Shahin Farshchi, Partner at Lux Capital, on leading the deep tech boom & science vs engineering risk

Welcome to Seed to Scale.

We're for investors with backgrounds as founders who met at the engineering school at the University of Pennsylvania.

Tim Young, Nahal Mehta, Hadley Harris, Vic Singh. We started ENIAC in 2009 with more.

Than 80 years of combined experience building our own companies.

We now lead seed rounds and bold founders who use code to create transformational companies. Starting a company from the ground up is really hard. In this podcast we'll be having conversations with some of the most interest founders, investors and influencers about the ins and outs of building an early stage company.

We talk about it all, funding, growth and everything it takes to build a lasting business.

Hi everyone, this is Vic Singh, the founding GP at ENIAC Ventures. For our latest episode of Seat to Scale. I'm excited to be sitting here with a good friend of mine and a true renaissance man in the world of technology. He's an engineer, a founder, an investor and partner at Lux Capital where he's very bullish and passionate about accelerating humanity towards a brighter future through feats of engineering.

My advice is always to really identify amazing talent and let that talent drive you to those interesting themes, those interesting problems.

Armed with a PhD in electrical engineering and over a decade of experience as a partner at Lux Capital, one of the leading high tech VC firms, please welcome Shaheen to our podcast today. Hey Shaheen, great to have you here.

Great to be here, Vic.

So Shaheen, I was super impressed by our first discussion around what it takes to build a cutting edge technology company. Would love for you to just start with your background for our listeners recounting your journey from an engineer to founder to now an investor at Lux.

Sure, I can go even further back. I grew up in the Bay Area. My dad was an engineer so he made me too much watch too much Knight Rider and Star Trek growing up. So I grew up with a passion for learning how stuff works. I went to undergrad during the dot com bubble. So greed drew me into practicing what I knew well, which is programming and learning about computer engineering in hopes of striking it rich working at a dot com startup. Unfortunately, I graduated in the bust and so I decided to pursue my passion for cars and greener pastures. Believe it or not, it was that depressing here in Silicon Valley. So I ended up going to Detroit, I went to GM and it was my first experience working for a big company. Learned a lot about the car business, learned a lot about big companies, learned a lot about myself and learned that I did not want to live in the Midwest and work for big companies. I wanted to come Back to my true knitting here in California. So I ended up doing a PhD in electrical engineering. I naively decided to start a company around my research in wireless vital sign monitoring. The company was not a commercial success though. We made some pretty cool gadgets. And I learned the hard way that it's one thing to have a great technology, another to have a viable business. And so after winding that company down, I went back to being a postdoc to pay my bills and. And I was told the best way to get to know VCs is basically by offering them deal flow and connections and not asking for money. And so I went gift in hand to a handful of VCs. Lux at that time was in its early days and was raising a second fund and I offered to show them deals and find cool new technology trends. I was one of the only guys in California at the time. And so it was effectively a. A remote scout for the firm and I was asked to join full time in early 2007. So I was the walking west coast office for several years before we set up our Palo Alto office. And we've grown our team and it's been a fantastic ride ever since.

That's incredible. That's awesome. Yeah, that's right. You know, they did start out in New York. I was also a baby of the dot com era. It was quite a ride. And getting into venture is all about hustle. Would love to get a quick background on Lux and the thesis that you guys have over there.

Sure. So when the firm first started, we were very focused on nanotech investing. After I joined in 2007, we started investing in our second fund. We started investing in semiconductors, alternative energy, biotech, and more recently we've been doing digital health, manufacturing, automation, robotics, AI, a lot of work around drones.

That's awesome. That's awesome. You know, you guys pioneered a lot of investment themes that you just discussed that are now in vogue, especially around science and deep tech. But in the early days it wasn't like that. Curious. How was it in the early days having this sort of contrarian investment thesis and venture, as opposed to the folks that were focused on say consumer and enterprise?

I would say that's very serendipitous. When we were investing in nanotech and basic science, most investors were doing ad tech and Cloud and SaaS and many of those investors were very successful. I would say that we're at a point right now where basic technology, like perhaps in the mid to late 90s with telecom, we're in that phase again where basic Infrastructure is being built just like how in the telecom era, there was a lot of infrastructure being built around the Internet and communications. There's a lot of infrastructure being built now around automation and robotics. And I think that there is a lot of opportunity to invest in those companies and build those capabilities that could be the basis of many great organizations in the near future.

Because you guys kind of pioneered these categories. You know, we all kind of make mistakes along the way. Just curious, what were sort of the. Some of the early mistakes or lessons learned in investing in these spaces that you can share with our listeners today?

