How General Catalyst’s $43B Venture Strategy Actually Works I Zeynep Yavuz

0:00Everything has changed so much in the last two years. you might have all these career plans, and you plan your next five years and how you're going to get to venture. Those plans throw it in the trash bin because everything has changed now. What does this mean for the future of jobs? I don't think people will need to change their professions, but they will need to think about ways to supercharge themselves with AI tooling. Today, more than 80 % of people who come to Dewelle to purchase a property do it fully through the chatbot. They never speak to an asset agent. After Dewelle deploys their AI platform, The EBITDA margins typically go from 12 to 40%.

0:35Who ultimately profits from this? In 2023, we had a partner meeting and we were having a discussion around what is going to be the biggest impact of AI. And it was pretty clear to us that the biggest impact was going to be in...

0:50So Zeynep, you are partner at General Catalyst, which is one of the biggest and most successful funds in the world. And if a young person is listening to this that has a very high level of ambition and is thinking that this is exactly what I want to do, I was wondering, what would you say to her? What is the main driver for success and success here defined as getting into such a position? I think I knew quite early on in my career, even before my career, kind of in university, I've decided that I wanted to go into venture. I wanted to work with founders. A lot of that was also driven by personal reasons.

1:25you know my parents were both entrepreneurs growing up with them I kind of saw how the job of an entrepreneur can be extremely lonely so I had this aspiration to work with founders with entrepreneurs and be a partner to them but I still didn't go into venture straight out of university and at the time I didn't do that because before becoming a partner to these founders I wanted to rightly equip myself so for me it was all about how can I go into an organization and learn the most and how can I get technical skills because I knew that that was something that is something that is harder to acquire later in your career so I was super hungry for that and therefore straight out of university I end up going into investment banking which is like super intense but I think I've like it was so worth doing that because of both the technical skills that I learned I think I learned what like good looks like and then I was in technology investment banking.

2:19So I ended up building relationships with a lot of software companies in the Valley, as well as media companies in the US. And then after that, ended up joining a private equity fund called TA Associates, which is like a venture and private equity investment. They initially started in venture and then moved into private equity. So I didn't go into venture immediately. I was looking for opportunities so that I can skill myself as much as possible so that I can be a good advisor to founders. And what do you think which skill or what kind of mindset helped you to go through all those different stages, like from investment banking to PE and then ultimately to venture as well?

2:55I think I knew the end goal. So I knew I wanted to go into venture, but I wasn't super deliberate in all the steps. It was more about a feeling at that point in time. So after investment banking, again, I had the opportunity to go into venture, right? And I was interviewing with both venture funds as well as private equity funds. And throughout the interview process, I realized that I could actually learn so much more going into private equity because it's a later stage company. So I will see what grown up businesses look like. And it is more technical. So I will continue developing my technical skills.

3:27So I made that decision at that point in time. And even after private equity, again, I had this idea of, OK, now I'm going to venture. But then I said, OK, you know what? It's not I don't have all it takes. I need to go into operating. And I made that decision. It was like almost a split second decision of having a venture firm offer and saying, this doesn't feel right. So it was more of an intuitive decision almost. Because in the journey of an investor, and this includes like in venture, you have identifying an investment. Then you do the investment. Then you are a board member. So you work with that company.

4:03And then there's the exit. And I had the experience in finding the investment, doing the investment. I had these from private equity. I had done exits in banking. I had done IPOs, but the board work was something that I really wanted to be good at. And I didn't think I could do that unless I had been in a company and worked with a CEO side by side for some time. So that was the decision in the end. I ended up joining World Remix, now called Zeps, which is a fast growing payments company in the UK, working directly with the CEO. The goal for that was, one, I wanted my brain to work a little bit differently.

4:37I had done investing for, at that point, five, six years. And two, I didn't think I could understand ever the mindset of a founder without ever being an operator myself and building things myself. And what is the underlying motivation of why you wanted to go into investment, investing into the first place? Twofold. One is what we talked about in terms of working with founders. I think that was the most important thing to me. And the second thing is that this is the kind of job where if you have, if curiosity is one of your biggest values and drivers, it's like drinking from a fire hose. You know, you are constantly learning about different things.

