You want to back startups that make actual physical stuff.
The firm is at 12.5 billion AUM, which might be changed already. I'm not sure.
I hope it's changed to the upside. We just named two IPOs, both Cerebras, that we did, and SpaceX, both in physical industries. They're doing extremely well. What you cannot fight against is 85% of the world GDP — roughly 100 trillion — is in the physical world.
You're an experienced banana farmer.
That's probably my number one achievement in life.
What were the biggest lessons that you learned? Banana farming.
It's hot in summer. But it's also the first time I was just like, I need to build a physical thing. This is like my thing. Eclipse today: 90 companies total. 30 of them we built. Yeah, there's some amazing companies like Bright Machines, Bedrock and Mytra and a bunch that we didn't announce yet. We never thought of ourselves as a venture capital firm. We call it operators with capital, because we have operators.
All right, Leor, welcome to Sourcery.
Thank you. Great to be here.
So, Eclipse is on a run. Cerebras had a huge IPO.
The firm is at 12.5 billion AUM, which might be changed already. I'm not sure.
Yeah. I hope it's changed to the upside.
Yes. So for people who don't know Eclipse, can you give a little bit of the background?
Yeah, I think the short story: we started the firm 11 years ago. Um, I know that we are counted as a venture capital for our limited partners. We never thought of ourselves as a venture capital. We call it operators with capital, because we are operators with capital. Um, we all left industries in order to go and build a firm that allowed us to build companies in the industries that we are passionate about, and that's physical industries. And yeah, you're right — maybe in the first eight years, manufacturing and space and semiconductors and defense and mining was very much kind of in the corner, when software was doing really well and enterprise software and crypto and consumer and fintech. And it definitely changed in the last two years. And yeah, it's just — I couldn't be more excited about the opportunities that there are right now in the world to build. And it feels like the best founders want to build them. It feels like the world needs more of them. And yeah, we just named two IPOs, both Cerebras, that we did, and SpaceX, both in physical industries. They're doing extremely well. So, exciting times.
Really exciting. We just had Andrew on and that was a really fun interview.
He did name at the end when I asked, you know, who inspires you, who are those kinds of people for you, and he specifically called out Pierre, your partner. Can you tell me more about Pierre? I know we were talking about this off camera, but this story is insane.
Yeah, the story is pretty crazy. Uh, we were like this odd couple in the first seven years of Eclipse. But yeah. I left when I was leaving Flex and I was thinking to start a vehicle that would allow me to build and invest in companies in the physical world. I got introduced to Pierre, and this is early 2015. I'm 31 years old and Pierre is 85 years old, and we're having a meeting. And like always, I'm not doing my homework and I don't know who's the guy. I see this olderish person stepping into the room wearing a suit, uh, full of cologne, and he's like, okay, young man, what do you want to talk about? And I'm like, uh, I don't know how I got introduced, but you know, I'm thinking to start a firm or a vehicle that will allow me to build companies in the outdoor space. And in a very PR fashion, after 10 minutes he interrupted me and said, okay, young man, we're going to start a firm together.
And I'm like, sir, uh, actually: A, I didn't finish high school; B, I've never invested a dollar in my life. I'm a builder, I know how to build, I'm excited to build companies in these sectors. And he said, hey, I will teach you everything you need to know about that industry. And like four months later, Eclipse was born.
Um, so yeah, Pierre is a special, special man. And, um, as I told you off camera, I'm taking him to dinner tomorrow for his 96th birthday. Uh, and he's still mentoring most of us at the team. But, uh, he worked with us seven years full-time in the office and brought a lot of what I think maybe this industry was originally, when, naturally, he started at Sequoia — because Don was his VP of sales at National and they left to start Sequoia. And he was there for 35 years. And we had a huge privilege to just hear the stories and learn from him of what the industry was originally designed by.
