David Lawee @ CapitalG
Ever wondered what traits and characteristics Google’s parent company Alphabet look for in a founder?
Wonder no more, because in this interview, Nathan Chan sits down with CapitalG Founder David Lawee, to discuss the journey of finding the next $1B Unicorn Business. David founded Alphabet’s $3billion growth fund, and has over 15 years experience under his belt working for one of the largest companies on the planet.
Before founding CapitalG, Lawee led marketing and corporate development for Google worldwide. Before that, he was a serial entrepreneur. The biggest takeaway from his past experiences was how to successfully scale companies, and during this interview, he finally reveals exactly how to do it.
Lawee shares what he believes it takes to create a billion-dollar company. Lawee reveals all the traits and characteristics he looks for in founders when it comes to investing billions of dollars, and exactly what the company needs to look like.
- How David Lawee found founded CapitalG, and what he learned during his time as a serial entrepreneur
- The characteristics and traits that he looks for when it comes to investing
- The difference between an ordinary company, and the billion-dollar unicorn
- Lawee’s advice for those looking to open more doors
- The change in the market, and a insider’s view into the investment world of Google’s parent company, Alphabet.
- Lawee also discusses how to align your company with investors’ needs
Full Transcript of Podcast with David Lawee
Nathan: The first question I ask everyone that comes on is how did you get your job?
David: That’s a good question. I think it’s always great to chart people’s career paths. I had been a serial entrepreneur prior to joining Google and my takeaway from that experience was that what I had learned at Google was really useful for scaling companies. And I wish I had known it. I would have been a way better entrepreneur. And when I was thinking about what I wanted to do next, I thought it would be great to be able to bring some of these lessons, Lauren, to next generation entrepreneurs. And I was talking to Larry Page about that and thinking about fundraising and he recommended or suggested that I do this inside of Google. And so we ended up raising a growth fund with Google as our sole investor. And then once the Alphabet structure came into place, we just went under that. And so I’ve basically been working there since 2013.
Nathan: Yep. Well, that’s exciting. Be a tonne of fun. So I have to ask you because really what I want to focus on is what do you look for when finding that next unicorn. But before I do, I have to ask, like you said you’ve learned some really valuable things at Google around scaling companies that you wish you knew beforehand. So what are some of those things?
David: There are a lot of detail around how you think about the organisation. So one of the challenges with large companies is people end up pursuing smaller opportunities, don’t think about scaling things globally. They naturally tend towards products, let’s say banking products or something that will work really well in the US but won’t go global. And one of the principles of Google, just as an example of a small thing, is you needed to launch in 17 countries right off the bat. So not all of that product strategy that you could have directed towards localization, you needed to think about in terms of like will this product work across the world? And it just trends you to a different orientation.
And so when you think about the products like Android, Google Maps, Google Docs, they all have that same complexion of working well across a lot of geographies. Now it took a lot of extra work to build in international compatibility into all of those products right out of the gate. But then you get the benefits of that when you’re trying to scale. You don’t have to rearchitect your code to do those things. And there’s like a hundred of those.
Nathan: Can you give us a one more?
David: I think the hiring strategy at Google, have you thought about, well, just taking a step back, where as a CEO you couldn’t lean in? Where Larry Page leaned in was, I’m going to set strategy and high-level goals, which we did through the OKR process. He was all products releases basically needed to go through Larry, when the company was already tens of thousands of employees. And actually this is going to be the most surprising for you, all top applications for new employees needed to go through Larry. And it’s just an interesting way that you think about scaling an organisation to say you know what, I’m going to make all the people that report to me bring the actual hiring packets of every employee that’s being hired that week. And then I’m going to go through randomly and look at the packets and ask them around about the candidates. And that had a cascading impact down their organisation. So I reported to someone who reported to Larry. So the week before that, I was getting my packets to my boss who was going through them and grilling me.
And I was doing that with the people that worked for me. And it was a way to ensure that people in a high growth environment didn’t do the natural thing of I need someone desperately and I’m going to make a compromise. So when you understand all the little behaviours and challenges of a growth company, then you try and systematise ways to manage that. So that’s why I say there’s like a hundred of those things because it’s like all the little things you do in a company well. Is that going to work when the company is a hundred times as big, a thousand times as big, ten thousand times as big?
