General Catalyst's First-Ever Quarterly Review | CEO Hemant Taneja

26:30We want to live them. I deeply care about making sure we're kind. One of the things I write about in this review is that kindness and ambition are not at odds with each other. I think in Silicon Valley, we try to glorify the asshole symptom of founders, thinking that's almost a necessary ingredient to succeed, and I don't think it has to be that way. And so we're creating a culture where we can have a team where everybody feels like they're doing their life's work and they can be entrepreneurial in the GC ecosystem. I think for somebody like Harsh to come, Harsh and Atul, to come and co-found Percepta with me or Jeanette to drive European transformation on the GC platform or Paul Kwan driving global resilience work on the GC platform, I'm like, they have to breathe.

27:28They have to be able to execute their own vision and values, which obviously has to be consistent overall for where we're going. And, you know, my job is to empower them. And so a lot of my focus is on how can everybody here be the best version of what they can be to create the change that they care about that's aligned with where I want the world to go. So that's the leadership sort of, you know, philosophy.

27:52Hemant Taneja:You're one of the most innovative funds or companies, I guess, in Silicon Valley. So how do you keep getting buy-in from LPs on these new ideas? How do you get buy-in on buying a hospital? How do these ideas develop and how do you get the support around them? It's a great question. And I think the main message I've communicated to LPs, but to our whole familia, as we call it, is everything we do is to meet founders where they are and give them powerful advantages. So when we buy a hospital, if you go to SUMA today in Akron, Ohio, we have seven of our companies and the Perceptor team and our own investment team that's literally there all the time trying to figure out how to take this community hospital that in all odds will go down the path of being another bankrupt health system in this country to become an AI native hospital, to drive abundance, to actually be economically viable so that we take care of that community, where it's been for over 100 years.

28:57And so that, when LPs hear that, what do they see? They see that we're getting on the ground help of work experience, understanding what the problems are. Our companies are getting enterprise-wide experience to go deploy AI. And society is getting potentially a model for how health assurance, which is what I call it, is proactive, affordable, accessible care can be deployed all around the U.S. and hopefully at some point around the world. If that's not the way to create the best enterprise value in our companies, I don't know what is. So I strongly believe that all the innovation, and frankly, Ken told me in 2018 to write a three-year strategy, which we'd never done before, and now it looks like nothing like what I wrote.

29:45And he also said to me, great strategies are built in hindsight. I think we follow our intuition. We have our values, we have our true north. And all these innovations that look crazy at the time end up being consistent with the values. And some experiments will fail, but some are going to go be huge enablers for these founders to go change the world. That's the reason they should pick us, and that's the place where I want to invest our revenue that we make as a business, is to go create these advantages for the founders. When LPs see that, they understand it.

30:20Hemant Taneja:And then how have you thought about fund management through these cycles? People are saying we're in a bubble again and at the last bubble and even through ZERP funds we're selling off to secondaries or just trying to get some liquidity for DPI. But when you think about maybe hyperinflated assets or companies, how do you think about the fund management of that? It's a great question. It's a very hard question. And I'll tell you the way this industry has traditionally operated is, let's hope a couple of our companies with the firewall, we return the fund a few times over and the rest will take care of itself.

30:55That's been the model. The sophistication to actually learn how to exit companies, most people in this investment business aren't very good at it. Many people in our team are also just learning to do that. But the problem with things that way is maybe there's a couple of founders that hit the power line, become profound companies in a fun cycle. But what about the other tens? They also are doing important life's work. And so how do we get them to create enterprise value? How do we get them to endure? And how do we get them to create value? For our innovation philosophy, it's like figuring out how to do that.

31:34and then what I really do push our team is that every one of us has that responsibility. Writing a check into a company is a privilege for everybody around the table at GC. Creating economic value on the other side and societal value is the actual job. And that is a cultural transformation and a journey we are on to say we need to be able to help our founders do that. We've built a lot of effort around it. The last thing I'll say is what happens in bubbles is your companies get incredibly valued. And it screws with your mind as investors because you think you're great because you got paper gains.

