Scott Nolan - SpaceX, Founders Fund, and Rebuilding American Uranium Enrichment - [Invest Like the Best, EP.467]

Introduction to Ramp

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Invest Like the Best Introduction

1:34Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. If you enjoy these conversations and want to go deeper, check out Colossus, our quarterly publication with in-depth profiles of the people shaping business and investing. You can find Colossus along with all of our podcasts at colossus.com. Patrick O'Shaughnessy is the CEO of Positive Sum. All opinions expressed by Patrick and podcast guests

2:06are solely their own opinions and do not reflect the opinion of Positive Sum. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Positive Sum may maintain positions in the securities discussed in this podcast. To learn more, visit psum.vc.

Scott Nolan Interview

2:24My guest today is Scott Nolan. Scott has led a fascinating career. He was employee number 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 that 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.

2:55General 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

3:25is 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 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?

Founders Fund Experience

3:57My 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, like, yeah, SpaceX Founders Fund and now General Matter. SpaceX, I was just an engineer coming out of undergrad. I had worked at Boeing during college,

4:28just 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.

4:59It 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 U.S. 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, like, do something really novel. It was going to take a new company.

5:29So 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. It 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

6:00and go to Square. In the meantime, I met Peter. I was sitting in a class that he was doing at the law school. This one was called Technology, Sovereignty, and Globalization. There was many different readings. There was 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.

6:32If 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 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 beat the capital for that? The thing that I focused on when I joined in 2011 was really, yeah, what set of companies are really promising that people underappreciate?

7:02And I had just come from SpaceX, which was not yet in 2011, like- Appreciated. 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 ships, satellites, space launch, transportation, infrastructure, almost anything that was not digital. And that this was a huge opportunity area

7:33that everybody was ignoring. And then came across this problem of enrichment of uranium and the U.S.'s total lack of capacity in the space, which essentially forced me to go start general matter. 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? There's like many layers to this. Number one was it was just avoiding trends, avoiding the herd, thinking for yourself.

8:03That 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 like 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 like layers of abstraction that were many layers and you would end up with a really different view on things. It's like really natural to just dive in

8:34and 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've 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 starting to already thinking about this

9:04probably 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? How do you think you affected him or changed his mind? Some of our hardware investments turned out to be pretty good. I think they exceeded all expectations for everybody. So like SpaceX Founder's fund first invested in in 2008 and then what it is today I don't think many people would have predicted. Like maybe Elon could have seen it going to this length.

9:36The ultimate purpose is colonized Mars so inherently it has to become the scale of company to do that. But I doubt anyone would have expected this sort of outcome this quickly. Maybe it's an obvious question but what is behind the avoid trends concept? 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

10:07going 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 get both fronts.

10:38This notion of finding something that is not being worked on or is underappreciated. You made so many investments in companies where this was a thing. What are the common through lines or attributes of something that isn't being worked on but is important? Like that quadrant in the two by two like is or isn't important is or isn't being worked on is important not being worked on as the place you hunted. What are the typical causes behind that being the case? Because it doesn't really make sense that something doesn't get worked on if it's really important. For better or worse they can draw you into a potentially brute force

11:09sort of approach. First few years at Founders Fund I'm looking for great founders I'm looking for under explored ideas it's just lots and lots of meetings. So from the investor perspective unless you have things that you're into that you think are underappreciated by the world and you've maybe been really excited about them for a really long time and why does no one think about this and maybe it's this idea in your head that you just keep digging on and maybe someday you find a company that's actually an expression of that trade then it's just meeting a lot of people and trying to find what's interesting and what sounds really different

11:39and what makes sense. From the investor perspective the attributes are something like hey you meet a founder they seem really smart they're talking about this thing no one's really talking about they're telling you why everyone who's thought about this problem either thinks it's impossible or they're arguing about it in the completely wrong way and if you adjust and come at it from a different point of view it results in a really different solution that has really different business characteristics. When you meet a founder like that who's working on something like this usually they're not just going to give you superficial answers

12:09to convince you to give them money. The conversations with great companies like that always felt more like this person is really into this thing for some reason and when I ask them a question they're not just giving me an answer and trying to bounce back to the surface they're like here's the answer here's the next question you're going to ask and let's take you all the way down the rabbit hole so they like showing it around the space that's how it felt from the investor seat if you think about what are the attributes of industries where this is the case I think a huge portion of them are going to be industries that

12:39somehow just stagnated and I think the thing that's most linked to stagnation is probably being a cost plus industry where there's very little incentive for progress not much incentive to bring the cost structure down and therefore you end up with this fixed market size that never takes off because you just get in a stalemate where all the companies maybe get to like oligopoly status the equation for max profits is just make pricing high enough to the breaking point collect your cost plus revenue and your margins

