20VC 2 Signs That A Company Is Ready For IPO, Why Fund Cycles Are Too Short & Why Management Teams Do Not Want To Go Public with Gene Frantz, General Partner @ CapitalG

In this episode of 20 minutes VC, host Harry Stebbings interviews Gene Franz, a partner at Capital G, Google's growth investment fund. Franz shares insights from his transition from TPG Capital to Capital G, emphasizing the evolving landscape of private equity and growth investments, particularly in technology. He discusses the importance of valuation, the readiness for companies to go public, and the challenges of distinguishing oneself in a commoditized late-stage funding market. Franz highlights Capital G's unique approach to adding value through leveraging Alphabet and Google's expertise, and the necessity of having both access and a discerning selection process in successful investing. The conversation also touches on the role of patience in investment from an LP perspective, and the critical importance of the team in driving company success.

• Harry Stebbings is the host of the "20 minutes VC" podcast.
• The podcast discusses venture capital and investments, with a focus on Google's growth investment fund, Capital G.
• Gene Frantz, a partner at Capital G, is the guest for the episode.
• Gene Frantz's background includes working at TPG Capital and Oracle Corporation.
• Robert Siegel from Xseed Capital is thanked for introducing Gene Frantz to the podcast.

You are listening to the 20 minutes VC with me, your host Harry Stebings, and you can stay up to date with all exciting happenings here on the 20 minutes VC on Snapchat at H stepbings, and it'd be a pleasure to see you there.

Joining me in the hot seat today from Capital G, I'm thrilled to welcome Gene Franz to the show.

Harry Stebbings introduces the podcast and welcomes Gene Frantz, highlighting the focus on venture capital and investment discussions.

• Harry Stebbings talks about two companies: Eight, a sleep innovation company, and Full Contact, a contact management solution.
• Eight's smart mattress is designed to improve sleep quality and productivity.
• Full Contact helps manage and engage with contacts more effectively.
• Both products are endorsed with discount codes for listeners.

I really want to talk to you about a company that's really changed the way I sleep and operate. Eight is a sleep innovation company with their latest product, the eight smart mattress.

With full contact, they provide the ability to organize your contacts, gain rich insights into them, and therefore build deep relationships.

Harry Stebbings shares personal endorsements for products that have improved his sleep and contact management, suggesting they could benefit listeners as well.

• Gene Frantz discusses the state of private equity in the late 90s.
• Technology investments were new for private equity firms at that time.
• He highlights TPG's focus on hardware and semiconductor companies, which were suitable for leveraged buyouts.
• Over time, the scope of lending expanded to include software and services, targeting more mature, x-growth companies.
• The opportunity to invest in growth companies at a larger scale in private markets became apparent.
• Frantz's transition to Capital G was influenced by the trend of investing in private markets and the platform that Capital G offered.

When I joined in the late 90s, which represented a large category of investment, still at that stage was fairly new to technology, but a few firms like TBG were quite forward looking at identifying tech as an interesting area and having reached a level of maturation where it actually made sense for the more traditional private equity kind of investing.

What started to become even more interesting with the passage of time though, was sort of the increase in opportunity for investing in growth companies larger scale.

Gene Frantz explains the evolution of private equity's approach to technology investments and his reasons for joining Capital G, which was aligned with the emerging trend of large-scale investments in growth companies.

• Market cycles are an inherent aspect of the business environment.
• Investment strategies must be adaptive to work through these cycles.
• The mandate for investors is to invest wisely regardless of market conditions.
• Creative investment approaches are necessary during both challenging and frothy times.
• Long-term perspective and strong convictions are crucial for investment decisions and exits.

"Well, I think cycles are a business reality and always will be, and there's no way around that."

This quote emphasizes the inevitability of market cycles in business, suggesting that they are a constant factor that investors must contend with.

"And so if times are hard or it's a cyclical, peaky kind of time, it's still our job to figure out appropriate places to invest capital."

Gene Frantz stresses the responsibility of investors to find suitable investment opportunities regardless of the market's condition, highlighting the adaptability required in their approach.

"Beyond that, I think just trying to keep as long a term of view as you can and having a strong set of convictions on what long term is appropriate for thinking about ultimately how one exits an investment."

The importance of maintaining a long-term view and having firm beliefs in investment strategies is underscored here, suggesting these are key to making sound exit decisions.

• Valuation plays a significant role in investment decisions, especially at later stages.
• In the current market, high-quality companies demand a full price.
• Selecting a high-quality company is the most crucial first step.
• There should be limits on the price an investor is willing to pay to ensure long-term profitability.

"I think it matters. I think particularly later stage where in the market that we've been in, prices obviously do matter."