32:13And it screws with the LP planning because they have these inflated valuations that impact how they do capital planning. So it's not good for anybody. When COVID happened, we were the first firm to go to the LPs. And we wrote down our portfolio by 40 % proactively for no other reason than saying this is not real. We got a lot of credit from LPs when we did that. When the chat GPT moment happened, we went back company by company and said, what is the actual reality we believe in? And we're going to course correct and say, that's what the value is of our businesses and the nav of our portfolios.

32:45Now we're going to manage from there. So I think just being intellectually honest, rigorous, and making sure we acknowledge that a huge part of the job is to drive economic value is something that has to be how you manage your funds. I don't think it matters if there's a bubble or not. Bubbles are actually great for us, no bubbles, and you also don't get companies that really make fast progress and generate outsized returns. But this philosophy has to be enduring in how you do the work.

33:12Hemant Taneja:There have been some funds that have notably sold portions of their GP, whether it's Thrive, Insight. Have you thought about that? Is that something that you've done? And maybe for people who don't know what that means, could you explain what selling some of your GP is? So selling a portion of the GP, usually what you do is you sell a slice of your fees and carry that you get from funds. And there are many reasons why people do that. You can do that because when there's a succession, new partners want a mechanism to buy out old partners. Sometimes you need to do that because you need capital to invest in the business.

33:48So there's many reasons. So the wrong reason would be if you do that to take capital off yourself, because then you're misaligning with your investors. The investors gave you money, carry some value, you sell it to the third party, monetize what your investors didn't, that would be a problem. So we did do this, by the way. We did it in 2018 with Peters Hill. And the reason we had done it was because we had decided right around that time that we're going to scale to have the kind of capital needed to build companies in this generation. And, you know, I think a few firms went down the path of you're going to need platforms.

34:27And by the way, whatever scaling we did, it seems anemic compared to what these companies need in terms of capital today. But we needed to do that to scale. But then we also did buy that relationship back, you know, a couple years ago, once we got through the scaling capital needs. and so yeah I think it's a much more common practice outside of our industry than in venture but some of the firms that did try to scale they did go do that and you know there's there's been reasons for it

34:59Hemant Taneja:One of the fun topics you talked through in this was how the software buyout model is broken can you walk through the math around that so even if a company scales and gets to 50 % EBITDA they could still be a loss to LPs Yeah, look, so in private equity, there was, there has been a circulation of assets. The P firm buys a company, they buy it on the idea that, you know, we're buying it on a certain multiple of EBITDA. We will lever that EBITDA so that the amount of equity you put in that business is, let's say, a third and two thirds is dead. We'll double the EBITDA and then we'll sell the business for, let's say, double the price on the same multiple.

35:44If you do double the price, you pay the debt back, you actually could make a 4 or 5x return on your equity in, let's say, a five-year period of how long it took you. Good return, probably a little less than that, but let's say it's a good return, and then somebody else buys it. But this happened because there was this assumption of a terminal value on those multiples in these businesses. So now think about the reality today. If you said the multiples of these businesses are going to compress significantly, if the multiples went from 15 times revenue to 3 times revenue and your business doubled, you're still valuing the business for a lot less, I give an example on this in the review, than what you paid for.

36:33So your equity has actually never recovered in that case. Why? Because the assumption of terminal value is gone. In the world of AI today, where code is self-writing, to say that a piece of software in a company that has been existing, let's say, five years, the free cash flow on that is worth 30 times means you're going to have 30 years of generating that free cash flow, which you're paying for. How can you ever make that assumption when technology is changing so fast to say these things are that durable? When you start saying these existing pieces of software are not going to be worth that much, then that exit math of terminal value as the way to make an investment and make money completely goes away.

37:18Now that exit math and terminal value exists in software. It doesn't exist in a lot of the other non-software industries. In those industries, you always look at a business on a free cash flow basis. A business is worth a certain amount on a free cash flow multiple and we're going to create structures to monetize on a free cash flow basis, not terminal value. I think software is just now maturing to a state where it's going to have the same dynamic. And there's a one-time massive reset that's going to happen because of the amount of leverage in the system. And there's a lot of leverage coming due in these P-back companies in the next five years.

