149. Startup Moats, Deep Tech & Where Science Fiction becomes Science Fact (Bilal Zuberi)

Bilal Zuberi Startup Moats Deep Tech The Full Ratchet

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149. Startup Moats, Deep Tech & Where Science Fiction becomes Science Fact (Bilal Zuberi)

  • An overview of moats
  • Example companies with moats
  • How to build a monopoly from the outset and if this is a requirement for Bilal’s investments
  • Incremental vs. step-change innovation and the implications on the breadth and depth of the moat
  • The types of moats
  • Bilal’s take on data and network effect-based moats
  • Using a business model as a moat
  • His thoughts on building brand as a sustainable competitive advantage
  • How NPS score plays a role
  • An example where Bilal thought there was a moat but it proved not to have the defensibility predicted
  • And finally, I get Bilal’s take on Lux’s investment strategy, their portfolio and how they are building value in the water, on the ground, in the air and even up in space

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Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet

0:22
Welcome back to TFR for a good one. Today we’ve got Bilal Zuberi from Lux capital to discuss his investments in transformational science and technology companies, as I’ve been told by many respected investors below has some of the best insights on moats and how startups create sustainable defensible competitive advantages. In light of that, we go deep on the topic and hear how he applies it through his investing. In this episode, we cover an overview of moats, types of moats, example companies with moats, how to build a monopoly from the outset, and if Bilaal requires this in startups, he invests in incremental versus step change innovation, and the implications on the breadth and depth of the moat will always take on data and network effect based Moats. Using a business model as a moat. Bill all thoughts on building brand as a sustainable competitive advantage. How NPS score plays a role. An example where below thought there was a moat, but it proved not to have the defensibility predicted. And finally I get Belaz take on Luxus investment strategy, their portfolio and how they’re building value in the water on the ground, in the air and even up in space. Big thanks to Ty Finley for suggesting below and making the connection. Here’s the interview with Bilal Zubiri of Lux capital.

1:50
Belongs Zubiri joins us today from San Francisco Bilaal is a partner at Lux capital, lux invests in emerging science and technology ventures at the outermost edges of what is possible. But what leads Lux is investments in AirMap desktop metal evolve technology sci fi works lens bricks noon, orbital insight super cloud medics Valle robotics in a few stealth startups, prior to lux biller was founder of geo to an advanced materials company, a consultant for BCG, and also an investor for general catalyst below. Thanks so much for joining us.

2:26
Great to be here. Thanks for inviting me.

2:28
Yeah. So tell us a story. I mean, you’ve had lots of different experiences as an entrepreneur and consultant and, of course, an investor even before luck. So can you kind of walk us through your journey into venture?

2:39
Well, story begins in Pakistan, which is where I was born and grew up and did my high school came to the US to study did my undergrad in Physical Sciences wanted to do something interesting, creative and make a lot of money doing that. So during my PhD days, got interested in the startup world, BCG provided a nice six to nine month window for me to get paid while I figured out what the startup is going to be. And that became GE O two. And so I started that company around 2004. rebuild that up and in 2008, you know, it was commercialized with automotive technologies getting licensed out to a major tier one supplier to the automotive industry, and we spun out a biomedical device company. Along the way, I had been helping a bunch of VCs think about VC investments in deep technology. And one of those was a good friend of mine was a partner at General catalyst, who invited me to hang out with him. And that Hangout when I met with him became a Why don’t you just join us and become a VC. And, you know, it felt like a good opportunity to both not make the mistakes I made, but also help other entrepreneurs sort of accelerate their companies in ways that I had learned after sort of four years of working on on a startup myself. So I started my VC career in Boston, where I was at General catalyst helping build out their deep tech practice. And then in 2013, I moved to the West Coast, when friends of mine who were founders at Lux capital asked me to join them as a partner, and help them build out their West Coast practice. And here we are, you know, lux is now a much bigger firm in terms of the capital under management. We have very exciting things that we’ve been working on. And I’m super excited to be a part of the team here.

4:26
Awesome. Yeah. And how big is the firm in terms of AUM and sort of what what stage and focus areas do you have? Yeah,

4:34
so So Lux manages now over a billion dollars, we are investing out of a $450 million fund that we raised earlier this year. We invest in breakthrough science, technology startups. So science fiction becoming science fact in our own lives. That typically means a lot of hardware, software, biotech, you know, sort of big hard problems that would improve the lives of people as well as To dress very large market, we typically invest in at the series, a stage with some very select Series B investments. And we do have a seed investment program as well. So think of us as sort of early stage investors who then continue to invest at every stage of the company afterwards. And you know, a lot of those early checks can be as little as a few $100,000 in a seed investment to usually, you know, five to $8 million when we first invest, got

