Laela Sturdy: Life Inside Alphabet's $7BN Growth Fund | E1190

1. 0:00 – 6:38

   Intro

   1. LSLaela Sturdy0:00

      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. So, I would let- uh, invest in a non-founder led company. You point out Satya. I know dozens of incredible CEOs that were not founders, and have same but different mix of special sauce that makes them the right person to lead that company, and often to lead the company through different stages.

   2. HSHarry Stebbings0:30

      Ready to go? (instrumental music plays) Layla, I am so excited for this. This is, I can't actually remember the last time we did this, but it was like years and years ago. So first, thank you so much for putting up with me for a second time.

   3. LSLaela Sturdy0:53

      Harry, I'm so happy to be back. It has been too long, but it is great to see you.

   4. HSHarry Stebbings0:57

      Venture is always categorized as this pattern recognition business, and to some extent I agree, and to some extent I wildly disagree. And I'd love to hear your thoughts. How do you think about whether this is a pattern recognition business, versus when it should be disregarded and we should see the Daniel Dynes and go, "You're a slight anomaly." How do you think about that?

   5. LSLaela Sturdy1:18

      Pattern recognition is certainly important in this business, and I think that, um, I look at my own career and, and as I've, uh, been able to see more businesses both as an investor, and then I spent many years as an operator, so I think I developed some of my, uh, deepest pattern recognition, um, from the years that, that I spent operating and building teams. So, I certainly think it is important. Um, and I think to some of my earliest investments, like, uh, um, I led the series B in Gusto. That was one of my first investments more than 10 years ago, and the pattern recognition there was that I had spent, um, well, many years as an operator building SMB businesses, so I knew just how hard it was. I wasn't somebody that you could just give a pitch to about how you could scale this and that because the, the TAM was so large. I knew that the nitty-gritty was in the, um, the operating details of how you scale channels and what the marginal CACs were, and what, uh, (laughs) you know, what, um, the- the devil was in the details. So, I don't know if that's pattern recognition or an insight, um, but I think some of the best investors, that's what they have. They have insights across industries that they bring together to make the right type of bets and lean into the right type of risk. Um, so I- I think of that more as even more important than, than pattern recognition.

   6. HSHarry Stebbings2:36

      Do you think those insights have a shorter life than ever before today given the fast-moving nature of our business? AI has changed so much, but it will continue to change so much, but PLG has changed in many ways. It is moving so much faster than it has ever moved. To what extent does insights decay?

   7. LSLaela Sturdy2:53

      I think insights will always be important, but if you rely entirely on insights, r- l- i- i- entirely on the past predicting the future, you'll never be a great investor. I think it's the combination of insights with an open mind. So, the first time that I invested in, in Stripe back in 2017, it was that same insight around understanding SMB, um, scale, as you know, Stripe's early qu- customers were inception customers. They were startups getting, getting off the ground. Um, and the, the new learning had to be how do you think about w- b- uh, uh, an SMB channel expanding into- to enterprise sales, and what will be different about a developer led sales motion compared to a, you know, specif- uh, c- compared to a, a decision-maker led sales motion, and what would, what would look differently? The AI example that you bring up today, I think we're, we're looking at the same things, which is enterprise AI customers. You're still gonna have... You still, in the existing, um, world, you have companies that are gonna buy software or buy AI, but you may have to think differently about their pace of adoption or the risks to their core business. So, everyone thinks the time is different. This is faster. This is gonna, you know, it's g- and it's gonna break sooner. This is a bigger trend. Which I think to some extent is true, but the core in taking the important insights from the past, taking the important insights across industries, and then be willing to see something new, to me it's that combination that makes the, uh, you know, great investment decision.

   8. HSHarry Stebbings4:24

      When did you rely on the past, and you did rely on it, and it damaged you in doing so?

   9. LSLaela Sturdy4:30

      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. So, I'll give you an example. Again, when, um, uh, first did the Stripe investment, um, or the Credit Karma investment, both of those are examples of companies that have really, really strong core businesses in totally different areas. Um, but they also have compelling stories for all of the additional software and additional products that, um, can come along with it. And those are examples w- uh, of companies where their core businesses were so strong that you didn't even need to see the second and third acts early on in the evolution because, um, you know, the first lesson is, uh, fantastic markets are always way bus- bigger than you expect. But we had many other companies where the core investment, the markets were not as big, and you really did need to see the second or third act, um, uh, transpire in order to make it a great investment. And I really learned that, uh...... that is much harder than it seems to do. And it's- it- it takes much longer. The chance of success once you've seen a large number of growth stage companies, you realize is relatively low. So, the example I can think of is now when I look at a- a- a- an investment, almost always my base case is, I'm only gonna underwrite what exists today. I can get excited about the, um, the possibility of the future and that's built into the upside case, but if there's not evidence of the launch of that product or e- or any sort of insight around consumer buying, real data-driven, then I will- I will not put it in the underwriting base case. And I've missed a few great investments for that. There are a few teams that really can launch products at a speed, um, that is just, the velocity is unmatched in- in the market. They have the right intuition and they really can create multiple product lines and multiple business lines. They are the exception, but using that as an example as a pattern recognition, I can lose my base case on price, um, based on- uh, on, you know, the- the rigidity of that underwriting framework.

   10. HSHarry Stebbings6:37

       Let's dig into

2. 6:38 – 10:43

   Why the Core Offering Matters More Than Ancillary Products

   1. HSHarry Stebbings6:38

      that. "I can lose my base case-"

   2. LSLaela Sturdy6:39

      Yeah.

   3. HSHarry Stebbings6:39

      "... on price." And so you-

   4. LSLaela Sturdy6:41

      Yeah.

   5. HSHarry Stebbings6:41

      ... need to see the- the one core app being the dominant thing and it's great that we have all these other things, but we need the core.

   6. LSLaela Sturdy6:47

      Yeah.

