E74: General Catalyst CEO on Running VC Like an Enduring Company

0:04Welcome back to Turpentine VC, the podcast where we discuss the art and science of building successful venture firms, VC to VC. Today, we're airing another popular episode from 2023, where Hemant Taneja, the CEO of General Catalyst, talks about the shift from artisanal business to an enduring firm. Up ahead, Hemant talks about the process of establishing operational rigor internally, General Catalyst's approach to fund size, talent strategy, and their early bets in companies like Stripe, Gusto, Snap, and more. Let's dive in. Hemant, welcome to Turpentine BC. Thanks so much for coming on the podcast.

0:41Thanks for having me, Eric. Excited to do this. When you took over as CEO at General Catalyst, was there a CEO prior? Or talk about how that development happened. Look, it was really interesting. Our desire to build an enduring firm and an enduring business really started, I would say, middle part of the last decade. I remember this amazing meeting I had with David, Joel, Bill Fitzgerald, who was our CO and really one of the co-founders from the beginning. And we were discussing the future of the original catalyst. And I don't take this as hubris. I said, look, you don't realize this. And certainly the world doesn't either.

1:27But I think I will end up doing reasonably well. I then invested in Stripe and Snap and we started Livongo and Gusto. And I'm like, wow, these are amazing companies. I was just very hopeful that that was going to work. And I said, I would like to build a platform. And this is a firm you guys started. I want to be respectful to what you want to do here. And to their credit, they were like, we absolutely want to build an enduring forum and leave a great legacy. And what do we need to do? And I think that's really when that journey started. it. And then, as you know, we brought in Ken Chenault as our chairman and managing director about five years ago now.

2:08And that was, you know, a lot of people wondered, why would you bring somebody with a Fortune 500 CEO into the venture business? You know, our intentionality very much was about how do we learn to be a good business? And I give Ken a lot of credit, first of all, mentoring me and learning how to take charge. Because if you're going to scale, you need to have to get away from the traditional mindset that this is an artisanal business and it's a small partnership and we're sitting around the table and making these decisions like oracles to, hey, we're going to build a business. And none of us knew how to build a business.

2:43That's the idea of our business, which is we're not the best operators. And so it was a very intentional choice to bring Ken in to mentor me. So it was actually, even though we announced it last year, it was a five-year journey. And I remember Ken sat us down at the very first dinner after he joined. And he said to David and Joel and me, he said, I know I'm here. I'm here to drive this succession. So this can be an enduring firm. And it's just been amazing to watch him develop me and develop others in the firm and help us navigate this succession as successfully as we have so far. It's fascinating because investors, we as venture capitalists would never invest in a company that didn't have a CEO or that had five CEOs sitting around the table and saying, hey, we got to vote on everything, etc.

3:34And yet so many venture firms operate that way. Talk a little bit about that. So in 2012, I remember sitting down with one of our LPs at that time. And they saw that we're starting to think about perhaps scaling our business. And, you know, I said to this particular LP that, hey, we are a business. And the LP said, you're not a business. It's a convenient arrangement for us to pay fees for you to manage our money. That really hurt, by the way. I was just like, that is literally how our industry gets thought of. And there was also this conventional wisdom that the more time you spend internally as a venture capital firm, the less time you spend with your founders and the less successful you will be.

4:22So the biggest irony of our business is we give great advice to other founders of how to scale their businesses, but we actually never run ours in a good way. I was like, we have to cheat that. I mean, I said this. I was like, you know, folks like John and Patrick at Stripe or Evan and Bobby at Snap. And I was watching, you know, Josh and Eddie Tomer at Kuston. I'm like, wow, there are these amazing operators. We need to run our business with the same rigor. We need to learn from them and actually bring that into our own organization. And that's the journey we've been on since then to say, we need to operate with the same rigor as opposed to it's just a few of us making a handful of investment decisions every year and the rest of it doesn't matter.

