Betting on Founders Who Build the Real World

0:09Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. In today's episode, I got to sit down with Lior Susan from Eclipse Ventures to explore his journey from building companies to starting his own venture capital firm nearly 10 years ago. I met Lior early in his journey as an investor, and I wanted to spend a lot of time going through his learnings on the similarities and differences of being an operator of companies to being an operator of an investment firm. I spent the bulk of the podcast talking about the things necessary to build a durable firm, including building the right talent base, adapting to changing micro and macro conditions, and how firms need to constantly challenge legacy assumptions.

0:49We really hope you enjoy our episode with Lear. Samir Khadji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third-party investments or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

1:30Lior, it's so great to see you. And thanks again for being on the show. It's been a long time coming. I appreciate it, Samir. It's great to be here. You know, it's funny because we were talking a little bit before this conversation started, and now Eclipse has been around for 10 years. I still remember the early days when you and I met in the offices of Formation 8, and this was just a thought of what you were going to do. Take us a little bit back into your background and then the things that informed launching Eclipse back in 2015. Yeah, I always say that I'm like a purpose build without the strategy.

2:03But, you know, I grew up on a farmland and a kibbutz community. So I started my career in the agriculture. Then I joined the military and I went to the special forces. So that was my defense. Then I left to start a company with my brother in the networking hardware space. And that was my first hardware touch. A company got acquired by Cisco. I met the CEO of Flextronics and joined my catflex to help them build a digital transformation team. And that was my manufacturing. So I'm like agriculture to defense to hardware to manufacturing. I was like a purpose built there to start this film without knowing it.

2:38But yeah, that's as an operator, as a founder, my passion was always building in the physical world. And 10 years ago, I felt these industries are going to have a massive digital transformation and there is no investors focusing on that. And that's the only thing I know or care. So that was the origin of Eclipse. Yeah, and there's so much there in terms of the thesis, right? So you had the background in manufacturing, you really understand that technology was not just on the screen, but it was on these physical devices. But a lot of what I often found when people are starting firms is there's not only a gap that you see that needs to be served through capital, but it's a certain DNA that you want to build the firm around.

3:21So you were with the Israeli Special Forces, obviously started a company, sold it. And those things kind of inform like what type of firm you want to build. How purposeful was that piece of it of what does Eclipse stand for from the values? And then, you know, the type of people you bring into the firm. Yeah, a hundred percent. And my first partner at the firm was Pierre Lamont. And when I met Pierre 10 years ago, he was 85 and I was 30. And after 10 minutes in a very Pierre fashion with a French accent, he said, hey, young man, he wants to build a film together when I didn't know anything about investing.

3:57But I think where we, him and I, very much share the same philosophy about building teams, naturally, he, after a National Semi, after Fairy Child, National Semi, and then Sequoia for 35 years, I think him and I believe in this special forces mindset, like small group of people that are aligning around the same shell vision and mission and collaborate and operate as a one unit. And that thing's 10 years into a cliff didn't change. If you then think back at that time, and as you and Pierre, Pierre is still around at the age of 95 and a ton of energy, obviously, in terms of what he's not only done, but done with you.

4:36But as you look at the evolution of the business, which now, you know, the last set of funds, obviously north of a billion total. The first fund was sub 200 million. Walk us through the original thesis of what you said. related to thinking through this aspect of investing in the physical world. When at the time it was all about kind of mobile and it was SaaS, where did you see the main gap? Yeah, I mean, I think you're right. And 10 years ago, I actually didn't even know what is limited partners means, that it's kind of sounds funny or LPAs or data room. That was all very much new to me. And we started with the first one of$125 million that Pierre and myself of contribute to start with.

5:19And then I went into the journey of looking for limited partners. It was much harder than I thought it's going to be. And thanks to you and a few others that helped me along the way, somehow we were managing to raise that fund over 16 months and five clauses. So it was way harder than I thought. I'll say that my original thesis was pretty straightforward. If you're looking on the world GDP, call it around 120 trillion, about 85 % of that is what that will categorize physical industry. Manufacturing, mining, defense, logistics, agriculture, aviation, basically anything that atoms operate in the world is the majority of the world GDP.

