I loved this interview with Shahin Farshchi. He’s curious, open, and has invested in some great companies (Planet Labs, Zoox, Nervana Systems). Shahin is a partner in the venture capital firm, Lux Capital. Lux focuses on making long term bets on outsiders and contrarians. And their portfolio represents that.
Shahin’s background includes a PhD from UCLA, starting a company, and working for different startups. In the last 10 years with Lux Capital, Shahin has invested in some fascinating companies across different industries (satellite, chip, robotic, self-driving/mobility, others). This portfolio diversity sets Shahin apart from other VCs. And it’s what makes this interview so interesting. As I say in the interview, Shahin must have some fun days. And importantly, Shahin has been a dedicated reader of Car and Driver since the age of 10.
Some other things we talk about:
-How do you vet whether a customer will buy from a prospective company you’re doing due diligence on?
-What’s your investment thesis?
-What’s the main lesson you’ve learned as a VC?
-How do you help your portfolio companies?
-How did Lux start and incubate a nuclear waste management company?
-How do you continue to learn?
David Kruse: Hey everyone. Welcome to another episode of Flyover Labs and today we are lucky enough to have Shahin Farshchi with us. Shahin is a Partner in the Venture Capital firm Lux Capital and Lux is a great website. They talk about making long-term bets and outsiders and contrarians and their portfolio represents that. So I’m excited to hear more about that. And Shahin’s bio on their site is also fun. He can tell you more, but he has been a dedicated reader of Car and Driver since the age of 10, which is probably all you need to know about Shahin, 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 Shahin on the show just to learn more about his background, what he has learned and what he is excited about these days. So Shahin, thanks for joining us today.
Shahin Farshchi: It’s great to be here.
David Kruse: And yeah, so I mean – I looked at a lot of websites over the years. 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.
Shahin Farshchi: Thank you.
David Kruse: And so before we talk more about what you are working on now, can you tell us a little bit about your background?
Shahin Farshchi: 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 that kind of I would say technology. And growing up kind of in the bay area through the dotcom bubble, I decided to pursue my Under Graduate Degree and Computer Science Electrical Engineering at Berkeley and having graduated in robotics, I chose to pursue my co-passion which to your point was cars and I decided to go to GM. I wasn’t too crazy about working for a big company, so I decided to come back to California, did a graduate degree and started a company around my research, which was building miniature wireless sign monitors for patients that were being moved around in hospitals, and it was a very important lesson early on where its one thing to pursue your passion and develop the technology and its 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 the life to that, I decided to explore options and I got to know a few VCs and Lux approached me and said ‘hey, do you want to trying being a VC?’ At that time Lux, a relatively young firm with little presence on the West Cost and I effectively became the walking Lux West Coast Office and here I am 10 years later.
David Kruse: Wow! Okay and so you kind of just threw yourself into the VC world. You don’t really have much prior experience before joining Lux?
Shahin Farshchi: Nope, I had zero experience with VC.
David Kruse: So how did you get going? How did you?
Shahin Farshchi: 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 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 learnt that the venture capital business is becoming very institutionalized, in a sense that the discipline of being a VC 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 are far more capable of handling the nuances that come up, that aren’t 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 maybe as valuable, perhaps more valuable than actually being at the helm of a company for many years.
David Kruse: No, that’s interesting. Do you think that would make you – let’s say if I ever wanted to go back to the startup company, do you think it will be much better equipped now to start up a company because of that?
Shahin Farshchi: 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 to a time to make hard decisions down the road and 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.
David Kruse: Yeah, and that makes a lot of sense. So, I like to dig in a little bit more of that, because I know you’ve had a number of exists with your portfolio companies. But before I do, maybe can you give a brief overview on Lux Capital? I tried to give a brief overview, yeah.
Shahin Farshchi: So Lux was founded shortly after the dotcom bust, but the hypothesis for the next wave of great companies will be built around innovations and 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 hypnosis that nuclear waste is going to be a big problem; this is around 2008. This is at a time when most venture capitalist were investing in wind and solar and bio tools and we have effectively built this company from scratching our officers and a couple of years later as a result of the Fukushima disaster this company went form basically zero to 100 – I wouldn’t say zero, but 5 miles per hour to 100 miles per hour over night and was very effective in delivering a solution to TEPCO, which was the operating of the Fukushima Nuclear Power Plant, and the company was incredibly successful and it recently was acquired by Dahlia [ph] for almost $400 million. And having been the Founders of that company we were big owners of that company, won a big chunk of 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 lead our investments in Plant Labs which is just building small satellites and putting them into orbit and daily earth’s observation. We’ve done enhance able digital health in healthcare IT companies and so we continue to focus on fundamental innovations applied to billion dollar markets. However the scope of those innovations continues to broaden as we as a fund grow. We are currently managing $350 million from our current fund and we touched that from $5 million to $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.
