20VC: Capital G's Laela Sturdy on What Stripe, UiPath and Duolingo Taught Me About Company Building and Investing | How to Analyse Valuation, Market Timing, Sizing and Exiting | Life Inside Alphabet's $7BN Growth Fund

26:55You're like Jesus Harry, I remember years ago these were softball interviews. What the fuck happened to your show. I'm good, Harry. I like it. I told you it's age. I had someone from Gradov and he was like, you know, series B and C. These ventages won't make money. And you're seeing Pat Grady move earlier, do Harvey at seed. Looks like a pretty pressing investment, to be honest. How do you think about that when you hear series B and C entry prices being where they are often 400 to a billion. It's going to be a tough time. I've never found generalizations to be to be great and we have always found great companies to back during every single point of all of the cycles.

27:42Some points it's been harder or easier but there are always great companies to be bought and invested in at fair prices. You don't always know they're fair at the time, but when you look back, if you made the call right, they're very fair. Rich pros, when you paid out most unfair, but now looks most fair. I mean, the way that you think of fair and growth, I mean, it's a funny word, so all to find it a bit is, you know, you look at the valuation multiples and you take a set of comps and you have obviously public market comps and then you have all the private market comps. There are stages of the market that the multiples that you're paying are extraordinarily high and they don't make sense from Historical averages and they don't make sense, you know sometimes compared to the public markets depending on the cycle So it's all that that's probably the most objective way to define fairs is how does the multiple Very you know based on comps But the part of the equation that's hard to figure out is what do you believe the future growth prospects of this company are and if you're more bullish that it can grow faster or better or different than other companies in the Comp Set than you are in fact paying a fair price.

28:54We can pick the big winners, like I'll go with Stripe 2017 when we invested in them. I would say lots of people didn't believe that they could compound and continue to grow at such a strong rate that actually the valuation multiple that we were paying into was more than fair because they would compound in such a large market and expand into other adjacent markets and could be a much, much bigger company than perhaps you imagined at that time. So that's the part that is the judgment part of this. And of course, the risky thing in venture is that it's easy to assume that all of these companies are special flowers that will compound at extraordinarily high rates deep into the future and of course most of them don't.

29:42Those in retrospect end up looking like less good valuations if you paid up for future growth. But there will always be the outliers that you couldn't imagine that they would grow as robustly and as well as they've done. And our job is trying to pick those. And then our other job that I would say is it's been interesting to me seeing how different parts of the industry go risk on and risk off. But I would say, you know, 2023 for us was as an example was a great year. We did a, I think, a lot of really great investments and when a lot of the market was pulled back, you're starting to see people lean in more now, but I think there are a lot of great investments.

30:21Across all the stages, we've gone earlier as well, especially in industries like AI, but we're seeing opportunities across the board. Are people really leaning in more now? It feels like seed never adjusted. Seat pricing never adjusted, volume, maybe adjusted a little bit, but pricing definitely didn't adjust. But everyone is unison that growth is dead, which is a bit of a morbid statement, obviously. Do you disagree and do you say that growth isn't data tool? Yeah, I mean, volume and activity is definitely down from the peak 2020 -21, for sure. If you exclude the AI deals that, if you add in the volume and dollar amount actually, looks quite high.

31:01Definitely volume is down, but that is different from being dead. I think there are still, you know, I started investing in 2014, 2015, like you see, there are activity levels where there are great companies that are growing quickly and opportunities to invest. And then there's the later stage, and that's early growth, the later stage of sort of pre -IPO companies where I think you're starting to see some interesting rounds where they're not going public because of, you know, the macro reasons we've talked about, but they want to raise a little bit of primary capital and some early stage investors want to sell some secondary capital.