5:18You will never go very deep into one thing. And I think that's what I learned from operating. In the world of operating, you do specialize and you go very deep. if you're in product even within a product you could go into a specific feature and it's it's very micro focused which is a skill i think what we have in venture is that we stay a little bit more on the surface but we need to be really fast in our on our feet on how we learn about different things if you have this curiosity i think you would be a perfect fit for the world of venture and do you you mentioned like the continuous learning process do you have a process around that or anything how you approach it when a company comes around where you're probably not too familiar with the space how do you go about that I would say it's twofold one like I read a lot so I read so many you know sub stack and medium articles and then the second thing I have I've done this over the years is that they're not really an advisory board but they are my friends so I have a group of colleagues slash friends that have superpowers you know when When I go into a business and financial services, I know exactly who to call.

6:28And this person doesn't need to be in GC, right? These are people who are my contacts in operating. It could be in investing, where I know they are the expert in that field and I can just talk to them about the market. I would say so much of my learning I actually do with my advisor board slash friends, because that makes things, that really does make things come to life a lot more than just reading. And if we go back again, because I always think that we are strongly shaped by the context and the environment that we grow up in. So I was wondering, what were early conceptions that you grew up with and that are still affecting you today?

7:03So I would say, I think entrepreneurship almost runs in someone's blood. And I think I had that with my parents. And now kind of my whole family, my brother also is in the family business. So I was kind of the old one out who decided not to start something. although I do think of myself as an entrepreneur in the context of GC and I think of everyone who works at GC as an entrepreneur. I think being interested in new ideas, having this drive and urgency, being more action-oriented, you know, it was one of the values in the family. You know, everyone was a kind of a doer. The second thing is that I think this is maybe culturally something in Turkey is that people can be quite persistent and I think that's something I grew up with, again, culturally.

7:41Never taking no for an answer. I think that was something important, you know, one of the most important traits of an entrepreneur, I think, is the persistence. Having that laser-focused vision and never taking no for an answer. And I definitely observed my parents doing that. When I grew up, I was really competitive into sports. And then having siblings really added to this because you always wanted to be better than the other. And then the other thing for me was also that I grew up with the idea that you can literally achieve anything that you set your mind to. and is this also where your own ambition came from from this idea of like okay you can just take action and get somewhere exactly and i think there was this thing about which i'm very grateful of that it's okay to fail the most important thing was i think as a kid i remember it's very vividly there is nothing you can lose from asking so just ask and if people say no it's fine i think that i really internalized which helped me then both build this network of people because and I would just speak to so many people without being shy and trying to learn from them, but also take risks.

8:46And if I failed, it was fine, which again is, I think, part of the entrepreneur mindset. So General Catalyst has today 43 billion SSN management. So could you talk a bit about how GC is set up and operates? Because for a venture fund, that's massive scale. So at GC, we have multiple fund strategies and beyond our fund strategies, we also have a number of companies that are affiliated with GC. But the first thing is that GC at its core is very early stage. So early stage is our core. We're in the people business. The number one goal for all of us who works at GC, whether you're in investing or in the Policy Institute or as part of Procepta, to meet exceptional people and bring them to our network.

9:29If you think about all the different funds that GC has, we have the seed and the growth fund. So that's the venture fund. Then we have creation, where we help build companies with founders. And that can be in the form of a hatch. So where we start a company together with a founder, ground up. Or we could be doing AI roll-ups, which is AI transformation and AI roll-ups in services industries. We have CVF, which is a non-dilutive growth financing vehicle, particularly to fund companies' marketing and sales spans. And then we also have GC Belt, GC Policy Institute, and many other businesses that are in the service of our founders.