Nathan: Yeah. Wow. Interesting. Well look, yeah, we’ll move topics because I really want to talk about CapitalG. And even during these times, there’s a lot of companies starting right now. I assume you guys would have a lot of deal flow and I’d love to really dive in. What are you looking for when it comes to finding that next unicorn, let’s sum. What are your principles? What’s the mental models that you’re going for or the playbook or do you have one or?
David: I mean, our general approach is… Obviously, companies that are coming to us are already amazing companies. If you’ve created 10 million of anything, $10 million of revenue, 10 million users, you’ve done something pretty extraordinary. And you found product market fit and you’ve… And so for us, we love, love the job because all day long we’re meeting with people who have done that. What distinguishes the companies that are right for us of that sets are the ones that we think could be a billion dollars in revenue or a billion users, like something meaningful. So that at every round, the next stage of investors are going to see a lot of upside. So there’s no pressure on us to sell the business. So for example, I could say for us, if we’re investing at let’s say 300 million valuation, we’re going to want an exit that’s in the many billions. Because that creates a lot of buffer for other financing rounds and subsequent investor interest. And so we’re not thinking about the next round, we’re thinking about three rounds out. Is it still going to be a growth company?
Nathan: Yep. Let’s see. So you guys particularly focused on late stage, what do you categorise as late stage? It’s got to be 10 million or something, like you said?
David: I mean, that’s a good ballpark. I would say product market fit.
Nathan: Yep, okay.
David: And so that doesn’t mean just creating the product, but you’ve figured out a way to bring it to market cost effectively?
Nathan: Yep, okay. And I’m curious as well, when it to companies that you’re invested in, can you give us some, maybe for the audience, some context around some of those companies?
David: Yeah. We’ve invested in Lyft, Credit Karma, CrowdStrike, UiPath, Looker. A mix of enterprise and consumer companies, probably two thirds enterprise, one third consumer, particularly in the last four or five years.
Nathan: Yep. Okay. Yeah, I guess when it comes to deal flow, there’s a lot of companies starting now, are you guys getting many that fit your appetite during a time like this?
David: It’s an interesting that there’s a lot of dislocation. And dislocation is good for entrepreneurs. And so a lot of the companies that are in our set of interesting entrepreneurs, ideas, areas, are seeing explosive growth, so. Fintech is seeing explosive growth around the world and health tech is seeing explosive growth around the world and we’re investors in Duolingo. And all that kind of entertainment and education content online is seeing explosive growth. So there’s quite a bit going on now. There’s obviously companies in our portfolio that have been on the other side of that, Lyft, Airbnb, others. And so it is a mixed bag out there. But in general, I feel like there is many opportunities now, really more than there’s been in a couple of years.
Nathan: Yeah. Interesting. Because yeah, either it’s gone one way or the other where it’s really accelerated the growth, particularly most online companies except if your business has some sort of face to face when it comes to the product, then yeah. Online has been massive across eCom.
Nathan: Yeah. Yep. Okay. Interesting. So that means you’re meeting founders when they’re at a stage where they’ve got good traction and they probably, yeah, like okay you said, they’re at that really big next level of scale. How do they go from 20 to 50 or 50 to a 100 or 20 to a 100 in an annual revenue, right?
David: Yeah. I mean, our hope is that they triple, triple, triple. That’s what we’re looking for, companies that are still in the steep part of their growth curve and they’re going to be there for a couple of years, few years.
Nathan: Yep. So if a company’s at 20, 30 million annual revenue, you’d hope that they’d be at a 100 in the following year and then 300 in the following year and then 600 in the following. Where are we, 300% year on year growth, that’s what you’re looking for?
David: I mean, at 10 million, I would say that. 10 million, 30 million, a 100 Million. And then it’s probably going to more like 200 million. That would be in the top quartile of companies that we see.
Nathan: Yep. Got you. And is there anything that you see around the profile, the characteristics and the traits of the founder. Do they tend to be they’re onto their second or third startup and they’ve done this before, or is it more that they’re first time founders?
