20VC: 2 Signs That A Company Is Ready For IPO, Why Fund Cycles Are Too Short & Why Management Teams Do Not Want To Go Public with Gene Frantz, General Partner @ CapitalG

Gene Frantz is a Partner of CapitalG, Alphabet’s growth investment fund which has investments in the likes of Airbnb, Snap Inc and Stripe. As for Gene, before joining CapitalG, Gene was a partner at TPG Capital, a global private equity fund. During his 13 years at TPG, Gene was responsible for multiple technology and telecom investments and represented TPG on multiple public and private company boards of directors. Prior to TPG Capital, Gene worked at Oracle Corporation leading its venture capital effort and previous to that in corporate development. In Today’s Episode You Will Learn: 1.) How Gene made his way from the world of traditional private equity to investing with Google? 2.) Gene has seen many investment cycles, how has Gene experience of both the ups and the downs of the market affected how he invests today? 3.) What does a company need to show or provide today in order to get a large late-stage cheque or IPO? How has this changed over the years? 4.) Why does Gene think that late stage financing has been massively commoditized? How can late stage funds looks to differentiate themselves in today's market? 5.) How does Gene view the extension of private markets and the delayed IPO? Why does he think management teams are less willing to IPO today? Does it concern him? Items Mentioned In Today’s Show: Gene’s Fave Book: The Righteous Mind: Why Good People Are Divided By Religion & Politics Gene’s Fave Blog: The Information Gene’s Most Recent Investment: Stripe As always you can follow Harry and The Twenty Minute VC on Twitter here! Likewise, you can follow Harry on Snapchat here for mojito madness and all things 20VC. Eight is a sleep innovation company. With their latest product, the Eight Smart Mattress, being a bed that literally tells you how well you slept last night, paired with an intelligent sensor cover that measures the quality of your sleep and delivers a daily sleep report. In order to bring you the best product, Eight used anonymized sleep data and feedback from over 10,000 people, to understand which materials and types of mattresses give customers the best sleep resulting in their unique blend of four responsive and high-density foam layers plus one layer of proprietary technology that helps people track and improve their sleep. You can check it out on Eightsleep.com - and if you use the code 20VC you will get a whopping 20% discount! FullContact provides the ability to organize your contacts, gain rich insights into them and therefore build deep relationships. With features like automatically identifying and merging duplicate contacts to the ability to snap a photo of a business card and FullContact will transcribe them for you, so no more lost and loose business cards at events. It is with these features just being the tip of the iceberg, FullContact really is the best all in one solution for contact management and you can check them out on fullcontact.com.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  You are listening to the 20 Minute VC with me, your host, Harry Stebbings, and you can stay up to date with all exciting happenings here on the 20 Minute VC on Snapchat, at H Stebbings, and it'd be a pleasure to see you there. But to the show's date, and we return from Monday's episode to the land of Google and their growth investment fund, Capital G, who have investments in the likes of Stripe, Snap Inc. and Airbnb, just to name a few. Joining me in the hot seat today from Capital G, I'm thrilled to welcome Jean France to the show. Now Jean is a partner of Capital G, and before joining, Jean was a partner at TPG Capital, a global private equity fund. During his 13-year tenure at TPG, Jean was responsible for multiple technology and telecom investments, and represented TPG on multiple public and private company boards of directors.

• 0:42Harry Stebbings?

  Prior to TPG, Jean worked at Oracle Corporation, leading its venture capital effort, and previous to that, in corporate development. I also want to say a big thank you to Robert Siegel at Xseed Capital for the intro to Jean today, without which this episode would not have been possible. But before we dive into the show's date, I really want to talk to you about a company that's really changed the way I sleep and operate. Eight is a sleep innovation company with their latest product, the Eight Smart Mattress, being a bed that literally tells you how well you slept last night, paired with an intelligent sensor cover that measures the quality of your sleep and delivers a daily sleep report. In order to bring you the best product, Eight used anonymized sleep data and feedback from over 10,000 people to understand which materials and types of mattresses give customers the best sleep, resulting in their unique blend of four responsive

• 1:27Harry Stebbings?

  and high-density foam layers, plus one layer of proprietary technology that helps people track and improve their sleep. This is perfect for people like me, people who want to be more productive during the day, who use or have used a fitness tracker and want to take care of their health and fitness and sleep. And if that is you, honestly, you have to check it out on eightsleep.com. And if you use the promo code 20VC, that's 2-0-V-C, you'll get a whopping 20% discount. And with Eight keeping me productive with a home product, Full Contact is keeping 20VC team on top form. With Full Contact, they provide the ability to organize your contacts, gain rich insights into them, and therefore build deep relationships, with features like automatically identifying and merging duplicate contacts, to the ability to snap a photo-

• 2:10Harry Stebbings?