13:10and then it never becomes a really compelling thing so like space launch for example to some extent defense which you see with Anderl trying to break that to some extent infrastructure like the boring company this is their prime thesis so I think incumbent stagnated oligopolistic cost plus industries are just primed for this If forced to go beyond that definition there's only so many of those and you've probably invested in companies effectively attacking each category or each subcategory a lot of those

13:41doing extraordinarily well what else would you say like there's lots of great founders on investments that weren't in cost plus industries or something what would I find if I went digging on this same thread there I mean Airbnb is a classic huge example when FounderStone invested it was still crossing from kind of a weird backpacking couch surfing air mattress in someone's living room to what it is today and so not that many people were that interested in sleeping on air mattresses in people's houses but that was something that that team was really into

14:11and how do we turn this into something much larger where people can meet each other and have like a really authentic experience when going somewhere instead of just staying in a hotel that wasn't something many people were thinking about and yet when you actually looked at it you realized how big the market could be and if they could cross over to a mainstream thing it could be huge that's one example Sean Parker was on the FounderStone team right when I joined and led the Spotify investment and the internal memo or thread on the Spotify investment was just so well reasoned

14:42and it was because of this history of understanding music and doing the Napster thing and then years and years of trying to find the right company that was taking the right formula I think led to that and led to him seeing the potential of Spotify and why it was the perfect geography to start in and the perfect licensing strategy and so I think it's often just like a really deep interest in something that's of personal interest to a founder and they believe it should exist they believe there should be some way to solve this and everyone's done it the wrong way and here's the right way I think sometimes people are sitting with those ideas for five or ten

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16:13operate smarter and stay ahead of the curve see what Ridgeline can unlock for your firm schedule a demo at ridgeline.ai across all the meetings you did first meetings how did you improve at conducting that meeting to figure out if this was the type of person and problem that you could get interested in it probably wasn't even the meeting itself it was probably just trusting your judgment more so I think on day one it was just okay I don't know anything I'm gonna take a lot of meetings some of these seem good some seem not so good we need to do the work because what do I

16:44know I think early on the intuition was all that you had to go on and I think it's usually correct and then you know I get probably a little bit better at the job in the next couple years get better trying to analyze things understand it that might actually lead you astray I think the analytics might because then you start doing the analysis when you kind of already know like oh I guess we should do the work but you can already know which ones you like in fact you should just concentrate into the fewest number of companies possible and don't dilute your average returns by indexing and then over time

17:15get better at asking the right questions to help harness the intuition or like okay we should dig into this could you think of a single investment that your gut was not flashing yes almost immediately that you like worked your way to get there and did it Airbnb was one of these we did a lot of work on it at the time so founders one did a small angel check early on and then did a much bigger check in the next round and so at the angel check it was still the very informal air mattresses I think

17:46there had been something where some guests completely destroyed a home and there's a whole bunch of controversy around that and then the company took a hard stance on that and said we will reimburse the host and we are professionalizing this and I think that was maybe the moment that you could tell it was going to go mainstream and then founders one made a huge investment but if you just look back at the past you might say oh this seems like a niche thing but if you did the work you could see a bunch of different trends you could see the demographics were shifting to slightly older crowd not just backpackers out of college like some

18:17people had perceived the market share in different markets was increasing a lot we did the work we looked at like every single market sliced market share marketing spend and you could see like all these markets that there were in there were just taking share and becoming the dominant thing so you analyze the data and it was like they're winning it's over they're gonna win there's two other components of the no competition idea one is the valuation and price you have to pay and the second is capital intensity you've invested in lots of stuff that requires

18:48lots of money to get the thing up and running and to revenue and to profitability curious how you learned about those two dimensions of earning high returns that did low competition bring lower entry prices on average and is that something you cared about much once you found someone that was doing one of these things and then also how you think about the amount of capital that you would have to put into the company to make it work the low competition thing typically would be associated with lower valuations but I think that's trying to find value deals in venture is dumb idea it's not the right

19:18plan maybe if you have a very small fund and you can pick up some interesting IP or this company maybe will never be that huge but this is a really good deal and you look at multiples and stuff and starts to look a little bit more like PE or something I think that can probably be okay but for true venture I think it's dangerous because either it says something about the company's ability to raise capital that they're unable to at market prices and unless this is the last round that they need to raise or they really are going to be

19:49a capital efficient business that's probably a risky thing maybe the team is incredible at debt financing but terrible at venture financing and so they're going to switch to debt and that's going to be amazing you could imagine a situation like that but typically if you're meeting a company and it's a crazy value deal it's probably just not going to end up being that good is what I've observed empirically do you think if we did an analysis of the actual dollars deployed by founders fund that more of the dollars would have been deployed once the company was already popular that may be the case yeah if you