5:56And if you want to build companies in those sectors, you are going to need to connect bits and atoms together. And that's companies just being built different. Naturally, some of Identic AI looks very different than Tesla. Some enterprise software looks very different than SpaceX. Some fintech looks very different than NVIDIA. So I think what Diwali is being very focused on in the last 23 years in some way, right Spoli, on this asset-led software only, when my approach and passion was like, no, I like to build in the physical world. And that looks different. That's going to take capital. Those founders are going to operate differently.

6:33And that's also drove how we changed the fund size in order to support those founders, learning that the needs in the market are much severe and the opportunity is much greater than I originally thought. Now that we're a year 10, you can kind of look back at all the things that have happened. And similarly for us as a company, so an allocate, we started four and a half years ago. And a lot of the original thesis is the very same, which is around the private markets. It's around the size, making things easier. And that hasn't really changed. But a lot of things have changed based on client insights, based on the evolution of the private markets, the macro.

7:14If you can look back, I guess, on those 10 years, and you kind of mentioned one thing, which is adapting the fund size based on the changes. What are some of the other big changes that you've seen during those 10 years that did act as a forcing function to change something about what you did, whether it was fund size, decision-making criteria, maybe the portfolio construction, things like that? Yeah, I'll say two things on that. Sam Osman opened our AGM last week, and he told me that I thought it's a brilliant sentence. he said, Leo, AI is more capital intensive than hardware. And I thought that's just a brilliant comment of we are seeing software as becoming more capital intense than hardware that kind of dramatically changed the world.

7:56I think I obsess about building high function team. And there is two things around building high function teams and like elite teams in sports and military and startups, whatever it is. You want to build a culture The culture is very much cement, but you constantly need to change because the world around you change. And how you balance between those two, I think, is the name of the game. How I can actually attract the people that will be the most talented I can find in the world, unite them around the mission, but not ignore what's happening around me, because naturally I operate in a very dynamic market.

8:34And that's true to any elite team I ever built in my life. And when we started Eclipse 10 years ago, the opportunity set was for a smaller fund. And I think where we are today is the opportunity set that the largest companies on the globe are in physical industries. Their earnings did a massive catch up in the last 10 years. So the public market wants to see more businesses like that. And for that, the richest person on earth started two companies in the physical industries in order to create that wealth. So the opportunity changed. And as a result, we are not changing our culture and the way we operate in our conviction, but we are adjusting the strategy to support it.

9:12When you think about the business model, though, and the business model for$125 million fund is very different than a fund raising$500 ,000,$600 ,000,$700 million, right? You're deploying more capital. The portfolio construction, you're doing follow-ons. At a much deeper degree, you're going later in the stack. And, of course, you have both early stage and kind of growth stage opportunities. opportunities, what has changed, I guess, on the business model standpoint, as you've grown fund sizes in as much as has anything changed in terms of how you make decisions, how you underwrite, and maybe just, you know, around the edges, like things that might be not obvious that managers should think about as they continue to grow fund sizes?

9:49Yeah, I'll say the one thing that did not change at all is we are still this high conviction, high involvement, high ownership, and we actually didn't change it in 10 years. We also didn't change of us hiring an incredible operators and train them to be investors. We didn't change our economic structure. Everyone makes money in the same way, regardless of which company it is. We didn't change the industries that we operate. We only operate in physical industries. What we did change is if historically 10 years ago, we thought the best company at Eclipse would be$5 billion enterprise value. I think we have now a few companies at Eclipse that will be 70 and 80 billion.