And it's actually very different today. If you're thinking of, you know, they were all operators, they were all hands-on, they did very few deals, uh, they had a very gentlemanly relationship between the firms. He told us so many stories about Sequoia and Kleiner saving companies for each other — something that — what? Can you imagine calling another VC today like, I have an issue with this company, I need you to come put capital and help me save that company? It will never happen. You'll probably get the phone call of like, all of my company's doing amazing, come preempt a round. Uh, but yeah, Pierre and I was that old couple. And, uh, I said — he's 95 — we celebrated his 95th birthday on camera, that, you know, for me is somewhere between a father, partner, mentor, friend — kind of all of the above — and he's probably one of the most amazing people I've ever met in my life.
And what kind of work culture did he bring to Eclipse?
Yeah, we — it's... I grew up in the special forces. Uh, he grew up, um, naturally in World War II. Um, got himself moved from France to the US for school. Met Gordon Moore and got into Fairchild. Left Fairchild to do National, left National to start Sequoia. So I say he's a very disciplined person. It's kind of the best — you know, the three values I can think of for Pierre are discipline, discipline, discipline. And I think where I grew up, and that's also maybe nicely connected to the companies that we like to build in this physical world — like discipline is really important. Uh, you cannot fake it till you make it when you're manufacturing something, because the yield will just be very bad. Um, and he brought a lot of institutional knowledge of investing and managing your board and how you write your quarterly reports. And I think in some way, in our first year of Eclipse, we already operated in a way that maybe a firm that is 10 years old — everything was much more institutional.
But he also has a huge heart, although he tries to hide it.
Yeah. Yeah. He really cares. And you don't need to do — you don't need your 90-year-old person to go to the office every day to teach other people how to do venture. You don't.
Yeah. Well, it seems to be working.
So, you were founded in 2015.
You raised your last fund. It was split between two funds about three months ago.
Okay. So, I want to go through your investing strategy, because you did say you're operators with capital. It's completely different from the traditional kind of VC game that's happening here in Silicon Valley, um, because of that hands-on approach. So, when you talk about venture equity and this incubation strategy, how does that work, and what are some of the companies that come out of it?
Yeah, I would say — I don't know if that model is perfect for everyone, just to be clear. Uh, I do think that companies that are building in the physical world, um, it actually doesn't make sense to get only passive capital on your board. Um, you need to know manufacturing and supply chain. You need to know, uh, how to deal with capex. You need to know how to deal with the government. You need to know how to think about subsidies. You need to know how to leverage debt versus equity. You need to know how to hire the right engineering team, regardless if it's mechanical, double-E, how to think about it holistically — because you build a system, you don't build an app that you probably — if you're good enough a founder — you just take the capital and you build a great app and there is a great outcome.
I also think that if you're looking at the generational change — we started kind of internet to mobile to cloud to SaaS enterprise software. And I think what we are seeing in the last 10 years is basically this full stack of tech companies taking a full industry. Cerebras is taking the compute industry, SpaceX is taking the space industry, and a bunch of others.
And these are much more complex businesses to build, much bigger if you're successful. But our model was, we were on the other side as operators, and we felt like what would be the most optimal things that we could have had in our investors in our previous life. And we felt like we just wanted to bring that model — that it's operators on your board, um, bringing high conviction, a lot of capital, and a lot of expertise and knowledge how to build those businesses.
Um, so that's kind of just the model. Um, on the incubation — it's two years into it. It's actually also a funny Pierre story. I'm feeling my hands start shaking and I'm like, God, I need to build again. So I'm going to Pierre and I'm like, sir, um, I kind of feel like building a company. And he's like, shut down the door. And he's like, young man, we are investors now. We are not building companies anymore. And I'm like, can we do both? Uh, and he's like, no. And he's like, your lack of discipline. Just lectured me for like an hour, and I was able to convince him.
Uh, and yeah, it's just amazing. I mean, I think Eclipse has today 90 companies total. 30 of them we built. And yeah, there's some amazing companies like Bright Machines, Bedrock and Mytra, and just a bunch that we didn't announce yet — the P energy we talked about, battery, that we also incubate. Um, and that's just — we did it from a selfish point of view because we just love building companies, and I didn't want to stop building companies now when I also have the investor hat. And B, it's just keeping our operating skills fresh, because when you're doing the transition from being an operator to investor 10 years into it, you kind of are not a fresh operator anymore — not in where technology is, not in where the network or talent or customers are — and just building companies keeps us fresh.
