E401 | Paula Wehmeyer, General Catalyst: European tech & trends that are shaping the ecosystem

0:28Welcome back, everyone, to the European VC podcast. multi-generational company that have then for some reason gone stale, primarily that they've lacked the integration of technology and adoption of technology. And for that reason, then go in and do a bunch of work to make that company super efficient and super ready for growth. And I think that's an incredibly interesting strategy for VCs to get into. So I really hope you'll enjoy this episode as much as I did making it. Here's a few words from our beloved sponsor. This episode is brought to you in partnership with Zero 100 Conferences, which organises intimate networking events connecting LPs and GPs in private equity and venture capital firms across Europe.

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1:53Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Paula, welcome to the European Easy Podcast. Thank you so much, Andreas. I'm so excited to be here. I am super excited to have you with me because General Catalyst, we have not had you on the podcast before. We are going to have both you and actually also Juliet from the London office. So I'm super excited that we're now finally covering General Catalyst. Let me start by just doing the readout of the core stats of General Catalyst. And then you can maybe add a bit of context to it.

2:32And we can dive a bit into who you are as a person as well. So to anyone out there that doesn't know, General Catalyst is a global investment and transformation company that partners with the world's most ambitious entrepreneurs to drive resilience and applied AI. We're going to dive into two words there that are a bit different from what you're used to hearing, meaning transformation company. So what does that mean? We're going to talk much more about that. And then we're, of course, are talking about driving resilience and applied AI and how that's different from maybe some others. The fund size is$8 billion in dollars.

3:06So a big one. And headquartered in the US, you're based in Berlin, I believe. I'm based in Berlin, exactly. And you're focused on pre-seed to pre-IPO, globally oriented, and you're going across sectors. You've invested in a bunch, more than 700 companies since you started 25 years ago. And General Catalyst, of course, has then the companies of Airbnb, Enduro, Commure, Helsing, Kayak, Livongo, Ramp, and Stripe behind them. So incredible track record of a firm that we all probably have met in some capacity over time. But Paula, tell us a bit about yourself and tell me what I got wrong in that long intro.

3:46Awesome. No, the intro was great. I'm happy to add like a little bit of my own flavor to it and sort of what I bring to the company. We've now established that we're not an investment firm. We're a company, a transformation company, as you said. So, you know, I'm Paula. I joined VC more broadly about four years ago when I came out of the classic management consulting route and moved to venture capital. At the time, I joined a firm that was called or still is called La Familia, a pre-seed seed, really early stage grassroots fund from Berlin, but investing globally. And about three years into my pre-seed, seed, really early stage investing career with La Familia, we actually merged and joined forces with General Catalyst.

4:35So that's my story of actually joining GC was GC was, you know, looking to venture more deeply into the European ecosystem and decided rather than hiring a lot of individual people to actually work with an established platform that really already has their boots on the ground. And that's the story how I joined GC a little bit more than a year ago now. And it's been so, so exciting to learn from the global platform, work with all these amazing investors who, you know, have a much sort of broader focus in terms of the stages they can go into. and to bring a lot of GC's conviction together with La Familia's conviction and really work on Europe and what Europe needs right now as a joint platform.

5:22And to those thinking, okay, let's dive super deep here. I am talking to Juliet about that and how a big firm thinks about partnering with another firm, why you do it, how you kind of try and make things work when you're investing out of a global fund, but you have a region that you're dedicated to yourself and all those questions that arise when you're doing something like this. But that's not what we're going to dive into today. Instead, we focus on your perspective on European tech and investing in the trends that shape the ecosystem. And then obviously, of course, these topics that we just described before being so substantially different, potentially than a normal VC firm that you decide to call yourself a company instead of an investment firm, a transformation company.

6:11I love that. But let's get into first your take on European tech. Let me hear from you. When you look at Europe and when General Catalyst looks at Europe, what do you see? Where are we? Obviously, I'm European. I'm German from the south of Germany, originally now living in Berlin. So obviously, we as a team, as Europeans have huge belief in Europe, but we're also aware that there are challenges, right? If I had to say what is kind of our big goal, it's we really want to see three of the 10 next big global AI companies coming out of Europe, and we really want to be along for the ride to shape that.