37:53And many of those companies, the equity value will certainly not exist. Some of them may not even recover their debt because the compression of multiples is so large. And by the way, that does not mean those are bad businesses. That just means they were badly priced in the context of where the value really resides in this new reality. And so you'll see other opportunities on how to create value on those companies as well. So you're already seeing venture capital gobbling up PE businesses. You look at a lot of what Mark and Madhu and our team is doing in creation. We're buying some of these things from PE firms.

38:28We're buying them for not a lot, and we'll arb them into AI transformation, and maybe there's a way to create outflows. I think you'll see interesting structures and interesting approaches to take these businesses and figure out how to create value on the other side of this erosion of terminal value.

38:44Hemant Taneja:What do you think about Vista's new software buyout debt fund? It's small. That was my first observation, like$250 million. But I think they're probably dipping their toes into the water around this idea that a lot of distressed assets. And they get software. They're a great firm. they get software well and they're probably thinking about how can we design these instructors you know and start playing so I bet I bet that could become a larger strategy for them you know if they figure out how to go from terminal value to pre-calculate basis of creating value in these businesses one of the like very unique things about general catalyst has been your global growth There are other funds that like to tout American dynamism that kind of baskets this like national interest, but you have global resilience.

39:34Hemant Taneja:So why did you choose global resilience as a strategy? Yeah, I guess a few things. I think global TAM, last I checked, was bigger than the American TAM. So it allows us to play in a bigger market. It comes down to our values. we believe in inclusive prosperity. So if we're going to have AI diffuse, we want to make sure it's captured all around the world. It's genuinely something we care about. And the other thing is, if you think about our two trends, global resilience and artificial intelligence, the geopolitics is going to force supply chains to shift. Does Europe really want to buy American defense products?

40:17Maybe some countries will, but the biggest ones won't. They want to create resilience. Does India really want to rely on Russia or America for their defense? Not really. They want to do it on their own. So our view was, well, defense primes are going to emerge everywhere in the world. And we want to help founders create those everywhere. So we were in the seed. We've been invested in Andrew Wilson's seed. We are deeply invested in Helsingston's seed. And that's a project that Jeanette and Daniel Ek and Paul Kwan have worked on. and then we're invested in Rafi in India that Neeraj has been working on as well.

40:53So our belief is that the opportunity is everywhere and we want to help founders and we do want to do it globally. I think we went down the path of leaning into Europe and India when Europe was a complete contrarian bed and India was starting to emerge as a FOMO bed. But we just think those regions are going to innovate. and there's lots of smart people everywhere, opportunities everywhere. And if we have leaders at GC that care about creating successful innovation ecosystems there, we want to empower them.

41:27Hemant Taneja:Part of that, too, is it sounds like you've been traveling a lot. Yes. I flew 650 hours last year. 650 hours. Okay. Not bad. It's about a month on the plane and growing. I think Alex Karp's numbers are like he spent three months on a plane. something crazy like that. So you recently invested$5 billion in India. How did that begin? It's not a fund. So again, we invest everywhere through our single funds. The commitment that Naraj and I made was to invest$5 billion over the next five years in India's resilience opportunity. And that's where we're working on building a hospital chain in India. We've got defense.

42:12We're working on manufacturing. We're in great companies like Zepto. which is sort of the e-commerce infrastructure. Look, India's got a tremendous opportunity out of it, and given the GDP growth, and it's a very entrepreneurial country. I was born there. And I think India's tasted success. It's had a bunch of interesting large-scale outcomes now where parents who have a lot of influence on their kids in India, You know, they used to push you to go work for a multinational if you had a good academic tradition. Now, it's embraced that maybe you should go and start a company. Build a tech company and build something at scale because there's role models for that.

42:58And so, I think the cultural resonance of entrepreneurship is there and the economic opportunity is massive. And so, it's a, you know, we're very excited about this. and it's personal to me as well. I do care about making sure we make a difference there and it is for Nera, just for our whole team in India and several others here.