  Have a business card and Full Contact will transcribe them for you. So no more lost and loose business cards at events like I always suffer from. It's with these features just being the tip of the iceberg that Full Contact really is the best all in one solution for contact management. And it truly has changed the way I not only manage my contacts, but engage with my contacts. And you can check them out on fullcontact.com. But enough from me, so I'm delighted to head back to Google and hand over to Gene Frans, partner at capital G.

• 2:41Speaker 01

  You have now arrived at your destination.

• 2:45Harry Stebbings?

  Gene, it's such a pleasure to have you on the show today. A huge thanks to Leila, your colleague for the intro, but thank you so much for taking the time out to join me today, Gene.

• 2:52Speaker 02

  My pleasure.

• 2:53Harry Stebbings?

  I'd love to get started though today by discussing a bit about you and how you made the transition from P to capital G.

• 3:00Speaker 02

  So why don't I start back with a little bit of commentary on the state of private equity when I joined in the late 90s, which represented a large category of investment. Still at that stage was fairly new to technology, but a few firms like TPG were quite forward looking at identifying tech as an interesting area and having reached a level of maturation where it actually made sense for the more traditional private equity kind of investing. And so joining TPG in the late 90s, we focused on the kinds of companies that represented a very good target for private equity, which meant that they were appropriate for leverage and banks would would actually give you loans to help buy them.

• 3:40Speaker 02

  And in tech, that primarily meant hardware and semiconductor companies, i.e. asset based businesses. And over the course, of course, of the 2000s and thereafter, what we saw is a dramatic increase in the scope of lending activities with a lot more focus on software service and that sort of thing. But primarily targeted at more mature companies that were sort of ex-growth in terms of their development and where cost reduction and other strategies that were more appropriate for mature companies made sense. And so TPG and other firms did a good job focusing on that and investing very successfully. What started to become even more

• 4:20Speaker 02

  Interesting with the passage of time though was sort of the the increase in opportunity for investing in growth companies larger scale. And so when one considers a lot of the companies that grown up during the nineties and prior to that, they were venture backed, they were successful. But for the most part, when they needed a meaningful quantum of capital, they would access the public market. And through two thousand, there were a variety of reasons, the public markets still were there. But there was really an opportunity to invest at much larger scale in the private markets. And that was something that I think private equity was a little bit later to, and that that represented a really big opportunity. And so my thought was that the opportunity to be able to do that, particularly in a really interesting platform, which is what we think we have here at Capital G,

• 5:04Speaker 02

  made for a very interesting dynamic. And so, you know, as much as anything, it was a call on an interesting trend in the investment landscape that I would comment since. And then, of course, many of the private equity firms, including TPG, have actually done a good job of addressing that market opportunity and are paying attention to it and and active in that place. But sort of that wasn't the case if you go back to, you know, the sort of two thousand ten, eleven, twelve sort of timeframe.

• 5:30Harry Stebbings?

  I do want to touch on one really interesting element for me then, having with you seen so many market cycles then in those seventeen or eighteen years since TPG. How seeing the market ups and downs, the cyclicality of the markets, affected how you view investments today and kind of company trajectory?

• 5:46Speaker 02

  Well, I think cycles are a business reality and always will be, and there's no way around that. And I think we, for our part, and this would be true, of course, for anyone in the investment business, have as our mandate the responsibility to invest wisely through cycles. And so there's, if times are hard or it's a cyclical peaky kind of time, it's still our job to figure out appropriate places to invest capital. And so the need to invest, you know, you could certainly modulate your pace of activity, but sort of not investing in something that we're in the business of doing. Google expects us to invest capital and do that, do that wisely. And so I would say that that sort of getting creative and finding ways to make money and invest wisely.

• 6:30Speaker 02

  Even if if times are fratty is something that that we certainly think a lot about. You know, beyond that, I think just trying to keep as long a term of view as you can. And having a strong set of convictions on what long term is appropriate for thinking about ultimately how one exits an investment, sort of what valuation should be considered at that point in time is an important part of the overall thinking that goes into that.

