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

Layla Sturdy, managing partner at Capital G, discusses the intricacies of investing in growth-stage companies, emphasizing the importance of balancing pattern recognition with an open mind. She highlights the necessity of focusing on core business strengths while being cautious about overestimating potential second and third acts. Sturdy also explores the challenges and opportunities in the current venture landscape, including the potential of AI investments and the dynamics of public vs. private markets. The conversation underscores the significance of strong leadership, followership, and the strategic timing of investments and exits.

• Early lesson in investing involved overestimating the success of second and third acts in companies.
• Success often attributed to non-founder CEOs who can lead companies through different stages.
• Importance of combining insights with an open mind for successful investing.

"One of the early lessons I got in pattern recognition in investing was believing more in the second and third act than I think really would transpire for most companies."

• Early lesson in investing involved overestimating the success of second and third acts in companies.

"I think insights will always be important, but if you rely entirely on insights, entirely on the past predicting the future, you'll never be a great investor."

• Insights are important but should not solely dictate investment decisions; an open mind is crucial.

• Emphasizes the strength of a company's core business over potential future expansions.
• Example with Stripe and Credit Karma: strong core businesses can overshadow the need for successful second and third acts.
• Base investment case should rely on existing evidence and data, not just potential future success.

"When first did the stripe investment or the credit karma investment, both of those are examples of companies that have really, really strong core businesses in totally different areas."

• Examples of companies with strong core businesses that overshadow the need for successful second and third acts.

"Almost always my base case is I'm only going to underwrite what exists today. I can get excited about the possibility of the future, and that's built into the upside case."

• Investment decisions should be based on existing evidence and data, not just potential future success.

• Importance of seeing evidence of a company's ability to execute a multi-category strategy before investing.
• Example with Whatnot: demonstrated ability to execute a multi-category strategy early on.
• Look for outliers that show a team can execute multiple things at once or faster than average.

"Met with several founders who their plan was to go multi category, met with a whatnot team, and I met with them within four or five months of their series a. They were already live in five categories."

• Example of Whatnot demonstrating early evidence of executing a multi-category strategy.

"I look for any evidence and I'm creative. It doesn't have to be working yet, but you want to see some, something that's a little bit of an outlier, that shows you this team is different."

• Importance of finding evidence or outliers that show a team's ability to execute multiple things at once or faster than average.

• Growth stage companies often wait too long to diversify or expand, which is crucial for strong public company performance.
• Early stage advice focuses on staying focused on the core business until it achieves significant scale and reliability.
• Growth stage companies should invest in adjacent areas and expansion opportunities but ensure these bets are concentrated and significant.

"In the growth stage, more often they wait too long, particularly as they're ramping up in the couple of years prior to IPO."

• Growth stage companies often wait too long to diversify or expand.

"I trust that that is the right advice for early stage companies. And I think the best companies we've invested in have followed that advice and they have stayed extraordinarily focused."

• Early stage advice focuses on staying focused on the core business until it achieves significant scale and reliability.

"The mistake I typically see companies doing at that stage, the growth stage, is too much, making concentrated enough bets in the second 3rd act, and they're not significant enough."

• Growth stage companies should make concentrated and significant bets in adjacent areas and expansion opportunities.

• Early stage investors often advise founders to focus on the core business, which can be challenging for growth stage expansion.
• Growth stage companies need to balance focus on core business with the necessity to diversify and expand for long-term growth.

"Most of my advice, honestly would be contra what we said there. It's like focus, make sure we have customers that love us, and only then do we expand."

• Early stage investors often advise focusing on the core business before expansion.

"It's really a timing issue. I trust that that is the right advice for early stage companies."

• Early stage advice is appropriate, but growth stage companies need to balance focus with diversification and expansion.

• Growth stage companies must maintain focus and prioritize effectively.
• Success in the core business can lead to overconfidence in adjacent markets.
• Common mistakes include underestimating the difficulty of gaining market share in new areas.

"I think the common errors are having a ton of success in your core business, which is hard enough."

• Success in the core business can be misleading and may lead to strategic errors.

"They almost make the same mistakes that the incumbents that they beat in their first act are making."

• Startups can repeat the mistakes of the incumbents they initially disrupted.