Gene Frantz acknowledges the importance of valuation in the investment process, particularly for later-stage investments where prices are more significant.

"But I think you need to have limits on how much you're willing to pay for that as you think about making money over the long term and sort of how your returns will come to fast."

This quote highlights the necessity of setting boundaries on investment costs to ensure long-term financial returns, indicating disciplined investment practices.

• Companies need to be larger and more developed to go public compared to 20 years ago.
• Management teams are less inclined to go public and prefer staying private longer due to available liquidity in the late-stage market.
• Companies are more cautious about going public even if they are capable of doing so.

"Yeah, well, I think to go public, I would say it seems like companies need to be a bit larger and a bit more developed than would have been the case 20 years ago."

Gene Frantz notes the change in requirements for companies to go public, indicating the need for greater size and development.

"And so as a result of that, companies electively will wait longer to go public and stay private and be a little bit more cautious about the decision to go public, even if they can go public."

The quote explains that companies are choosing to delay going public, staying private for longer periods, and approaching the decision with greater caution.

• Google's structure as an LP provides very patient capital, allowing investments to mature over extended periods.
• There is a preference for long-term value creation over the timing of an IPO.
• The patience of the capital base influences investment strategies and expectations.

"It doesn't in the sense that this is somewhat a virtue of our structure is we have in our LP here at Google Alphabet, the ultimate and very patient capital."

Gene Frantz expresses that the delay in companies going public does not concern him due to the patient nature of Google's capital as a limited partner.

"And in fact, we're much more interested in a company developing long term sustained value than we are in the particular timing of an IPO."

This quote clarifies the focus on long-term value creation over the timing of an IPO, aligning with the patient investment philosophy.

• Traditional fund cycles are often perceived as too short, given the ten-year duration.
• The average investment period for most funds is three to five years, influencing the timing of fundraising and pressure to show results.
• Investment decisions can be negatively impacted by the pressures of the fund's lifecycle rather than business fundamentals.

"Yeah, I think, absolutely. And even though funds are ten year funds, which sounds like a long time, the average investment period for most funds is probably three to five years."

Gene Frantz agrees that fund cycles may be too short and points out the discrepancy between the ten-year fund duration and the shorter average investment period.

"And so what that means is that every three to four to five years, you've got funds out raising capital. And when funds are raising capital, they want to show results."

This quote explains the cyclical pressure on funds to demonstrate performance results within a relatively short timeframe to facilitate successful capital raising efforts.

"And that's a poor reason to make decisions."

Gene Frantz criticizes the practice of making investment decisions based on the fund's lifecycle pressures rather than on the solid business fundamentals of the companies they invest in.

• Liquidity decisions should be based on the company's development, not investor convenience.
• Signs that a company is ready for an IPO include scale, cultural maturity, and predictability.
• Predictable revenue is crucial for guiding Wall Street and managing expectations.

Think about selling the company, examine liquidity when it's appropriate for the business in light of its development, not when it's convenient or desirable for the investor in the company.

This quote emphasizes that the timing of seeking liquidity should align with the company's maturity and readiness rather than the investor's desires.

I think there's two dimensions to that. I think one is whether the business is at a sufficiently advanced stage of development that it makes sense for it to be a public company.

Gene Frantz indicates that a company should consider an IPO when it has reached a stage of development where being a public company makes sense.

Predictable revenue.

Harry Stebbings summarizes the conversation by highlighting the importance of predictable revenue for a company considering an IPO.

• Growth equity and private equity have become highly commoditized over the last decade.
• Differentiation in the investment world is challenging due to the replication of successful strategies.
• Firms need to offer something beyond money, smart professionals, and hard work to be distinctive.

Investing writ large across growth equity, private equity has commoditized to a very high degree over the last decade in a way that would not have been the case in the prior ten years.

Gene Frantz describes the current investment landscape as highly commoditized, making it difficult for firms to stand out.

There's a very limited number of firms out there that are truly distinctive in terms of just we're smart and we got money and experience and we work harder than everybody else.

Gene Frantz points out that only a few firms are truly distinctive based on their intelligence, experience, and work ethic alone.

• Late-stage firms must bring additional value to distinguish themselves in a crowded market.
• Capital G leverages Alphabet and Google to provide startups with unique access to expertise and knowledge.
• Differentiation is aimed at enhancing returns and becoming a preferred partner for fundraising companies.

You needed to bring something to the party beyond just smarts, money and hard work.

Gene Frantz emphasizes the need for late-stage firms to offer more than just capital and effort to differentiate themselves.

We spend immense amounts of effort to ensure that we're bringing to companies that we invest in distinctive help and value add in the form of Google coaching, knowledge, access, that sort of thing.