David Kruse: 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? You invested in a variety of things, which in today’s world it seems like that could be an advantage. Yeah, how do you guys decide kind of what to focus on?
Shahin Farshchi: Sure, so I can answer that answer 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 in new technology that can disrupt a multibillion dollar industry. So we want to bet on a solution, on a technology that could be the thesis of a very attractive business. And so that’s the macro view, which his very different from other venture capital firms that tend to invest in kind of you know more consumer enterprise 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.
David Kruse: Got you, okay. And oh! Man, I just have so many questions for you, I don’t know where to start, but I think we need like a three hour interview. So I’m a little curious, I’m curious to hear a little bit more about how you incubated that the nuclear waste company and you know a lot of VC’s kind of do that, but not very successful. Like 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 transfer?
Shahin Farshchi: Sure. So that was very much of a thesis that was generated by my partner Josh in New York and this was back if you have more nuclear power, you are obviously generating more waste. If you decommission sites, then you have a lot of waste and if you keep the status quo then there is still obviously a bunch of waste and it was nearly 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 hoodie wearing 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 they were all the Founders on top of the regular people that were working hard at the company.
David Kruse: 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 of your exits have you – I mean we talked about the kind of seeing the lifecycle of a company. At most of these companies, that whether they are exited, were there times when you say pretty close to failing and you always hear about lots of companies kind of facing the death is the experience.
Shahin Farshchi: That’s a good question. Yes, being a startup investor, all of these companies you know look from the outside it may seem up into the rise. But when you are on the inside, it’s certainly a rollercoaster and so without mentioning specifics, there were companies in our portfolio that were the greatest returners, but had an incredible difficult time raising money at multiple points throughout their lifetimes, where it was up to the kind of inside investors considering to support the company. The companies, you had companies that had a very difficult time selling product or identifying their product or getting customers to care about their technology. It’s still being able to generate great returns and yet companies that had challenges with technology, that had ramp in delays, but still managed to deliver a product and get the market excited about the product. 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 its pretty much given that any startup company, no matter how successful at the end will have extreme challenges throughout its lifetime.
David Kruse: Which is kind of refreshing, because nothing is easy right and so when you hit those roadblocks you are not alone, even though really successful folks hit those same roadblocks.
Shahin Farshchi: Absolutely.
David Kruse: And so during that lifecycle a company and startup you know, what do you see as our role, cheerleaders, physiologist, introducer to other investors and your network or how do you kind of like to help companies?
Shahin Farshchi: I think you said it. Our job as investors is to – look 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 the advance; whether that’s going out there and helping them find amazing people to help them, the specific challenges associated with third companies, whether its help them raise money, whether its just sitting down and having a beer with them and hearing them out. So we are in the business of empowering entrepreneurs, we are in the business of helping them be their very best and when I sit down with the CEOs and teams, the first things I ask myself is what can I do to help them be their very best and there are many of the great VC here in Silicon Valley alone and there are many cases where somebody else down the street perhaps would be that investor, again or that partner who can help them achieve their best. But I want to be convinced that you know when I’m partnering with an entrepreneur, that I will be the best in helping them achieve their best.
David Kruse: That’s nice, I like that, okay. And can you tell us a little bit about your portfolio, maybe personally I know Lux has a large number of companies, but the companies that you are working with now?
Shahin Farshchi: 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 and electronic devices for timing purposes, so we solid that to Silicon Labs. I led our investments in Sibeam, which was doing 60 GHz transverse to enable gigabit per second communication so you can stream HD from your portable device to your TV. That was company was sold to Silicon Image, which is the inventor and owner of HTMI. More recently I led our investment in Plant Labs which I alluded to earlier, which is making small satellites for daily observation. These are a couple of guys out of NASA who invented the phone sats, which was using cell phone components to put small satellites in space and do interesting things and they basically took that step further and put a telescope in there into a shoebox size satellite and started gathering images from orbit that were pretty good and got a lot of big companies interested and so we are proud to be partnered with them. I led our investment to Nirvana, which was before it was 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 in AI silicon. So think about how people use our graphics processing units, we are very efficient at doing so end point anorthic in the ‘80 to render polygons to make graphics. These chips were designed natively to do the same algorithms that are used in AI in deep learning natively to accelerate these, that many orders of magnitude, these operations by many 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 and 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 will hear more about shortly.