   7. HSHarry Stebbings6:47

      Great. And so you're not willing to pay up as much as other people are who see the ancillary products as an eventual outcome?

   8. LSLaela Sturdy6:54

      Yep. That's exactly right. At- at times. And there's been times that, you know, I have broken that rule, and there are times that great companies show you the evidence of that right away. I'll give you a good example of that. So Whatnot, which is a- a investment that, um, I led a couple of years ago, I'm still on the board there, um, they're in the live, uh, commerce space, and we had been tracking that space for a long time, really believed that there was a huge opportunity in live shopping to, um, not only build a live shopping business in the US, but, um, and globally, but to use live shopping as a wedge to, um, to displace some of these older network effect businesses in, uh, in categories like collectibles where, um, it's really hard to, you know, dislodge the networks in those spaces. So I'd been tracking a bunch of early stage companies in that space, and really believed that the right approach was a multi-category approach. Met with most of the founders and understandably in a network effect business, it makes a lot of sense to start in one category and- and build up the network, and, um, and it's hard to go multi-category at once. Met with several founders who their plan was to go multi-category, met with the Whatnot team, and I met with them within four or five months of their Series A, they were already live in five categories. So y- y- you saw evidence, even if it wasn't, you know, to liquidity yet, or, uh, or, um, you know, didn't have the- the dimensions of a full launch, you saw evidence that they were- they were, um, executing a multi-category strategy. So whenever I'm underwriting, uh, a, uh, a case that involves expansion beyond the core in what y- what you're seeing, I look for any evidence, and I'm creative, it doesn't have to be working yet, it, um, but y- y- you want to see a- you want to see some, um, y- something that's a little bit of an outlier that shows you this team is different, this team can execute multiple things at once or multiple things faster than the average. Because the reality that you see in most- most startups around the second act is that they talk about it in board meetings, have it on their plan for a long time, "Hey, we're going to go international," it's pushed out a bit. "We're going to launch this product," it's pushed out a bit, um, because it's so hard. There are so many things you're doing (laughs) to focus on the core, um, and there's so many things just to, you know, to- to have the opportunity in front of you. But that is a- an example of a bet that more often is wrong, um, w- uh, believing that- that companies can achieve that sort of second act or that expansion, and so I look for any evidence to show that there's an outlier, and at times will- will make the bet without it, um, or at times try to creatively, uh, uh, convince myself through data that there's evidence that this- this company has a chance to do it more than others do.

   9. HSHarry Stebbings9:47

      In general, do companies wait too long and do it too late or do they do it too early and lose focus?

   10. LSLaela Sturdy9:52

       So I'm a growth stage investor, so I would say, um, that probably varies a bit, um, based on time. I would say in the growth stage, more often they wait too long. Particularly as they're, um, ramping up in- in the couple of years prior to IPO, because it's almost always needed, um, for a strong public company to have some sort of diversification, and again, some sort of evidence that you're gonna have durable growth over time, and that usually requires expanding your market in some way or deepening your relationship through additional product offerings with your core customer, and more often than not, all of those founders believe they're- they're a couple years behind where they would like to be in proving to themselves that this story is true and that this is the right investment, and then, you know, proving to public market investors that- that this really are- these really are gonna be durable revenue streams.

3. 10:43 – 19:46

   Do Early Investors Pressure Founders to Expand Too Soon?

   1. LSLaela Sturdy10:43

   2. HSHarry Stebbings10:43

      Do you find early stage investors help in that messaging to founders in terms of the advice they give them? I- I'm on the board today and most of my advice honestly would be contra what we said there, is like focus, make sure we have customers that love us, and only then do we expand, when we have significance, when we have reliability, repeatability, and at scale. And always your core market is so much bigger than you often think. I think HubSpot is a great example of that. Do you think early stage board members make that case more challenging for you, preventing multi-product expansion?

   3. LSLaela Sturdy11:14

      No, I think it's really a timing issue. I- I trust that that is the right advice for- for early stage companies, and I think, um, um, we think the- the best companies we've invested in have followed that advice, and they have stayed extraordinarily focused, they've nailed it in their core market. Um, so this is more really advice for the growth stage companies where, you know, you get to a certain scale, you're at 100, 200 million in revenue, a private company, by that point you're investing a significant amount of capital in operating expenses, in R&D, in sales and marketing across the board. So you're starting to, and you- and you typically have a large team, you have hundreds of people, sometimes more than that. Um, by that point, you're operating with a complexity where you do have the ability to execute against multiple priorities. If you don't, you're- you're- you're probably gonna have more trouble in the longer term. So I think the same advice, uh, holds. You stay focused on your core business, you- you make sure you, um, optimize and some have- have more opportunity, uh, for scale than others. Like again, if we talk about the examples of- of Stripes of the world, they can- their- their- their core business is so, so large that, um, and so, so complex that there's going to be a significant amount of investment in- in that core business for a long period of time, but you also get to the stage where you have the opportunity, um, to invest in adjacent areas and expansion opportunities. And the mistake I typically see companies doing at that stage, the growth stage, is too much, not making concentrated enough bets in the second, third act, and they're not significant enough, they're not focused enough, they're not large enough to really- to- to make a meaningful impact on the core business and to make a- a- a meaningful, um, uh, investment to- to again be large future revenue streams. So I think the actual same advice like holds. You need innovation at that stage, you need focus, you need prioritization, but you have to be able to do it, uh...... within your core as well as the second and third act, and that's what I see as the, you know, like, a, a, a common challenge in growth stage companies.

   4. HSHarry Stebbings13:20

      What was the most prescient failed second act to you and what did you learn from it?

