E399: How General Catalyst Finds Billion-Dollar Startups

0:00The reason AI is a wave today is because of open AI. If SpaceX was not successful, there would be no space industry today. The best thing that you can do is meet the best founders early and see the world through their eyes and let them guide you to where the opportunities are. General Catalyst today has$43 billion under management. Why in the world would you guys be investing in the seed stage? I think it's a very common question, actually, for a fund our size. But I think that there's two pieces to the question and a little bit of framing that's helpful. At the end of the day, we actually think of ourselves very much as an early stage fund.

0:36I think our DNA, despite our scale at this point, is early stage. Some of the best, most well-known investments that we've ever done are actually seed investments or started a seed relationships. Stripe, Andrel, Mercore, Circle, like every single one of those was a seed investment first. And so we really believe that Seed is the heart of the business, regardless of like the capital or the AUM. The reason we think Seed is so important, there's actually a multitude of reasons. I think the very first reason is that Seed is where you form the deepest relationships with founders. It's really the most, like if you're the first and true believer, they're going to remember that for the rest of their lives.

1:20And so whether it's 10 years later, 15 years later, The person that wrote you the very first check is someone that you remember forever. The second thing is we fundamentally think that Seed has some of the best returns in venture. It is the lowest entry point from a cost of capital perspective. You can buy up ownership easily at the beginning. And obviously, if you own 10 % of a company that's valued$10 billion or$100 billion or more, you're going to have incredible returns regardless of how many dollars you put to work. And the last reason that I personally care about a lot is that you get to work with founders who are truly living in the future.

1:56And we can talk about that a little bit more. But when you meet seed founders today, as opposed to a growth founder, you're meeting a founder, for the most part, has never built in a world that AI did not exist. If we compare this to a company that's five years old, which would be a typical growth investment, most of them started pre-ChatGPT. And so the founders who are building today are just building fundamentally in a completely different mindset. And I think for us as investors, it's important to capture that as early as possible and see that as early as possible. Said another way, your seed practice helps inform the rest of your investors.

2:31100%. Practical examples of that. If you're doing your job well, you're meeting a lot of these things before they become categories or themes. And so I'll use Andrel as an example. Defense today is a huge theme. There's a ton of capital going into defense companies. YC Demo Day is coming up right now. There's a number of defense companies. There's probably more defense companies in this YC batch than there have ever been before. But I fundamentally think that defense is a theme because of Andrel's success. And I think that we were fortunate to meet Andrel early and partner with them, not because defense was cool or popular.

3:05In fact, defense at the time was the opposite of cool and popular. But because Palmer is such a unique founder. And so I think that by doing that early and seeing firsthand what can be built in defense as a startup, that actually informed a lot of the rest of our global resilience team at which defense is at the heart of it. And investments like Cerronic, Nominal, and so on came from. By seeing Andrel early, you had more of a prepared mind for the next wave. By having a front row seat to what they're able to do, it just changed our perspective of what can be done in defense and industrials. Is there something that investor could do in terms of preparing for the next wave?

3:43or is it just knowing where to focus your time and energy? This is kind of speaking to founders living at the tip of the spear, living in the future. The best thing that you can do is meet the best founders early and see the world through their eyes and let them guide you to where the opportunities are. I think the reason AI is a wave today is because of OpenAI. And so I think if you were looking at OpenAI in 2017 or 2016 when it was just getting started, it would have looked very weird. but Sam and Ilya and everybody else that was around the table at the time were such exceptional founders that you really wanted to bet on them above anything else.

4:21I think it's just important to meet those founders as early as possible and just keep an open mind. Same with SpaceX as well as space technologies, these category definers. Do you think there's a world where if OpenAI was not successful or SpaceX wasn't successful, the entire industry would not proliferate? If SpaceX was not successful, I think there would be no space industry today. Even the most successful space startups, whether it's like Rocket Lab, which is public, or Stokespace, which is private, I think they are being built, and to some extent, I would even argue Blue Origin, which Jeff Bezos funded, are being built on the shoulders of SpaceX.

