By the time Covid took the world by storm in early 2020, old-line industries — which include bedrock sectors of our economy like manufacturing, logistics, supply chain, transportation, construction, and healthcare — had been sitting on the backburner and lacked innovation for decades. Fast forward two years, and the global pandemic only accelerated the deterioration of these industries and cries for the need of transformation were heard around the world from global leaders, businesses, and consumers alike.
Lior Susan, Founder and Managing Partner at Eclipse, is no stranger to old-line industries and recognized the need for change in 2015, years before Covid would startle the rest of the world awake. He recently spoke to Tank Talks podcast host, Matt Cohen, about investing in old-line industries post-Covid, how growing up on a kibbutz in Israel and his time working as a special ops officer in the Israeli defense force shaped his views on people and systems before starting his entrepreneurial career, and much more. Below are a few highlights from their conversation.
Matt/Tank Talks: During your time at Flex, you learned a ton about manufacturing and supply chains that influenced your thesis to launch Eclipse three years later. What were the specific things you learned about manufacturing and supply chain that really opened your eyes?
Lior: I learned a lot more than just about supply chain and manufacturing — what really opened my eyes was how big of a beast the Fortune 500 is. I’m a special forces guy and I felt like I landed in the Navy headquarters when I joined Flex. There are 250,000 employees at Flex — C-levels, senior VPs — the amount of layers and complexity were completely overwhelming to me at first. I was fortunate to have access to a lot of big conversations, board meetings, earning calls, time with customers, etc. Flex is almost like a microcosm of the world GDP: Energy, aerospace, defense, automotive, medical communication, logistics, manufacturing, and industrial. When I’d meet with customers to help them improve areas of their businesses, I was fascinated by how little technology had penetrated these industries. I was shocked by how they were operating in such an old school way and how thirsty they were for innovation. These industries accounted for probably $70 trillion out of the $85 trillion of the world’s GDP, yet had single digit tech penetration. Light bulbs went off in my head and I thought, “If there’s limited tech penetration, yet these companies account for most of the world’s GDP, there must be tons of venture capitalists and gross investors chasing after these companies to help digitize.” As I dug in, I found out that was not the case at all and the reality was actually quite the opposite. I received feedback from VC friends, “Dude, just give us FinTech, Consumer stuff, and SaaS. Don’t come at us with this complicated industrial stuff.” They didn’t want to hear about energy, batteries, or semiconductors. I knew I came across a lifetime opportunity to help transform these industries and I couldn’t walk away from it.
Matt/ Tank Talks: You took this “aha” moment and turned it into something three years later when you launched Eclipse. Let’s talk about that for a sec, because when people say, “Old-line industries,” we often refer to industries like energy, defense, automotive, trucking, aviation, etc., and like you mentioned, these are not your typical venture fund industries you want to go into, especially as a first fund. Which is crazy to think you did that with your first fund. So how did you convince investors to back you with this thesis, and who were some of your earliest supporters that wanted to be along for the ride?
Lior: I left Flex at the beginning of 2015. I met Pierre around this time and we launched our first fund in April 2015. To give you a sense of the challenges we faced, our first fund was $125M and took me 5 close attempts and 15 months before finally closing the fund. For perspective, our third and fourth funds were each $500M and we closed both in single closes. So, it was much harder in the beginning to convince people to buy into our vision. When I talked to people on supply chain, the need for manufacturing resiliency, batteries, etc., investors looked at me and kind of rolled their eyes. I would show them data around the world’s GDP and how most of it is in these industries. So yes, SaaS is important, but construction alone is bigger than a traditional software business. Aviation is larger than a traditional consumer business. And the list goes on. I must give WashU’s Endowment major props because they were the first endowment in Fund I to make a huge bet on us when A. I was not really clear on what venture meant and, B. Our strategy went against everything people were investing in at the time.
Matt/Tank Talks: You had some incredible background experience, but no experience as a venture capitalist or investor. That must have been a little challenging to overcome as well. How did you do that?
Lior: I clearly did not come from a venture background — I didn’t go to Harvard Business School, intern at a venture firm, or was ever a principal somewhere before. But you know, I actually think my operating background pays dividends in the types of companies we build. Eclipse is now about 24 people and we are continually hiring operators over traditional investors. We train these operators how to be investors because we feel having an operating background is much more relevant for our companies. The former VP of Production at Tesla, previous Apple Watch lead, and former Microsoft Azure Head are all my partners today. Yes, we make investments and sit on boards, but we’re not there to just look at quarterly reviews — we are there to give product reviews, help our founders build factories, set up their supply chains, and more.
Matt/Tank Talks: The past few years you’ve been investing in old-line industries and working with them to update their business lines, which is not very easy to do. Over the last two years, this little thing called the global pandemic happened, which has accelerated the need for transformation in these industries. How has your thesis played out from your initial funds before COVID and how has it changed since then?
Lior: I will say that we’ve witnessed a massive spike in technology transformation in these industries post-Covid. There’s been a huge influx of capital across the chain into these industries. We are seeing a massive flood of smart people leaving their jobs to build companies in the EV market, fusion market, or manufacturing space. It was clear to me that this transformation would come, but I think Covid just put a 500% acceleration on the original timeline I had in mind.
Matt/Tank Talks: When thinking about how we can upgrade our manufacturing supply chains, is it really just about replicating and replacing humans involved in the process, so we can focus more time on productive tasks? And if so, why isn’t anyone just saying that?
Lior: The notion that automation and technology are not and will not take manual jobs is wrong. I think what’s going to happen more is dislocation. So, I actually don’t think we will be taking jobs from people in the US — we will be taking jobs from Asia and moving automated assembly to places like Charlotte. I see a few problems the world is facing that are leading to opportunities that are exciting to me. When it comes to manufacturing and logistics, these are Baby Boomer industries. These people are in their late 50s and they’re going to retire. There is not enough new blood coming into the system to replace this aging workforce, which is our first problem. Second problem, we are consumerizing everything. We want to buy three different cars every year, four different phones, who knows how many shoes, and we want all of this to show up at our door the next day. Meaning, manufacturing, supply chain, and logistics will change our world. This new world will be controlled by software and will be run by automation on the factory and warehouse levels. And the last one is a geopolitical issue. Basically, countries now say, “Hey, we are not willing to give away our IP in order to get the low cost of manufacturing. Also, wages went up significantly, so that’s not low cost anymore.” The U.S.’ response to this, plus the added stress of COVID, was the infrastructure bill. I think we’re going to see more countries put trillions of dollars towards revamping infrastructure that by and large fall into the industries that we are playing in.
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