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44:45Hemant Taneja:Mistral, Dropbox, and Drada already trust Merge in production. Start building at merge.dev. Founders scale faster on Deel. Set up payroll for any country in minutes, hire anyone anywhere, get visas handled fast, and get back to building. Visit deal.com slash sorcery. That's D-E-E-L dot com slash sorcery. What do you think this worldview stage has given you perspective-wise? Like what are the biggest lessons? I know you've mentioned a few, but I mean, we are in San Francisco. So how do you take all of those learnings back here and help the culture build upon that kind of light? Look, you know there's that saying that if you want to go fast, go alone.

45:30If you want to go far, go together. The AI opportunity is a transformation opportunity. And if you really want to transform the world, you need to bring it along with you. And I think this idea that the rest of the world is dumb and we're just going to replace them is pure hubris. and I just don't think it's the way the industries and the world wants to do business with us. You know, we talk a lot about TechLash, and I just think the idea of partnering, being really good at actually deeply partnering with the world, is a skill that we can do a much better job of. And I just think it expands the opportunity.

46:13And so, you know, like the irony, and I think I put that in this review, the irony of how we behave is, we'll say in the same breath, I want to build a legacy defining company and legacy companies are stupid. So somebody else's legacy from the past is stupid and your future legacy is important. That's just a disrespectful posture in society. And I think taking these companies that serve a purpose, there are good people that work there and serve an important role in society, helping them be successful. I think that's one of the biggest economic opportunities. I think there's true joy in that. It's hard because you have to deal with the inertia and friction of the world, but you can flow through it if you actually are working with them with good intent and good respect.

47:04And that's a little bit of what defines the General Catalyst way.

47:09Hemant Taneja:on the tech lash. Okay, I thought this was interesting and this was all the way at the end. But you said there are four forces of tech lash. One is social, this like ambiguity on social media and real life. You need to be polarized, yeah. Polarization there, political containment. You have a really good hot take in that one. The genius asshole myth, which you talked about a bit. And then contempt for legacy, which you just covered. So, I mean, I guess to go over the topics that we didn't cover, could you cover the social media standpoint? Well, look, I think we have sort of justified that it's okay to say ridiculous things in social media because it gets you attention, even though that's not how you actually perform in your day-to-day job.

47:58There's a lot of that. because often you see people put out some messages, and that's not really what they would do in the real world. It's just to gain attention. And I think decoupling what you communicate and what you do and thinking that's okay, I don't think that works in the end. It just creates a lot of unrest and confuses people. It's not good leadership. So that's just, you know, we try not to engage in that. I can say lots of provocative things to get tweets and likes. I think it's an entirely unproductive exercise if you're focused on the long term. It's a very short-term mindset. All these things are actually reflective of how short-term we're becoming out thinking.

48:43And this other point around politics, listen, I think Tony Blair said this, you govern from the middle. and all the complex issues that you design policy around, you need to take a view and understanding all sides and designing versus being really polarized. And so, you know, we took a stance that we're not going to engage in politics. But we want to work with the administration, whichever one is there, with genuine partnership to help them think about how can innovation can truly be impact at scale in our societal systems. So we launched the General Catalyst Institute. We invested what we would have given in politics towards helping create good policy.

49:32And that's a more enduring long-term way to engage, even though in the short term maybe you could see some disadvantages with that as well. But I'll tell you, leaders in DC have embraced us because we have come with no agenda and embraced our founders. We brought many founders there, and I give our team in D.C., now also supporting Brussels and Delhi, a lot of credit for helping bring good education, good ideas to D.C., and it's been embraced. And so I just believe that if you create real partnership, people will engage all stakeholders, regardless of politics.

50:12Hemant Taneja:That brings us back to Anthropic versus Department of War. Okay, so can you break down a little bit of what happened with that and then also what brings us to Mythos and how they actually, they decided to strategically roll that out with Project Glasswing. Look, the Anthropic Pentagon, I think, was very tricky. And I cannot say the perspectives on either side were wrong. It's just like from where you sit and how you think about the world and what's important. And it's really what led to those issues. But what it shows you is just the complexity of what we have to go through. And I think you need a culture where you can actually have conversations around this and create productive outcomes as opposed to taking very binary positions.