4:59The other example I was going to use, it's another Elon company. I think there would be no electric cars without Tesla. I think that Tesla, and like not only no electric cars, I think there would probably be some self-driving cars like Waymo's maybe would still exist. But Tesla is so far ahead on personal full self-driving capabilities that I just don't know that anyone would have gotten anywhere near it without them. So I actually think that Elon has pushed two industries that would not have existed otherwise. To your point, I've developed this pretty strong conviction that seed done right needs to look like a generalist fund, should not be a sector fund.

5:33Why? because all the returns and seed come from the next generation of startups. So by definition, if you're out there marketing a fund for 24 months, your thesis is already stale. This shows up every couple of years. People will do AI funds or cloud funds or intranet funds. And if you think about it, if you project to the future, like if today somebody pitched you a cloud fund, you would kind of look at them like they're crazy. Or the idea of an internet-focused fund makes no sense. So I think thematic funds are always just a point-in-time thing. Eventually, everything just becomes a good venture fund and most great venture funds.

6:04I think if you think about the best venture funds, even outside of GC, they're almost all generalists. Why do you think there's such a bias for these sector funds at the seed stage? Why do you think they exist? As an emerging manager, which is something that I did before joining GC, you're always trying to differentiate yourself. And one of the easiest ways to differentiate yourself is just say, I'm going to pick this one area that maybe is not popular today and I'm going to put a stake in the ground and become the expert in that area. And I think if you pick that area well, that will give you maybe like one or two years or maybe two or three years of breathing room to just like run and own it there were crypto funds or ai funds there were probably internet and cloud funds before that but i think that that is an advantage that is not durable you'll have to get away from it but it's a good way to start expert calls have always been one of the most powerful ways to build conviction but today investors are asked to cover more companies move faster and do it with leaner teams with alpha sense ai-led expert calls, their TGIS call service team sources experts based on your research criteria and lets the AI interviewer get to work.

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8:21Take advantage of AlphaSense AI-led expert calls now. The first to see wins, the rest follow. Learn more at alpha-sense.com slash how I invest. There's also this argument that venture capital is so idiosyncratic. You could have an extremely seasoned LP that's invested in buyout, credit, real estate, maybe even for 30 years. Extremely experienced. They go into venture capital. They try to port over these intuitions from other asset classes, like sector specialists and buyout and lower middle market. Great strategy, enduring strategy. But some of these strategies just do not work in venture. I think that they can work at growth.

8:58Like the closer you get to real growth, the more it probably starts looking like private. I do think that on the early stage side, it just has to be generalist. And if you're looking at it as an LP, like picking sector specialists at early stage is probably not the right approach. You want to pick people who are exceptionally good at finding exceptional found. Just to play devil's advocate, what oftentimes founders really fear at the early stage is having a large fund invest and then not follow on the next round. How does General Catalyst, how do you solve around this problem? It's a great question.

9:31So I think what you're referring to is something that we usually call signaling risk. It depends on how the fund positions itself and how the market looks at the fund. There are a lot of peer firms of ours who really treat seed as a feeder towards Series A. And what will happen is they'll invest in a bunch of seeds and then they'll cherry pick their best series A's and they'll double down on them. And so then I think people will ask, well, like, what's wrong with the other companies? And that is the signaling risk. It's like, if you did not lead the A round of your best company, by definition, it feels like you do not believe in that company.

10:03What we did is we, and this is unique to GC because at GC, we have three partners who are running the early stage practice together, particularly focused on seeds. So myself, Jeanette, and Neeraj. and each one of us actually had our own seed funds before joining GC. So I had a fund called Wayfinder. Jeanette had a fund called La Familia, focused on Europe. New York had a fund called Venture Highway, focused on India. And they're all seed venture funds. And so we acutely feel like what it looks like on the other side of a large venture fund coming in and participating. And the decision that we made pretty consciously is we blanket said that we will not cherry pick any of our best companies at Series A.

10:44we will buy ownership up front at seed. We want to get around 10%. We'll invest, we'll partner, we'll do our parada at DA, but we actually will skip leading any of our seed companies rounds at Series A because we just want to get rid of signaling risk. We don't want anyone to think that we're picking the best ones. And we've been messaging this in the market for the past year. We have this on our blog, on our website. We tell this to founders up front. We tell this to co-investors. We tell this to LPs. And I think that that has really helped It gives founders confidence that they're not going to have to explain to anyone what's GC doing because they can show it in black and white.