So what is your process for starting the companies — the process — but how do you pick the categories?
Yeah, it's like I don't think you can manufacture this thing. That's kind of what I learned in the last like 11 years of doing that inside Eclipse, inside the firm. Every time I'm trying to build like a system around that, I failed. Every time that I think like, ah, if I only put this thing here I will be able to build two more, I failed. Um, so I think, you know, each of those things is a snowflake. And in some cases someone coming to us and saying, hey, I want to build this new HBM memory and I want to do it with you, and I'm like, amazing. And in some cases I'm like, oh, the world is going into heterogeneous AI. If I can connect multiple silicons and optimize them from the networking to the kernel to the orchestration, I actually will be able to build the most efficient, high-performance, lower-cost AI data centers. So if there's not a company that exists, I just go build that and recruit the team.
So, and in the case of Rivian and RJ, we actually carved out Mytra outside of Rivian with him. So it's like three very different models I just described, and there's like 10 more.
Damn, can we go into one of those companies — maybe Mytra?
Yeah, I mean — the one thing we really like to build is — I think about it like clusters — it's like an industry that we know — and robotics. A lot of us built robotics in our operating life and then in Eclipse, and we've been doing robotics and physical AI for a long time before it was called physical AI. But we were friends with RJ, and one of our partners at Eclipse was on the founding team with him. And I've been talking with RJ a long time about this robotics and manufacturing, and we probably talked like three years before we actually started Mytra together. And we were talking about general-purpose robotics in the manufacturing landscape. It needs to be mobile. It doesn't need to look like a human — so no humanoid. It needs to have high dexterity. You need a lot of data in order to train the model. And as we were talking over the years, he's like, you know, we have a small team inside Rivian that focuses on that.
And we did a robotics dinner at my house, uh, with him and a bunch of other founders. And at the end of the dinner — the wine helped — I told him, what do you think about us spinning out this thing? And he's like, huh? And I'm like, you can win all the wars. We can attract better talent that will not necessarily go work today for that problem inside Rivian. We can attract external capital, so it's not on your balance sheet. And it's like Switzerland — you can work with everyone.
And, you know, naturally, the rest is history. And we were able to carve out and start the company with him and Rivian. And yeah, the company is just flying. And it's just really exciting to see all the pieces coming together, and we're going to show the first product this year.
It's just so crazy to hear how close to the metal you actually are. I mean, I've had many conversations with many different CEOs and investors and that sort of thing, but like I don't even know what you said previously when you were talking about building a data center. I don't know what you're saying, but that's awesome. So, like, I guess like taking a step back on the macro scale of things. I talked about this with Andrew on the pod. I talked about this also with, um, with Tony Kim of BlackRock, because we were going through all the different categories.
And it's a common theme that's very ever-present between everyone. And it's like the original industries that built up Silicon Valley really were in the shadows for like decades, and now they're back again. And now you have like — I'm not going to say tourist VCs, but now you have a lot of these competitive VCs coming in and claiming territory. But how, if you're in the founder's seat, how do you decipher who to work with and where they actually have expertise?
Yeah, I would say the reason I started Eclipse actually was from a fundamental view. And it actually was also on the back of me spending a full year in China and seeing how they innovate in the physical industries. And naturally, people don't know, but China essentially built a roughly 20-trillion-dollar economy based on the physical world. And they built the entire systems on these five forces: talent, uh, policy, capital, technology, and customer demand. And they aligned those five forces in a way that let the economic flywheel fly. And it's actually very hard to compete against them as a standalone company. And my view was, if we don't do it in the Western world, we're kind of screwed. Um, and there's no reason for us — and of course it was from a selfish point of view because I love building those businesses. I was never a software guy. I was always a hardware guy. Um, there just is no reason why not to do it. And after talking with a bunch of firms — as I was leaving Flex — it was clear to me that a lot of my generation kind of came much more from the software world, and that sounds to them very scary: like low gross margin, high capex, long sales cycles. But that's what I love doing. And also my view was, as the world is moving more from globalization to deglobalization, countries will not be able to rely on their energy, manufacturing, defense — buying from other countries.
