Shahin Farshchi, Partner at Lux Capital - Interview

Hey everyone, this is Dave Cruz from Flyber Labs, a podcast on business and innovation in the Midwest and beyond. Here you'll meet fascinating people and learn about new technologies and practices that will change how you look at life and business. Enjoy. Hey everyone, welcome to another episode of Flyover Labs. And today we're lucky enough to have Shaheen Farshi with us. And Shaheen is a partner in the venture capital firm Lux Capital. And Lux has a great website. They talk about making long term bets on outsiders and contrarians and their portfolio represents that. So I'm excited to hear more about that. And Shaheen's bio on their site is also quite fun. He can tell you more, but he has been a dedicated reader of car and drivers since the age of 10, which is probably all you need to know about Shaheen, except that he also has a PhD from UCLA, started a company, worked for different startups, and in the last 10 years with Lux Capital has invested in some pretty fascinating companies across the satellite ships, wireless energy, robotics and other industries. So he must have some fun some days. So I brought Shaheen on the show just to learn more about his background, what he's learned and what he's excited about these days. So Shaheen, thanks for joining us today.

It's great to be here.

And yeah, see, I mean, I look at a lot of websites every day and you guys have a pretty good one there at Lux Capital. And yeah, it makes me want to get in touch with you guys. So I guess that's good.

Thank you.

And so before we talk more about what we're working on now, can you tell us a little bit about your background?

Sure. So I grew up in the Bay Area while my dad was a graduate student at UC Berkeley and he was a huge science fiction fan and he exposed me at a young age to science fiction and, and I kind of, I would say technology and growing up kind of in the Bay Area through the dot com bubble, I decided to pursue my undergraduate degree in computer science electrical engineering at Berkeley. And having graduated in the bust, I chose to pursue my core passion, which to your point, was cars. And I decided to go to gm, wasn't too crazy about working for a big company. So I decided to come back to California, did a graduate degree and start a company around my research, which was building miniature wireless vital sign monitors for patients that were being moved around in hospitals. And it was a very important lesson early on where it's one thing to pursue your passion and develop technology and it's another thing to be able to build A viable business. And we quickly found ourselves in a very difficult business of trying to sell technology into the hospital supply chain. And after choosing not to dedicate the rest of my life to that, I decided to explore other options. And I got to know a few VCs, and Lux approached me and said, hey, do you want to try being a vc? At that time, Lux, a relatively young firm with little presence on the West Coast. And I effectively became the walking Lux west coast office. And here I am ten years later.

Wow. Wow. Okay. And so you kind of just threw yourself into the VC world. You really have much prior experience before joining Lux?

Nope.

No.

Nope. I had zero experience with vc.

So how did you get going? I mean, how do you.

That's a good question. A lot of people would ask me that. They would ask me without having had my personal hypothesis going into this, was that to be a successful vc, you'd have to be a serial entrepreneur. You have to have started many companies successfully and then gradually transition into a VC role. But I quickly learned that the venture capital business is becoming very institutionalized in the sense that the discipline of being a VC is a. Is a craft in itself. Although it is extremely valuable to have operational experience, it is not absolutely required in many cases. Spending more time as a VC and being exposed to many types of companies and many, I would say, events that occur at these companies throughout their lifetimes also does equip you to be a very, I would say, competitive venture capitalist. I think that having seen many companies go from inception stage to exit and go through all these growing pains, I think you're far more capable of handling the nuances that come up that are inevitable throughout the kind of lifetime of a company and helping management overcome these challenges and build amazing companies. I think, again, the process of being exposed to many of these startup companies throughout the venture financing and growth process, I think is a very valuable experience that may be as valuable, perhaps more valuable, than actually being at the helm of a company for many years.

That's. No, that's interesting. And do you think that would make you, let's say, if you ever wanted to go back into startup company, do you think you'd be much better equipped now to start up a company because of that?

Absolutely. I think being a venture capitalist is very much like being a physician, just like how a physician spends a lot of their time, even early on, just seeing patients, seeing cases. I think every single one of these startups that you either evaluate as an investment or actually engage with as an investment from the fund are Case studies that are valuable when it comes time to make hard decisions down the road or make tough calls down the road. I think going back, for anybody who spends time looking at startup companies or investing in startup companies, I think those experiences will be very valuable when they go out and start their own companies.