11:20It also helps when we work with peer firms that they know that when we're referring deal flow to them, there's no adverse selection in that deal flow. And I don't know that anybody else has done that. It takes a lot of confidence in partnering early to do that. And it forces you to not do any option checks early, which I think a lot of firms just haven't been willing or able to do. A lot of people think this idea of signaling risk is overblown. I strongly disagree. And the reason for that is nobody has more information on a company than the existing investor. And to your point, especially if you have$43 billion and you're not following on to your company and you have that option, it's quite a bad sign.

12:04The way to think about it as a founder is if things are going exceptionally well, no one's going to care. If things are going exceptionally poorly, no one's going to care. but there's a big 80 % in the middle where things are going fine and it's not super obvious but they're going reasonably well. And in those cases, I think people do care. And that is where we just want to completely kill all signaling risk. We don't want anyone to feel that we're cherry picking. We will support all of our companies to the extent possible. And so far, we've been doing this now for about a year, year and a half and it's worked super well.

12:37A lot of top founders love to hire former top founders, General Callis has made the decision to bring in three people that had their own fund versus just worked at another firm. Was that a conscious decision? It was very much a conscious decision. And it's a better conversation for Haman, who had made that conscious decision. But I think that stepping back, actually, GC fundamentally is a very entrepreneurial place. Beyond the fact that we have three managers who each ran their fund, there's actually other companies that were incubating inside the management company in service of the founders.

13:09And so I think that there's a lot of desire for an entrepreneurial mindset. And I think that if you had built your own firm before, then that is part of that mindset. The reason we did this specifically around seed and acquired three seed firms is as G.C. grew a lot of the gravity because of the assets and the check sizes went towards growth. And I think there was a real desire to, on Haman's part and the team's part, to pull back the gravity towards early stage. And it felt that the best way to do that was to actually bring firm builders who wanted to build seed firms inside of the company and let them build the seed practice nearly from scratch, like reboot the seed practice inside of the company.

13:51And I think the best way to do that is bring people who are entrepreneurially minded. So you guys are looking to do roughly 200 seed checks in your seed portfolio. How do you go about investing in 200 companies? The unique thing about GC is that we really operate as one global firm. Like there's no GC Europe or GC India, there's just GC. And so across GC, we have teammates who are in San Francisco, in New York, in London, in Berlin, in Bangalore. And all of us operate together. We're one team. We meet together every Monday morning as a single team. We're in one WhatsApp. We all collaborate on deals.

14:29And so we think that over the next like three years, we'll probably do around 200 C deals. which I think averages out to about one and a half seed deals a week globally. And to give you context on that, that's about 15 people globally who are investing at seed. And so I think that from a cadence perspective and a relationship perspective and a management perspective, it actually is like a very reasonable amount of deals to do over a three-year period of time. And it actually is in line. We looked at the math on this. Like in Fund 12, we did, I think, right around 200 deals. Support for today's episode comes from Square.

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18:13And I think if you think of it in the context of like a$4.5 billion fund, right? If you own 10 % of a company, you probably want to see like a$40,$50 billion outcome to be able to return the fund, which sounds crazy. It's a very large number. Especially at the seed. Well, I mean, 10 % is 10%, but thinking about like a$50 billion outcome for sure, it's very difficult to project. And so I do think that, and we have this conversation internally all the time around like, can a seed check really move the needle? I don't think the money in matters. What matters is the ownership. And if you own 10 % of a generational company, first of all, of course, you would love to own it at a lower cost of entry.

18:52And second of all, I think we have the proof points that those businesses can materially impact and even return the fund. Not every deal has to do it, but I think that in every fund vintage, there's usually, whether it's GC or for other funds, there's usually like one deal that truly drives the fund. And sometimes even like if you do crossover investing from fund to fund, it might drive multiple fund cycles. I had a former partner at Founders Fund. And it's quite a counterintuitive thing, which is that the real power law outcomes don't necessarily look like power laws from the beginning, but you see a way to five to 10x and then they just start compounding.

