393. The $40T Opportunity Investing in Physical Industries, The Framework for Investing in Hardware, and Lessons Learned from Industry Legend, Pierre Lamond (Lior Susan)

393. The $40T Opportunity Investing in Physical Industries, The Framework for Investing in Hardware, and Lessons Learned from Industry Legend, Pierre Lamond (Lior Susan)

Lior Susan of Eclipse Ventures joins Nate to discuss The $40T Opportunity Investing in Physical Industries, The Framework for Investing in Hardware, and Lessons Learned from Industry Legend, Pierre Lamond. In this episode we cover:

  • Misperceptions in Fintech
  • Changing Barriers in Hardware
  • How to Find and Back the Best Founders
  • Macro Environment and Investing in 2023

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Transcribed with AI:

Our guest today is Lior Susan. Lior is the founder and managing partner at Eclipse Ventures, a multi stage firm focused on backing startups building in physical spaces. At Eclipse, Lior has led investments in Cerebras, Arc and Vulcan Forms to name a few. He’s also a co-founder and investor in Bright Machines, a startup that’s reimagining the way products are designed and manufactured. Which was recently valued near a billion dollars. Lior, welcome to the show.
Great to be here. And thanks for having me.
Yeah, you bet. I’ve been looking forward to doing this one. And I wanted to start with prior to getting into Eclipse ventures, can you share the one to two minute background of your upbringing and ultimately, what brought you to Silicon Valley? Yeah,
so I tried to do it fast. But I grew up in Israel in a kibbutz community in the north part of the country. Then the military went to the Special Forces and the been there for a bunch of years finish in 2008. A lot of my brother was starting a company called into cell and join him to help him build that company was first focusing on software defined network company got acquired by Cisco in 2012. I moved to the Bay Area, and met Mike McNamara that was the CEO of Flextronics back then, and Mack convinced me to join him and build the digital transformation team. And I agree, because I had a huge man crush on the guy and felt he is going to change the world. And I joined him and was doing that for about just a little bit over three years. And yeah, you know, it’s kind of was seeing how the whole market is changing and how all of my VC friends cares only about the software and fintech and you know, my heart is in physical industry, so decided to leave to start the Eclipse.
Awesome. So for those that don’t know, you founded the firm with legendary investor Pierre Labonte, who famously worked at Sequoia and legendary name in the space. How did you how’d you come to meet Pierre? What was the journey together to founding the firm?
It was amazing. So it’s been a year from time to time I can be very powerful. I didn’t know who is Pierre B. I never invested in anything before a clip. See, I for sure never, you know, didn’t walk in a VC had no idea what is this all in industry about? But when I when I told that the chairman of Flextronics that I’m going to have this idea I wants to go and invest in physical industries, and I think I will start a fund. You say, hey, go meet this guy’s name’s SPL Aman, and I’m quoting him you say I don’t know if he’s still alive, but if he is go find them, because he knows a lot about what you’re talking about. Actually, Sequoia was a Flextronics investors. And the early stage before flex, you know, went public, so it was a connection a little bit. So I went to CPS, and, you know, in a very PR fashion, 10 minutes into the meeting a interrupt me and he’s like, Hey, young man, are you looking for a partner? And I said, Yes. And kind of the rest is history. But give you a sense. I was 31 years old when we met, he was 85. And he’s now almost 93. And you know, it’s been just an amazing journey with him.
Yeah. Wow, what a what is special opportunity, thinking about your time working with Pierre, what is the greatest lesson that you’ve had from working with him, I’d be curious, both your most salient lesson when assessing new investments, but also one from either working with founders or building large businesses.
You know, it’s there’s so many things that we literally have here at Eclipse, we have a book of PR saying that some of them are extremely funny, and some of them are very serious. But probably the two things I learned the most from him, we are all operators at the Eclipse naturally, Pl I was an operator as well. And he told me that you cannot push founder, you need to nudge them. And I didn’t really understand this notion of nudging before but these all main points was you’re, you’re an operator. And when you see a problem, what we do as an operator, we dive in in order to solve it. And now you’re actually an investor and you need to convince you need to nudge the founder and the CEO to actually do what you think is makes sense you can push them and you know, as an operator Israeli, I like to push so you know, it was definitely a great lesson. The second one was his philosophy of it must be that big. Otherwise it will not make a great venture return that you know, you may you meet all of this amazing cool companies and he wants to be invest and he will say no, yeah, I understand why you like it, but it cannot be that big.
Awesome it. For those that are unfamiliar With the clips in your thesis, can you give us the overview of the firm? And where you guys focus?