David: Yeah, in the enterprise space I think we see more repeat entrepreneurs. A lot of times they understand a problem, have customer relationships, can pull together a team quickly and credibility with investors, know how to sell. There are a lot of skills that are more-
David: … transferable. On the consumer side, I feel like it’s unbelievable to me when someone creates two companies. Not because it’s, I don’t know. I mean, when you look at Jack Dorsey, you’re like that’s unbelievable. There just aren’t that many of those people around. And so you have a lot of people who toiled on a problem. It could be like the Airbnb founders and they hit, and then the company scales really fast. Some of those companies are some of our best companies because they’re super efficient models.
Nathan: What do you mean by that?
David: The consumer businesses have a tendency to grow exponentially whereas the enterprise companies, even our incredibly, even our best investments, they’re growing as fast as they can grow their sales force.
It’s a little more linear. Tripling is like you’re tripling your sales force. It’s not easy whereas there’s not that constrain in many consumer companies.
Nathan: Yeah. Especially two-sided marketplace, extremely scalable.
David: They can be. They can be. And they have good moats.
Nathan: Yep. So you’ve tend to find that more first-time founders are on the consumer end. And what about the characteristics? Because you would’ve met some fascinating, really smart, talented founders. Any traits that you look for?
David: There is an audacity.
David: Yeah. Just the courage. I grew up in Canada, which a little bit like Australia. People are a niche, they think about niches and dominated niches. And these are, the founders in our portfolio. I don’t know. They had better role models or better mentors, capital providers. The whole system is geared, you see this a lot in China as well. The whole system is geared towards being super ambitious. And all the support you’re getting is around painting a huge vision. And that definitely I feel like helps. It helps you attract a lot of money. It helps you attract great people. You build products that are have much larger applicability. And so I think that that mindset that it’s easier to do small things can sometimes be wrong. That in a way, because of all those things I just described, in some ways it’s easier to do big things.
Nathan: Yeah. Well look, I think, I guess if you’re looking for that billion dollar annual revenue or a unicorn, it’s all about total addressable market. And you guys are looking for people to try and tackle big problems with a big market.
David: Yeah. I mean, the market may not be so obvious at the beginning, like in the case of Airbnb. You’re like, “Oh, how big a market is there for sleeping on someone’s couch.” But then it actually becomes something much bigger. Same thing with Uber and Lyft with the taxi market.
Nathan: So you talk about early influences. That’s interesting. So do you think that these entrepreneurs perhaps were influenced by family friends early on or depends on capital partners?
David: Those are the super lucky ones. You can still come by a lot of people who have worked at other growth companies. It’s a huge leg up. If your family is entrepreneurial, it’s a massive leg up. You just have the exposure. If you’re lucky to get a great angel investor, that can be very helpful. If you have to figure out everything on your own, it’s going to be a little harder, I think. And so seeking out mentors is definitely something that I’ve found all of our entrepreneurs are pretty good at. People gravitate to them often, but it’s a two way street. These people always have a lot of people supporting them.
Nathan: Yep. And do you find that most of the companies that you’re investing in are in the Silicon Valley cluster or out of?
David: It’s about 50 50 for us.
David: In terms of the number of companies.
Nathan: Yep. And do you guys invest in other high growth markets in areas like China or India or, yeah, like Baltic areas like Europe?
David: Yeah, we’ve invested in two companies in China out of like 45 companies. So that’s a pretty small number. We We have about five in India and some number in Europe. I mean, like UiPath is European. We invested into European companies, it was Romanian but now they’re headquartered in New York. So there’s also some of that. But we’re investing globally. Our view is we take a theme and we run that theme down globally.
Nathan: Yeah. That makes sense. And what about, because you guys are late stage companies, is there much emphasis on the pitch in the deck?
David: Well, it’s less of a pitch, but it’s more of an explanation of the business. You need to be able to tell your story. It’s one of the skillsets. And then that’s just as true when you’re raising a seed round as when you’re going public, you need to be able to tell your story. And one of the skills that we look for in entrepreneurs is the charisma to raise capital.
Nathan: Hmm. So what are some things that people should be thinking about, whether they are early stage or late stage. Most people watching this probably wouldn’t be at the stage coming and knocking on your door. Maybe you said product market fit, but yeah. You would have seen some shockers, really bad ones. And then probably some really good ones. What do people need to be thinking about when it comes to the story and the pitch?