6:52And what we see today, to your question, is sort of three main elements why we actually think Europe is a super interesting, very different ecosystem than the US. So one is really, in Europe, we have a super deep talent pool, right? So this is not something that everyone knows, but we actually really have a huge inventory of AI researchers. So there is kind of this substance to build these big AI companies and to really drive transformation. In the past, it has been a little bit tougher for Europe to actually bring some of the research into fruition in actual companies. So that's something we really are kind of looking into how to shape.

7:34And another thing is a lot of European talent has actually moved to global companies in the US. So kind of a second thing we're always thinking about is how and when are these people coming back to Europe? And how can we maybe also catalyze that a little bit to work with them then to build European companies? So that's sort of the talent piece that we see that we think has a lot of potential. The second bucket is Europe probably has some of the strongest inventory of established industry companies, right? From the mid-cap German Mittelstand type companies all the way through to sort of large industrial conglomerates, there's really a great base of companies in industrial manufacturing, in defense, in energy that are actually ripe for transformation.

8:20And we'll get to that in a little bit. How can we actually transform these types of companies beyond the traditional venture model? For example, our creation strategy. Very happy to get into that a little bit more. But that's really another bucket where we think it's actually the time now to sort of take these established industry companies and double leapfrog, both by digitizing them, but now also by applying AI. And the third bucket is a bucket I like to call like the challenges of Europe, one being regulation and one being fragmentation, where some people might say, OK, these are like two main problems that are actually going to make it hard to innovate, where we actually think these are opportunities that you need to almost like, yeah, work with and use the good side of.

9:11So on the one hand, regulation, it also kind of means that it can unleash a lot of creativity by setting very clear legal frameworks. So Europe has a reputation of, through the regulation, actually being probably one of the safest and most responsible approaches to using AI, for example, in society. And we want to use that to our benefit. And on the fragmentation piece, there's a lot of businesses that actually take advantage of fragmentation. So that's sort of what we look for in Europe. For example, cross-border payments companies. That's a type of business model that actually benefits from the fact that there's fragmentation.

9:52So we kind of take that lens a little bit when investing in Europe. And obviously there's... Skype is another great example, right? Yes. Because of our fragmentation here, we had to figure out some way to talk beyond borders. So that's a good point. Exactly. Or AI translation is another one. Or, you know, what are sort of the ways you can overcome the barriers of fragmentation? Could you tell me a bit about the regulatory part? Because, you know, some people may have heard that we're going to do a summit next year. It's not announced yet. So here I am soft announcing it. But we're going to do a summit to reset the narrative on Europe.

10:29because very much I find that there's a lot of people with the big mics in the US, unfortunately, are dunking on Europe a bit too much. And one of the big things that they hit on is regulation specifically, say that we over-regulate all the time and so on. And I very much err on your side as well as saying, well, yes, on some point, but there are definitely also, first of all, let's just agree that the reason why we regulate a lot but also to really pave the way in a way where we can, across these many different countries, actually have a more unionized framework, so to say, to use a very European word.

11:10So I think for that reason, we need to remember why are we doing it. But yes, it also comes with problems. But I'd love to hear you. Where do you see the opportunities that this creates? I think nobody can deny that over-regulating and directly always shooting to the most regulated option that's out there is not a good idea. And that's something we're also working on with our GC Institute. So we have sort of a newly launched policy institute that's going to work very closely on shaping this. But the way we think about sort of the positive sides is, for example, let's look at the EU AI Act, right?

11:46So the focus was very much on transparency and accountability. And those are actually two things that are not bad things. You just have to kind of find the right way of formulating them. But if you do find it, then this can actually build a lot of trust. It also means that the AI companies coming out of there are very conscientious. And that's actually something, especially if you're selling to large established industry companies who also are very regulated or who also have, you know for example public market investors that they report to that's actually actually something they value and so it depends a little bit on who your customers are but being regulated and being very transparent and and conscientious with the way you use ai can be a huge benefit depending on who you're selling to yeah and i guess in the later the what one would often say is that it's easier to navigate for a later stage company than it is for an early stage company do you see anything and maybe this is actually a good transition into the creation strategy, I don't know.