Yeah, so we started the clips in 2015, we’re managing over $4 billion. Now, investing exclusively in the intersection between technology and the physical world, meaning we’re looking for tech native startups in industries like manufacturing, energy, construction, defence, aviation, mining, etc. And in general infrastructure, so semiconductor and other things. And we today are full stack. So we can lead early stage round seed series A Series B, but we also have a growth vehicle that we raised a couple of years ago, that allow us to lead a latest later stage round. And we love this book principles. And I was privileged to meet Reina multiple times, where our principle is a high conviction, high ownership, high involvement, so we only lead being very involved in those companies. And yeah, that’s kind of about us.
Yeah. Prior to the show, you mentioned this notion that most bullet, most investors believe that these physical industries, whether it’s semiconductors or manufacturing, can’t deliver venture like returns, or at least not in a capital efficient way. And this is obviously something that you don’t agree with Charles, I don’t think you would have gone to start Eclipse and have the thesis that you do. But where’s the disconnect in the ecosystem between someone like yourself, who believes in has proven that these companies are out there, and they can deliver said returns? And the majority of investors that don’t want to touch fiscal industries with a 10 foot pole?
Yeah. So say, it’s like a multi dimension question. I think the one to start to just be fair to other investors. It was the case maybe 10 years ago. And actually from the internet, boom, mobile cloud, etc. It’s actually was the case that a lot of the venture returns did not came from from an industries that was a physical industries. So I agree with that statement. Also, my generation of people that running other VCs came from the world of LinkedIn, and Twitter and Facebook, they actually we actually grow up in that arena, peers, the generation, they grew up in the world of semiconductor, even Don Valentine. So what was easy for them there was easy for them to do what they are familiar with. That was actually a second notion. The third one, and I think this is where the misperception coming. Today, our average check at the eclipse is identically the same as other FinTech fund or enterprise software fund. So this notion that this is more capital intensive than a softer is actually wrong. What I think it’s right is where this capital is going. So if it’s an enterprise software, you’re actually going to put a lot of money in sales and marketing. If it’s a copy that in the physical industries, you will put a lot of money in building a factory, naturally, the softer company don’t need to build factory, but the manufacturing company don’t need to spend 45% of their balance sheet on sales and marketing. So there’s just actually well those capital have been set. And the last thing I will say, I’m a fundamental investor, knowing by now I never went to school, but learn about it. Try myself that I’m a big in fundamentals. I look on the world GDP, the world GDP is about 100 trillion today. About 80 trillion is in physical industries, tech penetration in those 80 trillion is a single digit, and pure fundamental, I believe that number is going to continue to grow and grow and grow. And I will finish by saying if you don’t believe this, look on the public market, trillion dollar micro NACTO company called Nvidia $700 billion automotive company called Tesla. I don’t know $2 trillion logistics company called Amazon, a hardware company 2 trillion called Apple, actually the majority of the top 10 companies in the s&p 500 companies in the physical industries.
And do you expect that trend to persist over the next 10 to 20 years where we see companies with a hardware component, not just software, you mentioned a video, there’s Apple, Tesla, Amazon, etc. And when you take a look at the most valuable companies, to your point, they’re not just software, but as you pull that trend into the future. Do you think the companies that are joining the ranks of the aforementioned companies will also have a hardware component or Okay, and
the quality of the founder that we are seeing right now that came from the world of crypto and software and fintech and wants to be they don’t wants to be Mark Zuckerberg wants to be Elon Musk. And Elon Musk is building rockets and cars he also owning a social media but that’s he didn’t build that company for that matter, and arguably is diminishing returns not generating returns out of that investments. The mode of doing a full stack companies that have both hardware and software is just 100x better than the pure software and The barrier of doing those companies went down dramatically. So the quality of the people we’re seeing walking in those problems right now is incredible.
Can you talk more about what those barriers were and how those barriers have changed over time to start, start these businesses and the opportunity that’s provided for both founders and early stage investors. But if you had to highlight the top three barriers that no longer exists, what are those in your mind and how things fundamentally change over the past decade?
The funny thing, the probably the number one thing that changed is software. And I can do so much simulation today, before I build anything in the hardware that they just couldn’t do before, I will need it to build it, try it fail, try, it failed. And that the amount of software that is kind of happening right now, it’s incredible in the world of how those simulation, CAD, digital twins, etc, etc. The other thing is software. Again, now I can connect my hardware to the cloud, I collect all of this data. And now I’m not delivering only a piece of hardware. And that’s my only mode, I believe in a full stack. And I can push software to the hardware, I can pull data from the hardware. And that’s now influenced the business model that I’m involved, that is a giant innovation that happening in that space. And then you put on top of it, they saw amazing semiconductor that I’m using off the shelf components that I’m using off the shelf, the contract manufacturing that willing to work with anyone, including startups, that just lower the barriers of what used to be, I need to do everything from myself from scratch. We have a bunch of companies in the electrification space, you don’t need to build batteries, you buy batteries, and you just like, you know, you the the main thing that they will innovate is on the software. And it used to be the other way around. Um, so there is a lot of innovation and barriers that went down that we are seeing now companies raising $5 million. And with that $5 million, showing us fully automated warehouse using robotics and software, and you’re like, Oh, my God, I cannot believe you did all of that with.