31:37And those companies are being priced in line with public comps. So there are some, I think, good investment opportunities in what we believe are going to be, you know, franchise type companies in large markets. So you maybe have to work a little harder than some of the hay days of when we're at peak market opportunity. but I think that there are many great investments to be made. People that operate counter to the generally accepted views in the market are probably going to be the ones that have the most outsides for germs. I remember Pete one of my portfolio companies doing half a million in aero and one of the best firms in the world did 700 million post.

32:19I called up the founder and I was like, wow, like 1200X aero. Welcome to a new record club, baby. That's impressive. That was bad. What happens to all those companies that got a shitload of cash? I'm not like, nah. Yeah, they're trying to figure it out. I think the hardest first reality check is to figure out if those companies can recruit a team and retain a team that still believes in the dream, are they able to execute and are they able to grow? Obviously, there are valuations. Many of them are going to be way off. What the valuations would be if they were marked in this current cycle and those that have the ability to grow into the valuation and are continuing to execute both from a financial performance and then you can feel it and when you talk to employees and when you talk to the leadership team and you can really in my opinion feel whether the belief is still there and the excitement is still there and the momentum is still there to build something big and they're eager and many of them already have caught up to their valuations at peak amounts, and then you see the other set of companies where they raise way above maybe what arguably you could say the company should have been valued at.

33:31And when they lose momentum and are not executing, it can be a double whammy in terms of recruiting and retention. And I think those companies are either going to have to again figure out what an opportunity is to combine with other businesses or how else they're going a restart refresh whether it is a down -round to get the right equity investments, mostly again for their employees. You need people around the table that believe. Building startups is so hard. It takes so much longer and so much more emotional and other energy than I think anybody expects when they're starting a company and certainly even when you expect just being a board member, a partner, a advisor to a CEO.

34:14It's really enough for the long haul. always having that belief is critical. Were your best deals obvious, Laila? They never felt obvious. I tell this to my young, the younger members and I team starting out, I'm like, if you feel nervous and like you're advocating for something so hard and others are telling you no to the point that it almost makes you doubt it yourself, you're exactly where you should be. You're exactly where you should be. But like a striped feels obvious. The best camp table, very clearly generational defining founders. That feels obvious at the D. Well, let me tell you when I did that deal.

34:49I remember talking to lots of other investors and the pushback would be it's in a commodity market. It's value too high. There's not real differentiation. So it's always easy to look and I of course believe the opposite and talk to dozens of customers. More, it's been a ton of time with the team really understood the cohorts and why this was a differentiated go -to -market strategy that they have. So I believe something very differently, but I won't call out names of many smart investors that that sort of believe the obvious or believe the opposite Uipath when you know made that investment in the series B the numbers were extraordinary But the pushback was this company's been around for 10 years based in Romania Why is it all of a sudden exploding now and all the risks that people feel around category creation?

35:40Like, really, is RPA going to be that big of a market? Or are they going to put her out? Any good investment has the counterpoint and the part that is less obvious. The job of us, especially as growth stage investors, it's not just to get conviction in the thesis, but it's to get conviction in the thesis at that price, which does require for the best companies because the more obvious it is, the higher the price you're paying. You have to find deep conviction regardless. Leda, what do you need to underwrite? In terms of what do we underwrite to a capital G, three to five X returns, money on money returns, and depending on the stage.

36:17So if it's early, it will be 10 X, but the core of what we do in growth is three to five X money on money returns. You have one LP, do you give a shit how long it takes? Yeah, we do, of course. But you don't have the liquidity pressures of having 30 different institutions going with my money. And that's a huge advantage for us because it means that we can invest and hold over the long term, why we're so obsessed with finding generational companies that will compound over the long term, because that creates incredible money on money and incredible IRR returns without having a false reason to have to sell companies that we really want to own.

36:56I hold all my companies that go public because I have asymmetric information and I should hold those positions, not my LPs. Do you agree with that statement or do you disagree that actually just because you're a private investor, you have asymmetric information and you should hold the public store? I mean, I think that LPs have a lot of different incentives that they're managing and they have full -time investment professionals, many of them managing their public positions and public investors tend to have different access to data and insights and decision making that that help them decide when is the right time to hold and sell in the broad or context of their portfolio.

