How to Build & Develop a Venture Capital Firm with Peter Hebert of Lux Capital

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March 2, 2023

On this week’s episode we’re going back to our interview roots as we focus solely on a guest interview. For the chat, I sit down with Peter Hebert - Co-Founder & Managing General Partner of Lux Capital - to discuss strategies on how to build and develop a venture capital firm. Lux has been around for a long time and is one of the premier VCs out there so Peter - as usual - shares some great insights. Enjoy!

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‍Transcript (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is part of that effort. Now, we typically, usually do the partner meeting format where I talk to some of my partners about different things going on in the market, the tech world, et cetera.

Today we're gonna go back to our roots and we're doing an interview with Peter Hebert, one of the co-founders of Luxe Capital. A really fantastic large venture capital firm focused on what's now called Frontier Tech. We dive into a lot of different topics, but I think most interestingly, we're talking about how to build and develop the venture capital firm.

I hope you enjoy.

All right. We've got Peter Hebert now pronounced correctly. Correct. Over at Lux Capital one of the founders. Peter, thanks for being with us today.

Peter Hebert: Thanks for having me. I'd love to

MPD: start off hearing kind of an overview of Luxe in your words. Would you mind

Peter Hebert: giving us a little overview of the firm? I can give you the 32nd capsule, and then of course the, the longer story is more interesting.

We are in early stage venture firm focused on deep science and technology collectively manage more than 4 billion in assets based in New York and Menlo. And how did you

MPD: guys land on that sector? Because you're known in the venture space as being kind of the frontier tech firm, right? When something's a little too wonky for the rest of us software people to touch luxe is the light bulb that goes off in a lot of VC's heads like, we'll, we'll think to share the deal your way.

What's how did you guys land on the sector and the focus.

Peter Hebert: I'd give a huge amount of the credit to my co-founder Josh Wolf, who really, from a content perspective represented the focus was very much a polymath. Grew up focused on really biology, but AIDS immunopathology research. And for us, when we were getting started, we recognized we needed a reason to exist.

And so in 1999, 2000 at a time that everyone was focused on.com. We had no fundamental advantage. And so we were looking a little bit further out there on the risk curve and further afield, and that was what we would describe at that point in time is physical sciences, life sciences, computational sciences.

Since now, I think relabeled, deep tech, frontier tech, a range of other things, but for us was really core fundamental technological advantages across many different disciplines. In fact, many of those intersecting with one another. And that's where we found our specialty. And it was really kind of the early feelings of insecurity, inadequacy of feeling a need to be doing something differently because we assumed that otherwise it would be adverse selection if something came to us.

And so that was really what set us off on that vector that we've been on now 23 years later. Love that. And we are, if I

MPD: recall, the same year outta college, same age, and you have been very generous with your time. Coaching me a little bit on my journey of building a firm. I, I think it, you know, look, there's a lot of entrepreneurial advice.

I'm sure you could share, but I think we'll let the entrepreneurs share the entrepreneur advice. I'd like to talk today about building a venture fund, building a firm. Would you mind by just kind of taken a step back and telling us the evolution of lux, I mean, 23 years? A lot's happened. I'm sure it's not, you know, it's gone of kind of past expectations, maybe from day one.

Maybe it hasn't. But I, I'd love to hear your firm's story cause I think it's fascinating.

Peter Hebert: So I think the one thing that's most important to remember is when we set out to do this one, we had very little experience. We had lots of naive ambition, but I think we had an appreciation that we didn't have the model, we didn't have the blueprint, we didn't have the formula.

And I think so many people are the generals kind of fight in the last war and they presume that whatever it is that they've had, whatever that specific experience, that is the way to do it. And so embedded in the d n A of our organization is a willingness and a desire to adapt, to evolve, to improve.

And so it is the willingness to, to be very critical of things that we've done, evaluate those and figure out what can we do differently. . And so I think the ability and desire to experiment, to do things more creatively and, and kind of approach it in a more clever manner has certainly accrued to our benefit.

And so if I think about the evolution of locks you know, the areas that we focus have the kind of core philosophies and tenants that have remained consistent. And then certainly the strategy in terms of where we're accessing those opportunities. Profile at Argue has changed considerably from when the first decade really occurred.

For Luxe I, I would describe it as a focus entirely on technology, and we lost sight of the fact that it's really human ingenuity and the people behind the technology that is core, which maybe we were just slow to recognize the obvious. And so that has been a, a fundamental shift in the way that we've approached investing because rather than just spinning a technology out of a university, it's really working with the scientists and other entrepreneurial founders to do that and holding them probably highest in terms of regard in focus versus just purely the intellectual property, which is really a prioritization.