Yeah, yeah. And having been a hardware founder, I found that working with these contract manufacturers, it’s cheaper than you’d expect as well, because they’re adopting software. They’re adopting automation to be more cost competitive with their their own competitive set. So it really is quite interesting how things have shifted. I’m, I’m curious from your perspective at the earliest stages of venture, so call it precede seed, the initial round of funding, putting aside the nomenclature, from your perspective, is there a deficit of capital going into these physical spaces? Or is it relatively efficient?
So I’ve said two things that changed dramatically, I kind of post COVID, there was actually a big moment that happened in the industries that we operate a the world faced those industries to be very vulnerable, and not very resilience. And as a result, all of those industries now trying to digital console, a lot of the things we talked about made a lot of those companies to start because it’s easier to start. And as a result, we’re seeing much more capital actually coming from general firms and other investors that say, Oh, actually, in videos, a trillion dollar and Tesla is whatever it is, and and Elon has been very successful, we should start paying attention much more to those categories in those industries. And as a result, we’re just seeing much more capital coming to the earlier stage into those companies that we’re building.
Do you think we’re there yet, though, in terms of where it needs to be. And to put some additional colour around this I rewind two years ago, or three years ago now. And when crypto and web three was really trending, it felt like one in three, one in four companies that we were seeing was a crypto or web three company. And today, we it feels like one in three or one and for our generative AI business, it’s rarer still to come across those that have the insights in these physical industries. And I’ve asked why that is and reflected on it. And it’s because I feel like from our perspective, we’re incentivized to invest in businesses that can get big quickly, ie software, and we funnel money in there, and therefore talent follows where capital goes, and it almost self reinforces and more and more founders funnel into those spaces that can receive capital quickly at nice valuations and grow quickly. And from your perspective, you mentioned, there are some founders out there that have greater ambitions, but it almost feels like venture has been partly to blame in the Delta, in terms of capital going into those industries, versus where it needs to be and I’m curious if you think that delta is finally closed, or if we still need work, work in more invest servers need to be dedicating time attention and capital to the spaces.
Yeah, that’s the reason I started Eclipse. And I think nobody’s talking about web three and NF these anymore. And it was like the hottest thing couple of years ago. And now Gen AI is the hottest thing. I’m not the momentum investor, I’m a fundamental investor I’m looking on, you know, what always will be here is construction. You know, what also always will be here is logistics, and manufacturing, and defence. So, yeah, crypto will come and go, and if they will come and go, Gen AI will come and go, those industries are not going anywhere. And if you can build a company, and it’s going to take time, it’s going to require the capital, and it’s going to require some amazing ambition founders, the outcome will be Nvidia. So it depends who you are, do you want to do a quick flips and maybe find some small Gen AI marketing and be able to get the quick blame because you’re in the hype cycle, or you wants to actually build a company that, and I’m not judging, this is just my personality, that they will be proud to tell my kids that that sort of long duration energy storage, or metal manufacturing, or pharma manufacturing, or next generation aviation, things that will metaphor humanity, that usually in the world of history correlated to the largest outcome? And I’m for that, right.
I want to go into how you evaluate these companies in these spaces in a moment, but prior to evaluation is sourcing finding these founders that are starting these businesses. So I’m curious, how do you guys approach finding these companies it? You mentioned this in the beginning of the interview, but it’s not like these founders are leaving LinkedIn, or meta, and the usual companies that are already tied into the venture ecosystem. So how do you ensure that you’re maximising your chances of finding these founders, with these great ambitions and these physical spaces?