10:10Core is very much seed and creation. You can think of all the other fund strategies almost as a service to also our early stage founders. You know, the growth fund allows us to invest in a company at seed and then be with them throughout the whole journey to IPO, even post IPO. In Europe particularly, there are not that many funds that can do that. There are several examples of us doing the early stage and then continuing with growth. So Stripe, for example, we did the seed investment and then we led their B round and then invested in every round. After that, I think that's like total 14 rounds we backed Stripe and maybe more.

10:44If you look at my portfolio, we have Finom, which is an SME New Bank. We did the seed, we led the B and then we continued investing in the company. And then CVF has done a major investment also in Finom. So you can see all these different fund strategies coming together to support our portfolio companies. With such a large fund, how do you generate high returns for the investors? Because, I mean, generally speaking, it's usually easier to create high multiples with smaller fund sizes. The strategy of growing our AUM is really through different fund strategies. If you look into private equity, you can technically grow your fund size and your returns will not be so much impacted because of the way you drive returns.

11:23But in venture, because we're in the power law business, the fund size does matter in terms of driving returns. That being said, you know, GC was founded by entrepreneurs. You know, everyone in GC is an entrepreneur. All these fun strategies that I'm talking about when it comes to AI roll-ups or CVF were started by people who are investors or not even senior investors, like principals or more junior investors at GC. Like for us, it's not just, you don't only create value through doing seed investing or growth investing. You can also create value through building companies. You can build value through doing roll-ups.

11:58You can do that through debt financing. So I really like that at GC, we think about it holistically because every founder also needs to think about it holistically. Scaling and kind of increasing the product of a venture fund, is this also a way to differentiate? Because I think it was Jeff Bezos who said differentiation is survival. And it always comes to my mind because when he got asked a lot why he doesn't have any retail stores back in the day, and he said he just didn't know how to innovate. Everything. Yeah, exactly. Until he came up with, I mean, Amazon was the just walk out pay method.

12:33And then he went like big on this as well. So I'm curious about how the relation to venture in that. Yeah, that's probably right. Especially at this point in time. Because venture as an industry is definitely maturing. But we have more venture funds. We have more competition, which is all in the benefit of founders, by the way. but that also means that and and there is because there is like a limited amount of capital that can go into venture that competition is driving a lot of the funds to innovate maybe not survival but if you want to continue being the best you need to think creatively about how we drive value and I think that is when GC is looking to hire people that's probably like one of the most important values that we look for one of them is expanding possibilities so are people thinking creatively Are they going to be doers?

13:23Are they going to be not just execution people, but also entrepreneurs who have ideas? I think it was Doug Leone who said that venture capital is going from a high margin boutique business to a low margin mainstream industry. I don't think we're mainstream. Like, I don't think we're yet at mainstream. And if you look at how we run in GC, like you would be surprised that we are a big fund. But in the way things are run, it's still very much startup here. You know, we do have a CRM, but we established it like relatively recently, for example, whereas when I was at TA, we lived by the CRM. You know, CRM was like the most important thing and the data was stored for like 25 years.

14:02We're still a relatively small investing team. The reason we look big is because we have different fund strategies and different companies that are in the service of the founders. And you made some very interesting early stage investments as well in Europe in the last couple of years. And you're one of the few funds that you said can double down also in the later stages. So what are the reasons for founders to choose GC in this competitive context, especially in Europe? I'd say it's twofold or threefold even. One, I think the founders do like if a fund can continue with them to the IPO journey or even after.

14:40They also want to work with partners who have seen different scales. Because as a partner, if you have worked with seed companies as well as pre-IPO companies, then you bring the right experience to the board also to support them throughout that journey. So it's not this graduation where you invest and by the time it's Series C, someone needs to do the secondary and clean you up from the cap table and you need to leave the board. but you will have this one trusted partner that will be with you from the start till there's no end you know it could go forever basically that's one i think the second one is what i just said about all the fund strategies that we have like finom was a perfect example where we invested from the seed fund then we invested from the growth fund then now cvf is supporting them so there are just so many ways that we can help them even think about driving value and then And the last one is particularly in the context of AI, I think US is very important.