David Kruse: Okay, yes, those are one of my questions on Zoox and it look like they are on stealth, but I was hoping they were out of stealth by the time we talked. But understand if you can’t talk about it, but I’m curious. I think the tag line is something what comes after the automobile. So like well, that would be interesting to hear, but next time, next time. So how do you find these companies and are most of them I guess lets see, I guess most of them are in the bay area. Do you typically invest in the bay area?
Shahin Farshchi: Our portfolio is spread across the country. We have a handful companies in the Boston area, primarily life science companies and we have one stealth kind of visual 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 will really give a startup a non-competitive advantage. So that’s could really be anywhere. It just so happens so far to be concentrated in Boston and New York and the bay area right now.
David Kruse: Got you. Okay, all right. And there is another company that it’s kind of Serviços is a VR company?
Shahin Farshchi: Serviços, yeah.
David Kruse: Serviços, okay, and what are those guys doing?
Shahin Farshchi: Sure. So that’s another one of my investments. The company is based in Los Angeles and what they are doing is inventing new VR experiences. It is an extremely talented group out of USC with a vision to create truly immersive VR. So take VR from demos, which is what typically see to experience 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, their 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 on to a steam chart, let alone the top of the stem chars and back in August and there are some very interesting things going on there, and we expect the company to be delivering some pretty amazing contents in the next year that we expect will make VR a more main stream kind of product, more than a kind of Gwis kind of I would say, want to use the right words so not to offend anybody, but kind of nitch product today.
David Kruse: Yeah. No definitely, I mean I do VR quite a fair amount and yeah, its – you can always stay or at least I can only stay in it for so long without needing a break. I’ll have to go check out, I saw that they had a game. I’ll have to go check it out and see how it is. That’s cool, and that would be great to spend more time in VR if possible.
Shahin Farshchi: Absolutely.
David Kruse: 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?
Shahin Farshchi: Good question. So I love to read the MIT Tech review and EEE Spectrum, they cover a good breadth of technology. There is a kind of a – I’m not sure if you want to call it a blog, but there is a source of kind of daily technology kind of content based on scientific publications called Science Daily that I attempt to browse everyday and that’s on the kind of technology side. And obviously I look at kind of recapturing conferences and I look at articles that are published every so often as well. But it’s really learning from entrepreneurs. I learn 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 have worked with in the past and are looking for stuff for us to partner up together and I think that will be highest signal source of opportunities for me personally and I also go to events and get referrals from friends and women’s entrepreneurs here and there as well. So I mean being at Silicon Valley, no matter where you go, there is always a concentration of great entrepreneurs and you get to learn a lot and very frequently.
David Kruse: Have most your investments been done through warm leads? Did somebody ever reach out to you cold and end up making an investment?
Shahin Farshchi: Good question. I have reached out to entrepreneur’s cold and done investments, but – and this 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 are a very well connected entrepreneur, which you should be if you are starting a company, then you can quickly kind of be routed to the right investor, which is one, the majority of the opportunities we’ve seen have come through people that we have worked with.
David Kruse: Got you. And how do you decide who to reach out to, which companies? Do you read about them or does somebody say hey, you should go check this company out. Do you know that they are raising money or are you just curious or…
Shahin Farshchi: Yeah so there is 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 are radio silence. I have Sears email address. See if maybe they will respond to you. And basically I wrote a couple of sentences, that’s probably my thesis in this space and I quickly got on to buy. So yes, after that, that’s sort of the process there.
David Kruse: Interesting okay. And is there any certain industries or areas that you are especially interested in, that you are pursuing or is it more trying to find that great talent to match with the industries that you have already mentioned?
Shahin Farshchi: Yeah, so it’s more of the latter. But as far as kind of the broad, broad industry I’m personally very excited about automation and robotics. I’m very excited about you know all the applications of AI, I’m excited about state broadly kind of going back to my kind of original passion for Star Track and science fiction and also really excited about human machine interfaces. So VR will be one example, but basically being able to better connect technology with our body and better interface in technology and expand our impulse. If you look at AI, the rate of which AI is accelerating is just unbelievable and so the question is, in the inevitable circumstance that AI exceeds humans, how do human 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 they are far more subtle in an efficient ways that we can interface with technology. I mean if we 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 is many creative and noninvasive ways that we can interact with machines. We just have to be little bit more creative.