5:05Say more about the business that you're building. You already have a few different venture products, but we'll get into them. But say more, what's the vision for General Catalyst? Where is it five years from now, 10 years from now? So one of the first things that Ken had us do, and I think this was 2018, was to do mission and values work for the firm. I mean, 18 years into our existence, we go and do something that startups in the beginning, right? But it's never too late, I suppose. But it was sort of a journey to find out who we are and what drives us. We did the mission and values work. And, you know, our mission, I'd love to say this, is to invest in positive, powerful change that endures.

5:48The way we think about our business today is, well, we want to make positive change. The way you make positive change is by helping build companies that can endure for a long time. And the companies that can endure for a long time are the ones that are in the interest of society. And so you have to think about simultaneously focusing on enhancing purpose and profit. And so when you take a step back on that, and I always like to caveat that I'm a capitalist. I'm not an impact investor. The point is, if you want to build the most compounding businesses and therefore create the most value for your investors, you must think with this long-term mindset.

6:30And so today I think of GC as a platform for inclusive capitalism. We want to build these kinds of enduring companies that bring everybody on board and create opportunity for everybody to be inclusive. You know, there's a handful of areas where we think that is really interesting for us to do today. Those areas, I wrote this annual letter last year where I articulated that, are obviously the geopolitical shift around global resilience, where each nation is thinking about their climate and defense and food and ag and how is all that going to work in a way that they can protect and take care of their people.

7:09There's the technological shift around AI, which is profound and touches everything. And then we're very keen on the industry's transformations around health assurance, as we call it, and financial inclusion, which really gets done at the intersection of fintech technologies and decentralized crypto technologies, and how does that really manifest a better inclusive economy? Those are the areas, and everything we do is focused on how do we really help the very best founders create those mission-driven companies in these areas. And all of our products are focused on empowering the founders to build those enduring companies.

7:47So the innovation that you see, I always tell our LPs this, you should always ask us, how is this reinforcing our core, which is the early stage, the venture firm that we were and continue to be thinking of ourselves at the core and how does it really help these founders endure for a long time? Those should be our products. We had Mamoon and Ilya on and they talked about how Kleiner was doing so much and then they consolidated and they're all one fund, one team, one dream and they're just a generalist firm that wins series A deals. We also had Ben Horowitz on and of course, A6ZZ has built this massive platform and almost fund-to-funds where they have different practices and have massive AUM.

8:28And I'm curious, it feels like you're more in the A16Z game where you think of venture as a product, as a business. You have these different product lines. You yourselves have massive AUM. I'm curious if you think the future is more that way and how you think about that sort of comparison to begin with. First of all, when you talk about Mood or you talk about Benzmortem, these are iconic investors. And what that tells you, there's actually many ways to succeed in this business. And I always remember my conversation with Andy Golden, who runs the Princeton. And it has been a lead investor for us forever.

9:05Where I used to always ask me, well, how do we compete? How do we become a top firm in the ecosystem? This is not our lead is. And he would always say, play your own game. And there are many ways to succeed and just focus on what your game is. I think both of those firms are in a great trajectory. I think they're both very different from us. We think about scaling perhaps a little bit differently because I'm not sure you can scale venture capital funds to be very large and maintain performance. This is what happens. Bubbles happen. People get exuberant. Funds get bigger. Bubbles collapse. Funds get smaller.

9:43We're in the middle of that right now. And I think our industry kind of just keeps oscillating in this three-dimensional innovation of state sector and geography and funds around it. We just keep trying to optimize that. And I think we have to think very differently when you go back to the areas that I mentioned. If you're going to work on climate change, if you're going to work on transformation of the U.S. healthcare system, which we're very deep into, about a dozen years into. if you work on financial inclusion, those are just not problems you can work on with a 8-10 year horizon. So if that's our agenda then we have to start looking different from sort of a traditional venture capital form.