• 6:57Harry Stebbings?

  Can I ask, how central a role does valuation play for you in your investment mindset? I speak to obviously seed stage investors who often say kind of it doesn't matter as long as you get a seat on the rocket ship. What's your perspective on kind of the importance of valuation entering an investment?

• 7:12Speaker 02

  I think it matters. I think particularly later stage where in the market that we've been in, prices obviously do matter. And for the record, to be involved with any high quality company, you will be paying a full price in the market that we live in today. So it's really a question of what which companies do you want to pay a full price for? And so I think selecting a high quality company is absolutely the most important first step. But I think you need to have limits on how much you're willing to pay for that as you think about making money over the long term and and sort of how your returns will come to pass.

• 7:46Harry Stebbings?

  You said there about kind of company selection. I'm super intrigued, as we said, speaking now on the kind of slightly later stage element. What does a company need to show to get a larger cheque or go public today, do you think? And have these requirements fundamentally changed?

• 8:00Speaker 02

  Yeah, well, I think to go public, I would say, you know, it seems like companies need to be a bit larger and a bit more developed than would have been the case 20 years ago. But I think a great deal of the consideration where they go public is driven by management teams who may or may not be as enamored of going public as they would have been in years past and a recognition that there is liquidity in the late stage market in a way that there hasn't been. And so as a result of that, you know, companies electively will wait longer to go public and stay private and be a little bit more cautious about the decision to go public, even if they can go public.

• 8:38Harry Stebbings?

  Can I ask, does that delay? Concern you potentially as capital G obviously investing for financial return and liquidity often happening at IPO. Does that concern you with the extension of the private IPO?

• 8:49Speaker 02

  It doesn't in the sense that, you know, we and this is somewhat a virtue of our structure is we have in our LP here at Google Alphabet, the ultimate in variation capital. And so if we can find companies to invest in that we can be in for a very long period of time that are growing and doing the things that they want to be doing and building value. Having a longer time period before one goes public is totally fine from our perspective. And in fact, we're eager, we're much more interested in a company developing long-term sustained value than we are in the particular timing of an IPO in light of sort of Google has is as patient a company as there is. And so from an LP perspective, we have a very, very patient capital base and therefore

• 9:33Speaker 02

  much more interested in the long-term value creation story.

• 9:36Harry Stebbings?

  I absolutely love that kind of LP patient money. I'm intrigued though, does that mean that you potentially think fund cycles are too small in or too short in other perspectives where there's maybe not such patient capital with other private investors? Do you think maybe that 10?

• 9:51Speaker 02

  Yeah, I think absolutely. And even though funds are 10-year funds, which sounds like a long time. You know, the average investment period for most funds is probably, you know, three to five years. And so what that means is that every three to four to five years, you've got funds out raising capital and when funds are raising capital, they want to show results. And so on average for a company that even a company that enters at the very beginning of a fund has that kind of a clock on them over a four to five year period. And so and then and then if you enter, you know, on average, of course, you enter midlife into fund. So you end up having that conversation three years into your ownership by a private equity firm.

• 10:32Speaker 02

  And again, I'm generalizing, of course, and this isn't always the case, but sort of there's a pressure there from a timing perspective that has nothing to do with the business fundamentals. And then it has everything to do with the fundamentals of the firm that's invested. And that's a poor reason to make decisions about how to try to get liquidity. On investments and what's much smarter is to be able to wait and access the public markets, think about selling the company, examine liquidity when it's appropriate for the business in light of its development, not when it's convenient or desirable for the investor in the company.

• 11:07Harry Stebbings?

  I have to say, I've got so many questions off shooting that. Well, you said when it's ready. Are there definitive signs for founders and for kind of the exec team and the board to know when something is potentially ready for that liquidity moment of IPO?

• 11:19Speaker 02

  Yeah, I think there's two dimensions to that. I think one is whether the business is at a sufficiently advanced stage of development that it makes sense for it to be a public company. And so scale is one dimension of that. Cultural maturity is another dimension of that. Predictability is perhaps the most important dimension of that.

• 11:38Harry Stebbings?

  In terms of predictable revenue?

