A peek inside CapitalG, Alphabet’s $7 billion growth-stage investment arm

About a year ago, CapitalG, Alphabet’s growth stage venture arm, named partner Layla Sturdee as its new head, just as the unit’s founder David Lowery stepped down.

Some were surprised that Sturdee was promoted to this position. She joined Google in 2007 in a marketing role, was pulled into several departments over the following years, and when CapitalG launched in 2013, she was recruited by Lawley, who told CNBC in 2021, “I “In a way, it has made it an issue.” To know who are the stars inside Google, Laila’s name came up a lot.

Indeed, for many investors the past year has been the toughest year of their careers. We wondered if the same was true for Sturdy, a former college basketball star, who was quick to note that 60% of his team came from diverse or underrepresented backgrounds. To learn more, we reached out to them earlier this week at CapitalG’s bright, airy office in San Francisco’s Ferry Building; Excerpts from our conversation below have been lightly edited for length and clarity.

Belated congratulations on assuming office. How does your management style differ from that of your predecessor David?

I’m still leading investments and still on several boards, but I love being able to focus more on the team and figuring out how we can continue to build the firm. there is 1708152619 We have many more incredible investors at CapitalG.

There are about 50 people on your team; How many of these are investors versus otherwise?

Our model is to find ways that Google and Alphabet can help our portfolio companies, so that not only the individuals on this team, but you get an idea. [of what I mean]Over the past few years, more than 3,500 different senior advisors within Alphabet have partnered with our portfolio companies. [to help with] Pricing analysis, expanding infrastructure, setting up marketing and sales promotions. These are all different technical and business questions that come up for growth-stage companies, which is where we specialize.

Access to 3500 different senior advisors! How does that work?

An example is from the last few years, we have partnered with the Google training team that does AI and ML training for Google engineers. We said ‘Hey, this training is really effective and gets really high ratings internally.’ And many of our portfolio companies are asking us, ‘How can we advance our engineering and the talent in our organizations and prepare them to fully take advantage of AI trends?’ So we partnered with the training team and gave our portfolio companies access to that exact same training, and now hundreds of engineers across our portfolio are going through that training. I worked at Google for a long time before coming to CapitalG, and one of the amazing things about the culture at Google from the very beginning is the real culture of knowledge sharing.

The market for AI talent is very competitive. What can you tell portfolio companies who might be nervous about information coming and going into Alphabet through you?

Everything is opt-in from the portfolio companies’ perspective. We don’t share anything; We work completely separately. We do not share any portfolio company’s data with Alphabet and we do not share any of Alphabet’s data back with portfolio companies. We exist as mediator to find win-win where we are.

For example, [Google Cloud] has been an incredible market partner [and] All other cloud providers are also important and great partners, so we don’t force anything on anyone. We help facilitate the right introductions and marketing partnerships and product discussions where relevant.

How are decisions made within CapitalG? Do you have the final say on who sees the checks?

We have an investment committee [composed of] Myself and three other general partners who are really incredible investors. For example, my partner Gene Frantz, who I’ve been working with for the last 10 years — almost since the beginning of CapitalG — is a longtime investor who was previously at TPG and other places. [joining the outfit], So we’ve built a GP bench that’s really strong, and these GPs bring deals to our investment committee, and we make decisions as a committee.

How many bets are you placing per year? And what size checks are you writing?

We typically invest between $50 million and $200 million in each company. We are very driven by the thesis, so we spend a lot of time looking at the areas in depth. , And we’re investing in about seven or eight new companies per year and then typically [many] More follow-on [rounds] For our existing portfolio.

How much of a company do you aim to own?

We are flexible on ownership percentage. We are looking for returns on our money in these companies. For example, I led a Series D round at Stripe in 2017. I think it was a $9 billion valuation. [We closed] A recent AI investment that was on the earlier side – it was valued at less than $500 million – so we’re very focused on the market, how much we think the business is different, and whether we can invest significant amounts of capital at scale. Can.

What are your cash-on-cash returns?

We do not share them publicly. We do not share any returns publicly.

At $9 billion, you’re going to do pretty well with that investment in Stripe, whose valuation was up to $95 billion last year before being reset to $50 billion. Do you think the valuation fluctuations were in response to market trends or its performance?

Stripe is an incredible company and [tackling] This is certainly one of the biggest opportunities in the market, so I’m very bullish on their performance so far and what’s to come. When you look at any valuation, public or private, over the last 18 to 24 months, they have all had some kind of reset due to COVID. , .So I won’t read anything about the company’s performance.

Does Alphabet allocate you a separate fund every year?

Yes, we invest from different funds, so annual annuities.

How big are they?

We have $7 billion of assets under management [dating back to 2013],

So you have a lot of money in a market where others have less. With the IPO market stalled and other late-stage investors making less investments, are you buying secondary shares?

We are very focused on partnering with the CEO and management team. We will only invest if we have engagement with the CEO and have direct data from the company. Our model is that we want to be the best partner for these founders so that they can tell us the next best companies. So we always have a direct connection

Which secondary shares have you bought?

I won’t share specific companies because it hasn’t happened [publicly disclosed by the companies], And a lot of secondary sales are structured as primary anyway. But the broader trend you mention is interesting because it is early stage investors who are looking for liquidity. And I think that’s consistent with our strategy of finding the best growth-stage companies and where we believe their long-term compounding is very early. [trajectory], so we’re extremely excited to have those types of companies on the cap table. , , Our strategy is to partner with these companies early and then retain them for the long term.

However, you eventually distribute the shares back to Alphabet.

We certainly deliver, but I would say we have a long-term orientation.

Does Alphabet really care if you make a return? Are these bets mostly strategic?

We are focused on delivering returns, and we are focused on the mission of using the expertise and experience of Google and Alphabet to become a world-class partner to these generational technology companies.

Google is clearly doing big work on AI. Tell me something about your AI strategy.

We’re as excited about AI as everyone else. We have a really amazing team of people focused on this within CapitalG, and this is another area where we have some very good advisors within Google that have enabled us to make even more technology bets. Cyber ​​security is a good example here. We were at CrowdStrike in Series B when they had $15 million in revenue or something, and a big part of making some of those early cybersecurity bets was a different technical approach. So we’re bringing that same rigor to the AI ​​field.

One thing that we think is really interesting in the AI ​​space is that when we look at enterprise use cases, we actually think that a lot of the incumbents are quite well positioned, because they have the distribution , they have customers, they have workflows. , So we’re paying a little more attention to places where there is real technical variation and where workflow and existing delivery is less important. One company we’ve backed and we believe has a strong, technical differentiator is Magic, which is focused on building AI software engineers.

You’re also on the board of Duolingo, which cut ties with 10% of its contractors last month. A spokesperson said at the time that the company didn’t really need that many people to do the type of work they were doing, partly because of AI. Is this something that you are seeing in your portfolio companies?

I won’t comment specifically on Duolingo, but I will say that across our portfolio companies, they are looking at how AI can enhance the customer experience, and enhance their other systems and processes. I think there’s a lot of surprise and delight around it. There is a lot of rethinking going on in the marketing stack. Customer support and services are being rethought a lot. We are still in the very early innings. But just as I see enterprise customers excited to experiment with how they can use AI in their workflows, I see startups and growth-stage companies really excited to experiment with how they can How can they use AI to help organizations build and achieve. All of their employees focused on the most high-value opportunities. There is a lot of interesting work happening there.