5:25
it, and then do you have a particular focus area at Lux. So

5:29
Lux is based in half the team is in New York City, and the other half is based here in Menlo Park. That said, all of us invest across the entire country and across most sectors. So we, you know, while we do have some personal preferences, we are generalists. So we don’t have one guy doing biotech, another one doing Computational Imaging, and a third one, doing robotics. My investments have tended to focus a lot more on a general thesis around availability of distributed sensors on various platforms, and the availability of very large amounts of data that can be analyzed using the modern techniques in data analytics, and machine learning and AI to provide insights and then closed loop systems for large industries. So think of very, very large industries that in the past have basically worked on either very simple data analytics, or mostly on human intuition. And now getting transformed by the availability of real time data, both streaming data, as well as analyze information. So in companies that are working on physical security, doing that protecting us against bombs, and guns, and so on, I have companies that are scanning the earth, from the space to the drones, in the air, and then home security stuff, and Computational Imaging broadly. Love

6:47
it. Love it, about half of our investments are in the IoT and connected device segment. So I think this would be an interesting talk here. So can you talk through one of your first investments at Lux, and how it kind of represents this thesis of distributed sensors and data? Yeah, so

7:04
my first investment at Lux actually, my first investment in lux is actually a co investment that I did literally, while at General catalyst and transitioning into locks. So both funds invested together alongside Bill Gates. And it’s a company called evolve technology, and evolve uses, you know, Advanced Distributed sensors for anti terrorism activities. So think of sensors that can enable facilities to protect themselves against gunmen against bombs against other kinds of explosives. So this is an interesting one, because obviously, this is the unfortunate reality in our lives, where we’re seeing terrorism attacks on a rise. And, in fact, increasingly, most importantly, attacking soft target, you know, it’s no longer just high value target. But we’re to know the churches and synagogues and malls are under attack. And when you think about terrorism, becoming in some ways, distributed, right and decentralized, you have to have anti terrorist and physical security apparatus and mechanisms that are also distributed and decentralized. But unfortunately, that has not been the case in the past. So we became very good after 911 and protecting our airports. But those are centralized places, but we don’t yet have a technology that quickly, cheaply allows us to protect soft targets. And that’s what Evolve is focused on and utilizing both proprietary sensors. This is a millimeter wave detection of bombs and weapons and guns, etc. But also other things in Computational Imaging and machine vision machine learning to understand people’s behavior and understand where the threat may be arising and then obviously defuse it quickly,

8:49
who are the the customer categories and in the client says, well,

8:53
just this past weekend, my one of my partners, Adam Kalish was at a Bruce Springsteen concert on Broadway. And he walked through evolved security scanners that were scanning all the people coming through and protecting that that space. So think of concert venues. Think of, you know, Lincoln Center in New York City, you go there and you’ll see evolve technology. But frankly, you know, it’s being used in places that you wouldn’t normally think is required, right? So think of sports stadiums, they have a big need, because you know, tons of people walk through, you know, within a very short space of period of time. So you need technology that is very effective. But it’s also really fast to the airport type scanners where you stand there for 10 seconds or five seconds while it scans you just doesn’t work. So those are the kinds of, you know, everyday venues that evolve is being used at

9:41
awesome. Even the boss needs some security, right? Yeah, exactly. Exactly. Even more so. So you and I have had some good discussion previously about your thesis and your investments and sort of investing with moats in mind for some of our newer listeners. Could we start out with sort Have a description of sustainable competitive advantages defensibility and essentially the moat in venture. So

10:07
this is something that’s, you know, definitely very important to our firm that we invest in companies where they’re able to build a protective moat around their proprietary technology or acid base. Now, often it tends to be IP, it tends to be your, your, your product and wrapped around what all included in the product. But there are many other ways that you can build a moat in your business as well. And we believe in investing in these businesses, because we want to be addressing very large markets, but not with 15 to 20 other competitors going after the same way, after the same market with only slightly differentiated products, we like situations where you can, you know, if you solve the problem, which may be a very hard problem, and it may require a lot of technological prowess, maybe even regulatory hurdles, and otherwise to get that, but if you solve that problem, you will get rewarded for it, because the market is open for you. And you will have some but little competition. This is something that you know, of course, you know, in the in the world of biotech and others where you had individual compounds and the chemistry that you could patent was very well understood. But I think as we’re starting to see technology, we’re into everyday life, where we have autonomous systems, we have robotics, we have automation across our life, I think it’s becoming very important to realize that recognize that and build those modes. Now, in some industries, these modes are easier to build, you know, if you have a regulatory barrier, for example, and you’re able to build a team that can manage that if you have an international market with the complexity of selling, that’s very, you know, somewhat easier to understand, but very important for the companies, or you have businesses where military and government can be a very early customers, but very difficult to work with and difficult to understand how to best work with them. But if you figure that out, you can actually give your company a serious competitive advantage that other companies would not have. Now, I contrast these companies, with these, with these important moats, to, you know, the traditional consumer internet ideas, right sort of social networking, or you know, photo sharing, and Photo Filter companies there, I think you build a moat much later on, as you start building a larger network and the network effects start to play with you. But otherwise, it’s been harder to do that in many of the other industries, we tend to focus a lot more on industries where it’s definitely possible, and definitely where the CEOs and the founders are really focused on having that competitive advantage.

