the production scenario. It all revolves around processing at this point in time.

Pini Althaus:

We'd be very happy to see another couple of projects come online, because this is extremely important for national security and for the economy as well. I mean, if you think about it, Ryan, if you've got a billion dollars of rare earth materials, that translates into a trillion dollars or I should say trillions of dollars of finished product. So you've got a magnet in your phone there that's worth a couple of dollars and the cell phone's a thousand dollars. And electric vehicles and defense applications even more.

Ryan Morfin:

Yeah, everyone has one of these iPhones now, and there's tremendous amounts of rare earth on the circuit boards here. And I think people take it for granted that that supply chain is not secure right now. So one question for you, there's talk of this maybe medium term to longterm, but there's talk about mining in space. Do you think that's a feasible option in the longterm, medium term? What are your thoughts on that?

Pini Althaus:

No, that's just ridiculous. I mean, we're trying to find ways to make mining on earth economically viable. I think the cost of going up to space would be more than what our capex will be bringing our entire project into production. I mean, we've got about a 350 to $400 million capex to bring 130 year mine life into production. I'm not an aerospace expert, but I think sending a rocket, building a rocket ship and sending it up, I think maybe on the fuel alone, you could bring a couple of projects into production. So unless we have a fortunate situation or an asteroid lands on earth, and fortunate if it lands somewhere where we don't care, I don't see how that happens. And if it's big enough, it's a problem as well. It's nonsense. And even, options aside of the deep sea mining for rare earths, I mean, you've got all sorts of environmental issues around that as well. I think we need to look at projects that we can bring online, that can be done so in an economic way, that can be done so in an environmentally responsible way.

Pini Althaus:

I mean, one of the things that we've done at our project is we've got in excess of 60% of the materials that have come out around top, will have a clean green energy applicability to them. So we're using the benign processing method. We're going to be using renewable energy on site. In fact, we will likely be putting a solar farm on site as well. We've talked to a couple of companies that have approached us about that, and we'll be a net producer of power for the surrounding area. So there are ways to do it which don't affect the environment. Obviously if there's a project that's situated on a sensitive area, that's a unique situation for that specific project. We've seen it with the Pebble project, which is not a rare earth project. The Pebble project in Alaska where their environmental concerns is we've been recognized by both Republicans and Democrats, but we have to be reasonable about the projects that don't have environmental concerns.

Ryan Morfin:

So Pini, in season two, we ask all of our guests a series of six questions. They're usually, yes, no questions, but trying to take a survey of our conversations. And if you want to add a little context to the yes or no, feel free, but here goes the first question. If there was a COVID vaccine available today, would you take it?

Pini Althaus:

Yes.

Ryan Morfin:

Who do you think is going to win the election?

Pini Althaus:

Which election?

Ryan Morfin:

The US election.

Pini Althaus:

Well, I think it looks like Joe Biden's going to win it, but I think what happens, if we go past January six from my understanding is that the house will vote on it and it's one vote per state. But I don't know if I see it getting there at this point in time. I really don't have a crystal ball.

Ryan Morfin:

Third question. What type of economic recovery are we in? What type of shape is it taking? A V-shape, W, U, L?

Pini Althaus:

Yeah, I think 2021 is going to be challenging. I think we've been, and rightly so. I mean, we've had no choice as of almost every other country. We've been printing money for the past year because of COVID. And I think we've got to brace ourselves that, at some point in time, the chickens come home to roost. It was a necessary step. People needed it on an individual level. Businesses needed it as well, but I think we've got to do whatever we can to stimulate the economy, give people confidence to go out and work again, employ people. So I think we've got to watch ourselves, especially in 2021. And I have some concerns, but long-term, I think the approach in the United States is a healthy one.

Ryan Morfin:

During lockdown this summer and quarantine, was there anything in particular that you accomplished that you're particularly proud of?

Pini Althaus:

Yeah. A great amount of family time, which, if you would've asked me a few years ago if I could sit at home and be at home for six months, I would have told you absolutely not. I wouldn't be able to do it for six days, but it has... I'm sure it's done this with a lot of families as well. It's brought families together. We had a baby actually last year on Thanksgiving. So I was doing a lot of travel at the time and thought I wouldn't get to see my daughter in her first year or couple of years too often. And being home with her every day is actually been just the most amazing experience. So thankful at least for some silver lining in COVID.

Ryan Morfin:

Are there any silver linings that you see in the economy going into 2021?

Pini Althaus:

Yeah, I think we've gone through an absolute beating and it looks like we've got the ability to come out of it. And I think that's a testament to how strong the economy was built up in the years preceding COVID. So overall I remain an optimist. I mean, we are a country built on opportunity and going out and making it happen. And we're not a socialist country sitting and waiting for people to send us paychecks or wealth distribution or anything like that. I think the American dream still lives on. I think if you go out and you're willing to work and put your head to it and heart in it, I think we do have the ability to climb out of it. So if we look at what the economy is doing over the past few weeks, it looks like it's starting to rebound. And to me, that's assuring because it could go completely one way as well.

Ryan Morfin:

And the last question is, is there anything that you're watching, or listening to, or reading today that has been impactful on your thinking that you'd like to share with our audience?

Pini Althaus:

Yeah, that's a good question. I think it's been more personal stories. The news, I sort of take that in context or with more than a grain of salt. In some cases stay off the news channels for a number of days at a time, it became quite repetitive. But I think on the personal side, talking to friends, my family's all back home in Australia, they've just come out of 110 day lockdown, which we can't relate to that. It's been very trying on them and seeing the fortitude that they've had to come out of that and stay intact. I think the mental health issues that will come out of COVID are going to have a far longer effect than the economic issues. I think we're going to have to focus on mental health issues in this country for a long time to come.

Pini Althaus:

The impact on kids has been significant with regards to lockdown or remote schooling, et cetera. But to see people come through it. I think it's a testament to people in general and to the country and other countries as well, to see got that fortitude and survival instinct to try to get through whatever adversity we can. So hearing the personal stories, the challenges that people have gone through, I think it's made me a lot more aware of things that I have to be thankful for and where we can help out other people as well. I think we have to be united going forward because there are things...

Pini Althaus:

I think one of the things that COVID has shown us is we can get into this complacency and life goes on and we go one day to the next. And all of a sudden we get hit by something that affects everybody equally. I mean, COVID, whilst there were groups of people, whether it was the elderly or people with underlying health conditions, that got hit the worst. I mean, we all got hit in some form or another. So really, this should be something that unites us, not divides us.

Ryan Morfin:

Well, Pini, I appreciate you coming on today to talk to us a little bit about the supply chain crimp on rare earth and we'll definitely keep an eye on it and would love to have you back in the future.

Pini Althaus:

Thank you, Ryan. Thanks for having me.

Ryan Morfin:

Absolutely. Thank you. Bye-bye. Thanks for watching Non-Beta Alpha. And before we go, please remember to like, and subscribe on Apple podcasts and our YouTube channel. This is Non-Beta Alpha, and now you know.

 

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