• 11:39Speaker 02

  That's right. In terms of predictable results, where you know, the management team hasn't, the business is mature enough where it lends itself to not perfect predictability because of course that doesn't exist, but at least having a good sense for the cadence of the business and the ability to guide Wall Street in the way it demands to be guided. And, and so that just takes time. I think the, the point on cultural maturity is really whether the, the management team and the employee base are at a place where they're able to sort of thrive as a public entity and, and without being private, which of course has more flexibility and benefits versus being public.

• 12:16Harry Stebbings?

  I do want to kind of slightly take a step back because we spoke about kind of the raising of funds there and we've seen many later stage funds raised. And so I'd love to hear your thoughts on the competitive landscape of late stage funding and how maybe it's altered your approach with capital G. Is there much more emphasis on value add with, with now your role with like the growth team? And is that necessary with such a proliferated market, do you think?

• 12:38Speaker 02

  So I would say that investing writ large across growth equity, private equity has commoditized to a very high degree over the last decade in a way that would not have been the case in the prior 10 years to that. And in particular, it used to be a group of really smart professionals with, with money was differentiated and.

• 13:00Speaker 02

  Could go do things that were interesting and different. And the proliferation of that formula has meant that there's, for any given situation, you've got a huge number of people that are very smart, that have a lot of experience, that understand sufficiently enough about operations of a business to be really effective with management, where strategies that work are quickly replicated. And so it's very hard to differentiate. And I would argue that within the investing world, whether it's growth equity or private equity, there's a very limited number of firms out there that are truly distinctive in terms of just we're smart and we've got money and experience and we work harder than everybody else.

• 13:37Harry Stebbings?

  Can I ask, how can late-stage firms look to be distinctive? Often it's the tag that it's kind of merely money without being disrespectful or rude to you in any way, because I know that's not Capital G at all. But often that's the label given to later-stage funding, where a business is so formed that there's not much one can do in terms of formation. So how can one be distinctive, do you think?

• 13:57Speaker 02

  I think it's really hard, which, again, for me personally, is a big part of why I came here to Capital G, was the view that you needed to bring something to the party beyond just smarts, money and hard work. And so the prospect here to be able to build a business that could leverage Alphabet and Google, to bring to startups what historically they've never had, which is access to Google's expertise, knowledge and know-how, was really distinctive. And that that was something that the world didn't already have and could use. And in fact, if you look at our strategy, that model is totally core to what we do. And so we spend immense amounts of effort to ensure that we're bringing to companies that we invest in

• 14:39Speaker 02

  distinctive help and value add in the form of Google coaching, knowledge access, that sort of thing. And so that's something that's a big, big part of what we do. And to that point, the reason we do it is that we're trying to differentiate relative to other capital out there. And the reason we want to differentiate relative to the capital is that, A, it'll enhance our returns and B, it'll make us more of a go-to partner for other firms when they're raising money and make us more desirable than other sources of capital they may have access to.

• 15:10Harry Stebbings?

  In an internal kind of debate for myself, whether VC and kind of investing is a game of access or a game of picking. Obviously, Google and Capital G provides a huge amount of access. To what extent do you think it is this element of access or picking? How do you think about this dichotomy?

• 15:27Speaker 02

  I think it's both. I think if you look at the firms that succeed consistently over time, they certainly do a good job picking, but because they're winners and they're viewed that way, they also have access to the best companies. And so I think it's really important. You need both fundamentally to succeed long term and it's a cycle there. But you're critically important to have access to the best companies. It's sort of a foundational point to being able to be successful.

• 15:54Harry Stebbings?

  Would you say then it's the later stage VC's role to really network and integrate themselves in the early stage markets to really get that enhanced deal flow from the earlier stage funds?

• 16:04Speaker 02

  Yeah, I think our history tells us that where we do best is when we have an awareness of a company and are able to track it over time, get the know management over time and have conviction before we ever show up for the first initial meeting at the time a company happens to be raising in a cycle that fits with with our mandate.

• 16:22Harry Stebbings?

  But I'd love to dive into a quick fire now with Eugene. So I say a short statement and then you give me your immediate thoughts in 60 seconds. How does that sound?

• 16:29Speaker 02

  Sure.

• 16:30Harry Stebbings?

  60 seconds per one, don't worry. I'm not going to fire you with five in 60 seconds. But let's start with your favorite book and why.