37:37So I could see the case why that could be more important than an early stage investor who has information from when the company was private that they think is going to inform the right decision to buy or hold when a lot of other things are going on in the public markets. So I have been surprised by some not you, Harry, because you're particularly talented, but there's a lot of private, private early -stage investors that don't understand a lot of the dynamics of public markets and valuations and pricing and how portfolio management at that scale. So it's not just about understanding the ins and outs of the company.

38:16It's understanding a lot more, you know, I have a lot more context into that decision -making. I think we gross the overestimate our own knowledge of companies and the conditions matter a lot. You have short sellers, you have activist hedge funds, you have a huge amount of variables that are not present in private markets. And it's like saying I'm a great tennis player on clay. Gray, yeah. But actually, if you play on a grass caught in the rain, it's a different fucking deal. Totally agree. So, yeah. Okay, so the footage he does matter, but you can hold for a long time. So what have been your biggest lessons on one to sell?

38:51You're very kind, he said it was very talented. No, Leila, I fuck up. Yeah. Yeah, that's a mega man on not selling companies that I should have sold. So that's a fun part about our job areas. We got mistakes on the entry, mistakes on the exit, which keeps it interesting and wins on both sides, right? So I think it's humbling to know when to sell, right? Because you have, as you said, your own conviction on the, which translates by the time it's company is public, your conviction should show up in the financials that you're willing to underwrite. So again, we're gross stage investors. We're investing 50 to 200 million dollars in these companies.

39:28So we put a, these are big bets where we have a significant amount of resources on our team to really understand the customers, the company performance, the financial model that we're willing to underwrite. So it first starts with what are you willing to underwrite and how much conviction do you have in that? And then the decision to sell is also, So of course, impacted by, I mean, I saw a chart last week that was showing sort of exits in the last five to seven years and showing just how much of it came from multiple expansion. Right. So meaning just how much of the returns in the private equity landscape came from exits, companies trading at multiples higher than historical averages, which of course we all know for anyone that exited in 2021 as an example.

40:15If you exited there at all, it wasn't just company performance. You are exiting for almost every company trading at significantly higher than historical averages. So there's an element of timing as well that you're underwriting the financial performance and then you have to be prudent when you're managing positions to think about the macro environment and to de -risk in some cases or lean into the risk of your overall portfolio. And if you're talking to an LP whether it's one or multiple and you had a large portfolio and you didn't deliver any DPI during sort of 2021, you might have some questions.

40:54So I think it's always a balance of how you do it, but we look at holding positions as continuing to buy into the thesis. We love continuing to buy into the thesis of our very best companies. What's the largest position you have? We're not going to go into specifics on any positions, but we're managing 7 billion AUM. You said about mistakes on entry and exit. My biggest mistake on entry was thinking emerging markets was a good idea and investing in Pakistan. What was your biggest mistake on entry? What did you learn? We had some global markets you bring up a very important point. We started a capital G from the beginning as a global firm, global investment mandate.

41:35But I would say we've also made mistakes in entering markets where we didn't have a robust set of history or local resources on the ground, particularly those that were serving more local markets, where there were more surprises, and that has been certainly some hard -learn lessons along the way. What did we get wrong that there weren't people on the ground? In a lot of places that the way companies scale are quite different, so I'll use India as an example. You looked at the typical size, the number of employees of an Indian tech company, and it was significantly higher than a lot of the U .S.

42:09counterparts, parts, just the operational complexity of running those types of markets. Really understand, or those types of businesses, really understanding the consumer landscape, you know, GDP per capita, all those purchase behaviors and getting market timing right, getting the overall business models right, I think have been, they're just harder bets and require sort of a different understanding of the risks you're getting into. and I would argue in some of those markets during the peaky bubble points in the global tech markets that that risk wasn't necessarily priced in on the valuations.

