Future Building: Investment Insights with Lux Capital's Shahin Farshchi

Hi Shaheen, welcome to Venture with Grace today.

Great to be here Grace. Sorry about the IT issues that were plaguing me earlier.

Oh no worries. I feel like the, the most advanced venture investor always have the like small.

They can't figure out how to use their microphone you mean or set up their camera. Yeah, that's right.

You are not alone. Like, but anyway, so today I want to just like go through like some of like basically I would, I like so I basically I research all of your like past interview videos. Like I learned about like you know, your journey, like pursuing your PhD at Berkeley I believe and like you started your own company and then the company kind of wind down and then someone gave you advice on you know, why don't you build relationship with VCS earlier and then you googled like who's like the best venture investor in the space you were in and then Lux Capital came up and then you code DM them and then you do did like free diligence with them and then when they close their fund in 2007 and then you join the fund as a investor. So let's start with like I feel like Lex Capital have some of the most like frontier investment overall. How does the money flow in the industry and then why do you pick what you picked? I am a Andrew investor in a robotic company and so when I was researching the space, literally every single other end investor I've talked to, they said don't do it because of like there's intense amount of capital required. I wonder how does the money flow flow in the entire industry? And how do you kind of like select the big bracket of things that you want to focus on?

That's a great question, Grace. So the catalyst for capital flowing into these industries is driven by narratives and these are narratives that are created and delivered by great entrepreneurs. And so the concern that one of your fellow investors brought up, which was these companies need a lot of capital, that is absolutely true. These companies to raise in some cases billions of dollars to be able to achieve their goals. However, if the founders are capable in telling great stories that attracts great talent, that allows them to punch above their weight and show a lot for very little capital. You create this virtuous cycle of great people doing great things, attracting more money. And as an early stage investor you will be rewarded, not punished for being early in the capital stack. You will only be punished as an early stage investor if the company has a hard time raising money. And typically companies have a hard time raising money when there is a high perception of risk. But if a executive team is able to create comfort for the investors that if you take a risk on us, you, you will be handsomely rewarded, then investors will be more than willing to take that risk.

Okay, so let's define risk and then also like who are they selling to? So I sell some of your portfolio company that are like acquired by big company or some IPO'd and I think like I wonder, like what's your thought on like you know what, which group of particular sector that actually money can be generated or like the risk can be seemingly lower or I guess like how do you think about like what sector in specific to approach and when you are thinking about the exiting strategy since like in, like who are the people that will also invest in the sector that you feel like are doing a good job?

So we believe that the best people will ultimately attract even better people and build interesting businesses that will ultimately be valuable. If you look, if you take a very high level kind of look at successful businesses, it is companies that are able to build a product that is very unique, that is selling into a large and growing market if not creating a market of their own, and is able to do so under very attractive unit economics where customers are willing to buy in troves and pay, and gladly pay a high price because of the value that they're getting. And the company is able to maintain a monopolistic position. That is the kind of North Star that we're aiming for. So we don't necessarily have to engineer an outcome. To your earlier question, do you try to solve for an ipo? Do you try to solve for M and A? We solve for solving hard problems, solving hard problems that people are willing to pay for. And it is our hope and expectation that through solving those hard problems a high growth, high margin business can be built as a result. And if you're successful in doing that, then the options are abundant. From there there's going to be a lot of acquisition, acquisition interest in the company. There's going to be a lot of interest on behalf of the public markets for the securities in the company so the company can go public. So there's all these options that then become available. So you don't necessarily have to build a company to be sold in order for you to make money as an investor. You have to focus on building a great business. And building a great business always starts with attracting great people. We're attracting people who can attract great people. And that's our job as investors. We kind of look at, look at ourselves sometimes as glorified recruiters in our ability to be able to attract people at our companies or attract people to start companies that we would fund that can then create that virtuous cycle that I was alluding to earlier.