10:27And that's naturally giving you the confidence that he wants to compound capital and not only invest in the earlier stage, but also compound as those businesses start inflecting. And that's muscle that we did not have originally. Maybe I found that a lot of managers are not doing that for some reason. And for me, it was very trivial. And maybe thanks to PL partially is this is running a fund is running a business. It's not raising money and making investments. And so I was so fun. No, it's a company. It's a business. And everything that we do here, quarterly reports, AGMs, emails, is like in the top of the way I can, the best I can do.

11:09And I obsess about it and I cannot stop thinking about this is a business and we are as good as we are running our internal business. That's how we find the best CEOs. That's how we find the best LPs. That's how we'll find the best partner to join us at Eclipse. I couldn't agree with that more. And so many people actually miss this, whereby they think raising a fund is just basically around, I'm going to invest a bunch of capital, I'm going to work with entrepreneurs. And it's all the other stuff that you have to do because you have to think about your LPs who are your shareholders. You have to think about your team, its talent, acquisition, retention, its KPIs.

11:46How do you know it's working in a business that has such a long feedback cycle? Because it does take 10 years to even know, are you actually building something where the returns are actually showing up? And I want to maybe go down and double click on a few of those. So let's talk about from a team standpoint. You mentioned high conviction investing. You've brought in people that are operators that may not have been longtime VCs, but really understood sort of the manufacturing or physical world. You teach them to be investors. They're now acting as stewards of capital. How do you think about decision making?

12:18Because you are taking high ownership in these companies. And when you invest in, let's say, at Series A and you take 20 % to 25 % ownership, you have to be sure it's one of those companies that can grow and potentially return the fund. It also creates a conflict of you investing in other companies that are very similar comparables. So tell us what goes into how you make decisions. Is it consensus-based? Is it each investor can make their own based on conviction? Yeah. I was going to say, none of the Eclipse members ever were a VC before. So in some way, always we are bringing people that never invested before.

12:56And actually, when you're looking on the way that Pierre and Don and that team start, that industry actually started by people are coming from an operating background into the world of investing because they were investing in networking and semiconductors and high technical stuff, the stuff that we like. So we actually find that it's very useful for us to keep hiring an incredible operators and train them how to be investors. We are now 26 people at the firm total. when I started four years ago, we were four. So naturally we started with this consent decision-making, but we needed to adjust over the years because if we will have 10 people thinking about that this idea is a great idea in early stage, it's probably not that of a great idea.

13:37But how are you actually doing that in a culture that is we hunt as a pack in the economics? If Samir company is making money, Leo is making money the same way and vice versa. So we actually created here a lot of internal way of collaborate and communicate. So although we are not looking for a full consent now, when we're making a seed series A investment or when we build companies, it feels like Eclipse did that company rather than Samuel O 'Leal. You will never see us talking about this is that partner company or this partner company. The firm made that investment. When you're having conversations, and there are probably so many situations where a company is loved by a single partner or somebody who sourced the opportunity, worked with the founder, did the diligence, but it may not be obvious.

14:26And to the rest of the people that are in those IC meetings having conversation, maybe providing counter arguments of doing it. How does that actually then play out in terms of the individual who's championing the deal actually doing it? And then from that, are there certain rubrics that become non-negotiables if somebody brings a deal and it's a founder issue or it's a traction issue that it just doesn't happen? Like where is the index to allow that conviction to happen? Yeah, so I would say nobody here can make an investment decision by himself still to that date. Now, it's not required the nine partners to now have a consent because of what we just talked about.

15:09But there is always a deal team, at least three partners that needs to pound on the table in order to make that investment. And there is no official veto. But if someone feels really strong against, he will need to speak up. And that person is actually going to join the deal team now. So and he either gets convinced or he's not. And we're not going to make the investment. But the goal is when we are wiring the money, everyone is going to go, fuck yeah, I'm super passionate about this thing. Even if I'm having some very big questions about the idea, about the technology, about the market. It is cliche.

