Josh Wolfe of Lux Capital explains why the "buy-the-dip" strategy will no longer be effective.

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Over two decades, Lux Capital has grown to manage $4 billion in assets by investing in emerging science and technology companies and making long-term bets on contrarians in the space.

Josh Wolfe, a futurist fund manager at Lux Capital, has a keen understanding of scientific innovation and technological advancements that investors should closely monitor. In a recent interview with CNBC's Delivering Alpha newsletter, Wolfe shared his investment outlook and identified the most promising opportunities currently available.

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Can you provide your broader perspective on the markets, specifically in the tech and growth sectors? Do you believe that we are experiencing a slight deflation or a complete reassessment of the industry?

Josh Wolfe believes that in some sectors, it's a mix. He thinks that there is a flat tire in some sectors. He estimates that there is a greater than 60% chance that we are in March of 2000 for a broad segment of the market that has been very overvalued. This means that we're probably going to see an 80% decline in some of the most popular names over an 18-month period till October 2001. The 80% decline happened by 50 basis points, 1% drops over a long period of time, which was a measure of people's belief, clinging, that this was going to continue. Josh Wolfe thinks that buy the dip has been the mantra for five to six years, but it's no longer going to work. He believes that there will be revaluation across specifically some segments of the market, but largely across high-growth tech and speculation and the stuff that they specialize in.

In light of this, what advice are you giving your portfolio companies?

The most critical decision for management teams and boards is how to allocate the unprecedented amount of cash that has been delivered to their balance sheets. In our view, the best course of action is to "husband" that cash by investing it wisely and building a strong balance sheet. Instead of chasing growth during a potential recession, it is essential to focus on consolidating customers, technologies, and positions to prepare for a potential M&A boom in the future.

What is the impact of the slowing down of capital circulation in Silicon Valley on the valuations of companies and the capital they are able to obtain in the future?

Wolfe: Yes, yes, and yes. I believe that certain segments of the market will have an abundance of cash. We have raised a significant amount of funds, including a billion and a half just six months ago, with a lot of dry powder left to invest. However, the speed at which we are deploying this capital will be much slower than it was a year or two ago. As a result, I anticipate that limited partners (LPs) will experience indigestion, general partners (GPs) will slow their pace, and private market companies will see valuations decrease, similar to what is happening in the public markets.

Typically, there is a lag in companies taking lower valuations due to market conditions. However, recent reports suggest that companies are starting to accept lower valuations due to the current economic climate. Despite this, private companies have maintained decent valuations over the past few years, with many doubling or tripling their valuations. Some believe that this time may be different, and we may see a return to the 2002 period where startups will have to bootstrap for a while.

In the private markets, the latest valuation is determined by the marginal price setter. Historically, this might have been SoftBank or large crossover hedge funds that do private deals. These funds typically bought the winner in the company without much regard for the price, as long as they had great terms. However, if you are senior preferred in the capital structure of these companies, you are in a great position. In the future, private companies will go through a discriminating narrowing, with crossover hedge funds, late-stage growth investors, and even early-stage investors being more selective. This will be driven by a new acronym, SOBS, or the shame of being suckered. People do not want to be taken advantage of in this current moment.

I find that acronym appealing. Do you think it will endure, given that many investors have been waiting, particularly those who have been in Silicon Valley for a while? I've heard the term "tourist investors" used to describe public-private investors who engage in both sides, crossover investors, who don't anticipate staying in the market for an extended period. Do you concur with this assessment? Will we eventually see people abandon this market entirely?

It is common for industries to experience a significant decline in the number of entrants over time, with the wise person's actions in the beginning mirrored by the foolish actions of others in the end. This phenomenon occurs within sectors and investment sub-sectors. For example, between 2002 and 2007, the rise of activist hedge funds led to a pruning of the industry post-crisis. Despite this, there will be survivors, great investors, and new firms that emerge. I predict that between 50% and 75% of active investors in private markets will disappear within the next few years.

Are you actively investing your capital, cautiously observing the outcome, or simply waiting it out for the long haul?

For our existing companies, we have strong balance sheets and advise them to consolidate their positions quietly or loudly, but either way, just do it. For new investments, we are becoming more selective on pricing and are not participating in any auctions or deals that close quickly due to FOMO. We are playing the long game and investing in cutting-edge areas with few investors and companies, where we can capitalize on a company with a strong management team and make sure it is well-capitalized for five to seven years. We are not passive investors; we are active investors who sit on boards and help grow these companies from the beginning, providing them with talent, competitive intelligence, and future financing, risk reduction.

In our business, selecting the best meal from the best restaurant in the best city in the best state in the best country is like making an investment decision. However, just like how Godzilla can ruin your dining experience, ignorance of the macroeconomic context can ruin your investment decisions. It's crucial to pay attention to what is happening in the capital markets, inflows, price setting, and what the Fed is doing. Many people are not focused on these aspects, but we always incorporate a little bit of macro understanding and the global situation into our micro investments and security selection when investing in entrepreneurs and companies.

Are there any particular opportunities that excite you at the moment?

Wolfe highlights two major themes that the company is capitalizing on: hard power and soft power. Both of these themes relate to geopolitical instability, including the revanchist Russia, rising China, cold war between these two powers, bifurcation of financial systems, surveillance systems, and internet technology. On the hard power side, the company believes that the US and its allies need cutting-edge technology in aerospace and defense. For the past 20 years, there has been a Zeitgeist where people in the military industrial complex have been reluctant to provide cutting-edge technology to the frontlines of war, but the company is now focused on investing in the defense industry to provide this technology.

We anticipate a revival and reappearance of the next generation of primes and individuals who will challenge Lockheed, Raytheon, General Atomics, and others in the air, space, land, and sea. These emerging competitors will leverage autonomous systems, artificial intelligence, machine learning, advanced tools, and technologies that are costly, risky, and often overlooked by government customers. We believe it is crucial to focus on these geopolitically important opportunities. Moreover, there are now over 14 sovereigns competing to reach space. This intense competition has led to a race to launch satellites, antennas, communication systems, and other technologies that were previously invested in across various platforms, from launch to space exploration.

The tech of science is expected to experience a significant boom and demand worldwide, particularly in the U.S. pharma and biotech industries, academics, and government labs. These technologies will provide a competitive advantage and enhance global prestige.