15:35We are here very much invested in European resilience and building European technology companies and making sure that the talent is either returning from US to Europe or stays in Europe. But also, if you think about the talent density of AI, so much of it is in the US. So the global investing team and how we have exchange with each other and how we can help our European companies also go to the US is like a big value driver. For me to summarize, just so that I got it correctly, like you have the creation fund, and then this is the umbrella for two practices, which is the more traditional incubation and then the AI roll-up, right?

16:10So could you talk about those two practices and how they're different to each other? Creation fund was, you know, one of the cornerstone funds from the start of GC. Kayak was, I think, the first company that came out of it. For example, the founders of GC found with a company in the travel space, so they were entrepreneurs. And then with GC, they had this idea of, let's go find exceptional people and back them to the businesses. But what if we meet exceptional people and they don't have the business idea? Why don't we actually work with them to build these businesses? That was the idea behind the creation fund.

16:41Typically, the companies that come out of creation fund would be ideas that take a while to get to commercial traction. So what I mean by that is these are big ideas. And we know that after the seed investments, it's going to take them a while to get to the traction to be able to raise the A. So typically the way we would do these investments is that we would do the seed and also backstop the A. So we tell the founders, you've done your seed round and then A is going to be a very difficult round for you to raise. We don't want you to optimize for the wrong things. We don't want you to optimize to try to get to 1 million ARR, which is not really going to be in the interest of the long term success of this company.

17:18Maybe you want to really focus more on the product build in the first like 12 to 18 months. So if you want to go raise your A from outside, you can go do that. But you have the backstop with GC. And typically at the end of these two investments, our ownership would be a typical kind of C than a Series A lead. Because a lot of these incubations, as you know, would be getting a very high ownership in these businesses. We don't do that. It's still very much a founder's business. But what we do is that we're going to be a partner to you already. We're committing for multiple rounds. This could be in healthcare, for example, where go-to-market is challenging.

17:50Financial services is another one. Circle, for example, was a company that was built in the GC offices, funded out of creation. Again, like a huge idea, right? Sable coin that you need to work with the regulators to get it started. And this is with the founders from your network that you engage with that probably did not have an idea or the specific idea on how to start a company, but you say they're exceptional individuals and you approach them with an idea and then they go for the journey. It can happen in two ways. One is exactly as you described. Exceptional people, founders, operators that we know, that we want to empower them to go start.

18:22a business that we had been ideating about, for example. Or it could be that they come to us with an idea and we say, love the idea, but like if you raise a seed round now, you're not going to be able to raise the A. So for example, it could be an idea where you want to build something in supply chain and you need to connect with a lot of enterprises and manufacturers. If you were to do a seed investment there, by the time you connect with all the manufacturers and kind of set up the company, you're probably going to run out of that seed funding. You're not going to have commercial traction and the Series A is going to be difficult to raise.

18:51If we have very high conviction in the team, as well as the idea when we meet them, we might say, why don't we do this out of creation? You know, we will backstop your A, we will do a bigger investment effectively, and we will be a partner to effectively work committing long term. One example that I would give is one of the companies that I'm on the board of called Moment. This is a Pan-African payment network that we're effectively helping build out of our creation fund. The reason we did this out of our creation fund was because to build a Pan-African payment network, you need to get a lot of licenses.

19:27You also need to get payment volumes. So it's very hard. They have a cold start problem. To get those payment volumes, it's really difficult. So what we did is that we met this team. We had the idea already. We said, okay, why don't we work together? But why don't we do this as a three-way partnership? So we brought on board Rapid, which is one of our portfolio companies who has helped the technology and licensing. Then we brought over MultiChoice, which is one of the biggest pay TV providers in Africa, and said MultiChoice is going to be your first customer, so you're going to get the payment volume through them.

19:59So in a year's time, between GC, MultiChoice, and Rapid Funding, the company got started and got to very strong commercial traction, which wouldn't have been possible if we didn't do this out of creation fund, and we just did a typical seed investment. That's a very unique value proposition, isn't it? Yeah, exactly. And so this is for the creation. And then one part of it is also the AI roll-up, right? And the AI roll-up is mostly, you're mostly focusing on service businesses for this. So could you talk a bit about this and why services industries historically have not been very attractive for venture, but how this has changed now?