42:46So I think you found in some of the cases, at least on a deal -by -deal basis that we made, I think there were more mistakes there than areas where we really understood the industry, the locale, the market. The risk was definitely not priced in. Okay, but you mentioned that feed on the ground and it just This makes me think, what bench have I got? But Brian Singham and Founders Fund very clearly have the thesis that the best founders do not need your help. Do you agree that the best founders don't need the VC's help? The best people in the world can always benefit from having help. I think that the best founders will only be better if they have a really strong board as an example, or they'll only be better if they have a strong set of advisors, friends, colleagues that they can go to to help answer questions quickly to provide additional resources to be a sound newborn.

43:38And we are here to support MB as great as a partner as we can. Here's the best bullman me sit on a bull with. I've sit with lots of great board members. I love Rich Wong at Excel. Why is Rich so good? I think he's incredibly supportive to the founders. He has really great relationships with the executive team. He asks the hard questions. He does the work. and is really insightful and good person. I'm gonna do a quick five. So I say a short statement. You give me your immediate thoughts. Does that sound okay? Great. As if the last hour wasn't a quick five. Don't worry, you will get a chance to breathe.

44:09No problem. What do you believe that most around you disbelieve? That things that irritate you and others are probably things that you have in yourself. What irritates you? What irritates me entitlement? So I guess I need to look at that area. Do you think many are entitled today? You're quick fires changed. I think we're all entitled in different ways. I think we have a generation of incredibly entitled people. Yes. It amazes me that I've been able to get so far with such low IQ and just hard work. That is incredible. That is a statement, Harry. But I would plus one on how far you can get being humble and scrappy and hardworking.

44:54I'm 100 % agree with you there. Which venture investor do you most respect and learn from outside capital G? Can't be rich one. Let's just set it. I think what Eli Gil has done in the AI space has been really extraordinary. I always enjoy chatting with him and respect him a lot. Can you do AI growth today and make money? It is a place where corporates invest and they are irrational financial investors. In video, Amazon, you name it. they do not have the same objectives that us investors do. So it's a different game. Can you make money doing growth AI? We believe that over the last 18 months, the best opportunities have been going earlier in these AI companies, and that is what we've done.

45:38That being said, the market changes rapidly. So I think there are really exciting set of, I was just looking at our pipeline actually yesterday afternoon of growth stage AI investments, and they are scaling at extraordinary rates. There's really interesting technical differentiation, founding teams. I am excited about the look forward of investable opportunities in AI and things change rapidly. So who knows what the strategic so other capital sources will do. So we're always focused on building relationships and tracking the very best companies and confident that when the valuation is right, we will get in there.

46:17But I do agree with you that the previous 18 months that the A -Market has been robust and not always easy to understand the financial return. I'm sorry for the base question. Google Vansh's does series B and so does Capital G. Do you compete? We're primarily focused on growth. There are times we go earlier. There are times that they go a bit later. When that happens, we will collaborate. We'll work together, which we've done in many great companies, but most of the time we're focused in different areas. Is it like parents coming and say, play nice kids? We are the parents and we're playing nice, Harry.

46:56So there's a great team and we love working with them. Yeah, I love Tom. Tom is one of the nicest guys in venture. Tom is fantastic. Tom is incredible first -founding meeting you've had later. And when we like, that one I'll tell the kids about. Oh my goodness. I will bring up Daniel again because when you say tell the kids about Daniel I flew to New York within weeks of coming back from attorney Leave with my third child of three kids and chased him down to New York this time and I remember that first meeting not only because I was fresh off Maternity leaves I had a lot going on leaving through little kids at home But I also remember that the majority of the first meeting we talked about our upbringing our families literature and very little about automation.