12:34
So at the very beginning, when you’re making an early stage investment, or analyzing a company, prospective portfolio company, are you asking yourself if that company will have a monopoly within their segment, assuming they they achieve success in their objectives? Yeah, so

12:50
there’s obviously every decision is very unique and independent. But here’s the general thing you go through, right. So the number one thing you focus on as the team and you know, is it a competitive advantage there, just take a simple example is consumer electronics product, there are very few people in this world I would argue, who truly know how to build and ship a new consumer electronics product. I mean, there’s a reason why Apple companies like Apple are able to consistently do that. And many startups fail at that. So if you have a team that has done that before, has the relationships with the OEMs. abroad and understand the product marketing focus that consumer electronics companies need. That’s a very interesting mode that’s very hard to actually build that focuses on the team side of competitive advantage. But then you have technology and product Wait, this is this a product that’s truly differentiated, we’re not interested in incremental solutions, we’re not interested where some minor tweak on the business model may or may not provide you with a competitive advantage. And then last, but not the least, the very important question, is that okay, so you know, startups are hard, and we’re going to do the hard work, our entrepreneurs are going to spend, you know, 510 years of their life building it, will they be rewarded at the end. And I think if you’re building something that can be commoditized over the over that period, then it is very hard to make a justification that this is a VC worthy investment. We look at these companies and we say if they can continue to be ahead of the game and continue to have a differentiated offering over a long period of time, then I think they will get rewarded, whether it’s in the private markets or the public markets.

14:29
Yeah. Do you have an example of maybe a an incremental versus a step change innovation, maybe addressing a similar problem in a similar domain, but you know, one that illustrates sort of the value of the moat that you get out of a revolutionary or big step change innovation? Well,

14:45
I mean, you know, I can give you out of my portfolio or give you outside our portfolio within our portfolio. I’ll give you an example of a company like desktop metal, which is in metal 3d printing, and our metal 3d printing has been available for or maybe a decade or two. But the problem is that it has, it’s a very well understood technology space. But the way it has been addressed is using systems that are extremely expensive, close to a million dollars, they require certain kinds of facilities, you know, required gaseous environments. So you basically build a building around the machine that you buy, and it costs another million dollars or more. But it was accepted that that’s the way things are done. And whatever is the cost of doing business, you spend million $2 million, and now you have a metal printer available to you, desktop metal comes in and completely changes all of that, right. So there’s obviously four faculty members that are co founders of that company, tremendous amount of IP on completely doing the processes in a different way that you can now put a metal 3d printer in your office, literally, my office with 120 volt plug can be used for that. And that’s where you’re seeing, you know, this company is, you know, they’ve announced their product. Earlier this year, they’ve announced the second product now, tremendously interesting book of business that they have already, because they’ve completely changed the game, they’ve completely changed the game on what was possible with metal 3d printing, and who could use it to now you and I are prototyping product, and our office could be using metal 3d printers to do that, I think this is the kind of space where if you don’t have that kind of an advantage, then small advantage would be very hard to sustain for a long period of time, and frankly, competing with the incumbents that have been around and have deep relationships with a customer said that you’ll be working with, it’d be very hard to knock them out. Got it?

16:37
So take a step back. You talked about data centric moats IP, you talked about network effects, regulatory and and even team based. Can you kind of present an overview of the different types of moats as you think about them? Maybe from a category standpoint?