"Underestimation, really thinking hard about the right to win and why their product is differentiated and then focus and resources."

• Critical factors include understanding the right to win, product differentiation, and proper allocation of focus and resources.

• Debate on whether companies should go public at $100 million or $400-500 million in revenue.
• Key challenge in transitioning from private to public is predictability.
• Public markets demand consistent execution and clear storytelling from companies.

"I think that the sort of biggest challenge I see in a lot of companies making the transition from private to public is really around predictability."

• Predictability is essential for companies transitioning to public markets.

"In the public markets you really need to say what you're going to do and then do it."

• Public companies must deliver on their promises to gain investor trust.

"I've seen $100 million revenue companies that are operating with that level of precision, have their story tight, have their execution plan really tight, and would be a good candidate to go public."

• Companies with precise operations and clear plans can succeed in going public even at lower revenue levels.

• IPO markets are expected to open back up, providing opportunities for companies to go public.
• Focus on companies being able to control their own destinies, often leading to public company status.
• Multiple paths, including M&A, are considered but not relied upon.

"I think that the IPO markets will open back up."

• Expectation of reopening IPO markets.

"We really believe in founders and companies being able to control their own destinies."

• Emphasis on autonomy and control for companies.

"We're always looking for the standalone control, your own destiny. And in almost all cases that means being a public company at some time."

• Most growth investments are aimed at companies becoming public entities eventually.

• Willingness to invest in non-founder-led companies if the leadership is strong.
• Different stages of company growth may require different leadership skills.
• Founders can hire executive teams to complement their skills as the company scales.

"I would invest in a non-founder led company."

• Openness to non-founder-led companies with strong leadership.

"Some people just like to build zero to one more than they want to build one to 100."

• Different personal passions and skills are suited to different stages of company growth.

"Company building is a team sport. It's not an individual sport."

• Emphasis on the importance of a strong team in company building.

• Scaling requires a shift from individual genius to team collaboration.
• Complexities of larger organizations necessitate diverse skill sets.
• Founders must often adapt or bring in new talent to scale effectively.

"As you scale to a larger company customer base, complexity of products, complexity of size of organizations, it absolutely is a team sport."

• Scaling increases complexity and requires a team effort.

"You can no longer just rely on one, that one outlier or that extreme outlier advantages or skills or gifts that founder has."

• Reliance on individual talent diminishes as the company grows.

"It's a transition that companies have to make as they go from success, early product market fit, to real significance and large scale impact."

• Transition from early success to large-scale impact involves significant changes.

• Companies with $30-100 million in revenue growing at 15-40% face unique challenges.
• Smaller markets or slower growth models can limit scalability.
• Profitability and creative strategies are essential for sustainability and investment attractiveness.

"There are that group of companies, we probably are operating in smaller markets than maybe everyone anticipated when they started the company."

• Smaller market size can limit growth potential.

"If you're growing 15, 20%, you'll see that decay to single digits."

• Growth rates often decline over time, making sustainability challenging.

"Many of them that I see in the market are trying to first figure out how to be sustainable."

• Focus on achieving sustainability at mid-sized revenue levels.

• Roll-up strategies are popular in certain industries like beauty spas and vet services.
• Collaboration with private equity partners is common for executing roll-up strategies.
• Direct roll-ups by the company have not been pursued but remain a possibility.

"We typically write 100, $150 million check into a larger buyout that those firms are doing."

• Investment partnerships with private equity firms for roll-up strategies.

"We haven't done a roll up on our own accord so far in our history."

• No direct roll-ups have been undertaken by the company yet.

• Despite market cycles, great companies can always be found and invested in.
• Entry prices for Series B and C investments can be high, but fair valuations are possible.
• Historical perspective on valuations reveals that perceived high prices can turn out to be fair in hindsight.

"I've never found generalizations to be great. And we have always found great companies to back during every single point of all of the cycles."

• Great investment opportunities exist in all market cycles.

"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."

• Retrospective evaluation often reveals the fairness of initial investment prices.