Yeah, that makes a lot of sense. So yeah, I'd like to dig in a little bit more of that because I know you've had a number of exits with your portfolio companies. But before I do, can you give a brief overview on Lux Capital?

Sure. So Lux was founded shortly after the dot com bust with the hypothesis that the next wave of great companies will be built around innovations in the sciences. We initially invested in biotech, semiconductors and energy related companies. One of those companies was a startup we founded in our offices around the hypothesis that nuclear waste is going to be a big problem. This is around 2008. This is at a time when most venture capitalists were investing in wind and solar and biostools. And we effectively built this company from scratch in our offices. And a couple years later, as a result of the Fukushima disaster, this company went from basically 0 to 100 miles, I wouldn't say 0, but 5 miles per hour to 100 miles per hour overnight. And was very effective in delivering a solution to TEPCo, which was the operator of the Fukushima nuclear power plant. And the company was incredibly successful and it recently was acquired by almost $400 million. And having been the founders of that company, we were big owners of that company, wanted to chuck at that. And so we more recently have been expanding the scope of technologies that we invest in. We've invested in 3D printing, 3D scanning, digital manufacturing, broadly robotics and automation. We'll talk about driverless cars. I let her investments in Planet Labs, which is building small satellites and putting them into orbit to do daily earth observation. We've done a handful of digital health and healthcare IT companies. And so we continue to focus on fundamental innovations applied to billion dollar markets. However, the scope of those innovations continue to broaden as we as a fund grow. We're currently managing $350 million from our current fund and we cut five $10 million to lead series A rounds, although we also are active seed investors as well. And we have offices in New York and Menlo park and I'm based in our Menlo park office.

Okay, well, that's a great overview. Yeah, I mean, you guys are doing some really interesting things. I mean, do you think it's what's kind of your investment thesis because you invest in a variety of things which in today's world it seems like that could be an advantage. How do you guys decide what to focus on?

Sure. I can answer that question in two ways. One around individual investments and second around kind of the broad thesis. I can start with the broad and then narrow down to the specific. So we broadly look for companies that are leveraging a unique technology that can disrupt a multi billion dollar industry. So we want to bet on a solution, on a technology that could be the basis of a very attractive business. And so that's the macro view, which is very different from other venture capital firms that tend to invest in kind of more consumer enterprise types of companies. We take a step back and we look more broadly at disruptive technology and again building billion dollar industries around them. From a specific investment standpoint, we really concentrate on founders. We look for founders that can articulate, communicate a vision that helps them recruit the very best talent that could execute on that vision and build a magical company. I believe in the virtuous cycle of a fantastic story attracting amazing people and then those amazing people attracting more amazing people, enabling a company to do magic. And that's what we look for as it relates to specific investments.

Gotcha. Okay. And oh man, I just have so many questions for you. Sorry. I know where to start, but I think we need like a three hour interview. So I'm curious to hear a little bit more about how you incubated that. The nuclear waste company. And you know, a lot of VCs kind of do that, but not always successfully. How does that look? Did you guys come up with the idea or how is that different than, you know, two founders coming to you and you just having them in their office and you funding them? How did that kind of transition?

So that was, that was very much of a thesis that was generated by my partner Josh in New York. And his thesis was that if you have more nuclear power, you obviously generate more waste. If you decommission sites, then you have a lot of waste. And if you keep status quo, then there's still obviously a bunch of waste. And it was an area that a lot of investors weren't looking at. And so basically what my partners did was start a company and then hire some amazing executives from the industry. And it wasn't your traditional Silicon Valley kind of footy bearing young entrepreneur. These were silver haired industry veterans that were the right people for this. And basically they took over and they built this company and we obviously funded it and provided guidance and the rest was absolutely magic. And we owed all of the founders of company, the people that were working hard at the company.

Interesting. That's a great story. That must have been fun, I'm sure. Well, that kind of goes to my next question. I know you've had a number of exits, and at most your exits. Have you. And we talked about kind of seeing the life cycle of a company. At most of these companies that exited, were there times when you saw they were pretty close to failing? You always hear about lots of companies kind of facing the death.