20:37When AI happened in 2023, we had a partner meeting and we were having a discussion around what is going to be the biggest impact of AI in traditional industries. And it was pretty clear to us that the biggest impact was going to be in services businesses that are dominated by text-based and voice-based workflows. So that will be call centers, it would be insurance brokerage and claims management. It's going to be legal, it's going to be accounting, it's going to be property management in real estate where a lot of the workflows are just text-based and voice-based. And a lot of these industries, as you pointed out, they don't really have any technology.

21:12So they haven't had any innovation, which is precisely why venture investors haven't been so interested in them. So we kind of said, OK, this is the opportunity. There's a lot of AI software businesses out there. So AI application providers that are trying to sell to these services businesses. and you know I think that's a very strong trend and we're seeing that in customer service we're seeing that in legal you know they're having very strong growth but also we can we can kind of think about this in a deeper way in the context of AI transformation why don't we actually go become these services businesses so rather than trying to sell applications to these services businesses why don't we become that service business and become effectively start building the next generation of AI-driven services businesses.

22:01So that was the idea of AI rollups. After we identified all the industries that we estimated that there would be at least 40 to 50 % automation through AI in the workflows, and we studied these markets and realized how fragmented they were. So then at that point, we said, well, actually, instead of building these from scratch, Why don't we acquire one and then transform it? And then actually, because we see how fragmented this market is, we can also drive value through consolidation. It was people like me and a few other people who have also a background in private equity, have done roll-ups, have seen how we can drive value through consolidation.

22:41We said, well, that's kind of the cherry on the top, right? We can do the air transformation, but we can also drive value through consolidation. But air transformation comes first. So I think that is the most important distinction because the way we drive value in our AI rollups is more than the kind of 60 % or 70 % of it is through AI transformation. The rollup is driving value, but it's not driving value in the way you would do in PE, which is effectively levering up businesses and using that to do a consolidation and pay back that debt, which creates equity value. we don't use any debt in our investments.

23:20You know, we do this particularly for the first two years, pure equity, and it's very much risk on and it's very much spend in, whereas private equity would be spend out, you know, because we put the spend in because we want to drive the air transformation through the technology investment. So it's a very different approach to private equity, but there is some, I'd say, takeaways in terms of execution of the roll-ups from PE. So it's based on the hypothesis that the low-margin businesses can work with or AI can help automating tasks, which then leads to higher margins, right? And do you have any examples for this?

23:57Well, you're precisely right, by the way. I think quite a lot about this, where what will the panel of these businesses look like long-term? And this is why these services businesses are actually so interesting. The reason we've always been interested in software is because software is recurring revenue and a time margin. Then you look at services businesses today. Services businesses can also be very recurring revenue. So one example would be one of our portfolio companies, Duveli. They're doing a roll-up in the real estate agency business in the UK. If you think about the revenue stream of a real estate agent, it's rental contracts.

24:35Those are recurring contracts that are usually three to five years. So in terms of a revenue model, it's actually very similar to software. And now through AI transformation, the margins are also going up. So in the case of Deweyli, for example, after Deweyli deploys their AI platform to the agencies that they acquire, the EBITDA margins typically go from 12 to 40%. And the reason for that is because, you know, the agents that we have on finding tenant as well as property management, about 50 % of their time free up because so many of the tasks are not automated with AI. So then you look at that P &L of this business.

25:16If you were to be given that P &L of the real estate agency that's operated by Duvalier and it didn't have a name, you would assume it's a software business. Like you wouldn't know effectively. If you think about then the value creation that we have, right, so much of it is actually driven a lot more through the AI transformation rather than the consolidation because the margins of these companies are going up significantly. And that also drives multiple expansion. And last year, MIT conducted a study about the implementation of AI in the businesses. And I think, I mean, it was a big publication.