David: My view, and I think this is true for seed round and every stage, is that every single investor is just one investor. And each investor is going to be looking for something different. I’ll look at a hundred companies, let’s say… We look at thousands, but let’s just say if I look at a hundred companies, they’ll be probably 20 of those companies that will generate great returns. And I’m only investing in one of them.
Nathan: Yeah. Wow.
David: So your odds with any single investor are low. This is the same as seed so you just cannot get discouraged. And you just have to go into the meeting, try and understand what… That person has had 15 meetings that day and they, maybe they’ve done their homework. I feel like it’s super competitive now. We always are just doing our homework, but they don’t really understand your business. They’re outside in. And so you’re trying to help them understand your business, put the best foot forward in an hour. And I think that takes as much of an understanding of your pitch as it does understanding your audience. Some people are very theoretical, big picture thinkers. Other people, I can tell they understand the operating strategy or the financial metrics. They can’t place things. And so you need to understand the language of your investor.
Nathan: Hmm. Interesting. And everyone always thinks it’s like Shark Tank and he meets you on a bus there.
David: It’s so the opposite in our space. It is extremely competitive right now. And we are outbound calling for every meeting and descending these huge data packs of information that we’ve researched on their company and talk to customers. And so we’re doing a lot of work when we finally get in to see an entrepreneur. We are feeling pretty lucky. We’re not in the Shark Tank mindsets. We are trying to understand things pretty quickly and sort through a lot of data and make a decision basically at the end of that meeting. And so it’s dense. These meetings are dense. When we’re doing well, it feels like we’re all talking about the most important issues. And when we’re not doing well in a meeting, it’s like we’re talking past each other.
Nathan: But you guys could open most doors though, right? Considering just Google and stuff like that.
David: I would say that was 100% true when we started in 2013 and it’s less true now. And it’s not because of any change to Google. The market is incredibly frothy. It’s following the public markets. And I think the orientation has been at our firm it’s the same at every other firm. Well, let’s get to these entrepreneurs sooner. So two years before they need to fundraise, let’s start building relationship, understand that story. And so every great company that we’re meeting with has a set of entrepreneur investors that are fantastic and could fulfil their needs. And so they just need to, they’re not going to pick up the phone and start seeing who’s out there, they’re going to do business with someone they have a relationship with. And so we need to be that company. And so that’s why we’re so forward-leaning.
Nathan: Yep. Yeah. That makes sense. Look, you want to get on the front foot, especially at the stage that you guys are at, the people that you want to invest in, they’re hot or perceived-
David: They’re hot. We’re investing a lot of money. I’m investing in a couple of companies a year, one to two companies a year. That’s true for all of our partners. So we’re making highly concentrated bets and so we need to… It’s actually really hard to make that in a couple of weeks. If you’ve thought about a company over six, 12, 18 months, it’s way easier. So it behoves everybody, I think, that the entrepreneurs are better served by getting to know the founders. Founders are better served by getting to know investors.
Nathan: Yep. And when it comes to the founders, do you have rules like YCombinator where they can’t be solo founders? Do you have any rules around that or they’ve got to be a team of three or any rules there?
David: That probably makes sense for venture. But by the time they’re getting to us, they’ve proven that their operating model is working.
Nathan: Yep, yep. Got you. So it doesn’t matter.
David: Well, each situation is unique. There’s always some deficiency in the management team. For any other reason that the company’s now way bigger and they’ve got bigger challenges, new challenges. And so they need to add people. And so you are evaluating what’s the ability of this team to attract other people. And would I put my brother-in-law in this company is a type of good test, because that’s what you’re going to be doing as an investor. You’re going to be then going and selling this business to everybody you know.
Nathan: Yeah. So yeah, you’re really getting to late stage, that they’ve got traction. Do they have the potential to get to that really true scale, next level? That means you have a pretty high chance of success, right? If you’re at that stage.
David: You’re much more bounded in terms of the investment returns. You’ll very rarely lose money. There’s some percentage of ones where we’re losing money. There’s a lot of investments where we’ve made three times our money and then there’s a small number of investments where we’re making 10 times our money. And the returns of our fund really correlate with those 10 X returns. So you still have the distribution, you don’t have as many zeros and you don’t have any… I mean, you could get a 100 X, but it’s highly unlikely.
Nathan: So any company that you’re looking at, for late stage, what is the range of funding that you can deploy in that company over what span period?