That's a good question. Yes. Being a startup investor, all of these companies, you look from the outside, it may seem up to the right, but when you're on the inside is certainly a roller coaster. And so without mentioning specifics, there were companies in our portfolio that were the greatest returners, but had an incredibly difficult, difficult time raising money at multiple points throughout their lifetimes, where it was up to the kind of inside investors continuing to support the company. The companies you had companies that had a very difficult time selling product or identifying their product, getting customers to care about their technology, yet still being able to generate great returns, and yet companies that had challenges with technology, that had rampant delays, but still managed to deliver a product and get the market excited about their products. So it certainly is not a. I have yet to see a company that has that kind of up into the right kind of trajectory. But I think it's pretty much given that any startup company, no matter how successful at the end, will have extreme challenges throughout its lifetime, which is kind.

Of refreshing because nothing's easy. Right. And so when you hit those roadblocks, you're not alone. Even though the really successful folks hit those same roadblocks.

Absolutely.

And so during that life cycle of a company, a startup, what do you see as your role? Cheerleader, psychologist, introducer to other investors in your network, or how do you kind of like to help companies?

I think you said it. Our job as investors is to. Well, everybody has their own opinion, but I see my role as the champion, empowering the founder to achieve and perform at their very best, and whether that's being a sounding board for ideas, whether that's listening to them or sitting down with them as they event, whether that's going out there and helping them find amazing people to help them the specific challenges associated with their companies, whether it's help them raise money, whether it's just sitting down and having a beer with them and hearing them out. So we are in the business of empowering our entrepreneurs. We're in the business of Helping them be their very best. And when I sit down with CEOs and teams, the first thing I ask myself is what can I do to help them be their very best? And there are many great VCs here in Silicon Valley alone. And there are many cases where somebody else down the street perhaps to be that investor again or that partner who can help them achieve their best. But I want to be convinced that when I'm partnering with an entrepreneur that I will be the best in helping them achieve their best.

That's nice, I like that. Okay, can you tell us a little bit about your portfolio? Maybe your personal. I know Lux has a large number of companies, but the companies you're working with now.

Sure, sure. So when I started Lux, being a semiconductor guy, I led our investments in a couple of chip companies. So one was Silicon clocks, which was using MEMS resonators to obviate the need for quartz crystals, electronic devices for timing purposes. So we sold that to Silicon Labs. I led our investment in Cybeam, which was doing 60 GHz transceivers to enable gigabit per second communications so you could stream HD from your portable device to your tv. That company was sold to Silicon Image, which is the inventor and owner of hdmi. More recently I led our investments in Planet Labs, which I alluded to earlier, which is making small satellites for daily earth observation. These are a couple of guys out of NASA who invented the PhoneSat, which was using cell phone components to put small satellites in space and do interesting things. And they basically took that a step further and put a telescope in there into a shoebox sized satellite and started gathering images from orbit that were pretty good and got a lot of big companies interested. And so we're proud to be partnered with them. I let our investments in Ravana, which was before being sold to intel, obviously more recently they were using, they were inspired by the brain, using kind of architectures that are similar to our understanding of the brain to do deep learning and AI silicon. So think about how GPUs or graphics processing units were very efficient at doing full in point arithmetic in the 80s to render polygons to make graphics. These chips were designed natively to do the same algorithms that are used in AI and deep learning natively to accelerate these by many orders of magnitude, these operations by many orders of magnitude to bring AI to the masses. And so also made a couple of more recent investments that I can't talk too much about. One is a driverless car company called Zoox, which is really revolutionizing urban Transportation and a couple of others that are kind of in the pipeline and you'll hear more about shortly.

Okay. Yes, it was one of my questions on Zoox, and it looks like they're in stealth, but I was hoping they're out of south by the time we talked. But understand if you can't talk about them. But I'm curious, I think the tagline is something. What, what, like what comes after the automobile? So, like. Well, that'd be interesting to hear, but next time. Next time. So how do you. How do you find these companies? And are most of them. I guess, let's see. I guess most of them are in the Bay Area. Do you typically invest in the Bay Area?

Our portfolio is spread across the country. We have a handful of companies in the Boston area, primarily life science companies, and have one stealth kind of digital manufacturing company up there as well. We have a handful of companies in New York and yes, a lot of companies in Silicon Valley and a few in Seattle as well. And we like to look across the country and really it comes down to talent. And so we like to invest in areas where you have a talent pool that would really give a startup an unfair competitive advantage. So that could really be anywhere. It just so happens so far to be concentrated in Boston, New York and the Bay Area right now.

Gotcha. Okay. All right. And. Oh, and there's another company that. Is it pronounced Cervios? It's the VR company. Yeah, survios. Okay. And what are those guys doing?

