The Business of Building, the Power of People, and Investing in the Future ft. Shahin Farshchi, Partner at Lux Capital

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Hi everybody, I'm Jack Dunn. I am a partner at Diversa Partners. Today on the Dare to Be Legendary podcast, I'm sitting down with Shaheen Farshi, who is a 16 year veteran of Lux Capital and a partner there. Lux is a venture firm focused on emerging science and tech investing. I encourage you to check them and the companies they work without. I think it's almost impossible to come away from reading about the mission of some of these businesses without a new optimism for the future of the world and humanity and where kind of technology is taking us. And the work is so ambitious in the best sense of that word. I'm going to do my best in this conversation to avoid bombarding folks with my own scientific illiteracy and try to focus on where our work has kind of historically aligned and intersected, which is often when the companies that you have worked with from research phase from infancy, reached a point where a founding team is looking to bring in outside executives and how we think or how you think about building those teams for what are most commonly cutting edge, first of their kind category creators with often relatively loosely defined markets and huge ambition. I'd be curious to hear how you talk to founders who in my experience with Lux, are often from academic or research backgrounds, are often highly technical about the value that a more classic VP of engineering or a VP of product brings to the table, and what do you encourage them to look for in that addition to their team?

A lot of the people that we back from the very early days that are building these very technologically focused companies tend to come from very academic backgrounds and are very technical people. And the area that we try to make them feel more mindful of people, ultimately companies are comprised of people and a company's ability to succeed is based on its ability to attract and retain amazing people. So it's very important that we instill the culture at these companies where people are the most valuable resource and the leaders that are brought into the organization are people who have a skill as it relates to managing teams, as it relates to empowering teams and being able to attract more amazing people. And it may be the ultimate goal for the company to introduce a cutting edge technology or a capability that didn't exist prior, but that won't be possible unless you bring in that culture of cultivating and Retaining talent. And so I've had the fortune misfortune, if you want to call it, at being in companies myself as an early team member in my prior life where the technical leadership was extremely talented when it came to building stuff, but was not very good at managing people, at working with people. These were people that tend to be very introverted. There were people that had very little patience. There were people that didn't want to explain things and just prefer to do things. Although that is very helpful in terms of going from 0 to 1 to go from 1 to n. As an organization, it's very important to find that very rare mix of people that have those people skills as well as very strong technical prowess and technical vision.

Really, really helpful. And it makes complete sense. And it's such an interesting transition as people start to understand that shape of company building as opposed to or the difference between company building and leading a research team or a technical team with maybe a slightly narrower or more easily easy right word but clearly defined area of focus and sort of shared goal. What do you find is the biggest misperception in maybe a research oriented or highly technical founder in terms of what people expect when they're building that early team versus the reality that they find or you guide them through?

Highly technical founders typically come from either academic environments or R and D environments. And those are environments where pushing the state of the art and or having a broad impact are the top priorities. And that is very different from building a business. In fact, in some cases it could be at odds with building a great business. So a lot of these people come from those environments and have to go through the, you can even call it the growing pains of shifting their emphasis from pushing the state of the art for the purpose of pushing the state of the art, because that's how they're rewarded. Two, being rewarded by putting a product out there that people appreciate, that people want to use, and most importantly, people want to pay for. And so going from that technical mindset of hitting technical merits or technical milestones to one of building an attractive product that also is a basis of an interesting business is something that many technical founders have to go through. Some of them end up being lucky to just to be at the right place at the right time where they happen to push the state of the art. And it just so happened that pushing the state of the art led to a product that people actually wanted. But that is very much a very rare case. Most cases there are very, very smart people that work with these types of founders and these are typically co founders or CEOs that come in who really understand a use case that this product or this technology could enable or a market that could be made possible by virtue of the existence of a product enabled by this technology. And they focused the companies on these products serving these markets. And keep in mind that that's very distinct from focusing a company on pushing forward the state of the art. Because if you're only focused on pushing forward the state of the art, you'll just have to cross your fingers and pray that there's going to be an intersection between whatever it is that you're doing and the market. And we're not in the business of hoping, we're in the business of building. Therefore, we want to see leadership at these companies. And it could very well be the technical founders that go through this change that identify a market that either exists or doesn't exist. And most often those markets don't exist because the product can't exist. And they're able to create these markets and dominate these markets by virtue of making their products available broadly through solving these very hard technical challenges. There have been many occasions where I've met some incredibly talented people that are solving extremely hard problems. But it's been very difficult for me to translate those opportunities to investable opportunities. If I was a government funding agency tasked with funding the best scientists, it would be a no brainer to put money behind them to push the state of the art, to add a branch to the tree of knowledge, to create something that could have broader impact in the future. But it's very difficult to underwrite to a large business without that impedance match between a technology and a market that can be dominated by a company offering this product, hence creating a multibillion dollar company.