I wonder, okay, so can we walk through like your day to day on how do you shape your either like human connection diet or like content diet. So I think, I believe when you were talking about like the Mosaic ML funding team, they were, they funded some other company in the past and then it was a great outcome. I wonder, I guess like there's two kind of like questions. One is you are a very technical founder so you understand that like a particular technical aspect of things but like it was not really a good business when you were building your first business. And I, I feel like one of the biggest challenge for like you know, PhD turned entrepreneur is they probably have a really strong technical mode or like they will be amazing at recruiting technical talent. But in the end of the day it's, it have to be like a business to function right. So some of them like a particular sector, let's say biology or like you know, they're selling it to the hospital or they're selling it to the government like as a big buyer. So like they, they identify where the capital is going to come from and then they build a solution to solve a particular problem that leveraging that technology. However, they're not the industry expert. They probably don't have go to market strategy and they probably are not necessarily going to be the top salespeople like or like build a sales funnel within a specific sector. How do you identify like the best, the most attractive opportunity among those high technical mode PhDs?

Yeah, yeah, that's a great question and that's a challenge that I face every day. So you know, your earlier question was around like, you know, how I consume, you know, content and relationships. And I admit that I don't have a very strict content consumption regime. I wake up in the morning and I read Fortune, you know, I read WSJ Pro. I look at transactions that have taken place recently. I look at what investors have to say, what's top of mind for entrepreneurs. I try to get a better, I try to get a sense for the zeitgeist, just to kind of, you know, frame my kind of mental thought process for the course of the day. And really grace, like I wish I had a better answer for you, but like I try to get in front of as many smart people as possible during the course of the day. Like I've had the Fortune you know, before this call, to have spoken to a handful of extremely talented founders and investors before this call. So it's always a matter of maximizing interactions with people that I view that are more intelligent than I am. And that helps kind of keep me on my toes and helps me kind of consume that diet that you alluded to earlier to your comment on Naveen and Mosaic. I met Naveen when I was a postdoc, and he was evaluating schools to join for his PhD, and I was trying to recruit him into my lab, and he politely turned me down. But we did get into talking about venture capital. In fact, I was. I was working pro bono at Lux at the time, kind of part time, while I was doing my postdoc. And I told him about Lux, and he thought that was very compelling and interesting how we focus on. On the sciences and hard problems. And we reconnected when he was, you know, well after his Ph.D. and when he was starting Nirvana, which was one of the first AI chip companies. And we had the fortune of partnering with him in Nirvana, and he came back to us when he was thinking about his next company, which became Mosaic. And so in the case of Naveen in particular, you had somebody who was very bright and who was very good at communicating a problem and a potential solution and attracting people that would help him navigate the various markets that the product would go into. And as you know, like, these are very complex problems that need very different types of people to solve. So if you have a PhD coming out of a lab who knows a lot about a very, very narrow field, they obviously need to be complimented. And the more talented ones are the ones that know their shortcomings. They quote, unquote, using Donald Rumsfeld's quote. I think. I think it was his, that people who know what they don't know, they are able to go out there and recruit people that complement them and bring with them an insight into how do you take this technology and turn it into a product, how do you build a supply chain around it? How do you build distribution? How do you go after the customer? How do you make this product into something that the customer can consume? And obviously, that happens after you spend a significant amount of time identifying your market. That requires an army of people. So even though we like to think of, our brains tend to be very simplistic, and we like to attribute success to individuals. But as you know, it takes an army of people to take these companies to where they are. And you need leadership to build the kernel of that army, of that village. That will be able to go out there and execute and be able to deliver that message to talent and deliver that message to investors that would ultimately underwrite the vision.

I wonder when, let's say, let's say you like, I guess like I have a couple questions there. Like one is you invest in like I, I feel like it's a very diverse set of companies. There is you know, space tech, there is, you know, self driving car. So like basically there's a lot of different things that you invest in. How do you quickly educate yourself to become an expert in an industry and how do you do diligence on the people that you invest in? Be said, like, let's say, I think the easier way I could think of as a more like junior person in the space, I, I could just like let's say calling other people in the PhD program to ask if this person is legit. But like how do you kind of like quickly understand the technical problem they're solving and how do you quickly identify how does a business work within the industry? Let's say if someone's selling like you know, a space technology kind of product, how do you even understand the problem? Because of the problem is like very abstract to a degree, I guess. Like what is your diligence process look like for the company side?