Sure. So that's another one of my investments. The company is based in Los Angeles and what they're doing is inventing new VR experiences. So this is an extremely talented group out of USC with a vision to create truly immersive VR. So take these VR from demos, which is what we typically see, to experiences that would make people want to stay within VR for more than the kind of typical 15 minutes. And they actually launched their first product. It's a game that hit the top of the Steam charts, which applies to all PC games. And this company became the first VR company to make it onto a Steam chart, let alone the top of the Steam chart, Steam charts back in August. And there are some very interesting things going on there. And we expect the company to be delivering some pretty amazing content in the next year that we expect would make VR a more mainstream kind of product. More than a kind of gee whiz, kind of, I would say, want to use the right words here, not to offend anybody, but kind of niche product today.

Oh, yeah, no, definitely. I mean, I do VR quite a fair amount. And yeah, it's. You can only stay. At least I can only stay in it so long without needing a break. So I'll have to go check out. I saw that they had a game. I'll go check it out and see how it is. That's, that's cool. And that'd be great to spend more time in VR if possible.

Absolutely.

So how do you personally keep learning and like, how do you decide what to read? Because you cover so many different interesting areas. How do you stay on top of things?

Good question. So I love reading MIT Tech Review and IEEE Spectrum. They cover a good breadth of technologies. There's kind of a. I'm not sure if you want to call it a blog, but there's a. There's a source of kind of daily technology kind of content based on scientific publications called Science Daily that I tend to browse every day. And that's on the kind of technology side. And obviously I look at kind of recaps from conferences and I look at articles that are published every so often as well. But it's really learning from entrepreneurs. I learned the most from my meetings with great entrepreneurs. And a lot of the referrals either come from my own CEOs or team members within my portfolio or other investors that I've worked with in the past and are looking for stuff for us to partner up together on. And I think that would be the highest signal source of opportunities for me personally. And I also go to events and get referrals from friends and run into entrepreneurs here and there as well. So, I mean, being in Silicon Valley, no matter where you go, there's always a concentration of great entrepreneurs and you get to run across them very frequently.

Have most of your investments been done through worm leads? Has somebody ever reached out to you cold and ended up making an investment?

Good question. I have reached out to entrepreneurs. Cold. Okay, but. And done investments. Okay, but. And the vast majority of the others were through warm leads. The reality is that the network here is so tight that it is very likely that if you're a very well connected entrepreneur, which you should be if you're starting a company, so you can quickly kind of be routed to the right investor, which is why the majority of the opportunities we've seen have come through people that we've worked with.

Gotcha. And how do you decide who to reach out to? Which companies? Do you read about them? Or does somebody say, hey, she should go check this company out? Do you know that they're Raising money or are you just curious or.

Yeah, so there's one company that I did and I basically was. A friend approached me and said, hey, I've been trying to talk to these guys, but they're radio silence. I have CEO's email address to see it. Maybe he'll respond to you. And basically I wrote a couple sentences describing my thesis in the space and I quickly got it offline. So.

Huh.

Yes, that's sort of the process there.

Interesting. Okay, and is there any certain industries or areas you're especially interested in or pursuing? Or is it more trying to find that great talent to match with the industries you've already mentioned?

Yeah, so it's more the latter. But as far as kind of broad, broad industries, I'm personally very excited about automation and robotics. I'm very excited about novel applications of AI. I'm excited about space broadly, kind of going back to my kind of original passion for Star Trek and science fiction, and also really excited about human machine interfaces. So VR would be one example. But basically being able to better connect technology with our bodies and better interface technology and expand our intelligence. If you look at AI, the rate at which AI is accelerating is just unbelievable. And so the question is, in the inevitable circumstance that AI exceeds humans, how do humans keep up and are able to kind of better benefit from that? So that kind of goes back to how we can better interface with machines. And a lot of people think about ripping open our skulls and putting electrodes in our brains as interfacing with machines. I don't see it that way. I think there are far more subtle and efficient ways that we can interface with technology. When you think about the mouse, how powerful the mouse was in terms of being able to interact with computers, I think VR is a step in that direction. But I think there's many creative and non invasive ways that we can interact with machines. We just have to be a little bit more creative.

Yeah, like voice is kind of another whole almost platform now too, with the.

Absolutely, yeah.

Interesting.

Absolutely.

All right, well, we're almost out of time here, unfortunately, and let's see if I, I guess maybe I have time for. Do you have time for one more, One more question?