Yeah, I know. You shared with me recently, we were talking about a project and you said one of your heuristics. I asked myself if this technology or this product was ready right now. Is the adoption a no brainer? I think you gave the example of cancer drugs. People will take them right now if they are safe and effective. Obviously, I suppose the secret sauce of what you and your team do so well is I suppose, figuring out that delta between a market that doesn't yet exist and a market that doesn't exist. Are there other heuristics that you frequently find yourself turning to or frameworks that you're thinking about a lot when you're evaluating companies and sort of thinking about that gap between a market that doesn't exist yet? The timing is maybe not right or maybe it is right for this particular business and a market that's maybe, or a technology that's maybe too far ahead of the envelope or solving such a narrow problem that there isn't a business to be built around it.

Absolutely, Jack. Even before you go into the details of the technology, the potential product, the existing market, the potential future market opportunity, I look at the people and I ask myself, can these people attract people that are better than them? And by virtue of attracting these people that are better than the founders can punch above their weight and attract dollars? And can these dollars help them continue to attract even better people? And help them continue to punch above their weight and attract even more dollars and create this virtuous cycle of people attracting greater people, attracting dollars, showing great progress, attracting more dollars, attracting more great people. That is the perpetual emotion machine which doesn't exist in real life, but exists in the kind of intrinsic sense in a startup. That is what we're looking for. And the byproduct of this will be solving a group of super talented people thinking independently, solving really hard problems, having the foresight to imagine, to predict future market opportunities, and being able to position the company to capitalize on those market opportunities and dominate those markets. If you look at the example that you gave, a lot of VCs talk about only investing in 10x technologies, that is extremely difficult to do. Finding a semiconductor, memory or processor that is 10x better at everything than whatever would come out of intel and Nvidia is next to impossible. However, intel and Nvidia are going after existing market opportunities and there are future market opportunities that they either do not have the interest to pursue or don't have the incentive to pursue or fear pursuing because it may cannibalize their current businesses. And that's opportunity for a startup to build something that is different. It doesn't have to be 10x better, but different but well suited to that market opportunity and then go out and dominate that market opportunity through the catalyst of the human aspect that I just alluded to earlier. You can make great investments by doing the rigorous analytical exercise that you were describing earlier, Jack. Really understanding the technology, really understanding the credentials of a team, having a sense for where a market is headed. But if you apply those simple heuristics of the quality of a founding team, their ability to tell a story, their ability to attract great people, attract more dollars and navigate, have the creativity and the agility to navigate and the foresight to imagine something interesting and be able to communicate and create excitement about that future, I think that itself is A great basis for underwriting investments.

Yeah, I think some of that talent attraction acumen and it is nebulous because some of it's charisma, right? And some of it's humility and some of it's just that magnetism that you get with certain folks and the likelihood that people are going to sit down with them and immediately going to want to help them solve their company's problems and build something together. I'm off spending time with founders, especially in kind of frontier or hard science companies and talking about early go to market hiring and common things that all hear from them are to your point about the market not existing yet. We don't think there are many companies selling in a classical sense into our exact market, ieg. There are no good X for Y comps that we think are housing our desired talent base from a sales or go to market standpoint or in a lot of cases the entrenched player in our category is so large that an executive from one of those companies unlikely to be a good fit for our stage and the work that needs to be done here. The second thing I often hear is we are looking for co development partners as customers at this point as opposed to trying to build a repeatable scalable or any kind of high velocity sales or go to market motion. We're trying to find somebody with more of that mindset. The last that is frequent is our product is certainly 12 to 18 months from being ready for that scalable commercial deployment. I'd be curious how you coach founders in terms of thinking about timing and type of leader when they're starting to talk about go to market. Even when I'm coming in to talk to founders often about potentially running a search to find that person, a lot of them do already have some customers and partners. I know you guys are often helping them do that early market engagement, but I'd love to hear your thoughts on early commercial leadership in frontier tech companies and how you encourage your founders to approach that.