16:52
Yeah, there’s few of them that that quickly come to mind. Of course, the first and the foremost one that you know, is very obvious and easy to diligence is the one around the technology and the product, a lot of that has to do with the innovation, a lot of that has to do with the IP that’s built around it. You know, we often joke that a lot of our companies, by the way, have you know, the founding team includes, you know, very serious researchers and people who’ve spent, you know, 1020 years of their life, sometimes longer working on those problems, and then finally found a breakthrough that allowed them to commercialize that, right. But, you know, we joke that, you know, they spent half their life learning for the state of the art of Sciences, and learning all the basic rules, and then the rest of the half of their life, they spent sort of disproving them and creating new rules, right, sort of, you know, as we joke that, you know, they’re sort of in really inventing the future, and sometimes, you know, questioning the fundamental laws of physics. So when you do that, if you’re not wrong, if you’re not crazy, you are actually onto something really big, and you can protect it with IP. The second kind of moats are around the industries that you’re disrupting. So you know, finding a, you know, if this is a company that requires a certain kind of regulatory approval, it is pretty hard to do. And only those that are truly passionate, and a true believer in the ability of their technology to change, the game would actually go through those. Now, whether it’s the FDA type clearance, when you’re talking about the medical technologies, or you’re talking about the FAA and other types of clearances, Department of Transportation type clearances, are trying to sell internationally, when you have to get certain permissions, you know, the UL equivalent certifications, these are not easy things for people to be able to get, and they allow you to build modes. A third type of mode, that’s very important, in my opinion, and often gets overlooked is the team composition, you know, the kind of problems that we get attracted to are considered hard technical problems, but they’re also hard business problems, often you’re dealing with very complex that are customers, large incumbents, slow moving industries, where innovation is not necessarily welcomed open arms. So you know, the ability to maneuver in those spaces, while keeping your startup pace alive is actually a very unique trait that very few people have. And in fact, we talk about it often, as you know, we say in the startup world that you know, if you see a rocket ship, you should jump on it, you know, we like to refer to good performing startups as rocket ships. Well, one of the things about rocket ships is that they have very high acceleration as they get off the ground, right? They move at faster speeds at that time. And when you’re dealing with incumbents that are large, when you’re dealing with slow moving customers, trying to maintain that pace is hard. And, you know, certain entrepreneurs are able to do that either they have tricks up their, their sleeve, or the innovation is so big that they’re able to find their way around it or they create partners out of competitors to be able to get to the market faster. If you take a sum total of these strategies. You’re creating a very powerful defensive position that is very hard for you know, a new kid on the block to go up against you. And I think that allows these kinds of companies to build not only a lot of momentum but in the long term, a very large market cap for themselves. Where do

20:03
network effects fit in? What sort of category? Are they a part of, or is that kind of its own category?

20:08
No network effects are actually quite important. Now, of course, the ones we traditionally talk about is the classic network effect and social networking, where every you know, the value of the network grows, as every new note gets put into it. But it’s not just relevant for social networking Facebook type website, as well, it’s very relevant for our industries as well, you know, on think of the internet of things, the more units you put on, the more value you get, I use the simple example that out of Computational Imaging, and that we’re seeing being used in everything from the cameras we use to home security systems. You know, in our own life, we probably used to have 1520 30 years ago, one camera per family, and it would come out at special events, you would take some photos, and you’d print them, develop them and share with the family, then digital cameras came out and all of us could afford one for two $300. So all of us had a camera than camera phones came out. And suddenly, we had two or three cameras per person. So today, I have a camera on my laptop on my iPad on my phones, you know, a couple of home security cameras, I have, you know, maybe you know, five, six cameras per person. Very soon, in our own lifetime, we will see the number of cameras per person going from this small number to maybe 10s, or hundreds of cameras per person. And the utility of that network is that at that point, the cameras are not taking photos with us to look at and smile, they’re taking photos for machines to analyze. And they’re essentially analyzing every aspect of our life now with all the privacy considerations in place. But they’re really trying to figure out what is happening around us that even we may not be aware of. And all these cameras are talking to each other. All the centers are pulling their data together, and increasingly so at the edge sort of sending instructions to each other on what to look out for. Right. So if you’re thinking of a physical security system, this becomes an extremely powerful network where you’re no longer at a mall with a security guard sitting with eight camera screens and screens in front of him and trying to figure out if anything bad is happening. But you have a powerful network of sensors that all communicating with via machines to each other analyzing the information and quickly focusing the resources on where they see some anomaly happening. And that’s how I think the future systems will be in that kind of a setup, the network effects are extremely important. The more you know, sensors you put onto the network, the more intelligence you get, and frankly, the entire network becomes smarter.

22:25
Right? Yeah, some time ago, I wrote an article that I think I called data as a network effect. And I was talking about how, you know, it’s slightly intimidating, almost that some of these tech companies like the Googles and Facebooks, even Netflix, I cited it as an example of using data as a network effect. And even being able to predict your interests and your wants and your needs, to a degree beyond what you can predict for yourself and how this they’re hoarding of data. And their consolidation of data is making it very difficult for any consumer to sort of unplug from their platforms.

22:59
Yeah, and I think you’re increasingly, you know, seeing that spillover into our physical world as well. So you know, all of us now seem to have an Amazon Alexa at home, right? So what you’re starting to see is that, you know, you started with one device, in some ways, it didn’t do very much, right. Like, it basically played songs for you, which you could have played with your phone and kind of told you what the weather was when you had Siri on your phone. But it was, you know, simplification and made very easy to use by everybody. But you’re starting to see how the network effect grow, where you have now, pretty much every consumer hardware device coming out is almost required, in some ways to be Alexa compatible, unless it’s a device by one of Alexa competitors. And you’re seeing all these systems kind of communicate with each other. So you’ll have light switches, door locks, camera systems that are all communicating with each other over Alexa and communicating, you know, and sending data to each other that can be used. So if the camera system recognizes that there might be an intruder outside, or some shady looking person outside, immediately the door lock checks that you know, am I locked face or not? And perhaps even the security alarm goes off. And that could be actually a Alexa type method for you to talk to each other, and talk to that person outside.