12:49But this point that while some of these dynamics of Europe can make it difficult to be a startup compared to if we had less regulation, it might actually be positive for the companies that can actually lean in and figure out what you're allowed to do. Do you think that that is... And I think when we're, maybe also to your point, I completely, if you're a very early stage company, being immediately stifled by regulation is a very bad thing, especially if you're more on the research side where the aperture of possibility needs to be bigger. I think there's more as we get to the level of application and sort of effects on the established industry, there's definitely also a benefit to thinking through transparency and so on.

13:39In general, do you see it being a hindrance for European growth? Or do you think that it's actually something that's maybe talked up a bit more than it should be? Yeah. Look, I think it's something that needs to be dealt with. So, you know, I think if we leave it completely as it is, it's definitely more of a hindrance. But we kind of try to take a perspective of it also being an opportunity and something that in some segments can help us. if done correctly and written the correct way. But, you know, I think it's a mixed bag and I think it's not only negative. I think that's pretty much the message.

14:17All right. So, Paulette, I'd love to also ask you a bit about this global resilience bit. We spoke about it just shortly before we started the recording here and you said there's a lot of VCs that want to talk about resilience these days. And I would definitely concur. What I also hear, especially from the VCs that are more dedicated to it, is that there's a lot of people that want to talk about it, but there's a bit fewer that actually put down the money. You definitely have a general catalyst. So I'd love to ask you a bit about how you think about global resilience in Europe. Where are we? Where are we leading?

14:55Where are we less leading? So on. So maybe a quick definition, what resilience and global resilience really means to us. So what we mean by this is there is a need for modernization of critical infrastructure right now. In Europe in particular, we've seen both a war recently and an energy crisis. And this demonstrates how we're basically in a moment of shifting global dynamics. And it means that these infrastructure systems, so energy, the industrial infrastructure, supply chains, defense infrastructure and technology need to be modernized to be able to be resilient to such shocks. Right. So that when wars happen at our doorstep or energy crisis come up, we actually, as groups of countries, actually have a way to be resilient and to sort of respond to those shocks without being completely exposed.

15:53That's how we think about resilience in general. And that's something we're investing behind very, very intensively right now. In Europe in particular, we've actually invested in a bunch of companies in this segment already from Helsing, which is a really well-known example out of Germany. Fever Energy is another one. Smalt is another one out of Germany. And we actually have a whole bunch more that are unannounced right now. So stay tuned. But that's really something we're kind of putting a lot of our thesis energy, but also our investments behind. Where do you see that we are, you know, favorably positioned in Europe to really make a difference when it comes to this?

16:34And what dynamics goes for global resilience companies in comparison to maybe just your standard run-of-the-mill SaaS company? Europe is generally really well positioned for most of these industries. So what I just mentioned, so industrial manufacturing, supply chains, defense, energy, climate, because these are all industries that have to do with physical products, right? So there's always a physical infrastructure element to most of this. Either it's software that gets applied to hardware or it's actual hardware and manufacturing technology. And that's something where Europe really actually has a leg up historically in terms of manufacturing technology, in terms of the established businesses that, you know, initially drove the first kind of wave of this in the industrial revolution.

17:23So we have great inventory to work on these problems. What's different about global resilience type companies or resilience industries versus classic SaaS is, you know, The classic answer, it takes longer to become successful in these companies. So we really have sort of a patient capital approach here. And the other is, these are usually industries where the founders ideally have a little bit of background in those industries. So this doesn't always apply. I don't want to generalize completely. So, you know, take it with a grain of salt. But as a general rule, most likely if you're building a company in robotics, you probably want a background in robotics.