The answer is Jack, that it depends. There is no one size fits all because every company's go to market is unique and every market is different. For example, let's say you have a cutting edge chip company like Mythic. Mythic is a new company. They're offering a chip that has a capability that does not exist. That capability allows for their customers to make products that until now didn't exist with capabilities that are first in class. What kind of a person do you hire to go out and educate customers and make these customers comfortable? Well, in this case you need someone who maybe has spent decades in this industry who has been awarded with the trust of these customers. And as someone who a customer will invest perhaps tens hundreds of millions of dollars into a new product that would rely on the capability that this chip uniquely brings to bear. So the kind of background of this individual for this kind of company is very different from, let's say a startup SaaS company that's selling a productivity tool to other startup SaaS companies, for example, or other fintech companies. In that case, you need someone who is young, dynamic, aggressive, can make a bunch of phone calls, can convince a lot of people to try something out, who is good at measuring their progress and having an analytical perspective on, okay, where is my time best spent and being able to manage a team with that data and those basic kind of high level heuristics. So I feel like it is very important for boards and leadership to be intellectually honest about what their product is and what the risk appetite of their customer is and what the general profile of the decision maker is. Is a decision maker someone who is rewarded to take risks? Well, in that case, you may need a different person to interact with that person with that type of customer, or is that customer someone who has zero incentive to take a risk? And so in that case you need a different profile to interact with customers. So I think it's just as important to understand the needs and the people that you'd be working with as it is to find the best person. Because you can find an amazing person, but not a fit for the tasks that they have at hand and they are set up for failure.

Yeah, I think that is a really succinct way of framing it. And I think it's maybe sometimes somewhat frustrating to founders that I think our answer mirrors that a lot. It really depends on what you know about your go to market and what you don't, and what you know about your customers and whether they have a sort of a slot to fit your product in. Right. Or whether you're sort of evangelizing that capability or whatever your product's going to bring to their business or their lives for the first time. And it is a very, very different person. It's interesting because we are frequently on the other side of that conversation where we're talking to executives that maybe are, in my case, often more mainstream enterprise SaaS or classical enterprise infrastructure, those worlds, and we'll end up talking about some of the work that I might do with your team or your portfolio. And their response is often, oh, I would love to work on that. Right. And it is that sort of giddy enthusiasm that I think people have when they hear about the companies in your portfolio and your guys focus. But I wouldn't know where to start.

Or I don't know if I would.

Be right for that or whatever it is. And I'm curious, you talk to people all the time who are maybe getting ready to jump into something more ambitious that they've done before in terms of stage and in terms of category. And I'd be curious both if you have rules you follow assessing people's likelihood of succeeding in a less defined market in a kind of frontier tech environment, or if there's specific coaching you give to people getting ready to make a transition like that.