Sure. All right, Anything for the audience.

Anything for the audience. Great, Excellent. So I was curious about, and I don't always ask this, but I think you've seen so much stuff and across so many different companies. And so I was curious about like, mistakes and like things you've kind of learned. I know it's kind of a broad question, but I don't know. You seem like a good person to.

I think that's a great question. Yeah, that's a great question. So I got into venture as a scientist. And when you're a scientist, you are indoctrinated with the notion of whatever problem that you're solving because you're underpaid to do it is the most important problem in the world. And once you solve this problem, then the world is going to be a better place. And I learned the hard way that just solving problems in of themselves doesn't really mean anything. And it's a matter of how you can pedants match that solution with a need and to build a business around that need. So my biggest concern, or I'd say diligence item when I was talking to founders was whether or not they can deliver on the technology that they're promising. And what I learned early on was that when you pick the founder or the team, that's the right team, that can attract amazing people, they will deliver. It sometimes takes longer and costs more money, but they deliver. The bigger challenge is how willing the market is to embrace this amazing solution and whether or not you can build an interesting business around this solution where you as an investor generate a return on your investments. More often than not, I see these teams execute flawlessly. However, experience challenges as it relates to getting customers to actually pay for that solution, which may seem obvious on paper, but in reality actually isn't as straightforward. And so the biggest challenge or the biggest lesson that I learned or mistake that I made was to emphasize too much on technology. And I should have emphasized more on, okay, just assume the technology is going to work. Is there an interesting business here? And this turned into a great investment assuming the technology works.

And as an investor coming in like say a Series A, how do you vet. You're always trying to figure out who's going to pay for it and how much. But how? You know, sometimes at Series A, I'm guessing some of these companies, especially like the chip companies, are not that far along. You know, do you just. Do you talk to the customers or how do you feel? How do you get comfortable enough to be like, okay, I think there's actually something here. People are actually going to pay for this.

Yeah, yeah. So yes, you do talk to customers. And would you have to tease out are those customers who say, oh, yeah, sure, of course, this is really interesting? Well, why not? I mean, what does a customer have to lose by, let's say, not kind of expressing interest in some product or technology that could give them an edge potentially. You really have to kind of tease out those customers who really have an incentive and are genuinely willing to take a risk on a new technology versus those who are just trying to secure a free option by championing the technology early on, but then not taking action when it comes down to it.

Interesting.

And so to answer your question, it's to talk to as many customers as you can. And I didn't mention this earlier, but when I was an undergrad, during my freshman year, I sell cars. I was on a. I was working at a Nissan dealership the summer of my freshman to sophomore year. Just given my passion for cars, I thought I'd try being a car salesman. And I basically was trained to ask customers, what is it going to take for you to buy and drive today? And I've carried that lesson into my career as a vc when I ask customers, what is it going to take for you to buy this product? What or what is it going to take even earlier on, what is it going to take for you to enter some kind of a partnership with this company towards accelerating this product? So basically the question is what is it going to take for you to put some skin in the game? And at that point the answer should be, oh well, they should demonstrate X, Y and Z, whether it's certain performance metrics or certain economics or get to a certain volume on the manufacturing side. And I try to tease out how committed these customers really are and those that are willing to partner with these companies under very company favorable terms with a reasonable and well defined set of milestones that we think we can deliver with that round of financing then obviously I'm far more interested on that.

Yeah, that last part is probably especially important I suppose, because like you said, lots of customers can say, sure, we're interested, this is great, just hit these milestones. But it's another like actually put it to paper and then commit to it and sign on it. And even though it doesn't make them, maybe force them to buy a million dollars worth of it, at least they have signed an LOI or some type of a partnership. Yeah, that's interesting.

Exactly. And it shouldn't remain unsaid that these customers should be representative of a huge business for the company. They can't be, they can't be small customers. We'd like them to be big customers that can represent many, many millions of dollars in business for the company.

Yep, makes sense. All right, well, this has been great and I think unfortunately we should probably end it. But Shaheen definitely appreciate your time and thoughts and this. And fun to hear what you're working on, what you're excited about.

It's been great being here. Thank you again.

Definitely. And yeah, so. And I appreciate everyone listening to another episode of Flower Labs, as always. It's great to hear. Hear your silence on that end, but. And I hope you get in and stay tuned next time. So thanks everyone, for listening and thanks again. Shane.

Thank you.

All right, bye.