   5. LSLaela Sturdy13:25

      I, I think the common errors are not enough having a ton of success in your core business, which is hard enough, so you get to this point as a startup and a startup founder, you're like, "Wow, we have, we've done the impossible," right? "And we're, we were this scrappy little company and now we're a big, meaningful share gainer in this important market," and they almost make the same mistakes that the incumbents that they beat in their first act are making, don't fully appreciate, um, how hard it is to win share in that adjacent market. They don't, um, they don't think hard enough about, like, right to win. Um, the easy cases are when right to win are, are around sort of you already have the distribution and it's a logical extension, but I think some companies overestimate that. So they, I've seen lots of companies sort of launch second acts in markets where, again, their product isn't, isn't competitive and they can't, um, they can't get the share that, that, um, they expect and that they got in their first, that, that, you know, they got in their first core market. So I think a lot of it is just about the same thing that incumbents tend to do, underestimation, really thinking hard about the right to win and why, um, why their product is differentiated, um, and then focus and resources, so not being focused or, or resourcing the effort well enough to truly win.

   6. HSHarry Stebbings14:43

      You can't blame me for trying. (laughs)

   7. LSLaela Sturdy14:44

      I know. Good try. Good try.

   8. HSHarry Stebbings14:47

      Uh, uh, credit, credit to me. Um-

   9. LSLaela Sturdy14:49

      You're a y- you're, you're like a pro at this these days. I see, you know, all the... Y- you know how to get the squeak in there and get all the questions or the answers that you want.

   10. HSHarry Stebbings14:58

       But you mentioned about 100 million in revenue there. I have Bill Gurley and, uh, Brad Gerstenz saying, "Oh, people should go public at 100 million in revenue and they can," and then everyone else says, "Mm, no you can't really. It's more like four to 500 million." How do you feel about can you go public at 100 million in revenue or is it actually much more?

   11. LSLaela Sturdy15:18

       I think the, the sort of biggest challenge I see in a lot of companies making the transition from private to public is, uh, really around predictability. It's how, they are, they are much more typically, especially in the environment we've been in for the last decade as private tech companies, the rewards have gone to founders that have, that have been ambitious, think big, try to grow as quickly as possible. Obviously we've seen a, a correction and, and a move towards profitability along with growth the last two years, but there's a, um, you know, there's a premium for just y- like, dream big, execute well, and get approximately there. That's different in the public markets. (laughs)

   12. HSHarry Stebbings15:56

       Mm-hmm.

   13. LSLaela Sturdy15:56

       In the public markets, you really need to, um, say what you're gonna do and then do it. And the companies that are rewarded in the public markets are able to tell their story well about why this is a important market, why they're a big and, uh, you know, impressive company, how they're gonna continue to grow, um, how they're gonna deliver profitability and returns to shareholders, and they need to do what they say they're gonna do. Um, and that's a, that's a different discipline. And I believe if you do that, if you tell your story well and you execute how you, how you tell investors and the, and the public markets on how you're gonna invest, you actually have, uh, uh, high degrees of freedom to invest in the things you want to invest in. You, you, um, I think there's a bit of a myth that once you go public, you can't make the investments that you want. Um, I don't believe that's true. I think you can make the investments you want, but you are accountable to delivering those results, and when you don't deliver those results, uh, you go into the penalty box. And the penalty box can be a more constraining, um, place to operate. So I think, um, that's where some of, in my view, sort of the fear and, um, the myths and, and the realities of the public market stories, um, uh, stem from. Um, but I don't actually think it's necessarily a scale thing. I've seen $100 million, uh, revenue companies that are operating with that level of precision, have their story tight, have their execution planned really tight, and would be a good candidate to go public and, and could, could reap a lot of the advantages of, of, you know, that access to capital and some of the other things we talked about. And then I've seen other companies that are above 500 million (laughs) in revenue and, um, are operating without that level of discipline or where it would be quite a hard transition, I think, to, um, to get into that sort of quarterly reporting cadence and they need to make investments, uh, in order to do so.

   14. HSHarry Stebbings17:54

       Cor- uh, I'm gonna make you feel incredibly uncomfortable here, but, uh-

   15. LSLaela Sturdy17:57

       Yes.

   16. HSHarry Stebbings17:57

       ... why not? Uh, f- fuck it. Uh, so, uh, like, you know, Stripe, yeah, like they had this private capital markets means that they didn't need to go public. I don't, uh, you don't need to comment. Um, I, I will, I'll bet a strong bet on them they won't for many years. I don't think John or Patrick want to go public and I don't blame them for not wanting to go public. My question to you is this business has an inflow and an outflow, and the outflow's been turned off. Like, Wiz doesn't sell to Google. Uh, again, you're not commenting obviously. Uh, but it's like of course it would get blocked. So of course they say no. But then do you want to wait for an IPO? Like 18 months, like you lock up, you get shit from public markets investors. How do we solve the problem of liquidity Layla?

   17. LSLaela Sturdy18:39

       So first of all, I think that, um, the IPO markets will open back up and, um-

   18. HSHarry Stebbings18:46

       When? When? When?

   19. LSLaela Sturdy18:47

       Um, oof, gosh. We don't I, eh, like who knows that. Um, but I think they will open back up and, um, when they open back up, I think you're gonna see a ton of great companies go public. And I think, you know, you asked a question about M&A. I think, you know, at CapitalG at least what, what we're, what we're focused on when we make growth stage investments is we really believe in founders and companies being able to control their own destinies. So we look at opportunities and say, "Could this be a standalone public company?" Des- and we would never underwrite something dependent on M&A. Um, although as you say, like, M&A historically in tech has been a wonderful exit, um, for a lot of investors and a great, um, a great place to land for companies and founders. Multiple paths are always great when you're leading any organization to consider them. But we're always looking for, for the standalone, control your own destiny, and, um, in almost all cases that means being a public company at some time. Um, and, and you know, that's what we look for.

4. 19:46 – 28:55

   Can a Non-Founder Led Company Still Be a Good Investment?

   1. LSLaela Sturdy19:46

   2. HSHarry Stebbings19:46

      You know, we had Dalian on the show and he said about-... the best companies are always found by, like, companies very, you know, kind of, seriously. And I said, well, you know, Satya Nadella and I push back in that way in the great leadership that Microsoft had under Satya. I'm intrigued, would you invest in ever a non-founder-led company, and given the founder-led focus, is early stage really that different to growth stage?