You know, we've obviously scaled considerably. Our first fund was, was really less than 10 million single limited partner, one of the founders of the Carello group. What year was that? Well, we started in 2000 and it really wasn't a, because it was a pledge fund. It wasn't really a ever a, you know, a fund that was closed at a certain date.

I think we probably first started making investments in 2002. But that was a period of time where we would find an interesting opportunity. Our first kind of sponsor would write the check and it was credited basically to Luxe Ventures one. So Luxe Ventures two, I think we made our first investment in 2005, and that was approximately a hundred million fund.

And so today we are managing Lux Venture seven, which is a 675 million pool of capital. with a companion opportunity fund that's north of 800 million, so about 1,000,000,005. That's awesome.

MPD: Now just doing some math was this your first job outta college starting Luxe or what did you do before?

You must have been pretty young.

Peter Hebert: I was pretty young. First job out of college was working at a firm that once existed called Lehman Brothers Uhhuh Church. And I would not have guessed that Lux Capital would've outlived Lehman Brothers, but there you go. So it was a fairly entrepreneurial environment and maybe that got them into trouble, but it was interesting.

And so that was my first job. I originally my entire life wanted to be a journalist and so I went to college for journalism and my story was really ins inspiration through a class that I just kind of took largely on a whim, which was introduction to entrepreneurship. And so that put me off on more of a vector of finance and entrepreneurship and creating things.

And I was always kind of a self-starter. That for me was this magical moment that led me to where we are today.

MPD: You know, it's something you said just a minute ago really resonated with me. You were talking about the willingness to think differently about what you're doing and what the, how firms are normally constructed.

I think when I heard that language, It kind of jolted me back to how I think about looking for entrepreneurs and what makes a good entrepreneur. And there's three or four things that I really care about. One of which is curiosity and humility, which I think are two sides of the same coin. So in hearing that it's no surprise that, you know, a venture firm is just a company, right?

And you're an entre. Right. And so hearing the same patterns come out of that, how is that, how do you instill or build that curiosity and humility into an organization and how have you maintained it as you guys have become super legit in the market?

Peter Hebert: Great question. I'd say one element is kind of leading by example.

And so a couple things that I think about, and I think about this truly, it's like as a leader of a firm, as a father of children, and thinking about ways that I can kind of change behavior, affect behavior, but truthfully, there is not a, a thing that I would ever ask anyone to do inside this organization that I wouldn't do myself from doing the dishes to you know, seeking out an entrepreneur to serving on a board.

It's like, I think it's really, I. To maintain that level of scrappiness grittiness, especially because we're in a business that you're working with entrepreneurs who sometimes are first time entrepreneurs, and you have to have the humility. You have to be accessible, you have to have the empathy, and a lot of people I have seen, especially even when I entered this industry, are arrogant out of touch view there to be this huge difference.

It's almost like a caste system. I'm here, you're. Recognizing that, that one, I think just fundamentally as a human, I disagree with that, but also that it's like things are transient. People are, are starting out and they could be on top of the world in several years. And so, you know, I'm very cognizant of how people treated me when I was nothing, when there was no reason to believe versus perhaps if there's more money that I have control or influence of, and then I can actually watch how people treat me differently, which I lose than respect for those people.

So, so, so again, one is leading by example, but then also to me, it's really important to make sure that people recognize that this is a flexible organization and we're willing to adapt and we're willing to change. And so we do investment strategy offsites twice a year. And the most important thing, I think, of course, is getting the group together, discussing a range of various topics.

But I want everyone to underst. That this is an agile small firm, and we can put things, we can experiment on a dime really quickly. And so this is not something where it's like, oh, there's this aircraft carrier. It's not going to move. It's on this direction. It's like there are, there are things that we hold dear and this is what we're pursuing more broadly, but if someone has a good idea, we want that sourced.

So everyone should come with an actionable idea that we can put into place today. And as long as people believe that and see that, hopefully that catalyzes this feeling that, wow creative ideas are welcome. It's not just like, you know, the equivalent of a dentist office where it says like, innovation and someone holding onto you know, basically a climbing a wall or something like that.

Here it's like, we wanna make sure that that is, that that principle is actually put into practic. I love that we have, we

MPD: have a lot of parallels between our firms and ethos and otherwise. One of the reasons I was really excited about this conversation is cuz I see that from the outside and I've gotten to know that there's a lot of alignment on the inside as well.

One thing we do for setting that humility in place is some subtle things I probably shouldn't announce cause I assume my team's gonna listen to this. But I make sure everyone sees me doing the dishes at the office. I tape the cords. When we do a retreat, we have a rule that the most senior people get the worst rooms, right.