Yeah, yeah, so, so we don't typically, I mean there have been occasions where we've had a thesis around a certain space or a problem and we have either created a company to go out and solve that problem or we have identified the best team that's solving that problem. That has certainly occurred. But what happens more often is that a team comes to us that has identified a problem and has come up with a very compelling plan to solve that problem and convinces us that we should be part of that journey. So what we do as a firm is multifold. We come up with themes and theses that excite us and we proactively try to go out and attract or find those people that are solving that problem. And that just comes with spending a lot of time researching the space. I had a few of my partners, for example, spent a lot of time looking at the microbiome and they developed a thesis in the microbiome and they went out and they hired the best scientists and biologists that were working on the microbiome and created a company from scratch to go out and build therapeutics that are built on top of the microbiome. And that company is called Caliope that we're very excited about. Even before that you know, my partner Josh had a hypothesis around nuclear waste and we built a company that was doing nuclear waste remediation and that became a very successful company. So we went out, we found the best scientists and the best operators that were doing work in nuclear waste remediation. But that, that only applies to a subset of our companies. What we try to do more is build a very, very large surface area in order to attract smart people that are doing interesting things. So it's not like as if entrepreneurs are coming to us talking about problems that we've never even heard of. Like, we do have a baseline level of knowledge in a lot of these areas that we invest in. We find the experts that are smarter than us and they tell us about where the market is going, where the technical trends are going, what problems are emerging. And, and usually they have far more credibility than we do in understanding these industries. And so we find ourselves very fortunate when these kinds of individuals are coming to us and giving us the opportunity to work with them. And so it comes from a combination again of identifying themes from being educated on and understanding of what's going on in the general sector. So for example, you mentioned space. Like, we have quite a few space companies in our portfolio. We're mindful of the challenges that they're facing and new opportunities that they're identifying that they may or may not be able to go after. We have a lot of friends and contacts in the industry that we're in regular touch with. So when somebody comes to us with an idea, we have resources to be able to vet the idea and a level of understanding of the general industry to be able to gain conviction around what we're being pitched.

I wonder when you are thinking about. So I guess like, who is the expert that you're referring to? Are they more from like the, they're like leading a research lab or are they more from the industry? Like they are working at NASA, SpaceX or something? Like, who are the experts?

So we have the fortune of having been in this business for over 20 years and we have hundreds of companies in our portfolio. So when we get approached by someone with an idea, there is a very, very high likelihood that there are multiple individuals in our portfolio who are experts in that space and we're able to quickly call upon them and say, you know, what do you think of this? How do you feel about this market? Who's tried this in the past? So our existing portfolio is actually a huge resource for us that we draw upon quite frequently in addition to our network of people that we know. So whether it's scientists, whether it's other executives at large companies, whether it's other entrepreneurs, we do our best. After having met so many people over the course of our 20 plus year journey, we have the privilege of being able to tap into that network in order to be able to either confirm or get comfortable around something that we're being pitched that may or may not comport with an existing kind of point of view that we have.

Okay, so I'm gonna like do a quick like. So I guess like, okay, let's say if you encounter, if you're like a earlier stage investor and then you encounter a company that mines asteroids. So like, how would you kind of, if you have no knowledge in the space, you literally googled, what is that? Like, what is asteroid? How do you kind of do due diligence on this company?