It was clear to me that it's going to happen. Now, I was wrong on the timing — it took much longer than I thought. Kind of COVID was the really first one that showed the vulnerability, and as a result we were seeing much more of the onshoring start kicking in. But yeah, I mean, what you cannot fight against is 85% of the world GDP — roughly 100 trillion — is in the physical world. So if you just, you know, you're a first-time founder, and you're thinking about what is the biggest problem I can solve, you think about, okay, what is the largest TAM? The largest TAM is manufacturing. Largest TAM is energy, is defense, is transportation, is shipping, is mining. Application software — nothing about it. All of the software people in the world combined are just less than 20 billion.
VulcanForms that works in metal manufacturing — metal manufacturing is a $3 trillion industry. When we started Eclipse, I don't have the numbers, but my guess is quite a lot of money went into enterprise software and probably zero went into metal manufacturing. It just didn't make sense to me.
Um, it goes back to the question of what founders that are starting up want to think about. Um, it's hard. It's really hard to build these companies. It takes time. And it's kind of — I always have this thing in my brain: it's like you have these 500 planes that all need to land perfectly. That's kind of what we do. Um, the wafer needs to show up to the cold plate, to the PCBA, um, to the full systems, to the kernel software, to the customers, to get the yield — and everything needs to work perfectly. And it's just really hard to do, but I cannot do anything else in life. That's the only thing I'm passionate about.
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I mean, it is interesting. Uh, SK Hynix like recently went public. And when you look at the memory world, there's literally three players — like we went so long and there's only three players, and there's massive shortage, as you would know in the chip industry.
Yeah, totally. And that's kind of was my point. I was like, okay, great — Micron, SK Hynix, Samsung — uh, if you're looking at HBM's. And I'm like, when I — again, when I started Eclipse, I was like, it's really odd because there's like 10,000 SaaS companies — how can it be that there's only three memory companies? And then when you actually go deep, you are like, okay, it's like you need capex, you need a lot of engineering, you need, you know, the five forces I was talking about. And I'm like, that's what Eclipse are experts in, and we are building new memory companies. So it just feels like the best time in the history of humanity to build those industries again.
So how do you then overlay the venture model on top of these industries? And then how do you refute the kind of thesis — or pros — that people say these industries are not going to produce SaaS multiples? I know that's technically flipping now. I actually think it's going the other way — it's going to be better than multiples. But could you just explain that?
Maybe it's a little bit connected to the tourist comment that you made before. Uh, I think we kind of — we as a Silicon Valley and the venture overall, I think we kind of live in the world that SaaS and gross margin is the most important metrics.
Naturally — if you are a public company, if you're a real company, what matters is free cash flow. It's actually not gross margin. Gross margin is an indicator of what your free cash flow is going to be. Your EPS is based on your free cash flow. Uh, and naturally, if you tell me you have an 85% gross margin business and you are, you know, not in application software, you're a sales software — now we're trying to move so they don't think that they have anything really against applications — uh, and you're building a new CRM again, because there are a million of them, and you are 85% gross margin. The TAM itself is not huge, is my guess, 30 billion. There are a thousand companies doing a CRM. And what a lot of those SaaS companies happen is their growth was correlated with the way that they were burning money. And why is that? Because we mechanically moved the engineering spend from what's supposed to be in a COGS — in any normal thing — to an R&D, and it was an accounting trick. So your gross margin is high, but you still need to continue hiring engineers as the business is growing.
In our world you cannot do it. There's a hard COGS, and an accountant will not let you. Um, so maybe your gross margin will not be as high as the SaaS company, but at the end of the day, I'm a fundamental entrepreneur, and on a fundamental base I always ask the trick question: how big is the market? 20 billion is not big enough. How differentiated is what you do in that market? And do you have the right team to actually go and solve that really tough problem? Because Tesla is what, mid-teens, kind of trades like the best SaaS companies in the world. Cerebras is like what it is — I don't remember now, 40–50% gross margin — trades way better than most SaaS companies, because they solve a really tough problem and a gigantic market, and they get paid for it. And that's what I do for a living.
