Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: My guest today is Scott Nolan. Scott has led a fascinating career. He was employee #35 at SpaceX, helping develop some of their critical early systems. He then went on to more than a decade investing at Founders Fund, where he invested in SpaceX and many other of the defining companies of this generation. More recently, he started a company – incubated at Founders Fund – called General Matter. The topic of today's conversation is his time investing at Founders Fund, and more recently, his decision to build this company full-time. General Matter is attacking one of the most interesting bottlenecks in the United States – the enrichment of uranium to create power in nuclear power plants. We don't do any of that in the United States today – we've outsourced it overseas for years. Scott and General Matter are seeking to reverse that through the enrichment of uranium here in the United States. We touch on all aspects of what he learned, both as an investor, and already building this company in its early years. Please enjoy my conversation with Scott Nolan. Scott, I think an interesting place to begin our discussion is actually with a worldview type question, which is how you figure out what to work on. If I just plot your CV over time, you worked at SpaceX very early on, you've been critical to Founders Fund's success, now you've started your own business and are basically devoting your time to that. And even the path between those things looks very interesting, like when you switch from one to another intrigues me. And so I'm curious both from your perspective and maybe from the Founders Fund perspective too, since that was a shaping experience for you, how you think about this question of what to work on and what to spend your time on.
· Scott Nolan
[00:00:00] S1: My framework has always been just do something that's useful, do something that you feel like you're making a real contribution and using your talents to make some type of positive impact. It's what important problem is there that's not going to get solved otherwise that somehow I can contribute to. I think all three major things I've done have fit that in some way. If we take them one at a time – SpaceX, Founders Fund, and now General Matter. SpaceX, I was just an engineer coming out of undergrad. I had worked at Boeing during college. Just saw what the incumbent aerospace industry was like. Didn't want to work in that, didn't believe it was going to change anything. And so aerospace background, always wanted to work on rockets, aircraft. Asked myself, okay, what's the most exciting thing to do? And it was, I still want to be in the industry. I know the incumbents are not going to make an impact, but there's this new company, SpaceX, that is going to ultimately own the entire space launch industry, which I believed even when it was 30 people. It was to me a no brainer to go work there right after college. I interned during college. I saw what it was. It was like, yeah, these guys are going to win. I want to be a part of that. That was an industry that had stagnated for decades. No incumbent was doing anything interesting. They were all just writing government cost plus contracts. The US assumed that space launch was a nation state capability that would never be a commercially interesting thing to do, and it just had to be subsidized forever. And so the result was cost plus contracts, layers of subcontractors, dozens deep, and no ability for anyone to do something really novel. It was going to take a new company. So that led me to SpaceX early on, and then found my way to Founders Fund in 2011. So I was actually at Stanford, in business school. Started in 2010, was quickly voted most likely to drop out. It wasn't exactly – I wanted to get to work. I just wanted to do stuff. And so I thought about dropping out in actually the first or second month of business school to join Square. And so this one path was maybe go join Square. And Keith, who was at Founders Fund for a while, was the person trying to recruit me to drop out and go to Square. In the meantime, I met Peter, I was sitting in a class that he was doing at the law school.
· Scott Nolan
This one was called Technology, Sovereignty, and Globalization There was many different readings. There were things about theory of government, how would technology change the power dynamics around government versus industry, and he convinced me to join his startup in the venture capital space. And the basic premise was VC needs innovation, the incumbents won't do it. And circa 2005, the concept was founder-friendly. If you looked at all the most successful companies, they were founder-run all the way to the end. And so the premise was let's give founders back control of their companies and unilaterally support them in building that. That was the 2005 genesis of Founders Fund, but by 2010, when I was talking to Peter, 2011, it was more this contrarian thing of what important companies is no one funding and how can we be the capital for that? The thing that I focused on when I joined in 2011 was really, what set of companies are really promising that people under-appreciate? And I had just come from SpaceX, which was not yet, in 2011, appreciated. Four years later they were landing rockets, and it was obvious that all this stuff was going to work from the inside, but the whole world didn't understand it yet. And so my thesis was, hey, I think there's a huge set of physical world companies that could be really valuable. And this could span biotech, computer chips, satellites, space launch, transportation, infrastructure, almost anything that was not digital. And that this was a huge opportunity area that everybody was ignoring. And then came across this problem of enrichment of uranium in the U.S.'s total lack of capacity in the space, which essentially forced me to go start General Matter. Not that Peter even agreed with all the things in it, but let's explore these concepts. Really kind of out there, interesting stuff. So I did that class for a semester.
· Patrick O'Shaughnessy
[00:00:00] S0: If you think about the 11 or 12 years that you were principally just investing, in what ways did Peter most affect the way that you think about things and vice versa?
· Scott Nolan
[00:00:00] S1: There's many layers to this. Number one was, it was just avoiding trends, avoiding the herd, thinking for yourself. That was probably layer one. The second part was probably that whenever we looked at any companies, Peter always took a very orthogonal view to most people. So there'd be layers of abstraction, instead of just doing a spreadsheet and trying to analyze this investment, why don't we think about why are we even seeing this investment? How should we think about this investment from this very different perspective than everyone else? And so sometimes there would be layers of abstraction that were many layers and you would end up with a really different view on things. It's really natural to just dive in and start trying to understand the business, but trying to develop a very different perspective on it that would yield some alpha. He probably also thought at the time – I think around 2010 – it was all very contrarian, what is no one investing in, what's underappreciated? I feel like that was around the time that he was talking a lot about, we'd made all this progress in the world of bits, but not in the world of atoms. You could be on your cell phone and it was interesting, and then you look around and nothing's changed in 50 years. And so I think he was already thinking about this probably even more than he was talking about, and probably thinking which companies are doing this well, where would someone who could kind of understand the business world and the investing world and then also the startup world come from.
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: How do you think you affected him or changed his mind? [00:00:00] S1: Some of our hardware investments turned out to be pretty good. I think they exceeded all expectations for everybody. So SpaceX, Founders Fund first invested in in 2008 and then what it is today, I don't think many people would have predicted. Maybe Elon could have seen it going to this length. The ultimate purpose is colonize Mars. So inherently it has to become this scale of company to do that, but I doubt anyone would have expected this sort of outcome this quickly. [00:00:00] S0: Maybe it's an obvious question, but what is behind the avoid trends concept? [00:00:00] S1: There's two layers of competition. So the avoid competition thing was a huge, huge part of this. That's definitely a lesson learned. But the competition piece is typically understood as the company level competition. And so if there's a trend, inherently you have many companies going after the same trend. You're going to have new entrants. It's become a thing. It's not about one company, it's about the theme. And if there's a theme that's not about one company, then it's about many companies. And so how is it not the case that they'll compete profits down to economic equilibrium of perfect competition? So there's that piece, of avoid a trend for that reason. But then layer two is if there's a trend, then probably many investors are looking at it and they're pricing it up. Where's your advantage? And so you want to avoid competition on both fronts. And when there's trends, you usually have both fronts.