• Market Cycles Impact on Multiples: Valuation multiples can vary significantly based on market cycles and comparisons with public markets.
• Future Growth Prospects: The difficulty lies in predicting a company's future growth potential, which influences whether a price is considered fair.
• Historical Example - Stripe: Investing in Stripe in 2017 was initially seen as risky, but its subsequent growth validated the high valuation.
• Risk in Venture Capital: Many companies do not meet high growth expectations, making it challenging to justify high valuations retrospectively.

"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 sometimes compared to the public markets depending on the cycle."

• Multiples can be disconnected from historical averages and public market comparisons.

"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, then you are in fact paying a fair price."

• Belief in future growth prospects is crucial in determining if a price is fair.

"When we invested in them, nobody, or I would say lots of people didn't believe that they could compound and continue to grow at such a strong rate."

• Initial skepticism about Stripe's growth potential was proven wrong over time.

• Volume and Activity: Investment volume and activity have decreased since the peak in 2021, but opportunities still exist.
• AI Deals: The inclusion of AI deals can skew volume and dollar amount figures.
• Investment Opportunities: Good investments are still available, particularly in companies poised to become market leaders.
• Counter-Cyclical Investment: Investing against market trends can lead to outsized returns.

"Volume and activity is definitely down from the peak 2021 for sure. If you exclude the AI deals, the number, the volume and dollar amount actually looks quite high."

• Current investment volume is lower than peak levels, but AI deals can inflate figures.

"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 outsized returns."

• Investing against the market consensus can yield significant returns.

• Team Recruitment and Retention: Maintaining a team that believes in the company's vision is critical.
• Execution and Growth: Companies must execute well to justify high valuations.
• Valuation Adjustments: Many companies will face valuation adjustments in the current market cycle.
• Momentum and Belief: Sustaining momentum and belief within the team is essential for long-term success.

"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."

• Recruiting and retaining a motivated team is a significant challenge.

"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."

• Execution and maintaining team belief are crucial for justifying high valuations.

• Obvious vs. Non-Obvious Investments: Investments that seem obvious in hindsight often faced skepticism initially.
• Conviction in Thesis: Investors must have strong conviction in their investment thesis, especially at high valuations.
• Counterpoints in Investment: Every good investment has counterpoints and risks that need to be considered.

"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."

• Feeling nervous and facing skepticism is a sign of being on the right track.

"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."

• Conviction in the investment thesis, especially at a high price, is essential.

• Return Multiples: Growth investments aim for 3-5x returns, while early-stage investments target 10x returns.
• Liquidity Pressure: Having a single LP provides flexibility in holding investments long-term.
• Generational Companies: The focus is on finding companies that can compound returns over the long term.

"What do we underwrite to a capital g? Three to five x returns. Money on money returns, and depending on the stage, so if it's really early, it will be ten x."

• Different stages of investment have different return expectations.

"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."

• Long-term holding allows for compounding returns in generational companies.

• Asymmetric Information: Private investors may have information advantages, but public market dynamics are complex.
• Public Market Variables: Factors like short sellers, activist hedge funds, and market conditions add complexity.
• Decision to Hold or Sell: Understanding public market dynamics is crucial for making informed decisions about holding or selling.

"Public investors tend to have different access to data and insights and decision making that help them decide to when is the right time to hold and sell in the broader context of their portfolio."

• Public investors have different data and insights that influence their decisions.

"There's a lot of private early stage investors that don't understand a lot of the dynamics of public markets and valuations and pricing and how, and portfolio management at that scale."

• Many private investors lack understanding of public market dynamics.

• Mistakes on Entry and Exit: Investors make mistakes both when entering and exiting investments.
• Conviction and Financials: Conviction in the investment thesis should be reflected in the company's financials.
• Macro Environment: The macro environment influences decisions to hold or sell investments.
• Balancing Portfolio Risk: Managing portfolio risk involves timing exits and understanding broader market conditions.

"We got mistakes on the entry, mistakes on the exit, which keeps it interesting and wins on both sides."

• Mistakes are made on both entry and exit, but they are part of the investment process.

"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."

• Holding investments is seen as reaffirming belief in the investment thesis.

• Local Market Understanding: Success in global markets requires a deep understanding of local market dynamics.
• Operational Complexity: Differences in operational complexity can impact the scalability of companies in different regions.
• Consumer Behavior: Understanding local consumer behavior and economic conditions is crucial for success.