Gene Frantz explains that Capital G focuses on providing startups with unique resources and support from Google to differentiate itself from other capital sources.

• Success in VC requires both the ability to pick winners and access to the best companies.
• Consistently successful firms are good at selecting investments and have access to top companies.
• Networking and integrating with earlier stage markets can enhance deal flow for later-stage VCs.

I think it's both. I think if you look at the firms that succeed consistently over time, they certainly do a good job picking, but because they're winners and they're viewed that way, they also have access to the best companies.

Gene Frantz argues that successful venture capital involves both selecting the right companies to invest in and having access to the best opportunities.

Would you say then it's the later stage VC's role to really network and integrate themselves in the earlier stage markets to really get that enhanced deal flow from the earlier stage funds?

Harry Stebbings questions whether late-stage VCs should focus on networking with early-stage markets to secure better deal flow, suggesting that integration across stages could be beneficial.

• Tracking a company over time is crucial for developing awareness and conviction.
• Getting to know management and having conviction is important before initial meetings.
• This process aligns with the investment cycle and mandate.

At the time a company happens to be raising in a cycle that fits with our mandate.

This quote emphasizes the importance of synchronizing investment activities with a company's fundraising cycle and the investor's mandate.

• A rapid question-and-answer session with Eugene.
• Eugene is asked to provide immediate thoughts within 60 seconds for each statement.

Quick fire now with Eugene. So I say a short statement and then you give me your immediate thoughts in 60 seconds. How does that sound? Sure, 60 seconds per one.

The host introduces a quick-fire question segment with Eugene, setting the expectation for brief and spontaneous responses.

• Eugene struggles to pick one favorite book.
• Currently enjoys "The Righteous Mind" by Jonathan Haidt.
• The book's focus on political and religious division is topical and fascinating.

It's titled the Righteous mind by Jonathan hate and in fact the subtitle to the book is why good people are divided by politics and religion.

Eugene finds "The Righteous Mind" relevant to current global divisions, making it a compelling read.

• Few cons of working with Alphabet's Capital.
• Alphabet provides a balance of large company resources and independent business drive.
• The platform is unique and offers a differentiated product in the market.

The Alphabet format does quite a good job of balancing what effectively an Alphabet in Google is a very large company with having the independence and autonomy to be able to go drive a business independently.

Eugene appreciates the balance Alphabet maintains between the resources of a large company and the autonomy for independent business ventures.

• "The Information" by Jessica Vasilera is a preferred digital newsletter.
• "The Economist" and "The Wall Street Journal" are regularly read by Eugene for their proprietary content.

I think the information, Jessica Vasilera's new online digital newsletter is quite interesting.

Eugene values "The Information" for its unique and engaging content.

• Eugene believes that a strong team is crucial, especially in competitive technology sectors.
• Large market opportunities necessitate a critical focus on team dynamics.

I think team's crucial, and I think that for every, it's such a competitive world, particularly in technology, for large market opportunities, that team is critical.

Eugene emphasizes the significance of having a competent team to succeed in the highly competitive technology industry.

• Stripe is the most recent public investment due to its revolutionary role in payments and exceptional team.
• Despite high pricing, Stripe is seen as having long-term value.

Think our most recent public investment, most recent investment in a private company that's been publicly disclosed is stripe, which is a revolutionary company in the payment space with an extraordinary team and traction that's quite unlike what we see in most companies out there.

Eugene justifies the investment in Stripe by highlighting its innovation, team, and potential for long-term success.

• Eugene expresses gratitude for being on the show.
• Looks forward to further engagement or follow-up.

Great. And I'll look forward to the follow up then.

Eugene is thankful for the opportunity and anticipates future interactions.

• Leila and Rob Siegel from XC Capital are thanked for introducing Eugene.
• The episode's success is attributed to their recommendation.

And again, a big thank you to Leila and Rob Siegel at XC Capital for the intro to Gene today, without which this episode would not have been possible.

The host acknowledges the contribution of Leila and Rob Siegel in making the interview with Eugene possible.

• The host endorses the Eight smart mattress for improving sleep and productivity.
• Full Contact is recommended for contact management and relationship building.

Eight is a sleep innovation company with their latest product the eight smart mattress, being a bed that literally tells you how well you slept last night.

The host shares a personal recommendation for the Eight smart mattress, highlighting its sleep tracking capabilities.

With full contact they provide the ability to organize your contacts, gain rich insights into them, and therefore build deep relationships with features like automatically identifying and merging duplicate contacts to the ability to snap a photo of a business card and full contact will transcribe them for you.

Full Contact is endorsed for its comprehensive contact management features that facilitate deeper relationships.