So one lesson we learned is that building technology is probably the easier part. It's reducing it to practice and building a business around it. That takes a lot of time and money. A big mistake that I made or misperception that I had coming out of academia was that so long as the technology works on the bench, reducing it to practice is just a matter of some simple engineering. Well, it turns out that that simple engineering costs the majority of the time and capital that's required to bring a product to market. And then it's about the next product, and it's about building the organization, it's about building the brand. And so I think many people who do technology investing discount a lot of that, and they tend to focus on some of the early work, and they think that the rest is just a matter of time and a modest amount of money, whereas that time and money is grossly underestimated. And these companies take a long time actually bringing their technology to market, being able to get market share and really being able to build big organizations, which is very different in the case of software, where you can have penetration and growth be a lot faster, and you have the network effects available to you in software. That's very difficult to replicate in hardware and technology investing.

Wow. Yeah. Yeah, it's certainly a challenge, but the payoffs could be massive. How do you guys think about science risk versus engineering risk? I mean, you talked about, you know, having a background as a PhD and building products that work, but not taking it to market is a very different thing. But you. You also do take risk on the science side as well. How do you sort of square that circle between science risk and engineering risk?

So, taking a step back, we're in the business of seeking reward for eliminating or reducing risk. And so there are areas where reducing risk as it relates to science produces a reward, and there's areas where reducing a technology to practice is where we'd be rewarded. So just to give you an example, Here, when you're talking about healthcare, if you're trying to identify a molecule that can target a certain disease, then just the science around identifying that molecule and doing very early studies can generate a massive reward. It can generate a lot of value for a startup. So science risk then becomes very interesting and attractive for an investor to reduce. As it relates to hardware, tech, engineering, those kinds of products really require market penetration to be rewarded. So just by inventing some new gadget, you're not really generating a lot of enterprise value. That new gadget needs to be adopted, needs to be implemented, and there need to be economics proven around the business of selling that gadget or selling a service around that gadget. So a lot more work needs to be done. So the basic science and perhaps even the early engineering isn't rewarded as much as building a business around the product of that technology, around that, that new product that's being brought to market.

Switching a little bit in terms of the work that you've done, and both on the founder side and the investor side would love for you to offer some wisdom. First on the founder side, curious the advice that you would give or the best advice you would Give for scientists PhDs who start their own company? Today we have a number of PhD founders and we're learning a bunch of lessons along the way. You've been at it a lot longer than we have. So just really curious, what's the best advice you can give to PhD or scientist founders who start their venture and assume the CEO role?

So I think the CEO role is one that changes over time. And my advice to these academic founders who assume the PhD role is to be intellectually honest about what they enjoy doing, what they want to learn how to do better, and where they see themselves in terms of how the majority of their time is spent. A lot of academics are academics because they like doing certain things, they like asking questions, they like doing research. Well, guess What? Being the CEO of a company with 300 people does not result in spending a lot of time, you know, reading papers and working on solving problems. You'll probably be spending most of your.

Time recruiting in your portfolio. Have you seen really deep technical founders transition well with that advice and guidance to actually assume the CEO role at the different inflection points in companies? Or are you seeing them taking a step back and getting sort of a Sheryl Sandberg type person to head up the operations while they focus on on the product and the technical part of it?

It's been varied. We have a CEO in our portfolio. Will Marshall who is a scientist by training and was one of the early scientists behind the project at NASA, which was the underpinning of Planet. And he is doing a fantastic job as a CEO today, doing what a CEO needs to do for a company that's at 400 plus people. We have other CEOs in the portfolio. Mike Henry, for example at Mythic, also a PhD circuit designer by training and is now managing his growing organization, is doing all those things that I mentioned earlier around delegating management oversight and spending a lot of time working closely with investors and partners. There are other members of the portfolio that have stepped aside and have helped recruit those CEOs that would take the company to the next level because they enjoyed focusing more on the problems at hand and dealing with the technical aspects of the company.

Makes sense. Makes sense. And then sort of the same question in terms of the lessons you would offer, but this time to new investors who are getting into these harder technical spaces. You know, at eniac, we have a sub portfolio of hard tech and we're learning as we're going, but would love any advice and guidance you could offer to folks who are getting into it.

Yeah, I've seen a lot of investors, both during the current cycle and during the previous cycle, namely cleantech, make the mistake of identifying general themes and trying to quote, unquote, place bets in those general themes. So if you look back between say 2005 and 2011, there were investors that were investing in batteries, that were investing in thin film solar, that were investing in water technologies, and there were a handful of energy companies that were incredibly successful. But those investors who typically were taking this indexed approach to technology investing were subject to either adverse selection or paying too high a price to get into these companies. So my advice is always to really identify amazing talent and let that talent drive you. Those interesting themes, those interesting problems. We have the benefit of an amazing technology portfolio and we tend to find new investment themes at the fringes of our existing companies. So for example, we funded planet back in 2012. They were using cell phone components to build this constellation of Earth observing satellites. They were the first company to offer daily imaging of every point of the surface of the Earth. One big challenge that they had was sending the real time video back to Earth. They had to actually develop their own radios to be able to do this. We thought about the notion of doing a lot of the computer vision on board the spacecraft and only having to send compressed images or perhaps even details as to what's going on in the image. So for example, if you're flying over a parking lot. Instead of having to send a full video of the parking lot, you can simply send how many cars are parked in this, let's say Home Depot parking lot in Arkansas, or how many ships are in port, or how level. What the level of the tankers are for the ships at sea. So that basically guided us doing investments in edge computing, and we ended up doing an early investment in nirvana, which we sold to Intel. So I think being more about the founders and seeking new technologies at the fringes of existing challenges that are being overcome, I think is an excellent investment strategy. And again, I would avoid trying to build investment themes around buckets and trying to fill those buckets with companies.