David: Let’s say in CrowdStrike, we invested in five rounds. I think, close to $209.
Nathan: Yeah. Because yeah, okay. And then you’re looking to 10 X that.
David: You want the opportunity, the possibility of that, because that’s really going to make the fund returns fantastic. Overall our returns are roughly the same as venture returns.
Nathan: Yep. Okay. And we have to work towards wrapping up. I’m just really drilling you, David, sorry. I hope you don’t mind.
David: It’s no problem. Not at all. I know your audience doesn’t think about this that much, this stage, it doesn’t. But if things are going well, we’re talking to people two or three years after founding the company. So it comes upon you relatively quickly. And so it is good to, I think, to think about what’s the next investor. Just like when we invest, it really helps for us to be explaining to the entrepreneurs what the public markets will want.
Nathan: Hmm. Yeah. And what do the public markets want? When you’re at that stage, what do the public markets want? Like what is the, yeah.
David: I mean, as a CEO of a public company, you’re extremely well-served if you can predict your business. If you’re still at a point where you are in some major inflexion, like you want to get into a brand new market. You could do all those things as a public company but you just have a little less flexibility around making mistakes. It has more consequences. And so it’s nice to have a core business that is humming. To be in a steep part of your growth curve gives you a lot of breathing room versus let’s say people who’ve waited and then they let’s say closer to 25, 30% growth and maybe then investors are going to think you have one quarter 21%, they’re going to be like, Oh my God. This is not a growth company anymore. And then the multiples change and your employees get stressed. So it’s really great to have a few years of not dealing with that and getting your footing.
Nathan: Hmm. Yeah. But it’s so hard because isn’t it harder to grow the bigger you get?
David: It is. It is. Exactly. That’s why I think a lot of companies used to go public with 250 million valuations. And I think they were pretty well-served. And Salesforce and others grew into really big businesses. Then you had the 2008 era where growth equity investing actually became a really big thing. And you had companies staying private, like Facebook, $10 billion rounds. There has been a trend toward staying private longer, which has been good in terms of creating a market for our type of financing.
David: But it has changed the nature of a lot of companies’ public experience.
Nathan: Yeah. And when you talk about the appetite for the public markets appetite and predictability of business and having things humming, it’s really a focus on recurring revenue, right? You really want to have recurring revenue, right?
David: Yeah. And you want to be able to control the levers of your business. So you had a hundred salespeople and you know that those hundred salespeople will each generate $2 million of revenue in 12 months time. You can see the inputs and outputs. It’s like in a typical consumer business, you would spend this much on marketing and this would be the return on it.
Nathan: Yeah. So it’s a mathematical equation.
David: It becomes a little bit more than that because if you’re still in the phase where you’re not sure how much you’re going to get, then it’s hard to hire a hundred people. Maybe you should just hire five people and see what happens. And so if you’re going to hire a hundred people, you should know. If you’re trying to grow your business from 100 million to 200 million, that’s the order of magnitude scale that you’re adding.
Nathan: Yeah. I see. What advice would you like to give to founders watching this that are looking and they have that ambition to hopefully build the next unicorn?
David: In terms of financing or just in terms of psych?
Nathan: Both, both.
David: Yeah. I mean, I think you do, just go back to where I started. I really felt like I learned something at Google. My last company, Xfire, was a gaming company. We got to 10 million users. We thought that was amazing. It’s 2005, there weren’t that many users on gaming online. It’s a lot better if you’re thinking big from the outset, because when you think smaller you’re more likely to end up there. And then I feel like the one of the challenges for entrepreneurs, but it’s also really works when you’re good at it, is just evangelising that vision and just willing it into existence. A lot of this stuff I’m sure is the same advice you would share with any stage entrepreneur.
Nathan: Hm. Yeah. Awesome. Well, look, is there any questions that I haven’t asked you that you’d like me to ask?
David: I think you did a great job.
Nathan: Awesome. Well, look, thanks so much for your time, David. Where’s the best place people can find out more about yourself and a CapitalG.
David: Yeah. We have obviously website and LinkedIn and all that stuff. And all the contact information is on our website capitalg.com.
Nathan: Okay. Awesome. Well look, thank you so much for your time.
David: Okay. Awesome. Good talking to you.
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