19:29They find something out and they just start scaling. You've seen now thousands of investments as a venture capitalist. Do you look at power law outcomes as something that can be seen at the very start or is it just a matter of just constant compounding into great founders? It's a great question. I mean, I definitely think that you can never really like try and project out to a 50 to a hundred billion dollar outcome. I think you can justify some crazy decision making if you do that. I usually try to imagine like what does the world need to look like for it to be a 100x investment. So if I invest like a 20 million dollar valuation, I try to think of like, what does it need to be to be a two billion dollar company or maybe after dilution, like a four or five billion dollar company.

20:14I think that the reality is that the markets are so big now. And I think that's maybe one thing that we underestimated like 14, 15 years back is that when these businesses are compounding, they can compound for a very, very long period of time. And so the businesses that 15, 16 years ago we thought would be billion dollar businesses became five billion dollar businesses. The businesses that we thought maybe could stretch to be 10 billion dollar businesses ended up being 100 billion dollar publicly traded companies. and that was unfathomable 15 years back. And so I don't think you need to underwrite to that, but you do want to find these founders who they'll get to the next phase and then they'll unlock the phase after that and they'll just keep building these enduring businesses year after year after year and compounding at 30, 40 % a year for a long period of time.

21:04At scale ends up being a very impressive number. Before we started recording, we were talking about the second order effects of everything going on the market, SpaceX going IPO, trading at a couple trillion dollars as of today. And what does that lead to? I recently had Matt Wilthire, who runs Growth at Wellington, talk about this disparity between the public and the private markets. So in the public markets, there's only four tech companies that are underwriting more than 30 % annual growth in the entire world. So if you wanted to own Growth, you had to own one of these four companies. Now with SpaceX, there's five.

21:38in the private markets even though people see these large rounds happening and these mass evaluations there's still only about 350 billion dollars being deployed on a yearly basis and if you start thinking about the second order effects you have anthropic open ai and other companies start to go public at a trillion dollars you have ventures start to outperform the public markets which for the last five to ten years actually qqq has outperformed most venture firms but if you have this return to normal where the top companies are staying private, they continue to outperform. At some level, LPs are going to look at that and say, should I be allocating more into the private markets versus the public markets?

22:18If right now I'm 60-40, the most innovative endowments, and some other investors are like 95-5, is there going to be more cycle into the private markets? And what will happen as a second order effect if more capital goes into private markets? Companies can now stay private longer. SpaceX could do the next round as a private company. Anthropic and OpenAI could continue to do that. The reason Anthropic, SpaceX, and OpenAI are going public is no secret. It's because they need access to more capital. Why do they want access to more capital? It's because there's not enough capital in the private markets.

22:50Already today, Q1 2026, 75 % of all venture capital money, globally, venture capital has gone into five companies. Said another way, if the venture capital market was twice the size, each one of these companies could do an extra round. So if you look at it just purely from a capital market standpoint, forget about market size or total addressable market or GDP, take those all to the side and you just look at how long could companies stay private in the future, you're going to have potential for another two to three X return on companies that previously were forced to go public. I definitely think that there's more and more money pouring into private markets.

23:27And there's a bit of a debate of like A lot of the money is concentrating on a few deals at the growth stage. And somebody actually asked me recently, are there still early stage deals happening? I just kind of looked at them like they're crazy because my calendar is just so full of early stage founders. I think that the effect that's really going to happen is obviously early stage valuations will probably continue creeping up because some of the money will trickle not just into growth deals, but it will continue coming earlier and earlier. And we already see that. And we saw that in 2021, there was a lot of what I would call tourist capital.

24:00So a lot of these growth funds or even in some cases, hedge funds showed up and started doing seed investments and there was no discipline around any valuation or pricing or anything like that. And valuations just ballooned and then like the moment the market corrected, they disappeared. And so I think you'll probably see some of that happening again, just because of you're seeing these incredible private companies now IPOing at equally incredible valuations. I think there is a question for founders. There are some founders who never want to run a public company. They don't want to do public earning reports.