Frothy markets, investment clubs and focusing on growth: My discussion with Harry Stebbings on 20 Minute VC

With over 350,000 subscribers and 80 million downloads, 20 Minute VC has become a cult-like favorite podcast among entrepreneurs and investors worldwide. My colleagues Laela Sturdy and Gene Frantz appeared on the show in years past; this week it was my turn to meet with affable host Harry Stebbings. Please download the podcast here.

Below are a few of the topics we covered on the podcast, such as how firm structure impacts decision making, recommendations for new board members and our reasons for keeping CapitalG focused exclusively on growth when other investment firms are moving into the earlier and later stages. That said, to get the most value from the discussion, listen to the whole episode here. Harry manages to pack a lot of substance into only 20 minutes!

How do you separate yourself to ensure purity of decision making as a partnership?

We thought a lot about that when creating the firm because it’s core to being set up for success; organizational structure ties directly to effective decision making. We decided to have partners make their own investment decisions. We operate more like an investment club, rather than the more typical consensus-driven decision making body. Each partner makes investments individually. We don’t have to get buy in from anyone else.

This is a less common structure, especially among growth funds. Before deciding on this structure, we researched different investment firms and compared their returns. It became abundantly clear that investment clubs perform better.

Having lived it for the past 7 years, it’s easy to see why. First of all, investment decisions become a lot less political when you know you don’t have to win over your partners. Second, it changes the role of the rest of the partnership, which tries to help you make a decision as opposed to making the decision for you. Instead of jostling for allies, the rest of the partnership focuses on researching the merits of each investment in order to help inform a partner’s decision. It becomes all about asking the right questions.

As an investor, you can look at investment committee meetings as an opportunity to learn as much as possible. You leave those meetings focused on making a good decision as opposed to selling the partners.

As someone who’s worked through massive market cycles, how does that impact your investing mindset?

For entrepreneurs, it’s challenging to manage businesses when the environment is changing so meaningfully around you. You’re in a kind of a prisoner’s dilemma: If your competitor ends up raising 10 times more capital than you have, you need to raise the money at pace to compete with them, even though that may be a bit counterproductive. The extreme of that is in markets like India where capital comes and goes in cycles; it becomes extremely frothy, and then people get nervous and leave. It is extremely hard both from an operating and an investing standpoint.

At CapitalG we have the luxury of being able to invest across a wide range of sectors and countries. By increasing the size of the playing field across growth, we hope to surface up the best companies each year.

These days many firms are going multi-stage up and down the stack, from seed to pre-IPO, but you chose a very specific growth strategy. What was the thinking there, and what value do you think comes from being so stage focused on growth?

We started with growth because we thought we had a very differentiated perspective on growth and would be able to help companies in a unique way by leveraging the incredible talent at Alphabet, by building a world-class in-house growth team specifically focused on helping companies at this stage and by capitalizing on our own experiences gained from playing an active role in scaling Google into such a successful company.

When I talk to my friends in venture, they’ll often have 15 active investments and may be on almost that many boards. They connect with people over 20 meetings a day because they’re trying to get information on what’s happening in the community. In comparison, we’re a lot more prescriptive about where we go. I may be on 3 or 4 boards at a time. The process is totally different.

I might spend a month researching a given segment, and I will come back to that six months later and spend another month. We’ve been exploring crypto for seven years. I still haven’t made an investment in the space; I’m connected to a lot of the best crypto minds in the world, but I haven’t found an investment that I like yet — though I will. It’s the same with gaming. Sometimes you just need to be patient in these categories. In order to really excel in helping our portfolio companies achieve growth, it takes all of our attention and focus.

You’re on the board of some incredible companies like Lyft, CreditKarma and Convoy. How would you describe your style of board membership first, and has it changed over the years?

Over the years I’ve learned that different management teams need to be influenced in different ways. I take the time to get to know the CEOs and the management team and to learn how they think, how they make decisions, and what moves them. Then I put the time into working both inside the boardroom and outside to move the company in the right direction. It’s a lot more nuanced than I think most people realize and certainly more so than I appreciated when I first started out.

What advice would you give for people just joining their first board?

It’s not very effective to tell people what to do. As a minority investor, it’s a lot better to try to get them to see you as a mirror so you can be an honest reflection of what they’re saying and help them think about whether they’re focused on the right questions.

To hear more of our conversation, listen to the full podcast here.