24:08
Amazing. Yeah, I also wanted to get your take on sort of business model as a moat, you know, you mentioned sort of sensor systems. And, you know, often you can have sort of hardware incorporated into a business model. You could have a razor razor blade business model, which kind of increases stickiness and attachment of customers. I’m curious to hear your thoughts on if you think the business model itself can be structured to sort of create a moat, and if so, is that sustainable?

24:35
Yeah. So I think this is increasingly becoming more important. You know, some people are calling it in our world, the hardware as a service model, but often it’s misunderstood, but, but I think there are interesting effects of that. So, of course, in our own life, we’ve seen just in the last few years, how you know, our car ownership equation has completely changed because of a change in the business model, right? So it’s no longer about owning a car. car, it’s about transportation and mobility. And in fact, you’re seeing companies like Ford, not calling them an automotive company anymore, but calling themselves a mobility company, because they’re realizing that the business that they are in is moving people from point A to point B, or goods from point A to point B, rather than selling a vehicle to us. Yeah, I think the same thing, you know, in a very different way is happening around, you know, industries that we’ve invested in, for example, and in space and satellites, you know, Digital Globe used to have Earth imaging satellites, high resolution satellites, few of them, and the government essentially bought their entire capacity and would then share with others. And in some ways, you could position these satellites to look where the government wanted them to spend more time looking. And that has completely changed as companies like planet and others have come in where they have put constellations of satellites in the space, and you no longer buy satellite time. But you’re essentially buying data, a company in our own portfolio called sail drone is the same idea that you have this autonomous ocean going drones that collect incredible amounts of data that otherwise would cost you on a ship 30 to $70,000 a day to collect the collecting it for a fraction of that cost. But instead of you just you know, sort of taking ownership of one of those boats and using it where you want them to be they will have a network of these autonomous drones across the world, and you buy the data and you buy the insights. Now, when that happens, it’s not only that, it’s easier to of course, the it’s easier to buy, because you’re not making a capital expense decision. But it’s an OPEX decision. And it’s easier for you to calculate your ROI is but it’s also that you’re really tying into that company’s intelligence, right? So you’re no longer just a hardware provider, but you start thinking about how will your customers be using this information and what intelligence and insights they’re looking for. So there’s a greater partnership between the vendor and the buyer. And I think it creates a very interesting moat, because it becomes much harder for these companies to get off of that, because, you know, you’re no longer just buying a car, but you’re actually really built, you know, your own systems are built on top of the data networks that these companies are providing to you, but data streams that these companies are providing to you.

27:07
Sure, and if you’re providing ongoing value, or if the company is providing ongoing value to the consumer, something I like to talk about is how at the point of sale, that’s the beginning of the relationship between the company and the consumer, or a long term value exchange, right, whereas, you know, old school shelfwear In the software category, or gadgets in the hardware category, the point of sale was sort of the end of the value exchange between between company and consumer.

27:32
Yeah, the one time sale model is a really tough one for venture capitalists. But even though we started there, you know, we sold computers, and then we maybe sold some services with it. And then we had a upgrade cycle that we would come back and try to sell you the newer model. It’s very hard, it’s unpredictable. It’s it has a cyclicality to it, you’re partly dependent on you know, your customers own capital spend cycles, but partly dependent on how the economy is doing. And I think all of that is rapidly changing, in my opinion, where, as you said that the relationship begins when you make the sale. And frankly, there’s a very quick iterative process by which the vendor or the supplier actually learns how your customer is using the information that you’re providing to them. So you can actually build that into your own product development cycle. And even for what would be considered very hardware companies, there’s no, I mean, unless you’re selling an ironing stand anymore, almost all hardware has a lot of software included with it. And you know, as more and more software becomes more and more important for these hardware companies, those quicker iteration cycles, working in close collaboration with the customers is really important. And we’ve seen many of our customers benefit from that. And it’s across industries. You know, it’s as I mentioned, it’s satellite companies, it’s drone companies, you know, sci fi, for example, sells drones, to government and military and very quick iteration on how people are actually using them, in some ways abusing them, that we have to now built into our product so that they can survive those conditions. It’s happening in metal 3d printing, it’s not just a printer is an entire software package. And you’re starting to learn what kind of designs and techniques we need to provide for people to optimize on their product usage and the product design techniques, all the way to, as I mentioned in home, video monitoring stuff, but it’s not about selling you a home video monitor or a security system, but essentially providing you what you really are looking for, which is security as a service.