18:10Whereas with pure SaaS, there's also actually a benefit to being, you know, maybe very young, having just taught yourself how to code, being a little bit maybe naive on how you can disrupt a sector with software, which I think in many of the resilience categories is a little bit less the case. I think everyone recognizes that VC money is moving more and more into these areas. And you might call it deep tech as well. How do you see this changing the profile of the successful venture investors? Do you have any thoughts on that? And what do you see your colleagues doing in the industry to kind of maybe rethink how they work and where they focus?

18:56There's kind of two pieces to this. in my mind. One is, for sure, I was just talking to a friend recently who actually has like a deep tech profile, who's a physicist, who was interested in getting into VC. And I said to him, I think your profile is probably more needed in this industry than ever. And a lot of VCs would be super interested in his profile now because they need more people who actually deeply understand deep tech concepts who would be able to deep dive on a robotics company at a deeper level than maybe people with a pure economics business background. So for sure, there's a lot more appetite to hire those profiles into VCs.

19:35And then I'm seeing, you know, within the venture ecosystem, also a lot more kind of deep research and thesis building in these areas, which was, I think, less, again, less necessary with classic SaaS. It's pretty tough because each of these companies are very different. Evaluating them really end to end is definitely not an easy feat. But I think it would definitely help to get more of these profiles into the industry. Yeah, and I would say that, you know, my take is that it is definitely one of the core driving forces behind us seeing an increased specialization in VC firms. Many have kind of said that, well, this is because of the increase in competition.

20:17So for that reason, you see increased specialization. but I actually think it's very much also that the biggest opportunities are becoming harder and harder to diligence and deal with and it just is a very specialized skill set to be able to be successful in whereas you know and I actually think the U.S. is a great example right because it's not that the U.S. is full of specialists compared to Europe necessarily if you look five years back or seven years back, they all look quite similar. So it's really not the competition point. I think it's the fact that the innovations that we're seeing can drive very big outcomes now are much more complex to deal with.

21:02We're seeing that trend, but we're also seeing that being specialized in the past, I'm not totally sure how that plays out in the long run, because there's also certain waves of what sort of the next iteration is of what gets a lot of investment. So I think, yeah, we'll have to see how that works. It's a super good point. And that's exactly when I spoke to Max from IQ Capital on the podcast. He said, well, we're deep tech VC and we're specifically not a quantum VC or defense VC or whatever, because all through our 20 years of existence, we have gone from being you know a deep tech that then has had specialists specialisms or or increased focuses on one area to then if you look seven years later it would be a slightly different area that you know and and thus it's kind of this jumping from from core technology or sub vertical whatever you want to call it within the area of deep tech for for them that that that's making them say, well, we're deep tech first, and then we have the specialisms within us.

22:13Yeah, exactly. I think in the end, probably the best way of putting it is be somewhat technical and able to deal with deep tech concepts from the profiles of the investors on your team, but make sure everyone is just very curious and always kind of staying on top of what the next thing is rather than specializing maybe too deep into one exact segment, which then maybe gets a lot of investment. Those companies grow up, but we're then sort of onto the next thing at the early stage. And then more than anything that you have a foundational propensity or capability to build strong competence within a highly technical field.

22:58Because I think that the days of the financial VC, they're not numbered, but we definitely need fewer of them and we need more of the others. I remember when I was a direct VC player, I could just see how I'm not going to be very good at this because the very technical stuff, it just beats me. It's not my skill set. It's not what I do well. That's why I do fund investments today. Yeah. And I do think that some people should recognize that. And I think that the profile, the general profile, so to say, or if you look at the landscape, we're going to see a change in the makeup. One of the core competencies of any VC is like being able to kind of redefine yourself all the time, both in knowledge, but also in positioning.

23:48So I think being able to go with all those times is like a core skill in VC, regardless of what industry you focus on. And it has inspired many memes, especially the repositioning. All right. Okay. So Paula, now let's talk about the creation strategy. And we're running out of time because I wish we had much more than 15 minutes here. But the creation strategy, the applied AI strategy is radically different from anything I've heard from any other investor. So I'm super curious to hear much more here. Yes, I would love to tell you a little bit more. And it's also after joining GC, coming from La Familia, which was very, very classic early stage focus.