20:19look at actual dollars deployed it's probably more the whole concentrate into the winners strategy I think the way that that can still be a good strategy even if the company's popular is a it's popular but not as popular as it will be or be this idea that up rounds it's almost like anchoring on the past versus looking to the future Peter has said this a bunch of times and has guided the founders fund team to think this way it was more talked about in the early 2010s but if you've got a company that was growing steadily but then there's a big up round it's probably the case that that

20:50up round is not even enough up that if it's like a 2x up round maybe it should be a 4x up yeah what's going on there there's that famous quote of his which is the steeper the up round the grid or the under valuation what is actually happening that makes that true yeah people are just anchoring on the past or they're like oh last round was this I guess it should be reasonable compared to last round price and then in reality like okay all that matters is next round price how do we make sure the next round's an up round like what are the catalysts going to be for further increases and so yeah you don't get paid as an investor based on

21:20how close you were to last round's price it's it's ultimately against exit price but the only thing you have to go off of that's actual data or empirical is the past and so people are much more anchored on that what have you learned about how much

General Matter and Uranium Enrichment

21:32to be in love with the problem itself this is a good excuse to talk about general matter too like are you inherently fascinated by in love with uranium enrichment or is there some other big thing going on behind the scenes and I'm curious if you think about all these founders you backed my guess is most of them were deeply passionate about the domain because they had this thing where they could go down the rabbit hole or whatever how much does passion matter in selection of founders from the investor seat I don't think you want to be in love with an idea I think that's a risky thing because then you're going to try and find a way to express that by investing

22:03and you're going to maybe make some compromises on the team because you know this idea is just so good it's time has come but then if the team isn't there 90% of the time it doesn't work then there's a whole thing of course in jockey can you swap out the team but the whole founders one thesis was always no you need the founder to run the company to have this vision and to see it through from the investor side I think being in love with an idea is really dangerous and it can cause you to make all sorts of compromises that come back to haunt you and it can cause you to put good money after bad despite the writing

22:33on the wall but I think on the company side you have to be in love with the idea it's like not that rational to start a company there's a lot easier more comfortable ways to make money if that's the goal so it's got to be about what the company is doing specifically I think smart people who want to make money like there's so many good jobs in the finance world for that or people who just want to build there's lots of places you can build but if you want to actually start a company it better be something that you're really passionate about or you think that the problem is really important so for me no enriching uranium never never was something

23:04I was specifically excited about I was always into nuclear energy I always thought that this was a no-brainer probably the two things from sci-fi from like the 60s was always the two industries we were supposed to have not just from sci-fi but like what our country thought was we're going to be going to space and we're going to be doing things in space and we're obviously going to have nuclear energy we went from burning wood to chemical bonds and now atomic energy was clearly so much more energy dense and powerful and should be

23:35lower cost those were always things I was excited about never had a specific interest in uranium enrichment but then through the course of investing in founders fund went from 2010 just looking at all sorts of different hardware companies first investment I ever made was a satellite company planet labs then did a lot of different things that were outside of pure software last couple years of founders fund drifted back towards almost pure hardware by the end and then really energy where we invested in crusoe energy and understood the whole

24:06stranded supply inside of things and what could you do with that and then invest in a company called radiant which was the inverse stranded demand how could you serve that demand maybe you could serve it with a small microreactor even if that microreactor's output was expensive the stranded demand had to pay crazy rates anyway for diesel generators in a remote Alaskan village for example or an army base and so that's a good starting point fitting the whole founders fund thesis of start with a really small market and grow into a bigger market like

24:36don't worry about your tan worry about owning that market and then grow from there and so yeah my path to understanding the bottlenecks in nuclear energy was having invested in radiant having met so many other advanced reactor companies along the way and then all of them said the exact same thing we're going to make nuclear affordable we're going to make it scalable we're going to take this from huge construction projects to factory built and yet the one thing that's the hardest is not licensing everyone thinks the NRC is impossible to get through but no it's not

25:08that they told us it's actually we cannot get the fuel the fuel comes from Russia only Russia makes it we have to import it that's quite challenging and this was even pre-Russia ban we just need some source of fuel and so I spent all of 2023 looking into this trying to understand okay of the five steps of making fuel what's stopping it is it all of them is it there's not enough uranium is it something about the process and it was the enrichment step and so looked at trying to find a company in the enrichment step to de-bottleneck nuclear and to actually get the nuclear future that we want could not

25:38find anything for an entire year finally decided if this