Yeah, so a couple of data points, I think is interesting. Last year, we saw almost 30 to 100 companies in our spaces. So the amount of companies is being built in our spaces, the graph looks like like that up to the right, that in other an interesting data point is historically we’ll invest in a lot of people that came from SpaceX, Tesla, Amazon, Apple, because they will no force like really well and kind of be easier for them to sell those companies. We backed a bunch of people now that came from Coinbase. Mehta and Google, because they were like, we’re very good engineers, and we wants to do something that it’s matter that actually can, you know, have an impact on this world. We don’t want to do another crypto. So that’s a second interesting data point. About half of the deal that Eclipse is doing every year is we out bound the company. So we doing a minimum of a 12, I would bounce every week as a fail, each of us as partners, why and why that is
so good. I was gonna say Do you know what you’re looking for when you’re doing? So you have the season you’ve identified? Okay,
we build, we build about 66 zero investment thesis every year. Without investment thesis, we’ll go and hunt and look for companies that are answering that investment thesis and we will map the whole market and we’re trying to find the one that we like the most.
I see it How much do you draw on other geographies, in look to other countries for inspiration for what what is possible? Or what is likely to happen here in the United States. And to add some context, I mean, Korea, Japan, they’re much further ahead when it comes to automation and robotics, for example. So as you’re taking a look at these physical spaces, do does that factor into your thesis building? Do you look to other geographies? Or what is your process or framework to identifying these trends and building these theses that you’re the most interested in?
Yeah, that’s a good question. Everyone here are operators that operate in companies like Tesla and rivian, and Apple and samsara and GE and flex and many others. And we have this network of a lot of people in different industries that we will meet constantly to get an idea of Tell me about your problem and your production. Tell me about your problem and your supply chain. Tell me about your problem in the worlds of construction and labour. And from that we will zoom out to build those thesis and it will go thesis 1.0 2.0 3.0 and this will be the depth of the thesis. And you’re absolutely right in a lot of cases. We will also look on other geographies of like okay, we are looking on next generation minerals and we are looking on how mining of minerals looks today in South Africa and Australia that actually will be much more advanced than in this country or Canada for that for the matter, then we will go and send a team to do a research of okay, if I wants to automate it, abstraction of mineral, what is the right architecture to go and do it? We will build the thesis and then we’ll go and outbound the market of companies that will think answering that that type of a thesis.
Got it it can you share any theses that you’re the most excited about right now.
We do a lot of work on onshore semiconductor, we actually doing that for a long time. And we have a bunch of companies and we think there is much more to do in the whole stack of semiconductor. So photography to fabs next generation materials, the whole testers and software to support that. There is a lot there. And we did I think, super exciting naturally with the whole government onshoring effort. There is a lot to do in this country around next generation semiconductor.
Yeah, definitely. Okay, so we built the thesis, we found the founder. Now, when it comes to evaluating and choosing which one you’re ultimately going to invest in, how do you think through assessing both the founder, and also the opportunity? Are there any frameworks or must have asked attributes when you’re assessing these businesses in these physical spaces?
Yeah. So naturally, in some way old school team, Tam technology for us, because we are all here have a deep technical background in those sectors, the tech will be the first one, we are cleaning off the table and go dive in and look under differentiation and check that box, the TAM, the market must be that big. I talked about now we operate in this believe that if we wants to be the best venture capital in the world, we must build companies that can be that big. So the TAM needs to support that. And the one that we are spending most of the time naturally is the team. And the end of the day, we are going to sign up for working with people here for 10 years, we are an operators, we are going to be the largest investor on the cap table, always on the board. And you know, it’s going to be a journey of us being very involved in your business. And we wants to make sure that you want us as a partner, and we want you as our founder,
I want to double click on a couple of those areas. But maybe let’s start with the team. And the ambition to take it big, right? Like, how do you delineate the founder that wants to ride for 10 years go to IPO versus the founder that might take that 100 100 and $50 million acquisition offer when it comes up in three years?
Yeah, it’s appear to have this famous say, he say companies are not getting sold, companies are getting bought. And his main point is like, if you’re trying to sell a company, you’re not going to get the great outcome, the best outcome will be when someone knocking on your door and say I wants to buy a business. And it’s hard to know, you know, most of the founders were saying no, I wants to build the largest business in the world. But then the reality when someone knocking on their door and offered them to be $400 million. In our case, they will say yes. And you know, the famous beer saying you say you cannot enforce the founder. If the founder wants to sell you let them sell because at the end of the day he ran the company happened to us before that, you know, we thought companies are selling too early. But that’s kind of part of the journey.
Yeah. And next is on technology. I’m curious to get your perspective on patents, which isn’t something that’s talked about very often. But they matter, more invisible industries where you have real inventions that are protected. How much do patents and IP matter when you’re evaluating the technology, and it’s defensibility
in a lot of gays needs, we will invest in a two guy in a presentation. So there’s like nothing yet to show besides the quality of the team and the problem they wants to solve. We are definitely you’re absolutely right. I think one of the most in what companies that we backed out doing is there is a lot of IP. And we will usually we’ll dive in later on with the strategy, what should be patterns, what should be trade secret, we do a lot of trade secrets because you don’t necessarily want to tell the world what you’re doing when you patent you are going to put all of your drawing in the pirate patterns authority Authority Office, we will spend time on that, but usually in a later stage. Got it.