10:23And that's what's happening to us and Ken always says great strategies are built in hindsight. I think ours is too. It's just a set of instincts and considered decisions as we're building this. But I'm very excited to see what we do become in a few years. But it'll be a lot of our values and our mission and focus on the transformations I'm talking about. And what does that mean more concretely in terms of how you guys are structured or organized or sort of plan against that vision? I think a lot about culture. And the kind of culture required to build the type of firm we're trying to build is one where you preserve the magic of a partnership when it comes to investment decisions where a few of you debate and discuss and make decisions on a particular investment and then get behind it as a firm to help build that company.

11:16But at the same time, you need to run with the rigor of one of those iconic portfolio companies I mentioned earlier, so you can actually endure. So how do you really build a culture that allows for both? And so one of the reasons my title is CEO and managing director is when it comes to an investment decision, I'm just another investor on the table. There's areas where I have done well, and so the firm will listen to me more, there's areas where I don't know much and the firm should not listen to me. When it comes to building a platform, I run the business. And they're very much a CEO and we're going to run it with our OKRs and our executive committee and all the things.

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13:05I'm curious how Macro determines strategy more broadly. I think if you take the pressure off of, we want to make these funds bigger and bigger and bigger and say, we want to be on three-year cycles. And there's a certain amount of capital bottom-up that our organization can and should invest while maintaining high performance. sort of sticking to that and sort of saying, hey, venture capital work is your innovation factory for solving those long-term problems. The other question is, what else do you need to be able to then compound these businesses and drive those transformations at scale, which our industry hasn't traditionally thought about, right?

13:45We don't think in the context of we're building ecosystems and creating broader change. We think about how do we take a company to a certain amount of scale, take it public and exit and turn it over to other investors. My view is that as the industry institutionalizes and as the type of work we do ends up being much more sort of societal and in terms of efficacy of core pillars of society versus just efficiency with software, we need to think differently. We need to think on a longer horizon. We need to think about our governance in a different way, which is why we did a lot of work on responsible innovation.

14:23My last book was focused on trying to frame the mindset and mechanisms for that. And we need to have a capital base and a set of tools that can help these founders and companies through those inflection points for that longer change. So that's what drives the way we think about our firm, the way we think about the people we have in the firm. This is a very eclectic place. We've got two Fortune 500 CEOs. We've got a filmmaker who's won a couple Oscars. We've got the most elite bankers in tech and some trade investors. It's just eclectic. And I think it unlocks that diversity of thought so that followers can work with us on that long horizon.

15:03When you look out at the future of VC and how the asset class is evolving, do you think that more firms will be doing some of the financial innovation that you guys are doing or some of the product innovation? Or how do you think about the future of how the asset class is evolving? I said this, I want to say like six or seven years ago now, that as the companies are starting to stay private longer, some should and most shouldn't. But as some were, it was very clear that some of us who were focused on early stage were growing up to figure out how to help those companies endure and maximize their opportunity in them.

15:42And then you're also seeing some of the public market investors coming in commoditizing capital and essentially flooding it into the system to say, let's just buy the options and the ones that work will in the end work out because of parallel. And my belief was you'll see a few of us grow up to be interesting, unique platforms. And you'll see a few of them come down and actually learn how to do the early stage part of the business and become full stack platforms. It's worked well for some, not for others. I think it's about the difference is going to be which ones have taken the time to invest in culture and create a sense of purpose and mission for why you're doing this and which ones have just been mercenary.

16:22And that's ultimately what determines missionary companies become category-defining companies. And I think there are a handful of firms that are doing it that way. And I think they'll become enduring large platforms and others will struggle. But we'll always have the long tail of early stage firms as well. The opportunity is so large. So many different sectors are firing on all cylinders. We're not even done with the previous cycle and now you've got the AI inflection happening to everything that the solopreneurs, folks like Elad, I think they are franchises. I think there's a bunch of early stage firms that are going to have a great, continue to have a great future.