51:02because I, when I listen to and I, you know, I spoke to the folks in DC and the, what they think is important for national security is correct. And when I listen to Dario and some of the things he's talking about are also correct. These are just complicated issues. And so judging versus just, gosh, think about the people trying to make these decisions on both sides and the unprecedented complexity of this, and we just rile people up as opposed to take a step back, think hard, and think about how do we really address this. And so I'm sympathetic to it. It's like, boy, it's a very complex dynamic.

51:45Now, on mythos, listen, I give Darío a lot of credit in the way he handled it. They've had that model for a while. They did not release it. They thought a lot about it. And what did they do? They gave it to the companies to create an advantage, to essentially eliminate security debt in the existing infrastructure before more and more complex technologies are getting out there, as opposed to not. This was not to create fear in the ecosystem. I just think it's ridiculous, frankly, to take that stand. I think they've been very responsible. I know some of the CEOs they've worked with on sort of exposing them early, make sure they take advantage of this.

52:30What else would you do? I thought we were accelerationists in this group. So the same people are now complaining, like, about this. I don't really understand that. I mean, I think they actually did it responsibly. And, you know, on the other side, it's like, my God, these models are incredibly powerful. And what's to come is just, again, from an investment perspective, where do you invest? What else is going to be irrelevant because these models become stronger? It's like the uncertainty of what's durable or not is just stunning right now.

52:58Hemant Taneja:Part of Glasswing 40 is Nikesh Arora, who you just brought on. So how does that work? And congratulations. So Nikesh has joined as a lead engineering director. And he's been, first of all, Nikesh is incredibly brilliant. He's an entrepreneurial soul running a Fortune 500 company. And he's done an incredible job building that. He's also a great investor mind. So as I think about our GC ecosystem, which is a collection of investors and builders, I just think he'd be a great mentor for all of us. And I've had many conversations with him about where this is going, and every one of those conversations is extremely provocative.

53:35And so it made sense to lean on him just like I and we lean on Ken. And I just believe in, you know, great leaders that are deep thinkers and have seen scale to just be guiding, you know, guiding the team here at GCN. So that's been the purpose. So really excited that a lot of us are going to work closely with them.

54:00Hemant Taneja:Amazing. So as we close out, just a couple of quick questions. So one of the hot topics around Silicon Valley is General Catalyst's potentially rumored IPO. Do you have any comment on this? We're not going public. You're not going public? No. No. I've said it many times. Why do people think that? I don't know. You don't know? You have to ask them. Okay. We'll ask you all. Two, on Harry Stebbings' podcast, this is a really difficult question. On his podcast, you said you eat risk for breakfast. What do you eat for lunch?

54:41Look, I think, first of all, why did I say that? I really do leap into new things. I imagine failure. It's just never that bad. And so I actually want to make sure our entire organization is fearless in how we take risk. You don't want to take stupid risk. You want to take calculated risk, but you need to be able to do that to make progress. And, you know, if we can actually have a culture of taking risk and a culture of conviction, which I guess would be my lunch meal, then we would do a great job.

55:11Hemant Taneja:And what's for dinner? Those are probably the two things I care about. Curiosity. Okay. How about that? That's pretty good. Well-rounded diet. And then lastly, so Julian Fialco had a burning question. Your early days at General Catalyst, you wore a puka shell necklace. What is the story behind the puka shell necklace? I don't even remember. I think, so when I joined GC, I was 26. I joined as an EIR for four months. And I quit this nice job I had after selling my business. And my parents were like, what are you doing? What is this EIR thing? but you know the firm and you know David and Joel the founders empowered me like I take pride in empowering everybody else at GC today and and I remember my early reviews used to be we think you're gonna be great at this but you just got to you know have a little less fun in your 20s and I think Bobby Shell is a reflection of sort of that phase of life that's amazing well thank you so much for such a thoughtful conversation and also for putting out the first quarterly review.

56:25Hemant Taneja:Appreciate it. Thank you. Thanks for having me. Hey, it's Molly. If you enjoy our interviews, check out our newsletter, sorcery.bc, where we deliver a once a week top deals and tech headlines email and also go deeper on our podcast interviews. Subscribe to Sorcery today. And don't forget to subscribe to the podcast on YouTube, Spotify, Apple, or wherever you listen. Link in description to sign up.