15:44So I will say the cliche and we'll continue to make mistakes. Although we know that this is the case, we are trying not to compromise on the people. And we are good as our CEOs. Full stuff. They are our product. In our AGMs every year, there is 10 CEOs. And I will always help people come to me and say, listen, we are going to all of those AGMs all of the year. We see maybe one or two. Why you bring so many? And I'm like, why? Because they're my product. I have nothing else to show inside my product. This is what I sell to the world. So we're trying really hard to find CEOs and founders that can help us build generational businesses.

16:22So if you look back and you've invested in a lot of great companies over the years, some of massive billions of dollars in a private market cap. Any commonalities in terms of the founders when you met them in the early days of the traits they had that really got you convinced to go on a journey with them? Now, I found that there is no factory of founders and they are coming in so many different shapes. I would say maybe one thing we skew towards, the founders that building in physical industry tend to be slightly older. So in a lot of cases, it would not be kids out of YC, although I know we are seeing more and more great stuff coming out of those places.

17:02But that's just historically. But listen, we had people that are drop-offs from high school. We have people with PhDs. We had people that worked in Tesla. And we have people that came from the academia. We had people that failed in startups. And we had people that took companies public and now doing another company. We actually, I cannot tell you that we find one architect of someone that can build massive business. Yeah. So then as you kind of think about the business itself, we're talking about you picking investments. You meet a founder, you like the founder, you go through DD and ultimately you discuss it.

17:38And I see at the same time, you still have to win that deal, meaning the founder on the other side may have other options to which they can pick. And in a market today that's incredibly crowded with a number of different investors, big funds of your size, some generalists, some sector specific, how have you evolved your business model to provide a service? And going back to this analogy that you are running a company, well, your service offering has to increase the more ownership you are taking, the more capital you're providing. So maybe talk a little bit about how you've evolved from day one to where you are right now.

18:11Yeah, I would say in some way, we actually did not evolve in Dutton. and I will explain myself. Ours, you're right, the CEOs is the product and we are providing them service. Capital is, I always think it's commodity. Actually, capital is not what I offer them. What I offer them is my time. And if you're building a company in the manufacturing space, you want Greg Riker because he built Tesla Manufacturing. If you are building a company in the robotics space, you want Charlie Mohenje because he deployed the entire robotics for Tesla, Rivian, and CloudKitchens. If you want to close big commercial deals in the enterprise world, you want G10 Bell because he did it for Rivian or Caitlin Glancy because he did it for Flexport or Aiden because he did it for Samsara.

18:58If you're doing anything in the applied physical AI, you want Seth Wintroff because he did it for G. So in some way, the way we win those deals is because we are those people before on our operating life. And now we have the ability to provide them our operating backgrounds and networks and knowledge when they are building companies in the sectors that we know really well. We don't do crypto. We don't do consumer. We don't do enterprise. That's the only thing we did as an operators. And that's the only thing is we do today as an investors. When we think about this sort of this value add and value add can come in so many ways.

19:37It could come in the form of general advice. It could be helping with customers and getting in front of customers, partnerships, obviously raising capital, talent acquisition, all those things. In many firms, you have a partner that basically is your quarterback. And then some of the firms have adopted things like platform teams, where they have groups that are focused on one thing, talent, GTM, whatever it is. And in your case, you have very senior operators that are helping each company. But how do you think about activating the entire Eclipse team for a given company where, let's say, Lior, you are the board member, but at the same time, you have a number of team members across the Eclipse organization that could help in different ways with that company that you're on the board of.

20:21Does that also work in a team approach? Yeah. There is no associates here. There is no platform team. There is no someone to – there is us. There is only nine of us, and we do the entire work. Building the thesis, building the company, hunting for the deals, winning the deals, scaling those business, and one day exiting that. And I found that like in the special forces, it's not a scale. There is a reason we have small teams. It's because you can actually align them and really choose an elite backgrounds, folks with a background that actually can achieve something that is incredible. And that's the view that we are taking.