Yeah, I don't have a particular rule of thumb for that one. I feel like, at least the way I tend to do it, that coaching and that preparation is something that I do from the very beginning. I try very hard to make the leadership teams be able to identify what they don't know in terms of what the talent that they need to bring on to the team, as well as filling those known unknowns from a talent perspective. And so that is very different from saying, okay, well who do we need today? Now let's go out there and find those people. It should be a, in my opinion, it should be a continuous process, the process of identifying, okay, what are the current needs, what are the future needs and who are the right people to fit this. And by the way, like this is the art of company building. People think that company building is all about just building a product or going out and quote, unquote, winning a market. But that is kind of like saying that playing basketball is all about scoring shots. And there's a lot more that goes into it than just scoring those shots. There's a lot of preparation that goes into it. There's a lot of practice that goes into it. There's a lot of team building that goes into it. There's a lot of team dynamics that go into it. There's a lot of strategy that goes into it. And what you see is the outcome. And if you're just looking at the outcome, you think, oh, that was all very simple. And so the coaching that you're alluding to is an ongoing kind of process of say, partnership. I wouldn't even call it a mentorship or coaching process. It's a partnership that a board member or investor brings to a founder by virtue of collecting kind of experiences from a broader set of companies that they have been involved with previously or that they're involved with at the time and trying to bring as much of that as possible to the company to be able to anticipate future needs and be prepared to take action when it's time to take action on those needs.

I think it's so powerful to hear you kind of come back repeatedly to the people side of things, right? Learning how to manage, learning how to bring the best out of people that are bringing expertise to the table that you don't have in your founding team or you don't have exposure to in your professional career is obviously a big part of what we do. And it comes up again and again for us in these conversations. Just that getting that people component right is really the core of building great businesses. Gene, maybe this isn't a fair question because I doubt you have one answer. But if somebody had said to me maybe, let's say 15 years ago, maybe probably even 10 years ago, computer vision as a term, I wouldn't have had a context for what that meant. I could probably have imagined something close enough to get me by in a conversation. But it feels like that's a theme that now we're working with so consistently across a bunch of companies. What are the things that you have your eye on and are most excited about right now that you think will have that level of familiarity with 10, 15 years or now?

So I think what makes us unique relative to other investors is that we go after the unknown. We go after companies that do not fit into a traditional profile, whether that's e commerce software, SaaS. If you look at these more kind of down the fairway venture investments, they're investments that have clear metrics against which investors underwrite. There is very clear precedent as to what works and what doesn't work. And people know what to look for and what to stay away from. And there is relative predictability that if you do X, Y and Z right, then this is the kind of outcome that you can expect. And going back to your coaching question earlier, the things that the founding teams need to be coached on and the times at which the coaching needs to occur is better understood. Now when you start bringing up these topics like computer vision, autonomous cars, electric aircraft, satellites, rockets, semiconductors, it becomes very different and it becomes perhaps more ad hoc in these metrics that I was talking about that people perhaps underwrite and the efforts that they would bring to bear alongside their investments become very much unique to every single one of these investments. So it's very difficult to kind of systematize, institutionalize investing like this, it requires creativity going into every single one. And so if you look at a computer vision for example company, the product isn't necessarily a software product, it could be a hardware product that is bundled with a software product. There could be zero margin generated in the hardware piece with 99% margin generated in the software piece. It could be a one time enterprise sale with a dedicated salesforce for every customer for some of its products and then other products being made being offered, you know, through I guess third parties or through websites. There is like you have to build the relationship between the board and the mentors and the team and the actual steps that go into taking paternity of the investments on the fly as it relates to the specific needs of the business. Again as opposed to a more tried and true path that is common in SaaS software, fintech investing, if that makes sense. So when you're talking about hard science investments, when you're saying hard science, I don't want to trivialize software companies and fintech companies because they're also solving really hard problems. So rather than use the word hard, I would like to use the word different. So e commerce companies are solving hard problems. These are non trivial businesses but the kinds of problems that they solve, the nature of those problems are somewhat common amongst their peers. Whereas when you look at these hard tech companies, the nature of the problems that they're trying to solve, whether it relates to the technology, whether it relates to the product, whether it race to the go to market, they tend to be unique to every single one of them. And so that's where the challenge for the investors comes in and identifying the blind spots becomes important.

Really fascinating and I think that's probably a good place for us to conclude. Shaheen, thank you again so much for coming on and it's, it's always fascinating to talk to you and it's always interesting to hear how you think about the broader market. I feel like we're often in the weeds talking about individual companies and your guys approach is very cool to learn more about. So thank you again for making the time and been great chatting with you.

I love the Jack, love the brainstorms and really excited to continue working with you.

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