47:44So that was the first of a very deep relationship, you know, business and personal on getting to know each other. And I think that is certainly important to me and I think important to a lot of the founders that that I work with that there is there's trust and there is a relationship that you know is based on really liking each other's people and believing in a common dream and then trying to help support each other to get there. Would you ever invest in someone you don't like? I try not to, Harry. It's an interesting one though, isn't it? It's like some people you know they're good, but you're like, I just don't like you.

48:19It's important for me to get to know people and really invest in relationships I'm going to work with over the long haul. What have you changed your mind on in the last 12 months? How to win a presidential election? Which VC would you swap portfolios with most? I'm not trading Harry. I like our chance at a championship. I really wouldn't trade our portfolio Can't Brady swap his for someone? Well, I hope they enjoy the trade. Okay. What concerns you most today? I mean what concerns me roast is is Misinformation, autocratic regimes, threats to democracy. What do you know now that you wish you'd known when you joined capital G?

48:54I wish I knew just how important getting the really big things right would be. Venture is a business of 80 -20 outsize returns. So you have to make a few big big decisions, bold bets, right? And I wish I knew to really focus all of the small activities because you have to do a lot of work and a lot of small activities sort of along the way that build into those big bets that you step up to at the right time. But I wish I really knew the power law and how strongly it existed and And so sort of stay focused on that and stay focused and prioritize my time accordingly. How many truly important, important decisions do you make a year?

49:38Six to eight. That's interesting. You know a lot of small ones along the way. That's more than most people say. Like most are like ones too. I don't know if it's like a venturism, most I ever do. What do they do on their time, Mary? I see that doing two investments a year and so they're just thinking of like net new. The final one for you, Laila. What question you've done in shows before you've been on other shows? What question are you not asked that you should be asked? I think venture is a lot more of a people business than maybe others do. Insights you have about about leaders. What's different about them?

50:14What's unique about them? What would make people want to follow them? Do you not think they're relatively common across all? They may show themselves in different ways. But a good answer is one way you can take the alternative side. And so if I ask you that question, you say, an incredible ambition, incredible vision, I can't take the opposite side of any of these. I would argue that it is more... Actually, the outlier point that we talked about earlier, I think most of the exceptional leaders that I have worked with, they don't all have the same characteristics, but they have something that is incredibly important to followership that allow followership to happen.

50:53And so, followership is the consistent outcome, but what and how they get exceptional people to follow them differs wildly across leaders. To what extent is followership tied to success? Success hides all ills. Bluntly, I have so many friends at certain companies now. And the companies are just fricking flying. And every three months is like, I'm so much richer than I was before. I'm so much richer because there's new rounds, new rounds, new rounds. Is it a follow -up of leader or alignment to success, which is addictive? Well, I think if you do have the very best companies, you do need both. But I would argue that sustained durable growth, if you can't recruit world -class talent, is very, very hard to sustain that.

51:39I guess the entry one is, who can have a really ship period in town follow -up? And that is where not all leaders have that. I think some leaders have a follow -up that their outlier characteristics require success as an and and some have the attributes as a leader that people will stick with them through the hard times as well. And those tend to be, you'll look at those companies have really strong culture, there's maybe there's a vision that is even more ambitious that's harder to achieve and there's an expectation among those following that there will be hard and dark periods. And then I think others, you see fleaship as soon as things start getting hard because they were following a leader for a certain attribute that if they don't see it translating into success, they're out.

52:25Layla, listen, I'm sorry for my prying questions, but thank you so much for joining me today. Harry, it's always a pleasure to talk to you and I love your questions and look forward to catching up over a non -recorded and recorded session again soon to dig in even more. It was so special to have Layla back on the show that I'm warden incredible portfolio she has built with capital G. If you want to watch the full interview in full you can find it on YouTube by searching for 20 VC that's 2 -0 VC and we always love to see you there. But before we leave you today, all of you listening use tons of software every day.

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55:40As always, I so appreciate all your support and stay tuned for an incredible episode this coming Monday with Aiden, founder and CEO at Co here.