21:00I think I am the one that working with the CEO to sign a$3 billion commercial deal this year that I just did. And when the time to scale manufacturing, I'm calling Greg Riker and say, Greg, come help here. We just signed this$3 billion and I need them to build two more factories. So we are very much work as a one unit and mobilize the different backgrounds of the partners between the needs of the particular situation. but we personally are not big believers in those platform teams. We're believers of we are the one that's going to do the work for you. Yeah, and the DNA in many ways is very similar in terms of going really deep with these founders, having partners, not having a bunch of junior associates.

21:43And one of the things that you had mentioned is everybody on your team came from an operating non-VC background, yourself included, right? You were a longtime operator starting companies, leading companies. And one of the questions I always get from people is like, what is the hardest part of transitioning somebody that's only been an operator with no investing experience to being a full-time investor? Yeah. And we still fail. 10 years into it, we still fail. And we have multiple of people that was partners at Eclipse that are now actually in the portfolio. So I would say it's a very hard transition.

22:18and I give you a couple of things that we are very much spending time on when we are thinking about onboard someone or we call it the bootcamp. You, I don't know, G10 manage 10 ,000 people and now it's him. Aiden took a company public and now it's her. There is like this big suddenly vacuum of like you're coming from building something at scale to now it's just you and you are individual contributor. You write the memo. You do the outbound. You're building the thesis. There is nobody to do the work for you. You do the work. And the other thing that I found that is really interesting, you are bringing people that was elite individual in building companies and you bring them to be rookies because they're new to this business.

23:04And there is something around the brain that is like a really tough switch. Shit, I was just ringing the bell building my own company and now I'm this rookie learning about sector. I don't know anything about venture capital. So there's like a multiple of things that we learn to appreciate and trying to learn during our interview process to making sure that in your personality DNA, we find what we like. When you're then recruiting people and bringing on new partners, obviously bringing on a new partner is not a trivial thing to do because they're fitting into a very small team and they represent the firm and they represent the founders.

23:41Are there certain things that you index on based on your learnings of who has made the successful transition from being an operator to being an investor? Yeah, I'll say two things we learned, for example, that was not obvious to me when we started the firm and I made some mistakes is like the ability to scale down. So even people that build companies and scale them and you were like, oh, yes, he was there at seed and they took it public. it would be easier for him to go to see it. Not true. So the ability to scale down is one thing. And the second thing, especially with a lot of, we have so many operators here that have such a crazy, deep manufacturing, supply chain, engineering background, is the business understanding.

24:24And then those early stage companies mainly needs us on the business side. Yeah, we can help on the manufacturing. We can help someone in engineering. Where they will fail on the go-to-market, fundraising, ability to tell the world how they are going to change the mining industry, for example, or the manufacturing or the defense industry. So the two things we are heavily indexed is the ability to scale down and the business sink. Yeah. And we've talked to all these variables that have helped you evolve. And a lot of your evolution in terms of growing is obviously insights from what the founders need.

24:58It's obviously the change in the markets, both macro and venture market. And I want to kind of zoom out for a second because it's been an interesting 10 years in the world of venture capital. A lot's changed. Obviously, the introduction of artificial intelligence, which is now omnipresent in every single conversation. We had a ZERP period when you started, so no interest rates, then COVID, and then the basically peak in 2021. Where do you think we are right now? Maybe just outline the big things that you've observed and how venture has changed and how it's impacted or informed what you do today.

25:34I think in some way, and listen, and I know there is this massive chatter about the frottiness and bubble and whatnot. And I'm not, I didn't finish high school, so I don't have some crazy MBA degree to tell you if we are in a bubble or not based on interest rate, GDP growth, and unemployment. I don't spend any time thinking about it. I'm spending time building companies. I do think in some way, our thesis is connect to what's happening to venture. And my main point here is, if you think about venture capital is like the best place to introduce new technology in something. If technology 10 years ago, when I started Eclipse, had only a small sleeve to penetrate, and that was the world of internet, enterprise software, cloud, consumer, et cetera.