Yeah, that's a, that's a good question. So we, it's hard for me to even come up with a. Think of an example where we've seen something that we've never seen before. So, for example, we saw our first asteroid mining company back in 2013. So we've had 11 years of different kind of flavors of interstellar mining companies or moon mining companies pitched to us over the years. So we have a lot of context to be able to draw from in the occasion where I can, I can give you one example. You know, we had the privilege of meeting Peter Beck, he's the founder of Rocket lab, back in 2000, I think it was 2012 or 2013 as well. And, you know, he came to us with the thesis that you can 3D print many of the components of a rocket, and in addition, you can use electrically driven parts in the place of mechanically driven parts that will greatly reduce the complexity of a rocket. And you can use composites in places where, you know, exotic alloys are otherwise used to build a rocket. So there's a lot of new concepts coming together that we were not familiar with. Obviously we were familiar with SpaceX that had taken the approach of using conventional technology with modern manufacturing techniques to reduce the cost of launch. But here you were talking about adding all these new technologies, and that was relatively new for us. And it took a little bit of work for us to identify the experts in every single one of those individual spaces, whether it was, you know, how to mold composites. You know, you can mold composites and make, you know, yachts and race cars out of them, or, you know, or spacecraft out of them, but then like using them for rockets or the fairings was, was seemed like a new concept for us at the time. And also 3D printing, you know, it had been around for a couple of years. And so we had folks that we knew in our portfolio and our friends, for example, Rick Fullop, who later founded Desktop Metal or had just founded Desktop Metal at the time, give us his view on that. So you know, for us, like we try to find very creative ways to understand or at least get comfortable with what the founder is pitching us. But ultimately, Grace, like we're not in the business of double checking or trying to confirm whether or not what a founder is saying is true or as possible, we try our best to be as knowledgeable as we can of the space going in. And if we're not knowledgeable, using the resources that we have in our portfolio to get smart and ultimately getting comfortable with the vision that the founder is presenting to us through our level of confidence that other people that are smarter than us will also likely buy into the story.

Okay, so I wonder since it's kind of like so based on what you just mentioned, like, okay, so one thing that you said in another interview was like, you feel like non technical people could succeed in the space of investing in hard complex companies if they are really good at like asking questions or you know, figuring out the space. Can you unpack a little bit on like how would you approach it if you're Non Technical, non PhD starting from today?

Grace, I'll even take it a step further and I'll say that in many occasions non technical people are even advantaged relative to technical people because when you're technical, you're knowledgeable of a certain space and we're all human beings, we're not machines. And as a human being, if you view yourself as an expert, you may infer incorrect conclusions by nature of just not knowing what you think you know. If you are not a technical person, you know that you don't know and you take it upon yourself to go find the right person to answer the question and you may end up as a non technical investor with, with, with better facts to help you make a decision versus being a technical person that thinks is under the false assumption that they may know better than anybody else and they don't ask the questions. As a, as a good investor, you need to be able to ask the right questions and go to the people that have the answers. That's the extent that your technical knowledge should be used, not to be able to actually solve the problems themselves. Because if you're investing, then by definition your technical Prowess or skills are already obsolete and so you shouldn't be relying on them to be able to double check, you know, what a founder is claiming or to be able to validate whether or not something is possible. You still need to go out there and ask people, you know, even when it comes to areas in my own field. So I'm a, my background is in circuit design and mems. When I see a MEMS company, when I see a micromanufacturing company, I go to my, you know, my former lab mates and friends and then in the field and ask them, hey, like, you know, what do you think of this? I don't assume that just because I'm an expert I have the answers. And I feel like the technical people do have a tendency of following this trap of thinking that they know everything, whereas they don't. And you know, the old Mark Twain quote, it's, you know, it's not what you don't know, it's what you know that just ain't so. And that is an issue that a lot of these technical investors could find themselves in.

I wonder. So earlier you mentioned about like the storytelling skills and then like are they, is this founder able to convince like you know, us and better investors or like more like a complex, like, like more industry investors to invest in the company later on? And I wonder. I have two questions on that. One is like what kind of questions that you would ask during these diligence process and then how do, how do you make yourself comfortable, quote unquote to you know, get involved with a company and if you're younger, like how do you build up this network? And like your investment thesis, since you started in your PhD program, you were scouting for Lux and like Lux was like a very young baby. It was like just almost starting the first round and to now you guys are on Fund 8, I believe. So like it's, it's been, it's been a while. So like how does the journey kind of evolved and if you're starting out today, how do you kind of build an edge in this space?