I’m also curious how the macro economic environment has changed the way you’re approaching investing, if at all. I mean, it sounds like even at the earliest stages, it’s apples to apples and relative to investing in a pure FinTech, b2b company or a company that strictly uses software relative to these businesses that have a physical component. So has the macroeconomic environment affected the way that you’re approaching making new investments whether it’s at the early stage, or as you mentioned, you are full stack so you do growth as well. Where are you pulling back? If anywhere, where are you leaning in more just in terms of a stage perspective?
Yeah, did not change at all. For us. Again, we are fundamentally investors and And we think you know, the best companies in the world is building regardless on the cycles of the economy, we are seeing, again, some of the most impressive founders I’ve ever seen working on those problems, and we are just very, very excited about backing them, I stay the Global Fund is a pretty new thing for us. And I’m super excited about it, because we are seeing some businesses that we passed, and they’re not being amazing companies, or we just missed coming in once a collapse on the cap table. And also, where we see a different is they have a much more realistic understanding on valuations. And you know, some of those businesses, unfortunately, went too far by some tourist investors, the thing I really love about what we do to do company in the physical industry, you need to have much more discipline than traditional, you know, crypto, something that is very hard, you know, hype and you can get a lot of money and could just grow, it really is a if you break, I like to say you cannot break it till you make it because when you break it in our industries, you actually break it. It’s like the battery didn’t work, that news, your customers are not going to continue by it. You can push software, maybe to fix it. So usually we see we find more discipline and the type of founders that work in our industries. But no, no, no any change on our side, we being more active this year that we’ve been active in the last two years
now really, as the way that you approach advising founders changed at all? or what have you telling your founders today.
I mean, I think, again, we work with them on a daily basis with the founders. And we are very, we are managing the portfolio, what we call the core value drivers. So basically, we’re looking on each company and what is the four or five things that must be true each month and each quarter and each year in order to unlock the inflection point. And we’ve been working like that with those companies for years. Yeah, we are telling those funders listen, you need to be much better than before, and you need to use your cash in a more disciplined matter. But that’s not not very different than what we told them two years ago. So we always have that approach of like, you need to be smart on core value drivers before you actually need to go out and raise more capital, because it’s pretty straightforward. If I didn’t hit the inflection point, and I need to raise money, guess what, regardless of the environment is going to be hot?
How do you think founders should best leverage their relationships with investors in general? So you guys are very hands on? The relationship seems like it’s quite fluid, or it’s one of that’s on a spectrum with investors and founders. How do you? How would you advise founders to best leverage their investors?
I think it really depends. And our approach is authentic to who we are. So I kind of I don’t know how to do anything else. And I always tell founders, if you just want to check and so on to show up in a board meeting and probably didn’t even read the board deck on the wrong on the wrong person for you. So don’t take my money. I think we’re founders should the leverage investors the most and that’s another thing that touched me and eight companies are not failing on technology, those are usually are not failing on the people, they will always fail on the market. If you have attraction, revenue, solve all of your problems in life. That’s kind of what we tell founders here. And PL big around that is revenue solve all of your problems in life. And I think investors have a lot of relationship with executive. And in every Saturday and Sunday are the two hours that my wife and my family knows that they’ll block of me out bounding for on the behalf of our customer on the behalf of our portfolio customers. Because I will have a much better hit rate because people will want naturally to answer my email or my LinkedIn outreach to ask your investors go work for me go out do outbound on the go to market and the customers. The hit rate is amazing.
I mean, I’m sure founders love that when you bring in customers in their behalf. Lior if we could feature anyone on the show, who should we interview on what topic would you like to hear them speak about?
Great question. I think we talked about the principles. I would love to see Ray on your show. You know, I think usually he’s talking a lot about macro and actually more in the words of hedge funds. I actually think he have a lot of really interesting insights when early stage venture and how to think about building those companies. While you’re thinking about the public market. I think this timeline is compressing and the expectation of founders to think about what a really large company with mean for them how to think about earnings, how to think about right investors in the public market. So if you can get a plus one by me, oh, yeah,
he’d be great principles is a fantastic book, and he’s just an amazing person in general. Or do you have any habits, tactics or techniques that you would consider a secret weapon?
We have this famous things are the clips. We say we sleep fast. I learned that the other day So far says it’s this joke is that you don’t need to sleep a lot. You just need to sleep fast. So if you can sleep fast, you will get more time of your day.
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