And it's just, it's just setting a tone that we're here to kick ass. And it's not about a hierarchy and it's not about status. We're here for a mission to do something that has impact. It's not about making money even, right. That's a byproduct. So I, I love hearing the way you're talking about it.

Now, you said something to me and maybe I'm unearthing some private wisdom, but that's what I wanna do. So I'm gonna pull you into it. That landed I think I met with you five, six years ago. It's all a blur with Covid and we're, we're now at the tail end of our third. So we gotta, we gotta jump.

We're behind you guys in terms of when we started up our operation. We started our firm in 2012, but really raised our first outside capital in 17. And we've done very, very well with it. But there was always a feeling of misalignment between our performance, which was good, very good. And the amount of capital flowing our direction felt like there was a lag, right?

We needed the, to earn the trust of the LP community to catch up. And I remember meeting with you in your office out in Palo Alto when we were early days that I was maybe feeling that frustration a lot more than I am today, where we've got a lot of wonderful support from wonderful partners. And you gave me some wisdom about time.

Do you remember what you said?

Peter Hebert: No, but I'm sure , if you Yeah, if you illuminate me, I'd think it was brilliant. No. Yeah. No, I would think

MPD: you told me that I don't remember if I'm gonna paraphrase this and it's gonna be wrong, but that it had taken years. For you guys really to get traction with the investors and obviously you've had tremendous success since, and the game is one of the key ingredients in building a firm for all the VCs listening is sustainability.

It's continuing to be a responsible fiduciary of capital to act with integrity and to be in the business for long enough to, to help people understand that you're gonna be around continuing to do. And it's not the first time I've seen this time component in a service business. We saw this you know, we have a software development shop we sold about in 2021, and what we found was once you click to 10 years old, you get contracts you wouldn't have got if you were eight years old.

That was it, fortune 500. It's just open doors in different ways. And we are experiencing the effect of simple. It's not just that we've continued to perform or we work harder or whatever, it's, there is something to the institutionalization with H that has been very powerful for our ability to raise capital.

And you were the first to kind of illuminate that pathway and we're all, all the VCs out there staring in the dark, all the gps, knowing that there's a hallway in front of them, you're the first to turn the lights on for me on that

Peter Hebert: dimension, I think. Limited partners that I know want to allocate to a manager that they know will be there, that has great respect for the fact that they are a fiduciary, that they're kind of taking ownership and control and have an obligation to deliver returns for that investor.

And they'd prefer to make fewer decisions rather than more they wanna allocate to a manager that they hope they will grow with over time and do many funds in the. . And so, you know, I've probably given this analogy to you or this story, but I remember when we were first getting started first, no one had any idea who we were, right?

We were in New York at that point in time. The entire business, despite it being 1999 or 2000 there was welcome to Silicon Alley. The entire business was, well, I guess to some extent Walham. There was you know, little venture capital community, but it was really out west. And so we needed to be able to project that we were stable stewards of capital.

When, you know, you can look at me right now and imagine me 24 years earlier, mm-hmm. , that would probably be a scary thought to someone who had, who had saved up money, who had B built wealth and then entrusting that with someone like myself could. Be great risk. And so we would try and overcompensate and we would dress up in suits and ties and walk around with briefcases like, we are stable, please trust us.

And you know, I think we were always focused on building a firm that would last over a long duration of time. And so our inspiration to some extent were people that we viewed as great business builders and. Investment managers like bill Conway and the Carlisle Group and other major institutions.

But if you look at the history of the venture capital industry, it, there's actually few good examples of people that have had permanence and persistence through multiple different generations. But the vast majority of them do not put their names on the door. You know, I think Kleiner Perkins is one of the few.

Over a number. It has, has not been necessarily smooth, but over a number of generations has persisted. But the other ones it's not, you know affixed or, or tied to a single individual. And so for us, we wanted to create a firm that would many ways outlast the individuals that created it. And that was al always the inspiration.

MPD: And yet another parallel. And with that, thank you for being on with us. I'm sure a lot of people will find this to be a helpful

Peter Hebert: convers. My pleasure. Thank you for having me.

MPD: I personally love that segment. I'm hoping everyone else did too. You know, usually when we get VCs on, they're talking about advice to entrepreneurs and some VCs don't know entrepreneurship as well as entrepreneurs do, but there's not a lot of people out there talking about. Advice on how to build a venture firms.

And it is a very unique form of entrepreneurship that has a lot of very challenging elements to it. So getting someone who's kind of gone the long way through the journey and been very successful on to share is super helpful. And I think for all the gps out there that are finding their way, hopefully there's some nuggets in here that will help guide you.

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