24:28This was also the biggest change for me and what really excites me about being at GC. So basically, we as GC have a really long and deep history of hatching, as we call it, or incubating, as maybe the industry calls it, companies together with very ambitious founders. There's over 45 examples actually in the GC portfolio that we co-created. Examples include Commure, Livongo in the healthcare space, and Kayak in the US. this strategy, the creation strategy, includes both this sort of incubation and creating companies, but also the option of investing in and transforming established businesses outside of kind of the classical venture world.

25:10So basically, you could almost say like, is this similar to PE? No, it's not, because what PE would typically do is transform in terms of taking a lot of cost out improving efficiency. Whereas what we would really do is think about what is the potential of this company in the very, very long term? How can we create a long lasting technology driven company? How can we drive AI into this company to actually make it a generational business for the really long term? And that includes a lot of different segments. I'll give you maybe one or two examples to make it a little bit more tangible. So could you maybe before you give me those examples, Maybe you could describe a bit because we all know the parameters of a VC deal.

25:56You do a pre-seed, okay, then this is kind of going to be the valuation and the ticket is going to be something like X, Y, Z. And then you know that whole game. When you're looking at the creation strategy, can you talk a bit about what type of deal parameters would you normally have in these? So the deal parameters are very, very flexible. And there's a lot of different ways we've done this. But maybe I'll talk a bit about the profile of the company instead. So a typical venture-backed company is get started, goes through these rounds, usually is growing very, very quickly, typically is not profitable because they're investing a lot of the capital into growth and really becoming a big company in a short amount of time.

26:45That's sort of the thesis behind classic venture. A lot of it is software. So the margin, so the gross margin is actually very, very high, but you're investing a lot of the capital into growth. So that's how you sort of move along these stages in venture. Companies that we would maybe transform through the creation fund might never have taken in venture capital. They might have been bootstrapped. They might be really generational family businesses. They oftentimes would already be profitable because they're just self-standing great companies. But they might, for example, not be as far in terms of applying technology and applying AI.

27:20And that's really where we sort of come in. And the difference is if we're investing into a venture company, it's oftentimes, for example, the software to transform industry X. So they're selling to the companies in industry X to transform it. Whereas with a creation strategy, we would actually transform the business itself. So we would almost be transforming our own balance sheet in that way. So it's just kind of a, it's a different perspective to sort of the same outcome, which is improving industries with technology. Are these normally majority stake or minority stake? There's a lot of different options there.

28:01It can be anything. So interesting. Then let me ask you a bit about the, and we are going to get to the, like two concrete examples of this, but we maybe just want to ask you a bit about the skillset of the VC. Now we just spoke about the skillset of the VC to be able to do global resilience domain investments. How about this? Because it's definitely different from, it's different to underwrite this type of investments to a 200K uncapped safe note. Exactly. I mean, it's interesting because this is also kind of a little bit of a new field, I would say. So we've had this discussion a lot, you know, like, okay, should we now hire private equity background people into that team?

28:53And we have. There's a couple of examples on the U.S. team with PE backgrounds. But there's also, you know, sort of the argument that people working on creation need to have a perspective of, you know, what is the technology transformation opportunity in different industries. So that would bring in sort of the more technical people or the classic venture profiles. And the third profile is sort of entrepreneurial profiles themselves. Because in this strategy, we really, a lot of the thinking has to come from us and a lot of the opportunity generation, right? So either we're creating companies with the founders, we're incubating them, then we have to have like a lot more of the idea and the sort of the entrepreneurial energy there.

29:37But the same is with transforming established industry companies. You know, we have to have a very strong point of view on which industries we should be working on. What types of companies should this be? because there's such a kind of broad aperture of what you can be doing versus classical venture where yes you're always actively sourcing but you're not creating these companies and these opportunities typically so it's a little bit more reactive and that's why you know we're trying to strike the balance between those three profiles but it's definitely a more entrepreneurial VC profile. When you think about the side of it that are mature companies I imagine that here you have a lot of, like oftentimes the reasons why you would say the venture and startups work is because the big old companies, they just cannot change.