29:21
Love it. Love it. And it totally shifts the discussion from being all about customer acquisition, and just how do we place products to how do we continue to provide more and more ongoing value over time and increase that curve, but, you know, something I wanted to touch on also was brand, and I know that brand is probably not, you know, a big moat, at least at the point of investment. You know, usually these companies are maybe trying to build a brand but haven’t gotten there yet. But I used to work for a company called Danaher, and I did m&a for them. And part of our focus was buying really strong b2b companies that had really strong brands, you know, on the on your BCG matrix, but all of these would be the sessions. The cash cows that weren’t being milked, right, we jack up the prices, and we’d launch new products. And we’d exploit more channels and extract as much value out of the strong brands as possible. So how do you think about brand as a moat as a venture capitalist, and with the companies that you’re investing in? Look, anytime

30:15
you especially if you’re selling to the consumer, the brand becomes really important. Now, it’s important if your entire business model is predicated on building a brand is a completely different animal. Right. So if you are, you know, selling airline tickets online, and you know, you have to build a brand, and hence, you have to spend the 50 100 million dollars plus that might be required to do that you’re running TV ads, magazine ads, and all that’s a very different kind of a brand building exercise. Or if you’re selling a commodity product, a new brand of tissue papers out there that may be incrementally better. I think even on harder tech products, entrepreneurs are realizing how important brand is. And the reason is that people want even their, you know, sort of very technically sophisticated products to be aspirational products. In some ways, the iPhones of the world have changed that for everybody, or even before that the apples of the world, right? Just the idea that you are buying something that has an aspirational value associated with it is really important because people anticipate now that I’m buying what I’m buying now, but I’m essentially buying into something bigger than that, you know, the over the air updates, the OTAs, as they’re called now, it is no longer something that people just talk about. And very few companies do almost all hardware products and are built with that because the customer understands that if I’m buying into a particular brand, I will get this kind of feature update. And you know, this, this delight that I will continue to get, it’s not a once and done thing. And I think those brands become extremely important. Look at all the companies that have you know, those of us who do deep tech investing, look at a success stories like The Tesla, the nest, the SpaceX, the Oculus, the stem Centrex is of the world, they’re almost you know, a household name, even though they’re selling products that are not necessarily house should be household names. You know, Tesla is not a product for average American is an extremely expensive product, even though they want to make it available to everybody. But certainly SpaceX is not, you know, or STEM centric is not, but they had to build strong brands, because it’s not just about a recognition. But it also sends a message of what this company stands for what this company stands for, in terms of its value prop to the end user, what it stands for, in terms of its innovation capabilities, and what it stands for, in terms of its understanding of where the technology world is headed. And so definitely companies that are able to get into that Zeitgeist and, and are able to capture the imagination of people do well, it’s not enough, your product still has to deliver. But if you’re able to build a brand, you certainly create a lot of value for your venture investors and for your shareholders. Because companies, when they’re getting bought are also given a lot of value, especially when you’re addressing very large incumbent industries that pay if I buy this company, not only do I get this great team, and I get this great technology with very early revenues, I actually get to tell my entire shareholder base that I am buying this hot stuff that will allow me to really take a step function in how I think about myself and the customers and other customers think about me, and your ability to bring that to a customer is actually pretty important,

33:17
super wide and deep moat. Right? So are you looking at NPS scores for prospective investments or any other advanced brand oriented customer satisfaction metrics,

33:28
so often be invested in at a time and the product is not even launched yet? So in that sense, at the time of investment, no, but certainly when the product launches, it becomes extremely important, especially for any product that’s consumer focused, but not only consumer focused, in some ways, it also says a lot about the management team. Who do they put first? Is this a management team that driven by satisfying their customer base and addressing their customer bases problems? Or is this a tech first team that has a widget and looking for somebody to use it, I strongly believe in backing teams that are mission driven, but their mission is to actually solve some important problem in the world, an important problem is usually with the customer who is going to pay and hence they have to have a very close relationship and eye on how the customers the end users could be a business enterprise or a consumer is actually thinking about their solutions, what kind of feedback they’re getting, and how quickly is this company responding to that?

34:27
It’s amazing. Do you see your founding team spending a significant amount of time with customers to make sure they’re fully understanding that and how best to fulfill the mission

34:36
100% And in fact, increasingly, so even more, I mean, look, you know, our teams tend to be very technical. And this is not something that comes naturally to them. Many of them did not attend business school classes and think about NPS scores and their one on one classes, but they’re starting to appreciate understand and technical founders are realizing that this is really important. And in some ways, I would argue that I look back what has changed with I’ve been investing now for roughly 10 years, what has changed from 10 years ago, hardware investing to now is a much greater appreciation among the founders and the entrepreneurs, that it is not only the technology that wins, it’s actually the solution that you provide to a customer’s problem that when’s your technology may be a really, really important part of that. But you’ve got to solve the end problem, which is why you saw that 10 years ago, there was a lot more component Based Investing happening, okay, you know, here’s my little chip on my little device that actually does the most important thing. And people would build that and then would hope that they would get picked up because this is the most important component turns out as some others have called it, this full stack kind of companies were more relevant and important than venture worthy, because they’re, you could actually show the end customer by using your core technology, but building the right solution around it, you could tell the end customer and be closer to them to first tell them that I’m solving your problem. But more importantly, also, that let’s go develop the solution together. Because often the customer is also learning in that process, by using your solution, what their needs really are or how they’re changing.