David Kruse: Yeah, like voices kind of another whole platform now to.
Shahin Farshchi: Absolutely.
David Kruse: Make that stuff, yeah interesting.
Shahin Farshchi: Absolutely.
David Kruse: All right, well we are almost out of time here unfortunately and let’s see if I – I guess do you have time, do you have time for one more question.
Shahin Farshchi: Sure, go ahead.
David Kruse: All right.
Shahin Farshchi: Anything for the audience.
David Kruse: 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 many companies. So I was curious about like mistakes, and like things that you kind of learn. I know it’s kind of broad question, but I don’t know, you seem like a good person to…
Shahin Farshchi: I think that’s a great question, that’s a great question. So I got into venture as a scientist and when you are a scientist, you are indoctrinated with the notion of whatever problem that you are solving, because you are underpaid to do it, is the most important problem in the world and once you’ve solved this problem the world is going to be better place. And I learned the hard way that just solving problems in and of themselves doesn’t really mean anything and it’s a matter of how you can even snatch that solution with a need and to build a business around that need. So my biggest concern or I would say diligence item when I was talking to Founders, was whether or not they can delver on the technology that they are promising. And what I learnt early on was that when you keep the Founder or the team, that’s the right team that can attract amazing people, they will deliver. It sometimes takes longer and cost 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 the solution where you as an investor generate a return on your investments. More often than not I’d see these teams execute flawlessly. However, experienced challenges as it relates to getting to customers actually pay for that solution where, which may seem obvious on paper, but in reality actually isn’t as straight forward. And so the biggest challenge or the biggest lesson that I learnt and the mistake that I made was to emphasize too much on technology and I should have more emphasized more on, okay just assume the technology is going to work, is there interesting business here and is turning into a great investment assuming the technology works.
David Kruse: And as an investor coming in like say a series A, how do you bet. You know we are always trying to figure out who is going to pay for it and how much, but how sometimes its series A I’m guessing that some of these companies especially like the Chip Companies are not that far along. Do you just, do you talk to the customers or how do you, how do you get comfortable enough to be like ‘okay, I think there is actually something here; people are actually going to pay for this.’
Shahin Farshchi: Yeah, yeah so yes you do talk to customs and what you have to tease out are those customs, who say, ‘oh yeah, sure of course its really interesting, well why not.’ I mean what does a customer have to lose by let’s say, you know not kind of expressing interest in some product, and technology that can give them an edge potentially. You really have to kind cheese out those customers who really are having 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 you know early on, but then not taking action when it comes down to it.
David Kruse: Interesting.
Shahin Farshchi: And so to answer your question, it’s to talk to as many customs as you can and I didn’t mentioned this earlier, but when I was an undergrad during my freshman year I sold cars. I was on a – I was working at a Nissan dealership, the summer of my freshman to sophomore years, give the passion for cars, I thought I tried to be a car salesman. And I basically was trained to ask customs, what is it going to take for you to buy a drive today? And I’ve carried that lesson into my career as VC when I ask customs, what is it going to take for you to buy this product 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 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 XYZ, whether its 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 customs 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.
David Kruse: Yeah, that last part is probably, especially important I suppose just – like you said, lots of customs would say sure, we are interested, this is great. Just hit these minestrones, but it’s nothing like actually putting to paper and then commit to it and sign on it and even though it doesn’t make them – maybe be force them to buy a million dollars worth of it, but at least they have signed an LOI or some type of a partnership, yeah, that’s interesting, that’s…
Shahin Farshchi: Exactly, and it shouldn’t remain unsaid that these customers should be representative of a huge business for the company. They can’t be small customs. We like them to be big customs that can represent many, many millions of dollars in business for the company.
David Kruse: Yep, makes sense. All right, well this has been a great and I think unfortunately we should probably end it, but Shahin I definitely appreciate your time and thoughts and it was fun to hear what you are working on and what you are excited about.
Shahin Farshchi: It’s been great being here. Thank you again.
David Kruse: Definitely and yeah, so and I appreciate everyone listening to another episode of Flyover Labs as always. It’s a great hear your silence on the other end. But I hope you stay tuned next time. So thanks everyone for listening and thanks again Shahin.
Shahin Farshchi: Thank you.
David Kruse: All right. Bye.