16:59And then you'll see some platforms that want to have many, many different ways to engage with the founders that are thinking over the long term. I want to return to something we discussed earlier about your responsible innovation thesis, just the desire to do good. I've heard one critique of the cleantech era, the critique being that the investors were too inspired by the idea of doing good, that they weren't rigorous enough in their underwriting of these opportunities. They wanted it so bad to be true. I'm curious if you agree with that assessment, and then also how you or people in general should think about balancing the desire to see a certain reality come to pass with also just being realistic about what's the real opportunity.

17:46First of all, having been one of the people that failed a ton in cleantech, I can give you many critiques of the cleantech period if you'd like. Yeah, let's hear it. No, I won't go there now. But I think the core issue when we were doing 1.0 was the playbook for how to build a company wasn't sound financially. The policy designs weren't sound to create, you know, reliable markets, which made the capital unreliable. And these companies need long duration to succeed. I think one of the big things about a smart observation is to not think of this as you're somehow trying to optimize diametrically opposed metrics around purpose and profit.

18:29I think you have to believe that by being purposeful, you will actually enhance your profit. And so I think the clean type 1.0 just those markets just weren't set up and we didn't build the companies the right way is a reason that they failed and the economics weren't just thought through. I don't think it's because they were just do good or saying, oh, we'll take less margin. We just never made a viable business in most of those cases. And it was only forces in nature like Elon that got through because it just, you know, just brute force it. But very few companies got to that scale. so i wouldn't over think that uh their mislearnings are responsible innovation from there i i think um in this next phase especially in the areas that i just mentioned how can you build a company that's going to be around for 30 years and be an amazing investment if you don't embrace responsible innovation how is that possible and i think that's my personal hope is that our firm just proves that that mindset is a way to create elite returns.

19:31And we're very much on that journey. That's well put. From a firm strategy perspective, how do you think you're different than A16Z? Because I see a lot of overlap in the ambition. How do you guys think you do things differently? I mean, I love listening to almost everybody there. I find them really provocative in the way to think about the world. In terms of how are we different, I probably responsibility is something we would lean into a lot. And I'm not sure that's like an explicit strategy. I would say we're not really doing, you know, other than healthcare, not really doing sector specific funds.

20:08So I think our product construction is probably different. You know, we have this customer value fund and our funds are going to be smaller. I don't think we're going to be scaling to the size that I've seen them scale. At least for us, I don't know how to generate any returns on very large fund sizes. So we're going to be on a more measured sort of venture capital complex. I think we have a different approach in healthcare. We're focused more on health assurance. They're more focused more on life sciences and AI. Let's talk about healthcare because you guys have done phenomenally there and you in particular.

20:40What is your unfair advantage in healthcare and why have you guys done so well? I think we, first of all, we got lucky that when we built Livongo, you know, there were a set of instincts around, but became the core pillars of health insurance. We ended up partnering with Glenn and Lee, you know, just phenomenal entrepreneurs in the space. And we were able to create a culture that was truly tech and healthcare at the beginning, which was our thesis when we founded the business together. We bought a little company and, you know, we launched in like 2014, I think. So first thing is that we were fortunate enough to be part of a ride that showed up how to build a good company in the space that had, you know, good economics, good margins.

21:21and then you had like 100 companies that showed up that were Livongo 4X. That's when you know you built a category-defining company that unlocks a lot of opportunity around certain mechanisms. In 2019, because we had about 15 or so businesses, I already had launched Commure as one of our hatches and a few others. I had given a presentation to a partnership in that fall when I was writing my book on healthcare that next second is going to be about healthcare and we should lean in. and we should make it be a 20 % bet for us. And I'd like us to become very intentional about it. And this was pre-COVID, right?

21:57And talk about getting, perish the thought, but talk about getting lucky in terms of having a prepared mind and then COVID happened to you, you know, where that's like the iPhone moment of the space. You know, we just said we must lean in. We must turn this crisis into an opportunity because we had a thesis, we had a track record, health systems are asking us for help, and our philosophy was all around radical collaboration with them. So it just became a what better time to lean in and make a difference. Set of lucky circumstances that over time manifest themselves into an unfair advantage perhaps.