36:09
So is it is a mode a requirement for an investment that you guys make, or multiple of these moats that we’ve talked about whether it be you know, IP, or product or team or any of the others?

36:20
Look, I’m sure we’ve made some exceptions. If an amazing entrepreneur walks through the door, sometimes you’re just backing the team, you’re just basically saying, This guy is amazing, he’s going to do something amazing, or she’s going to build some amazing company. And we don’t know exactly where but let’s back them up. You know, even we’ve had entrepreneurs and residents to do that. But I think by and large, if you look at the success stories in venture, specially in the deep tech space, those modes have been really important if you don’t have that. So let’s assume you’re the genius that discovered a very large market that nobody else had discovered. And you start making some headway in there, you don’t have a moat, guess what other people even if they may not be genius enough to recognize this on their own once they see you making headway once they see you raising capital from good investors, when they see you getting customers, they will come there, right, not only new startups will get formed in that space. Other VCs who could not invest in you will invest in competitors or create competitors. And large companies will start putting some r&d resources to Hey, we should have something happening in this space to suddenly this genius idea that you had is now being attacked by all kinds of companies. And either there’ll be margin pressure, or your exits are problematic. Or you’re dealing with talent crunch, where you know, the same talent is now divided over 10 Different companies, it becomes much harder to build a very large company, unless you have a protective mode that keeps most of the competition out. Some may still get in and competition is a healthy thing. But too much competition is great for the for the customer, but it may actually suck for a venture investment.

37:51
Awesome. Awesome. So I want to put you on the spot a little bit here and cite any example doesn’t have to be in the portfolio. But do you have an example of a situation where maybe a tech company thought it had a moat like a broad and deep moat, but ultimately didn’t have the defensibility that they thought and were disrupted and lost a bunch of their value?

38:10
Ah, well, I’ll name this company because you know, a lot has changed in this company now. But you know, I looked at the early stage around at a company called MakerBot, which was the among the early pioneers of plastic 3d printing. And I went in and company was early on in essentially figuring out how to put plastic 3d printers almost like a paper laser printer on your desktop. So everybody would have access to that. I think it was a very interesting goal. I think they were very early. Certainly they were visionaries in that space. I ended up you know, we chose not to invest. And we chose not to invest because we didn’t see the moat that they thought they had. So they thought they were ahead of the game. They thought they had IP, when we looked around, it didn’t feel like that to us. And then of course, I in some ways, they got a venture exit, and they were bought by a large company Stratasys. But we saw what happened within the next two to three years of this company getting founded. We’ve had dozens, if not hundreds of 3d printing companies, plastic 3d printing companies that God created, the pricing pressure was huge, in some ways they had to get out of that business, because it was just in some ways impossible to build a large business that was a standalone business. This is a place where very interesting idea very relatively early to the market, being a visionary but not having the right kind of moat either on the team or on the technology side that allowed them to build a very large business. Now they were still able to do a great job. They evangelize this product, brought it to market and frankly, essentially created the 3d printing market, at least for the venture capital world. But yeah, I think that would have been had that company had or companies with that sword hadn’t had a lot of IP protection around it. They could have built a standalone multibillion dollar business. Go

39:59
Well, yeah, so as I’m looking across your portfolio right now, and I’m noticing, you’ve got water applications, ground air space, I mean, it seems like you’re covering the entire altitude stack up for lack of a better term. Can you kind of talk about the way you think about this and the way that you’re building out this portfolio? Yeah. So it’s an