   3. LSLaela Sturdy20:08

      So, I would let, uh, invest in a, a non-founder-led company. You point out Satya, um, I know, um, you know, dozens of incredible CEOs that were not founders and have that, have same but different mix of special sauce that makes them the right person to lead that company and often to lead the company through different stages. Some founders only want to do the early stage nature of the companies and their, and their genius really is in the more entrepreneurial pursuits, and they want to bring in a partner that has more strengths in scaling or large company building. Um, and I think you get a different set of trade-offs for that. I think there are examples that we could point to in so many different areas where, where both can be true. But you often, uh, you know, there are real trade-offs and, um, I think we try to support founders to scale into the best CEOs that they can be as their company scales for as long as they want to. And, um, you know, believe and have seen it been extraordinary successful bunch of, across a bunch of companies.

   4. HSHarry Stebbings21:10

      When they don't scale, why don't they scale?

   5. LSLaela Sturdy21:12

      You know, a wide variety of reasons. I think, um, sometimes it just comes down to... I'm a big believer that you have to really love and want to be doing what you're doing to, to, to be the best in your field. And I think sometimes it's just a match for personal passions and, and, um, some people just like to build zero to one more than they want to build one to a hundred. Um, they like or dislike, uh, the people management and the team complexity side of things. And then time, uh, then I think there are just some attributes around running a larger, uh, scaled company that are important, some operational skills, it's a better match to bring someone else in. But I think typically, and almost always we've seen in our portfolio that even when a founder doesn't have those skills, he or she has extraordinary talent. Again, that, and passion and drive that got them to that point and they can hire in the right executive team to build out. The team needs those skills. No one person ever needs a particular experience set or particular skills. That's why company building is a team sport. It's not an individual sport.

   6. HSHarry Stebbings22:19

      Do you think so? 'Cause we had on Matt Clifford from EF on the show, who's at Entrepreneur First, it's the second largest, I guess, incubator compared to Y Combinator, and he said that for founding teams what matters most from 10 years of people evaluation is actually the spikiest skill of one founder, not the balance of the team. That is the single biggest determinant.

   7. LSLaela Sturdy22:40

      I would say there's a difference for the zero to one versus the scaling a company on that particular insight. So I- I could see how that is stronger, um, when you really just need to get to product market fit. There's something that... And I do think outsized genius in that area... And I'm a big believer in spikiness. I mean, that's one of my core investment theses is always look for outlier metrics in, look for outlier personality traits in a founder. Um, I believe that outlier data is really important to pay attention to and that we'll end up having, um, outsized impact and returns. So I... There's a large part of that I agree with. But I think as you scale, um, to a larger company, l- you know, huge scale, customer base, complexity of products, complexity of size of organization, it absolutely is a team sport. You can no longer just rely on one... Uh, that, that one outlier or that extreme outlier, um, uh, advantages or skills or gifts that that founder has, sure, those con- continue to contribute in an outsized way to, um, uh, to the company's success. But it will never be enough, uh, alone to compete on a field where you're playing against other teams. You're not playing, aga- you're not playing a one-on-one game. So I think that just a transition that, that companies have to make as they go from success early product market fit to real significance and large scale impact.

   8. HSHarry Stebbings24:13

      What happens to the generation of companies now that is between 30 and 100 million in revenue, but they're growing like 15 to 30%, maybe 40%, what happens to them?

   9. LSLaela Sturdy24:25

      I think that's gonna be a very interesting, uh, investment opportunity and a, and a good question. I mean, I do think that there are, um... That, that group of companies probably are operating in smaller markets than maybe everyone anticipated when they started the company. And, uh, and as they've, uh, they've grown if you see, you know, companies growing at that rate, um, at that scale, it's usually either a, a signal that the market size is, is not gonna be big enough to build a $500 million, billion business or there could be some element of, um, their growth. It could be a vertical marketplace or s- or a vertical software company where, um, you know, th- they, it's a slower growth, but as you add the R&D capabilities you can, you know, increase share of wallet and add product modules. So you can see some companies that w- you know, when they reach 100 million in scale they continue to compound at 15 or 20%, but most of the time you see a decay curve. So most of the time (laughs) if you're growing 15, 20%, you'll, you'll see that decay to single digits. Um, and I do think for those companies it's going to be hard to remain independent. I do think many of them that I see in the market are, are trying to first, uh, figure out how to be sustainable. So figure out at that scale, uh-... can they reach profitability or, you know, single digits profitability. Um, but that's obviously going to be a- a tough, uh, tough public market case, a tough case to sort of return invested capital. So, I think there's a lot of creative conversations happening about that set of companies. Um, can they be combined into a bigger entity and try and figure out scale? Is there a model where they could be much more profitable? 'Cause if you're at 100 million but you can get to, you know, 20, 30% EBITDA margins then- then, uh, eh, you know, that's a whole different financial profile. So, I think that- the- that- that's going to be a really important question and there are dozens and dozens of companies in that category that are- have been well-funded. Some of them still have a significant amount of capital on their balance sheets, so they're trying to figure out if they can invest to try to re-accelerate growth. And I think you'll see a range of outcomes, um, and there'll be some, you know- you know, some good investment opportunities in that.

   10. HSHarry Stebbings26:42

       Do you have the financial freedom to do roll-up plays? Like, I- i- are you structured in a way where you could actually kind of cross PE as well? Everyone is talking about roll-ups today, especially if you are in beauty spas or vet services, by the way. That's the hottest. But, like, is that something you could do in the structure?

   11. LSLaela Sturdy26:58

       So, in the context of working with a private equity partner, if they were to do a roll-up or- or invest in more traditional profitable assets that, um, either trade from the public markets to the private or have been private the entire time, then we're very open to- to partnering with those companies and we'll write a- you know, a- we typically write a $100, $150 million check into a larger buyout that those firms are doing. And- and we have had a lot of success with those partnerships. So we do it in that capacity. We wouldn't, um- um, eh, we haven't, I should say, e- e- never say never, but we haven't, um, done a roll-up on our own- own accord, uh, so far in our history.

   12. HSHarry Stebbings27:38

       You're like, "Jesus, Harry, I remember years ago these were softball interviews. What the fuck happened to your show?" Uh, I don't know.

   13. LSLaela Sturdy27:45

       Yeah, you're doing good, Harry. I like it. (laughs)

   14. HSHarry Stebbings27:49

       I- I- I told you. (laughs) It's- i- it's age. I had Sam on from Greylock-

   15. LSLaela Sturdy27:53

       Yeah.

   16. HSHarry Stebbings27:53

       ... and he was like, "You know, series B and C, these vintages won't make money."

   17. LSLaela Sturdy27:59

       Mm-hmm.

   18. HSHarry Stebbings27:59

       Um, and you were seeing Pat Grady move earlier, do Harvey at seed.

   19. LSLaela Sturdy28:04

       Sure.

   20. HSHarry Stebbings28:04

       Which looks like a pretty impressive investment, to be honest. How do you think about that when you hear series B and C entry prices being where they are, often 400 to a billion, it's gonna be a tough time?

   21. LSLaela Sturdy28:17

       So, first of all, I never listen to the summaries of the market from, uh, any, uh, industry insiders or at any of the other firms as a... 'Cause I've never found generalizations to be- to be great. And we have always found great companies to back during every single point of all of the cycles. Some points it's been harder or easier, but, um, there are always great companies to be bought and invested in at fair prices. You don't always know they're fair at the time, but, uh, when you look back if you- and if you made the call right, uh, they- they- they're very fair.

5. 28:55 – 31:42

   Which Price Seemed Unfair at First but Now Looks Justified?

   1. LSLaela Sturdy28:55

   2. HSHarry Stebbings28:55

      Which price when you paid my felt most unfair, but now looks most fair?

   3. LSLaela Sturdy28:59

      I mean, the way that you think of fair in- in growth, I mean, it's a funny word so I'll define it a bit, is, um, you know, you look at valuation multiples and you take a set of comps and you have f- uh, you know, uh, obviously public market comps and then you have all the private market comps. So there- there are stages of the market that the multiples that you're paying are extraordinarily high and they don't make sense from historical averages and they don't make sense, you know, sometimes compared to the public markets depending on the cycle. Um, so it's all... That- that's probably the- the most objective way to define fair, is just how does the multiple vary, um, based on, um, uh, you know, based on comps? But the part of the equation that's hard to figure out is the- the part that you have to analyze as an investor is, what do you believe the future growth prospects of this company are? And if you're more bullish that it can grow faster or better or different than other companies in the comp set, then you are in fact paying a fair price. So, you know, we- we can pick the big winners, like e- I'll go with Stripe, um, you know, 2017, um, 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 that actually the valuation multiple that we were paying into was more than fair, uh, because they would compound in such a large market and expand into, you know, other adjacent markets and could be a much, much bigger company than- um, than perhaps e- eh, you know, e- eh, you imagined at that time. So that's the part that is the judgment part of this. And of course the- the- the risky thing in venture is that, um, it's easy to assume that all of these companies are- are special flowers that will compound at extraordinarily high rates, uh, deep into the future, and of course most of them don't. Um, so those in retrospect end up looking, uh, like less good valuations if you paid up for future growth. But there will always be the outliers that it- y- you couldn't imagine that they would grow as robustly and as well as they've done, and, you know, our job is trying to pick- to pick those. And then our other job that I would say is it's been interesting to me, uh, you know, sort of seeing how different parts of the industry go risk on and risk off, but I would say, um, you know, 2023 for us was- was, uh, a- as an example, was a great year. We did, uh, I think a lot of, um, really great investments and when a lot of the market was- was pulled back, um, you're starting to see people lean in more now, um, but I think there are a lot of great- great investments across all the stages. We've gone earlier as well, especially in- in, um, industries like AI, but we're, uh, we're seeing opportunities across

6. 31:42 – 36:00

   Is Growth Really Dead, or Is There Still Opportunity?

   1. LSLaela Sturdy31:42

      the board.

   2. HSHarry Stebbings31:42

      Are people really leaning in more now? Like, it feels like seed never adjusted. Seed pricing never adjusted, volume maybe adjusted a little bit, but pricing definitely didn't adjust. But everyone is in unison that growth is dead, which is a bit of a morbid statement, obviously. Do you disagree and do you say that growth isn't dead at all?

   3. LSLaela Sturdy32:00

      Yeah, I don't think growth is dead. I think i- it depends how you define, um, uh...

   4. HSHarry Stebbings32:05

      ... volume in activity.

   5. LSLaela Sturdy32:07

      Yeah. I mean, volume in activity-

   6. HSHarry Stebbings32:08

      Is that hard?

   7. LSLaela Sturdy32:08

      ... is definitely down from the peak 2020, 21, for sure, if you exclude the AI deals that if you add in (laughs) AI deals, the num- the, the volume and, uh, dollar amount actually, uh, looks quite high. Um, so d- definitely volume is down. But that is different from being dead. Um, I think there are still, um, you know, I started investing in 2014, 2015, like you see, um, th- there, there are activity levels where there are, where there are great companies that are growing quickly and opportunities to, to invest, and then there's the later stage, and that's early growth, the later stage of sort of pre-IPO companies where, um, I think you're starting to see some interesting rounds where, um, they're not going public because of, you know, the, the macro reasons we've talked about, but, uh, they want to raise a little bit of primary capital and some early stage investors want to sell some secondary capital, and those companies are being priced, um, in line with public comps, so there are some, I think, good investment opportunities in what we believe are gonna be, you know, franchise-type, um, companies in large markets. So you maybe have to work a little harder than the, some of the heydays of when we're at, uh, uh, peak market (laughs) opportunity, but, um, or peak market activity, uh, but I think that there are many great investments to be, to be made, and, um, you know, people that, that operate counter to the generally accepted views in the market are probably gonna be the ones that have the most out-sized returns.

   8. HSHarry Stebbings33:39

      I remember at peak, one of my portfolio companies was doing like half a million in ARR, and one of the best firms in the world did them at 700 million post. I called up the founder and I was like, "Wow, at 1,200 X ARR, welcome, welcome to a new record club, baby. That's impressive." (laughs)

   9. LSLaela Sturdy33:57

      Yeah.

   10. HSHarry Stebbings33:57

       Uh, so that was bad. What happens to all those companies that got a shitload of cash and are like, "Nah?"

   11. LSLaela Sturdy34:06

       They're trying to figure it out. I think the hardest first reality check is to, uh, to, to figure out if they ca- those companies can recruit a team and retain a team that still believes in the dream and going and, you know, are they able to execute and are they able to grow? Like, obviously, their valuations, many of them are gonna be way off what would, what the valuations would be if they were marked in this current cycle, um, and those that have the ability to grow into the valuation and are continuing to execute both from a financial performance and then y- you can feel it and, and, and when you talk to employees and when you talk to the leadership team and you can really, uh, in my opinion, feel whether the belief is still there and the excitement is still there and the momentum is still there to build something big, and they're eager and many of them already have caught up to their valuations at, at peak amounts, um, and then you see the other set of companies where they raised way above what arguably you could say the company, uh, should have been valued at, and when they lose momentum and are not executing, it's, uh, it can be a double whammy in terms of recruiting and retention, and I think those companies are either gonna have to, again, uh, figure out, uh, w- what an opportunity is to combined with other businesses, uh, or how else they're gonna restart, refresh, whether it is a down round to get the right sort of equity investment, eh, for, mostly, again, for their employees 'cause you need people around the table that believe. Like, y- uh, you know, like, building startups is so hard, um, it's such a, takes so much longer, uh, and so much more emotional and other energy than, um, I think anybody expects when they're, when they're starting a company, and certainly even when you expect just being a board member, a partner, or advisor to a CEO, it's, it's really in it for the long haul, and so I think, um, always having that belief

7. 36:00 – 38:50

   Were Laela’s Best Deals Obvious from the Start?

   1. LSLaela Sturdy36:00

      is critical.

   2. HSHarry Stebbings36:00

      Were your best deals obvious?

   3. LSLaela Sturdy36:02

      They never felt obvious. I tell this to my young, (laughs) the, the younger members of my team starting out, I'm like, "If you feel nervous and, like, you're advocating for something so hard and others are telling you no, and y- you know, to the point that it almost makes you doubt it yourself, you're exactly where you should be. You're exactly where you should be." (laughs)

   4. HSHarry Stebbings36:22

      I'm like, Stripe feels obvious. Like, the best cap table, very clearly generational defining founders. That feels obvious at the D.

   5. LSLaela Sturdy36:30

      Well, let me tell you-

   6. HSHarry Stebbings36:31

      Mm.

   7. LSLaela Sturdy36:31

      ... when I did that deal, I remember talking to lots of other investors and the pushback would be, "It's in a commodity market, it's valued too high, there's not real differentiation." So it's always easy to look, and I, of course, believe the opposite, and, and did, you know, talked to dozens of customers, more ex- and spent a ton, ton of time with the team, really understood the cohorts and why this was a differentiated go-to-market strategy that they have, so I believe something very differently, but I won't call out names of many smart investors that, that sort of believed the obvious. Or believed the opposite. Um, UiPath, when, uh, you know, made that investment in the series B, the numbers were extraordinary, but the pushback was, "This company's been around for 10 years, based in Romania, like, why is it all of a sudden exploding now?" And, um, all the risks that people feel around category creation, like, really is RPA going to be that big of a market or are they going to putter out? So I think there's, um, any good investment has, you know, the counterpoint and the part that is less obvious, uh, and I think the job of us, especially as growth stage investors, it's not just to get conviction in the thesis, but it's to get conviction in the thesis at that price, which does require, for the best companies, because the more obvious it is, the higher the price you're paying. So you, you have to find deep conviction regardless.

   8. HSHarry Stebbings37:56

      Leyla, what do you need to underwrite?

   9. LSLaela Sturdy37:58

      So we, we underwrite, um, three to five X returns, money on money returns, um, and, you know, depending on the stage.

   10. HSHarry Stebbings38:05

       Okay. D- do you-

   11. LSLaela Sturdy38:06

       So if it's really early, it will be 10 X, but the core of what we do in growth is three to five X money on money returns.

   12. HSHarry Stebbings38:12

       You ha- you have one LP. Do you give a shit how long that takes?

   13. LSLaela Sturdy38:15

       Yeah, we do, of course. We- we, uh-

   14. HSHarry Stebbings38:18

       But you don't- you don't- but you don't have the liquidity pressures of having 30 different institutions going, "Where's my money?" And so how-

   15. LSLaela Sturdy38:24

       No, and that's a huge advantage for us because it means-

   16. HSHarry Stebbings38:28

       Yeah.

   17. LSLaela Sturdy38:28

       ... that we can invest and hold over the long term and w- why we're so obsessed with finding generational companies that will compound over the long term, because that creates incredible money on money and incredible IRR returns without having a false, um, reason to have to sell companies that we really want to own.

8. 38:50 – 43:35

   Should Private Investors Keep Public Stock for Asymmetric Info?

   1. HSHarry Stebbings38:50

      "I hold all my companies that go public because I have asymmetric information, and I should hold those positions, not my LPs." Do you agree with that statement or do you disagree that actually just because you're a private investor, you have asymmetric information and you should hold the public stock?

   2. LSLaela Sturdy39:11

      You know, LPs have a lot of different incentives that- that they're managing and they have- uh, they have, you know, full-time investment professionals, many of them managing their public positions. And public investors tend to have different access to data and insights and decision-making that help them decide when is the right time to hold and sell in the broader context of their portfolio. So I could see the case why that could be more important than an early stage investor who has, uh, you know, information from when the company was private that they think is going to, you know, inform the right decision to buy or hold, uh, when a lot of other things are going on in the public markets. So I've been surprised by some... Not you, Harry, 'cause you're- you're- you're particularly talented, but there's a lot of private sta- private, um, early stage investors that don't understand a lot of the dynamics of public markets and valuations and pricing and how- um, and- and portfolio management at that scale. So it's not just about understanding the ins and outs of the company, it's understanding a lot more- um, you know, have a lot more context into that decision-making.

   3. HSHarry Stebbings40:17

      I think we grossly overestimate our own knowledge of companies-

   4. LSLaela Sturdy40:21

      Yeah. (laughs)

   5. HSHarry Stebbings40:21

      ... and th- the conditions matter a lot. You have short sellers, you have activist hedge funds, you have a huge amount of variables that are not present in private markets. And it's like saying, "I'm a great tennis player on clay." Great.

   6. LSLaela Sturdy40:34

      Yeah.

   7. HSHarry Stebbings40:34

      But actually if you play on a grass court in the rain, it's a different fucking deal. (laughs)

   8. LSLaela Sturdy40:41

      Totally agree.

   9. HSHarry Stebbings40:43

      So I think that's not said enough.

   10. LSLaela Sturdy40:46

       Yeah.

   11. HSHarry Stebbings40:46

       So, yes. Okay. So liquidity does matter, but you can hold-

   12. LSLaela Sturdy40:51

       Yes.

   13. HSHarry Stebbings40:51

       ... for a long time. So what have been your biggest lessons on when to sell? You very kindly said I was very talented. Uh, no, Layla, I fucked up-

   14. LSLaela Sturdy40:58

       Yeah.

   15. HSHarry Stebbings40:58

       ... mega, mega-

   16. LSLaela Sturdy41:00

       Oh, man. Yeah.

   17. HSHarry Stebbings41:00

       ... on- on not selling- not selling companies that I should've sold.

   18. LSLaela Sturdy41:04

       That's the fun part about our job, Harry, is we got mistakes on the entry, mistakes on the exit, which keeps it interesting and wins on both sides, right? So I think it's, uh- um, it- it's humbling to know when to sell, right? Because you have, as you said, your, um, own conviction on... Which translates by the time this company is- is public, um, your conviction should show up in the financials that you're willing to underwrite. So again, we're growth stage investors. We're investing $50 to $200 million in these companies, so we put a- uh, these are big bets where we have a significant amount of resources on our team to really understand, um, the customers, the company performance, the financial model that we're willing to underwrite. So it first starts with what are you willing to underwrite and how much conviction do you have in that? And then the decision to sell is also, of course, um, impacted by, uh, the- um, I mean, I saw a chart last week that was showing sort of exits in the- the- you know, the- the last five to seven years and showing just how much of it came from multiple expansion, right? So meaning, um, just how much of the returns in the private equity landscape came from exits, companies trading at multiples higher than historical averages, which of course we all know for anyone that exited in- in, um, 2021 as an example, you were... If you exited there at all, it wasn't just company performance, you were exiting, for almost every company, um, trading at, uh, a significantly higher than historical averages. So there's an element of timing as well, that you're underwriting the financial performance and then you have to be prudent when you're managing, um, positions to think about the macro environment and to de-risk in some cases or lean into the risk of your overall portfolio.

   19. HSHarry Stebbings42:51

       What's the biggest-

   20. LSLaela Sturdy42:51

       Um, and, uh, you know, I don't think, uh, i- i- if you're talking to an LP, whether it's one or multiple and you had a large portfolio and you didn't deliver any DPI during sort of 2021, you might have some questions. (laughs) So I think it's always a balance of, uh, of, um, uh, you know, how- how you do it. But we look at holding positions as continuing to buy into the thesis, and we love continuing to buy into the thesis of our very best companies.

   21. HSHarry Stebbings43:22

       What's the largest position you have?

   22. LSLaela Sturdy43:24

       We're not going to go into specifics on any positions. So- but we're managing-

   23. HSHarry Stebbings43:28

       What's the biggest-

   24. LSLaela Sturdy43:28

       ... 7 billion, um, uh, is our AUM, um, Capital G right now.

   25. HSHarry Stebbings43:33

       What's the biggest-

9. 43:35 – 45:30

   The Biggest Mistake on Entry?

   1. HSHarry Stebbings43:35

      Y- you said about mistakes on entry and exit.

   2. LSLaela Sturdy43:37

      Mm-hmm.

   3. HSHarry Stebbings43:37

      My biggest mistake on entry was thinking emerging markets was a good idea and investing in Pakistan. What was your biggest mistake on entry and what did you learn?

   4. LSLaela Sturdy43:45

      We had some- Uh, uh, the global markets you bring up a- you know, a very, uh, I think important point. We've started- uh, we started Capital G from the beginning as a global firm, um, global investment mandate, but I would say we've also made mistakes in entering markets where we didn't have, um, uh, you know, a robust set of history or, uh, local resources on the ground, particularly those that were serving more local markets where, um, there were, uh, more surprises.... um, and that has been, uh, you know, some, certainly some hard-learned lessons along the way.

   5. HSHarry Stebbings44:20

      What did we get wrong there? There weren't people on the ground?