"We started capital g from the beginning as a global firm, global investment mandate. But I would say we've also made mistakes in entering markets where we didn't have a robust set of history or I local resources on the ground."

• Entering markets without deep local understanding can lead to mistakes.

"The operational complexity of running those types of markets or those types of businesses, really understanding the consumer landscape, GDP per capita, all those purchase behaviors and getting market timing right."

• Operational complexity and understanding local consumer behavior are critical for success in global markets.

• Venture capitalists debate whether the best founders need help from VCs.
• Strong boards and advisors can enhance a founder's success.
• Support systems are crucial for founders to quickly access resources and answer questions.

"The best people in the world can always benefit from having help. Right? I think that the best founders will only be better if they have a really strong board as an example."

• Even top-tier founders benefit from external support and advice.

"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 assembled new board."

• Founders thrive with a network that offers quick problem-solving and resource access.

• Effective board members are supportive, have strong relationships, and ask tough questions.
• Rich Wong at Excel is highlighted as an exemplary board member.

"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 he's really insightful and good person."

• A good board member balances support with critical questioning and hard work.

• Personal traits and irritations often reflect one's own characteristics.
• Entitlement is a common irritation, suggesting a need for self-reflection.

"You disbelieve that things that irritate you in others are probably things that you have in yourself."

• Personal irritations can often be a mirror of one's own traits.

"What irritates me? Entitlement. So I guess I need to look at that."

• Entitlement is a significant irritation, indicating a need for introspection.

• There is a perception of increased entitlement in the current generation.
• Success can be achieved through humility, hard work, and scrappiness.

"I think we have a generation of incredibly entitled people."

• The current generation is perceived as more entitled.

"That's a sad statement, Harry, but I would plus one on how far you can get being humble and scrappy and hardworking."

• Success can come from being humble, scrappy, and hardworking.

• Early-stage AI investments have shown the best opportunities in the past 18 months.
• Growth-stage AI investments are scaling rapidly with technical differentiation.

"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."

• Early-stage AI investments have been the most promising recently.

"I was just looking at our pipeline actually yesterday afternoon of growth stage AI investments and they are scaling at extraordinary rates."

• Growth-stage AI investments are showing rapid scaling and technical differentiation.

• Google Ventures and Capital G focus on different stages but collaborate when necessary.
• Collaboration occurs even when both entities overlap in investment stages.

"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."

• Google Ventures and Capital G collaborate despite occasional stage overlaps.

• Personal connections and shared backgrounds can make founder meetings memorable.
• Building trust and personal relationships is crucial for successful partnerships.

"I flew to New York within weeks of coming back from maternity leave with my third child...the majority of the first meeting we talked about our upbringing, our families, literature, and very little about automation."

• Memorable meetings often involve personal connections and shared backgrounds.

"There's trust and there is a relationship that is based on really liking each other as people and believing in a common dream and then trying to help support each other to get there."

• Trust and personal relationships are essential for successful business partnerships.

• Venture requires focusing on a few big, bold decisions for outsized returns.
• Small activities build up to significant bets over time.

"I wish I knew just how important getting the really big things right would be. Venture is a business of 80 20 outsized returns, so you have to make a few big, big decisions, bold bets."

• Focusing on big, bold decisions is crucial for success in venture capital.

"I wish I really knew the power law and how strongly it existed and to sort of stay focused on that and stay focused and prioritize my time accordingly."

• Understanding the power law and prioritizing time accordingly is essential.

• Exceptional leaders possess unique traits that inspire followership.
• Sustained growth requires recruiting world-class talent and maintaining followership through tough times.

"Most of the exceptional leaders that I've 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."

• Exceptional leaders have unique traits that inspire followership.

"Sustained, durable growth, if you can't recruit world class talent, is very, very hard to sustain."

• Recruiting world-class talent is essential for sustained growth.

• Venture capital is fundamentally a people business.
• Understanding leaders' unique traits and their impact on followership is crucial.

"I think venture is a lot more of a people business than maybe others do. The insights you have about, about leaders, what's different about them, what's unique about them, what would make people want to follow them?"

• Venture capital is deeply rooted in understanding people and leadership traits.