40:19
interesting realization that we’ve had, it wasn’t planned that way. But I think what you’re referring to is that we have companies like planet and orbital insight that are in the space, literally, with satellites in space, that are imaging the earth and analyzing that imagery for a very large number of markets, from oil and gas to commodity brokers to hedge funds. Then you have the drone industry, where we have a bunch of investments where again, these are eyes in the sky that are providing intelligence from military, to government, to commercial customers, and increasingly, so thinking about drone delivery processes as well, then you have autonomous vehicles on land. So you have companies like Zeus and Eva and others that are focused on bringing autonomous capabilities to land based vehicles. And then the same thing, as I mentioned earlier sail drone company and autonomous drones on Sailing on the Ocean and collecting data. There’s a lot of commonalities across this number one is that we talked earlier about distributed sensors that are internet connected, real time analytic capabilities, that if you close the loop, it becomes an autonomous system that is happening across all of these these autonomous systems operating in their own domains, and collecting data sharing that data and the data is getting analyzed. The second thing that’s happening is what has happened in the world of machine vision, machine learning and AI has enabled datasets to be analyzed not only on their own, but also combined with other datasets, and deep learning techniques used to extract insights from it. So that has created the multiplication effect for these industries. So satellite imagery can be coupled with the drone imagery for providing high density, high resolution maps of land that can be used by autonomous vehicles, as just as an example, or data collected from satellites can be blended with the data that’s collected from the oceans to create the new climate models and the weather models, for example. So a lot of interesting things happening. And also, it’s having ramifications in the supply chain as well. So the LIDAR systems that used to cost 50 to $100,000, because they were developed for research purposes, are obviously now down to a few $100 being used for automotive applications. But the same LIDAR systems are being put now onto drones for doing agricultural mapping applications, and will increasingly we’ll see, you know, hyperspectral type, which are also laser based scanning systems put onto satellite for looking through the clouds. So even on a cloudy day, you can get measurements of smokestacks, and chimneys and agricultural output. So there’s vendors that were providing to one of these industries are now finding that they are these are common their platform commonalities that they can now go across industries and provide services to them.

42:54
Amazing, amazing blow if we could cover any topic here on the program, What topic do you think should be addressed? And who would you like to hear speak about it?

43:02
Gosh, well, you know, one question that I think about quite a bit. And you know, I’ve been thinking about this here at Lux, since I’ve joined here as well is we think of successful deep tech companies as examples. Tesla Nast, SpaceX, Oculus, etc. One thing is very interesting there, right? None of these companies got even to their first dollar of revenue before they had raised at least 100 $200 million. Right. So these were capital intensive companies. Now, the mantra around Silicon Valley is, Oh, you gotta be capital laid, and you know, but these companies, you know, Tesla’s worth, what? $50 billion. Now, that was a $3 billion exit SpaceX, I mean, billions. Oculus was $2 billion exit stem Centrex, you know, 10s of billions of dollars, they were terrific, some of the best venture capitalist returns in Silicon Valley. But they were solving very hard problems. They’re the kinds of companies Lux capital invests in, but they take capital, and they take patient capital, because you don’t have revenues and traditional metrics of LTVs, and customer acquisition costs and NPS scores and so on. So what are the best practices for evaluating these companies, not only at the earliest stage when you first invest, but if you get opportunities to invest in this company along the way, how would you evaluate those companies? I think it’s a topic that Silicon Valley avoids, frankly. And I would love to be a part of that discussion. I’d love to learn more about that. We’re constantly learning it at LAX. And as I said, over the years, it keeps changing as more and different kinds of capital flows into Silicon Valley.

44:26
I love it. Love it. Who would you like to hear speak about that? Who do you think is one of the better investors at doing just that?

44:32
I mean, look, if some of these companies have some, you know, investors that DFJ for example, that was an investor in Tesla and SpaceX, I think I’d love to hear their thoughts. I think Founders Fund has done some interesting things. I think we are now sitting at a stage where some of my partners have invested in companies that are worth a lot but when we invested we knew that they would need to raise quite a bit of capital and one of the things that we do at Lux is produced the financing risk of our portfolio company. So there are people who do investment, you know, think of large capital data collective DFJ Founders Fund, we do these kinds of investments. And I think we should probably put our brains together and share our learnings and lessons. And hopefully we’ll learn a lot along the way ourselves.

45:16
But while what investor has influenced you most and why

45:21
I’ll give you a name that might be considered cliche to some of your audience, but I’ll tell you the statement that’s on my mind that I think about quite often. So Charlie Munger, obviously, he’s the the idea of the moats and greatest investors of all times. But there’s a quote that’s attributed to him, which is a great business at a fair price is superior to a fair business at a great price. I

45:41
love that. I love it.

45:43
I think in venture capital, we’re looking for the outsized returns, we’re looking for the outliers, and sometimes you have to pay up but it’s worth it.

45:53
And finally, below, what’s the best way for listeners to connect with you?

45:55
Oh, gosh, I’m extremely public. All my social media is on so I love interacting with people I learned a lot that way you know, living in my own Silicon Valley’s a bubble and gotta get out of that bubble as much as we can. Twitter is probably the easiest way to reach out to me once it’s completely public and be it has probably has most conversation options in a group so I met BZ notes and love to get new followers, but more importantly, engage in conversation.

46:23
You are one of my favorite Twitter followers. So check him out at BZ notes. He’s very interactive and your own quotes, I think, are ones that I like to put on my board. So anyway, thanks so much for taking the time. And joining us today below. I hope to get a chance to connect with you when I’m out in San Francisco and can’t wait to publish the interview.

46:41
Awesome. Thank you so much. Great talking to you.

46:49
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot him an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening