Derek Zanutto General Partner CapitalG where he focuses on investments in enterprise software. Derek has led a number of investments at CapitalG, including Armis, Collibra and Dataiku, and he serves on multiple boards of directors. Prior to joining CapitalG, Derek helped lead technology investments for 10 years at TPG, Hellman & Friedman and GIC, including investments in Uber, Airbnb, Lynda.com and CAA. Derek started his career at Morgan Stanley. Derek holds an AB from Harvard College and an MBA with High Distinction from the Harvard Business School where he graduated as a Baker Scholar.
Derek Zanutto is General Partner CapitalG where he focuses on investments in enterprise software. Derek has led a number of investments at CapitalG, including Armis, Collibra and Dataiku, and he serves on multiple boards of directors. Prior to joining CapitalG, Derek helped lead technology investments for 10 years at TPG, Hellman & Friedman and GIC, including investments in Uber, Airbnb, Lynda.com and CAA. Derek started his career at Morgan Stanley. Derek holds an AB from Harvard College and an MBA with High Distinction from the Harvard Business School where he graduated as a Baker Scholar.
PEMO: Derek. Thanks so much for joining us today. I was wondering if you could tell me a little bit about what you guys do at capital G, what sort of investments you like to look at?
DEREK: Absolutely, absolutely. And thank you for, uh, for making time today. That was great to connect. So, so capital G you know, we’re, Alphabet’s independent growth fund. Um, and our mandate is to go invest in companies that have established product market fit and are ready to scale. And we provide, you know, both in house and alphabet Y expertise to help those companies and those entrepreneurs achieve their growth potential. Um, to date, as an example, we’ve leveraged over 2000 Googlers over the past few years to help provide support to our portfolio companies. Um, over that time, we’ve deployed over $2 billion into businesses and currently have a, roughly 35 active portfolio companies, um, in our, in our, um, portfolio. Um, and our mandate is, and our strategy really is to be pretty selective with where we invest our time and resources. So for us in any given year, kind of finding four to five new companies to invest in is a good year.
DEREK: And we do that deliberately so that we can have a very concentrated portfolio where every investment matters to us. And we can have enough bandwidth across the team to really lean in with sort of the spoke engagements to really find the right resources within alphabet and Google to help our entrepreneurs and executive teams scale their businesses, um, in terms of what that means from a focus perspective. Um, we, we, we spend our time both covering enterprise security, um, and enterprise software, and then also more consumer companies. So both B2B NBDC, um, efforts, um, within the BDC side, we’ve been big investors in companies like Airbnb, convoy, credit karma, um, Duolingo Glassdoor and others, many others. Um, and on the B2B side, you know, big investors and early backers of companies like CrowdStrike, Looker, uh, Stripe UI path, as you scaler among others.
PEMO: I understand that you’ve been really successful in a lot of your investments. What’s the secret of your success as an investor,
DEREK: You know, uh, and yeah, it’s, uh, you know, in investing is a super tough and humbling business. Um, I, uh, I think there is a lot of incredible investors out there that I personally learned from, and that I look up to as mentors in my career. And I think, you know, the, the, in my view investing is, is obviously part art, part science. Um, and it’s a lot about pattern recognition and being willing to be an active learner, um, throughout your career. You’re never, you’re never done learning about a new category, a new company, a new trend, a new theme. And so from my perspective, the coolest part about being an investor is that you get paid effectively to learn something new every day, um, in a really dynamic environment. Um, and you get to you not only kind of make, um, hypotheses about the future state of the world, but then also get, uh, invest capital behind those hypotheses and then help the people who are actually, you know, the entrepreneurs out there and their teams are actually out there building companies and changing society and changing the way business gets done.
DEREK: You gotta be, you know, their partners in their journey and try to help them along the way with resources, your own network, um, that you can bring to bear as a, as they look to build a businesses and, and change, um, you know, the technological landscape. So I think that’s, it’s super rewarding, um, to, to in the central privilege to be a part of that, um, that, uh, that process. And it’s something that I think is a, it’s a, it’s a really intellectually challenging and really humbling experience at the same time. Cause there’s obviously, um, there’s a lot that can go wrong along the way, but, um, I think if you, if you find the right partners and the right network, um, within the investing community and with the, you know, entrepreneurs that you’re doing business with, um, you know, every, every company has its ups and downs, but over the long period of time, if you’re able to be there, be active, be are true partner to them and collaborator, um, it’s, it’s a longterm business and it’s something that can be incredibly rewarding. And, um, uh, I’ve been very blessed, uh, today
PEMO: It’s like changing the world really, isn’t it. Um, so tell me how you coping during the crisis. Um, are you still investing and how are you handling your portfolio current portfolio companies?
DEREK: It’s a good question. And it’s funny, it’s a certainly, I think top of mind for, uh, most of the investors in an executive, I spent a time with every day sort of, you know, what now do we do in this crisis? How are we changing our day to day and what should we be doing? And over the coming quarters and years, as a result of COVID, I’d say for, you know, for me and for us as a fund and capital G, we are, um, first and foremost, I was spending a bunch of time with our portfolio companies to support, you know, there are CEOs and executive teams as they navigate the current environment. Um, clearly very impressive dented times for everybody. We’re all, um, active learners in this, in this market environment, trying to figure out the right path forward. Um, and we’re really kind of leaning in there and trying to be a resource to our executive teams as they think through, um, how do they adjust either product strategies?
DEREK: How do they adjust kind of the go to market channels they’ve been leveraging historically and what needs to happen now that we’re in a, you know, remote work from home environment, what, what tools and resources can they leverage from us, a capital G and with Google more broadly as they kind of adapt to the new market reality from go to market perspective. Um, and then a lot of time, obviously seeing kind of the, uh, the financial aspects of the business and funding perspective, how do they think about budgets, cost structures, um, customer success and support in current market environment. And so those are the types of conversations that we’ll have every day with our portfolio companies and the teams at these businesses as they kind of navigate this challenging time. And I’d say, you know, one of the benefits of being a part of a platform with many portfolio companies is that you get to crosspollinate the learnings from one company to another and understanding, Hey, you may be facing this challenge in as an example, I’ll give you example, um, you know, uh, some of our software companies historically have gotten, you know, 30, 40% of their highly qualified leads from in person events and conferences.
DEREK: Um, obviously with COVID, uh, that that channel is dried up and, and used to move entirely online. And so companies are starting to learn how to do things in a digital format to generate leads and refill that pipeline. Um, and so that process, it, you know, has had to happen quite rapidly as we’ve all transitioned to a remote environment. And so the real time learnings we can take from our portfolio companies is they’re experimenting with new ways to generate leads top of funnel through these new digital events, and then understanding as they get those leads, how will they actually convert into sales down the road? Those data points are real time. They’re new, there’s not a great historical data set. You can look at to see how will this fall, because we’re in such times at the moment. And so being in a position where we can kind of understand trends across portfolio companies and share learnings and advice, you know, in a generalized fashion with our entrepreneurs and their CMOs, I think is really invaluable.
DEREK: And so it’s been a bunch of time around that. And then, you know, importantly also looking at Google’s businesses and how they’re adapting to this time is another kind of area we’ll draw insights and resources as we kind of try to act as good partners, thought, thought partners and collaborators with our executive teams and our portfolio companies. So we spend a bunch of our time, um, and then obviously from a, you know, investment perspective to continue to be just as active as we were pre COVID, you know, I’d say that, um, it’s certainly a challenging time, um, for the investment business more broadly, as you can imagine, we’re not, we didn’t grow up in this business, um, learning how to, how to invest in companies and bank teams, um, entirely over video conferencing. Um, and so I think we’re all kind of learning on the job and learning, how do you build rapport and build trust and relationships over a video that it’s certainly a challenge.
DEREK: And I can’t say that we’ve cracked the code and figured out a way to make that perfect, but I think we’re making progress there. And we’re certainly, um, having, you know, a lot of managers and a lot of very interesting and compelling entrepreneurs who are, um, you know, looking at their, their roadmap for the next year, two years and thinking about, you know, how do they, what kind of capital needs will they, and what kind of partner do they want to bring to the table to help them deploy that capital in an effective manner, Nelson scale. And so running a lot of those conversations now. And so from a conversation meeting perspective, I’d say it’s pretty, uh, it’s back to normal is what it feels like to the precut levels. Um, but the format of those interactions is obviously wildly different. So we’re, we’re, we’re still, you know, learning the best way to do that. I’m sure I could, I could get some advice from you, um, playing her on, around, uh, the best way to, to help, uh, build rapport in a remote fashion. Cause saying at this moment in time, any advice is good advice as we’re all kind of learning on the job here.
PEMO: So, um, tell me, uh, what about the, um, your portfolio, uh, companies, and as far as their, uh, state of mind, a lot of the VCs have been telling me, you know, they’ve had to really support a lot of founders, um, as regards, um, just, you know, how to cope really. Um, and I’m wondering if you’ve got any tips there.