   6. LSLaela Sturdy44:23

      In a lot of places, the, the way companies scale are quite different. So I'll use India as an example. I mean, you know, you looked at, at the typical size and number of employees of, um, an Indian tech company and it was significantly higher than a lot of the US counterparts. Just the operational complexity of running those types of, uh, of markets. Really understand... Or those types of businesses. Really understanding the consumer landscape and GDP per capita. All of those purchase behaviors and getting market timing right, and getting the overall business models right, I think have been... Um, they're just harder bets, um, and, um, require sort of a different understanding of the risks you're getting into. And I would argue in some of those markets during the, the peaky bubble, um, points in the global tech markets that that risk wasn't necessarily priced in on the valuations. So I think you found, um, in some of the cases at least on a deal-by-deal basis that we made, I think there were more mistakes there than areas where we really understood the industry, the locale, the market.

   7. HSHarry Stebbings45:27

      The risk was definitely not priced in. Okay.

10. 45:30 – 46:12

    Do the Best Founders Really Need VC Help?

    1. HSHarry Stebbings45:30

       But you mentioned the feet on the ground and it just makes me-

    2. LSLaela Sturdy45:32

       Yeah.

    3. HSHarry Stebbings45:32

       ... think about venture value add. You know, Brian Singerman, Founders Fund, very clearly have the thesis that the best founders do not need your help. Do you agree? The best founders don't need the VC's help.

    4. LSLaela Sturdy45:42

       The best people in the world can always benefit from having help, right? I think that, um, the, the best founders will only be better if they have a really strong board, as an example. Or they'll only be better if they have a strong set of advisors, friends, colleagues that they can go to, um, to help answer qui- questions quickly, to provide additional resources, to be a sounding board. And we are here to support and be as great of a

11. 46:12 – 46:33

    Best Board Member Laela Has Worked With?

    1. LSLaela Sturdy46:12

       partner as we can.

    2. HSHarry Stebbings46:12

       Who is the best board member you sit on a board with?

    3. LSLaela Sturdy46:15

       I've sat with lots of great board members. I love Rich Huang at Accel. He and I have been, um, really-

    4. HSHarry Stebbings46:20

       Wh- why is Rich so good?

    5. LSLaela Sturdy46:22

       Um, 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. He's a really insightful and good person.

    6. HSHarry Stebbings46:32

       I'm gonna

12. 46:33 – 56:27

    Quick-Fire Round

    1. HSHarry Stebbings46:33

       do a quick fire. So I say a short statement-

    2. LSLaela Sturdy46:35

       Yeah.

    3. HSHarry Stebbings46:35

       ... you give me your immediate thoughts. Does that sound okay?

    4. LSLaela Sturdy46:37

       Great.

    5. HSHarry Stebbings46:38

       What do you believe that most around you disbelieve?

    6. LSLaela Sturdy46:40

       Things that irritate you in others, uh, are probably things that you have in yourself.

    7. HSHarry Stebbings46:46

       What irritates you?

    8. LSLaela Sturdy46:47

       (laughs) Um, what irritates me? Entitlement. So I guess I need to look at that, Harry. (laughs)

    9. HSHarry Stebbings46:57

       Do you think many are entitled there?

    10. LSLaela Sturdy46:59

        (laughs) Well, your quick fire's changed. Um, I think enti-

    11. HSHarry Stebbings47:03

        Um, we have a quick fire s-

    12. LSLaela Sturdy47:03

        ... I think we're all entitled-

    13. HSHarry Stebbings47:04

        ... tria.

    14. LSLaela Sturdy47:04

        I think, uh, we're all entitled in different ways. Yeah. So-

    15. HSHarry Stebbings47:08

        No. I think we have, like, a generation of incredibly entitled people.

    16. LSLaela Sturdy47:11

        Yes.

    17. HSHarry Stebbings47:11

        Like, it amazes me that I've been able to get so far with such low IQ, and just hard work. (laughs) Like that is-

    18. LSLaela Sturdy47:19

        I would challenge-

    19. HSHarry Stebbings47:19

        ... incredible.

    20. LSLaela Sturdy47:19

        ... that statement, Harry. But I-

    21. HSHarry Stebbings47:20

        So-

    22. LSLaela Sturdy47:20

        ... I would, I would plus one on how far you can get being humble and scrappy and hardworking.

    23. HSHarry Stebbings47:27

        Which venture investor do you most respect and learn from outside Capital G? Can't be Rich Huang, 'cause you said it.

    24. LSLaela Sturdy47:34

        I think what Elad Gil has done in the AI space has been really extraordinary.

    25. HSHarry Stebbings47:39

        Mm-hmm.

    26. LSLaela Sturdy47:39

        So I've enjoyed, I always enjoy chatting with him, and, and respect him a lot.

    27. HSHarry Stebbings47:43

        Can you do AI growth today and make money? It is a place where corporates invest and they are irrational financial investors. NVIDIA, Amazon, you name it. They do not have the same objectives that us investors do, and so it's a different game. Can you make money doing growth AI?

    28. LSLaela Sturdy48:03

        So 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. That being said, the market changes rapidly, so I think there are a really exciting set of, um... I was just looking at our pipeline, actually yesterday afternoon, of growth stage AI investments, and they are scaling at extraordinary rates. There's really interesting technical differentiation, founding teams. So I'm excited about the look forward of, uh, investible opportunities in AI, and things change rapidly, so who knows what the strategics or other capital sources will do. So we're always focused on building relationships and tracking the very best companies, and confident that when, when the valuation is right, we will get in there. But I do agree with you that the, that the previous 18 months, um, that, uh, the AMR, the AI market has been robust and not always, um, uh, easy to understand the sort of financial return.

    29. HSHarry Stebbings49:06

        I'm sorry for the base question. Google Ventures does series B, and so does Capital G. Do you compete?

    30. LSLaela Sturdy49:13

        So we, um, we're primarily focused on growth. There are times we go earlier, um, and, you know, there are times that they go a bit later. Um, when that happens, uh, we will collaborate. We'll work together, which we've done in many great companies, but, um, most of the time, we're, you know, focused in different areas.

Episode duration: 56:27