22:30But I'll tell you, we have a lot of work to do. We have a lot of companies and great ambition around achieving the health insurance vision. But I mean, I look at the amount of work, and it needs to be done, it's easily 15 plus years from here. So we'll see how we actually turn that unfair advantage into real valued returns, but I'm very optimistic. I'm very excited about it. Yeah. And how do you think your strategy is differentiated from all the other healthcare funds out there in terms of the way that you're thinking about it? So one of the things we're really heavily invested in is developing partnerships with a lot of health systems.

23:05So our belief is that if you truly want to make this industry proactive, reduce the healthcare GDP, and solve for health equity, which are sort of the three pillars of health insurance, you have to help our provider groups, health systems, become better businesses. They need to become vibrant. They need to have 20 % EBITDA so they can invest in their communities and have a flywheel of profit to accomplish their purpose, going back to my point about alignment of purpose and profit. And so we're doing everything with the body. So how do we drive that theory of change? And so I think having that sense of mission and then, you know, so many founders have come and wanted to work with us because they agree with that and they want to be part of enabling that.

23:55Then over time, that just becomes an ecosystem. And I've said before, the Amazon of healthcare is not a trillion dollar company, it's a trillion dollar ecosystem. My hope is that the founders we're working with collectively can come together and help implement that theory of change. Totally. Let's talk about your incubation strategy more broadly. And you guys call it creation. Why don't you talk about how you've developed the strategy, how you think about it, and how you think about it maybe differently than others in the industry? So creation for 20 years has been highly serendipitous. And I think it happens because you just had a bunch of investors that were builders in their previous mindset.

24:31I was an entrepreneur. Joel and David were entrepreneurs. Larry was running tech companies. And so, you know, I would say the three most interesting historical incubations for us were Kayak, which we started in 2004, Demandware, which became the Salesforce Commerce Cloud and Devongrel. These are like three different categories, three different category defining companies. But it was all serendipitous. And I think what we're doing now is thinking about what are the types of projects that kind of naturally wouldn't self-combust. in our ecosystem where we can maybe catalyze interdisciplinary teams, their capital intents, they need access to certain parts of the networks to make those markets develop a certain way.

25:17Those end up being good projects because we want to be net accretive to the ecosystem in the way we do our work. And we have a new partner, we just joined Marc Bargova, who's helping us bring more structure to how we align with potential co-founders for those efforts and how do we get better at research and rigor around the ideas we choose to work on so that you know maybe instead of doing you know one or two of these a year maybe we aspire to maybe do you know six seven eight of these a year we don't want to turn it into a factory because every category defining company has its own culture so starting with a factory would just not lead to the outcome you're hoping for which is you know building category defining companies so So we really want it to be that we're this invisible co-founder to folks in solving big problems with our creation efforts.

26:06I want to also go to one of your other strategies you mentioned, the customer value strategy. Why don't you unpack what exactly you're doing there, what inspired it? For subscription-oriented businesses, when you think about the CAC LTV equation, it starts to become a little bit like a digital project finance opportunity and the observation was so much of the equity gets invested in you know funding sales and marketing very quickly you could literally think about that as financing uh you know your cac with a certain ir threshold effectively and so you know we came up with a way to finance that in a way that isn't equity oriented.

26:49It's not diluted to founders. So that's a better product to figure out your growth once you have a convicted product market fit in the business that continue to pour equity and keep diluting yourself. So we thought it would be an interesting way to support our founders and frankly our own investment in their companies to go much longer and compound much further by giving them a facility like that. That strategy went off to a great start. We just did our first public company investment out of that in Lemonade as well. I'm excited about that being just a really founder-friendly product that we were able to create for high-growth companies.