• 16:37Speaker 02

  Oh, golly. Well, let's see. I have a hard time picking one favorite book. I have a book I'm reading right now that I'm finding quite enjoyable. It's been around for a while and I think it's more topical now than ever. And it's titled The Righteous Mind by Jonathan Haidt. And in fact, the subtitle of the book is Why Good People Are Divided by Politics and Religion. And that seems like an immensely topical subject right now in the world that we live in. And so fascinating to me as I try to, as all of us do, figure out how to think about the current state of the world.

• 17:09Harry Stebbings?

  Pros and cons of working with Capital G?

• 17:12Speaker 02

  I'd say cons are very few, actually. The alphabet format does quite a good job of balancing.

• 17:20Speaker 02

  What effectively enough that in Google is a very large company with having the independence and autonomy to be able to go drive a business independently. And that's, that's a great advantage. I think the pro is that having this platform from which to go find great investments is totally unique and differentiated. And as I mentioned earlier, kind of a product, if you will, that the market has never seen before.

• 17:40Harry Stebbings?

  What's your favorite blog or newsletter? Are there any must reads when they come in?

• 17:44Speaker 02

  I think the information Jessica Vassalera's new online digital newsletter is quite interesting. I think they're doing a really nice job of developing proprietary content that is interesting. It's something I pay attention to. And then I'm a very regular reader of The Economist and The Wall Street Journal.

• 17:59Harry Stebbings?

  Penultimate one, Rorio Driscoll said markets make outcomes and team at this stage is not really so relevant. What are your thoughts on kind of the centrality of team at this stage?

• 18:10Speaker 02

  I think team's crucial and I think that for every, you know, it's, it's such a competitive world, particularly in technology for large market, market opportunities that team is critical.

• 18:21Harry Stebbings?

  And then finally, what's your most recent public investment and why did you say yes?

• 18:25Speaker 02

  Think our most recent public investment, most recent investment in a private company that, that has been publicly disclosed is Stripe, which is a revolutionary company in the payment space with an extraordinary team and traction. It's quite unlike what we see in most companies out there. And it was considered to be a high priced, expensive financing, but into a company that we think has incredible long-term value. And so got comfortable with it as a result of that.

• 18:52Harry Stebbings?

  Well, Gene, thank you so much for coming on the show today. As I said, Leila told me it'd be an amazing show and she absolutely was right. So thank you so much for giving up the time today.

• 18:59Speaker 02

  Great. And I'll look forward to the follow up then.

• 19:03Harry Stebbings?

  So much fun having Gene on the show there. And again, a big thank you to Leila and Rob Siegel at XC Capital for the intro to Gene today, without which this episode would not have been possible. And if you'd like to stay up to date with all happenings behind the scenes at the 20 minute VC, then you can add me on Snapchat at H Stebbings with two Bs, or check us out on our new blog, mojito vc.com. It'd be fantastic to hear your thoughts and feedback on that. But before we leave you today, I really want to talk to you about a company that's really changed the way I sleep and operate. Eight is a sleep innovation company with their latest product, the Eight Smart Mattress, being a bed that literally tells you how well you slept last night, paired with an intelligent sensor cover that measures the quality of your sleep and delivers a daily sleep report. In order to bring you the best product, Eight used anonymized sleep data and feedback from

• 19:47Harry Stebbings?

  over 10,000 people to understand which materials and types of mattresses give customers the best sleep, resulting in their unique blend of four responsive and high-density foam layers, plus one layer of proprietary technology that helps people track and improve their sleep. This is perfect for people like me, people who want to be more productive during the day, who use or have used a fitness tracker and want to take care of their health and fitness and sleep. And if that is you, honestly, you have to check it out on eightsleep.com. And if you use the promo code 20VC, that's two zero VC, you'll get a whopping 20% discount. And with Eight keeping me productive with the home product, Full Contact is keeping 20VC team on top form. With Full Contact, they provide the ability to organize your contacts, gain rich insights

• 20:30Harry Stebbings?

  into them, and therefore build deep relationships. With features like automatically identifying and merging duplicate contacts, to the ability to snap a photo of a business card, and Full Contact will transcribe them for you, so no more lost and loose business cards at events like I always suffer from. It's with these features just being the tip of the iceberg that Full Contact really is the best all-in-one solution for contact management, and it truly has changed the way I not only manage my contacts, but engage with my contacts. And you can check them out on fullcontact.com. And as always, I so appreciate all your support, and I cannot wait to bring you Friday's episode with Jason Brown, CEO and founder at Tally.