So Grace, I'll, I'll start with the earlier one comment that you made. I just want to clarify. So when I say we look for founders that are able to sell their vision effectively and attract people that are smarter than us, I'm not just talking about future investors, I'm talking about executives. I'm talking about engineers. I'm talking about getting partners, like vendors, people on the manufacturing, supply chain, distribution side to work with them, to partner with them, to take a risk on them. It is the entire ecosystem being willing to buy in to the vision and not just investors, because investors only account for a portion of what the company needs to succeed. What's most important is talent, and it's harder to sell talent than it is to sell investors. If you're a quality engineer working for a great company, solving interesting problems, why would you leave to join a startup? Well, if there is a, a, if there's a founding team that can really sell a vision and convince the founder that they're going to be doing something that's far more challenging and far more impactful for less money, then that is a huge win for the founding team. They have to be capable of doing that, and that is not easy. There are very few executives that are successful or effective at doing that. They have to convince partners to take a risk on them versus just going and working with more established companies. They have to convince customers to make a bet on them to basically pay for the promise that the company is, is claiming. And so the aspect of sales and selling a vision and holding yourself accountable to that vision is something that applies to the entire ecosystem and investors are only a member of that. So we have to put ourselves in the position of the early engineers, of the customers, of the suppliers and the vendors. Like, hey, do we buy into this? Are we excited about this? Would we be excited about this? Would we take a risk on this? And if the answer is yes, then an enthusiastic yes, then we absolutely want to get on board with and invest in the company. To your question on for younger investors, I touched on this in the past and I'd be happy to reinforce it here. As a younger investor, it's just really important to build a strong network of nodes around you that you can touch on when these new opportunities present themselves. So you can find comfort in answering these questions. And it's also for the new investors, building a large surface area so you can get access to these amazing, to meet these amazing founders. So being a great investor is two things. It's being able to find the opportunities and it's also being able to vet the opportunities. And both requirements. Just being out there, being visible, being present, and building as many relationships as possible.

By building relationships, what does that entail?

That's a good question. It entails really building a level of mutual trust and a sense of that. If, because our most valuable resource is time, ultimately you want it. Like, I need to convince you, Grace, that if you spend time with me, if you build a relationship with me, it will ultimately be mutually beneficial. If you're, for example, if you're, if you're a scientist and I'm an investor and I'm trying to build a relationship with you, then you as a scientist need to be convinced that by spending time with Shaheen, I'm going to be exposed to some really interesting ideas that I'm going to help him figure out. For example, he will be providing me with great advice as it relates to furthering my research or perhaps even spinning out companies. So being able to create a sense of kind of mutual benefit and mutual intellectual stimulation ultimately I think is what all of us should be, so should be, should be solving for as we build out our networks of people around us.

I want to be mindful of time and I want to, at the end I want to learn more about what kind of, I guess how do you keep yourself updated in the sense of technology as well as the entire talent ecosystem in the frontier technology or deep tech sector.

Yeah, so. So on the, on the technology side it is, it is really staying close to my companies because the companies are on the cutting edge of technology and staying close to what they're doing. Understanding what they're doing really helps me keep abreast of that. I have companies in my portfolio do everything from launch rockets to take spacecraft from low energy to high energy orbits, to warehouse and, and logistics automation to semiconductor chips, to compilers for compiling code onto accelerators, to robots that automate different protocols used in drug discovery. So like there's, there's a huge kind of range of companies pushing the state of the art in the portfolio. And I stated and I stay close to them to understand that. In addition, again to having a lot of friends and I have a lot of friends that are professors in various fields that I stay close to and ask like, what's on your mind? What's exciting you these days? And they tell me about what excites them. So, you know, it's just, it's just really a, an outcome of just being out there and being curious that leads to being plugged in to where things are going. And I just, I wish I had more time to be able to do it more.

Amazing. On that note, where can people find you?

People can find me on Twitter, they can find me on LinkedIn or they can shoot me an email. My email is my initials SF like San Francisco Lux vc. So drop me an email.

That's an amazing email handle by the way. Thank you so much.

Thank you. Grace. Loved it. Thanks for the questions.