Take us through quickly. Your sourcing strategy, is it aligned with how I'm thinking about it?

Yeah. So our sourcing strategy ranges from reading technical papers and identifying great scientists and great assets that are being built at universities and building companies around those assets and bringing very talented executive talent to carry those companies forward. That would be effectively de novo company creation, which we've done several times. The other would be using our followers on social media and sharing ideas and themes and being able to attract those founders to us.

Are we in a deep tech boom right now? I mean, there are a lot of hard problems being solved and PhDs coming out of the woodwork. They're leaving academia early. They're not doing their postdoc. And then on the other side, as we talked about, you have new investors that are entering. Do you feel like we're in some sort of boom kind of cycle or bubble even in deep tech right now? And how do you think about that at Lux?

I do feel like as if there is a lot more interest in this space certainly than there was five, six years ago. I become fearful when investors are funding science for the sake of funding science as opposed to funding the kernel of a business. And so it is always worthwhile to fund an entrepreneur who's building an amazing asset with the expectation of hopefully some business to be created around that asset. But we see that happen far too often around technologies that for some, can be more incremental. And so, for example, if a group is building a better lidar device, does it really make sense to build a company around that and be a supplier in the automotive supply chain? Unless that lidar is significantly better than the state of the art? And so there are people doing some work in quantum computing I haven't heard a whole lot about what specific problems exist today that a quantum computer can solve, which with far Greater efficiency that would lead to the basis of very large companies. There is conversation around cryptography, around being able to discover chemicals. And the expectation is that, at least my expectation is that these new applications could, for example, come about a result, as a result of quantum computing becoming available. But I, I would have liked perhaps to see more clarity around the problem that's being solved as opposed to the glamour around the, the tool that's being built to potentially solve it.

A bit more personal. You know, you were born in, in, in the States, but then you went to Iran as a teenager. It must have been a really interesting transition and I'm sure it shaped your worldview. Would love to just hear, hear how that experience affected you.

Sure. In many ways, Iran is very similar to the us. I mean, people at the end of the day have very similar basic passions and needs and ambitions. And it's also very different in a way, the society was a relatively close society. It's funny, during the time that I was there, initially the only access to western culture was through cassette tapes and videotapes that were smuggled into the country.

Wow.

And then two years later you started having satellite broadcasts. So people were illegally putting satellite dishes on their rooftops. So almost overnight you went from only having access to three or four year old, like, let's say modern talking cassette tapes to being able to watch, you know, Pearl Jam performing in concerts. So it was a, it was, it was a very sudden transition and the cultural change was just shocking to see people go from like being Relics of the 80s in the early 90s in the terms of dress and style, all of a sudden being as modern as the most modern people here in the US A couple years later, after this media was introduced. And so I think Iran is probably an outlier amongst countries outside the us. Iran is a relatively wealthy country. There's oil, you know, there's money literally coming out of the ground. It was eye opening in a sense that I got a sense for the haves and the have nots. I mean, I grew up in a middle class neighborhood here in the Bay Area in Iran. You know, I was, you were literally a stone's throw away from poor neighborhoods in Tehran where folks had very little. And so, you know, it was, it was, it was sobering to see how people can be happy and people can be content with very little. Just seeing that, that, that culture and that dynamic and just giving, getting perspective on what drives people, what motivates people. And at the end of the day, just people being very similar.

Right.

I think was eye opening for me. I think, you know, here in the US we have this kind of tendency to think of us versus them, whether it's the, you know, A's versus the Giants or the 49ers versus the Raiders. Like, there's a lot of us versus them mentality and rivalry, whereas people are just very, very similar. And. And the language may be very different, and there are some cultural norms that can be very different. But the weddings that I went to in Iran were not very different from the weddings that I go to here in the US the challenges that you face as a high school student, sure, the high schools there were all boys. I would go back and forth during the summers. And the personal challenges that, you know, we, as teenagers, you know, faced over here is very similar to the personal challenges teenagers faced over there. So the veneer may be different, but at the end of the day, people are very, very similar. And I think people tend to lose sight of that.

Well, this has been awesome. Anything else you want to share with our audience? You have a lot of founders, a lot of investors, a lot of folks that want to be either. Any last thoughts you'd want to add?

Yeah. My advice to founders is always to dream big, to work hard, and to not give up if there's certainly challenges and roadblocks that will be thrown your way. And there will be this consistent theme of overcoming these challenges and anticipating the next challenge. So my advice is always to. To keep the. To aim high and to dream big and to, again, not give up.