So I want to go through some of your portfolio, because you have some really fun names in there. That's obviously one of them. You have Ursa Major, VulcanForms, which you mentioned, and Bright Machines, Auggury, Skylab, Oxide — which we should really talk about.
Uh, Wave, Bedrock, True Anomaly — also very cool. And same with Redwood Materials, which is the next one I have, and Arc, the Nuclear Company, Verata, you also have Anduril on there. But I guess start with all of those and the different categories you're going after. Let's base it off the latest fund raise. So, of the physical industries that you're going after, like what are the main categories?
There is a — when you raise money in our world, we raise money from what's called ENFs — endowments and foundations — and pensions, like institutional investors. They always have this question when they do the diligence about portfolio construction.
And I always have the exact same answer, like: my portfolio construction is not to have a portfolio construction. Uh, and the main point here is like we might do five memory companies now — that will not be a very good portfolio construction — but I see so much of like people are calling me and saying, hey, can you introduce me to Bedrock? And I'm like, okay, why? It's like, we must have a physical AI company in the portfolio. And I'm like, I actually don't must have anything. I must have the companies I'm obsessed with, unrelated to trying to say, oh, I must have one defense, one chip, one robot. We don't think like that.
Um, what I was saying — what I think is really interesting in the market right now — we went really deep historically on semiconductors. And I think people think about semiconductors as a chip, right, that's kind of what you have. There's so much around that: capital equipment and testing and lithographies and supply chain and packaging and subcomponents that go into this thing. So that world is actually really, really big, and it's growing at a rapid pace. We just talked about SK Hynix as a good example. Um, so we really like it.
Um, we also really like a lot of new types of energy sources. We think that energy is such a gigantic market, and we did a play in nuclear, and we have a play in sodium ion and like peak energy and TNC, and we have Redwood on the LFP and recycle and kind of second act, and we just did a gas turbine company that's building a new — like a modern — just, you know, going to compete directly with GE Vernova on a very large gas turbine. So I think in the energy sector there's just a lot to do.
Um, AI is definitely — and we are not doing anything in the foundational models or LLMs. Uh, we kind of catch AI on both sides: the picks and shovels to AI, that we do a ton, and then we take AI to the physical world with physical AI. But there is so much to do. There only is like — I know nothing about bubbles and valuation and things like that. I only know how to build companies. But I'm telling you, from building, there's so much to build out.
What are you most excited about?
Um, I think, you know, I told that to my daughter. Um, so she sees so many people coming — all day there are people coming to our house that I'm building companies with. So, you know, she's 11 years old, but she can go — she can take you down on term sheet negotiations. Dangerous. Dangerous. Um, and she asked me like that, what do you think is — like, which phase are we on building companies?
Yeah. Wow. Yeah. Yeah. Yeah. Because she was born into it. She's actually our oldest child.
She's like, Dad, how's the AUM doing?
Yeah. How are we doing on like DPI level?
Yeah. Yeah. Yeah. She's very close to asking that question as well. That's actually her mom. It's not her, but this will be her as well. Um, she was actually born into Eclipse, so she is actually the same age exactly as the firm. So it's kind of — yeah, it's super cool. But, um—
Um, and we have an Eclipse Kids Day. Um, so we take every year the entire kids of Eclipse to visit two or three of our companies.
And then we end up at my house in like a little pool party, and it's actually next week. Um, so it's really cool to see the kids really looking at how a robot like Mytra moves a pallet, or seeing like Reliable, how, you know, planes are moving, or seeing, uh, Salar, how a drug is being manufactured. Then those kids ask me some really good questions. So she's knowledgeable anyhow. Uh, what I told her is like, listen—
We are probably in the most interesting time that humanity ever had around building. And we are at the very edge of the spirit of building those businesses, and we better not screw that moment, because we have capital and we have talent and we have government supports and we have customer demands and technology to really — I do believe we can grow 5, 6, 7% every year. I'm going to work really hard to see it coming true. And I think growth, both for companies and countries, solves a lot of problems, because I think you can focus a lot of your time on where to cut spend as a country or as a company, but you can also grow much faster. And I think it's maybe the first time — I used to say Henry Ford and Carnegie, and I actually changed it to: this is the best time in the history of this country to build companies.