DEREK): Yeah, yeah, no, that’s a good question. And spend a lot of time on that with our RTOs partnering with you. I think three things come to mind for me. The first is, um, health and safety first and foremost, for just to have that top of mind in any conversation you enter with your executive team, through your customers, your employees, any, it doesn’t matter who the constituency is, but I kind of helped remind myself to start every conversation, just sort of regrounding yourself on the fact that the current health crisis, right, is impacting many people on a very personal way, and just be aware of that dynamic and interactions you’re having and appreciating that people could be experiencing huge stressors in their personal life at the moment, um, that you may or may not be aware of. And so just be humble and self-aware to, to have an appreciation for where people are coming from.
DEREK: What else is on your mind inside of the day to day kind of office work that they’re doing? That’s kind of step one, I think, and going that personal connection and just start doing the best you can to, to, um, have that relationship with people. I think number two, I think is really increasing the frequency of communication with employees, I think is hugely important in this environment. You know, I’d say I, I was actually, it’s funny. I was just speaking with the CEO of one of my portfolio companies who I have huge respect for and has been a real, you know, teacher to me, um, around how he manages his team. And he mentioned to me that they pray, we pray a little bit, we’re doing all hands, executive team meetings once a month. They have a monthly cadence where they do a deep dive on where things were headed, what the issues were, what the bottlenecks were, where they needed cross functional collaboration, et cetera, et cetera, um, strategy of the company forward.
DEREK: And, you know, postcode is like, all right, once a month, it’s not going to cut if you need to do this weekly and then weekly or every other week, and just increase the frequency of communication in this environment. So that’s, that’s a pretty easy, obvious thing, but has been, I think, very helpful for him, for him and his team. Um, and I think the second important aspect of that is, you know, really, um, erring on the side of being more, not less transparent, um, with both good and bad news. So some of the mistakes that I see some executives making is painting too rosy of a picture, um, to their employees or to investors with board members and, um, and sort of, uh, living in a bit of a, uh, state of mind that suggests, Hey, we just don’t know. I got the back half of the year could be great or really be great.
DEREK: Like we don’t really know yet. Let’s just wait and see. And, um, in my experience in the competition, I’m having, I think those CEOs that haven’t been to that wait and see mentality, they, um, aren’t doing themselves or their employees any favors because I think, um, the more transparent they can be in either saying, I don’t know, but I have a scenario plan in place, and here’s what we’re going to do. If X, Y, Z happens, that’s a much more powerful. And I think comforting and reassuring message to hear if you’re an employee or a board member of the company, because then at least you understand that the leader of the organization, um, is self aware enough to know what they don’t know and is already thought through scenario planning so that if things get worse or if they get better, there was a plan of action ready to go that excused against to help the companies and the teams get through it.
DEREK: Um, and so I think the more people can get on the front foot with having scenario planning done, which hopefully at this point in time has been done already for most companies, but the more they can, um, continue to revisit those scenario planning exercises in the current environment, just given the rate of change of new information coming daily and weekly over the course of this crisis, the more they can do to revisit those plans and scenario planning to stay agile over this period, I think is a huge, is a huge positive. Um, so I think it’s really that frequency of communication and transparency emphasize for leaders of companies at the moment, the thing really, really important,
PEMO: Right. And this is a question I ask all the face say, so please, excuse me. I’ve just wondered what I, because I know it’s impossible actually, to predict that I’m still going to ask the question, what’s your prediction of where we’re heavy it headed as regards the startup world and, um, the investment in the next couple of years.
DEREK: Yeah, that’s a good question too. Yeah, no. And, um, uh, I wish I had a crystal ball, but all I’m happy to, uh, to give you some, some thoughts, you know, I think, um, a couple of observations that I’ve had over the past couple of years, and even more recently is trends accelerating, but a few things that I pointed out. So something to think about one is, um, the pools of capital that are chasing investment opportunities are increasingly employing together. So, um, the, the super late stage investors that historically would have done the pre IPO around or buying public stock and the open market are increasingly going earlier and earlier, um, saying, Hey, why am I going to buy, you know, one or two percentage points of the company when I can try to buy 10, 20 percentage points of the company in a much early on in its life cycle.
DEREK: Um, and part of that, and that’s a trend that people thought about people kind of know about it, you know, what’s maybe less obvious is that it’s indirect response to, I think what the later stage investors are seeing from some of the earlier stage investors, which, you know, funds that have historically done seed and series ideals are now how over the past number of years, when building up growth equity platforms and large pools of capital to go later stage. And so you’ve got the early stage investors, kind of cherry thinking their best deals and doubling down and, um, taking away opportunities for later stage investors down the line. And because of that, the later stage investors that haven’t been, you know, by that even if you wanna use that term by going earlier and tried to disrupt that, that process and going upstream. So we’ll grab on there earlier on.
DEREK: And that just means in my mind, that’s a, these pools of capital that early mid, late stage public stage, they’re starting to increasingly blurred together, creating a really interesting and dynamic competitive landscape where entrepreneurs now have a much wider range of options for where they raise their next round, where they raise capital. Um, and I think for, you know, for some entrepreneurs, there’ll be assumptions now where historically, if they had to raise an eight round, they had to give up a certain percentage of dilution to raise a certain amount of money. And they had to give up a board state to a series, a fund that would come with a network around them to help them scale the business. But now increasingly there’s an alternative, or they can choose the path that says, Hey, I’ll raise twice as much money at the same amount of tuition.
DEREK: And I don’t need to give them a board seat by taking capital. And from a later stage fund that from their perspective, because they’re managing a much larger pool of assets. They can write the same size check ins by company, um, but they can be hands off. And if my company does not make it and they don’t make a return on their investment, it’s not going to move the needle for them because they have a much larger pool of capital and stuff. They’re happy to get past with hands off. And so it’s just another option for entrepreneurs kind of pick it up and they’re raising capital in the earlier stages. And so I think one friend that I think will persist then become more, you know, um, uh, strengthened further is this idea of, you know, there’s just so many more places to go to raise capital.
DEREK: And so for a certain subset of entrepreneurs that’ll mean they want the active hands on value, add investor advisor. Um, and then others will also be initially hands off, fast and easy kind of way to do business. So I think there’s a bigger menu of choices than there would’ve been a few years ago. Um, and I don’t see that changing. I think that’s going to strengthen, and I think, you know, the impact of COVID-19 this whole environment, what that means for the market basket, for deals and competition and how founders are getting funded to scale their companies know, I, um, I’ve been surprised to tell you the truth, that there hasn’t been a bigger reset in the private market, valuations, everyone, you know, and even an early, as a coven when the market, the public markets are down 30%, the reality is that like lot of these private companies could just wait and not raise capital if they didn’t need to.
DEREK: And then we ended up and now public markets are up a flat for the year, has X up 20% of the year. And so like the public market is coming back, but the private markets in my experience, they tend to be like a one way ratchet. Like they don’t, they tend not to ever decline materially, but they do go up in terms of where the pricing. And I think a lot of that, just, you know, the LPs that are looking to get exposure to growth equity, to DC, to higher returning higher risk asset classes that has been a longterm secular trend that has continued. And the current environment I think will persist. Um, as interest rate interest rates stay incredibly low. You know, those LPs are looking at their own portfolio as a public stocks, you know, commercial real estate of a VC, whatever it is.
DEREK: And they’re saying, wow, over the past 10 years, my performance by asset class, private equity in VCA has been some of the best performing returns for me as an LLP and boy, like, I want to hear that past tenure data, like, let me do more of that. And they continue to want to put more capital into the strategies, putting up more, you know, more of a supply push into private equities asset class, VC growth, HPE. And as a result, all that capital is chasing a certain number of deals every year. And that, um, supply demand and balance is going to continue to prevent, I think, you know, asset prices in the private markets from declining, but I think we’ll continue a steady upward trajectory. So I think the fact that co had happened is a good reminder of the risks that we’re all taking in the private markets as we fund companies.
DEREK: I think for the past 10 years, it’s been up into the right, you know, and then it didn’t take a, a genius to make a ton of money over the past 10 years, is this, you know, valuation multiples across the industry, particularly in staff expanding quite interiorly. Um, but now with COVID happening, I think it’s a good reminder for people in the industry that there is real risk that we’re taking and therefore the types of underwriting that people are doing now, maybe changing a bit. So I think your question, another way they sell T is I do think in the private markets while valuation multiples are holding up well and are really declining. Um, I do think there’s a bit of a flight to quality now where, um, companies that are showing, you know, better meta economics, so shorter payback periods on customer acquisition, higher, gross margins, whatever metric you want to key in on.
DEREK: I think those companies are gonna continue to benefit from even more premium valuations because people want a flight to safety and the flight to quality. And then the companies that maybe are having a tougher time proving out this unit economics, um, will still get funded. And a lot of them will still get funded. But, um, you know, I get quite the same uplifting evaluation, but all in all still feels like there’s, there’s every reason to believe in my view that patients are continuing to find more artists to go out. And because of the supply demand the dollars from the LP community and the people chasing yields in a very low rate environment. Um, and, uh, so we’ll just continue to be a lot of competition for deals and getting paid and, uh, and I’m not sure code is going to materially change that.
PEMO: Well, that’s really interesting. It’s a great perspective and overview of the ecosystem. Thank you very much, Derek really appreciate your time today and I look forward to speaking to you down the line and we’ll see how you’re doing.