A chat with Adam Valkin: Venture Capital

Adam Valkin is a managing director based in Boston, MA at General Catalyst Partners. He is originally South-African and a graduate of Harvard College. At General Catalyst, he has been involved with investments in Brainly, ClassPass, Deliveroo and Monzo among others. I had the chance to sit down with him to talk about the beginning of his career, the changes he has seen in the industry as well as some of his most recent investments.

We’ll start by going back to your undergraduate days. What was your first job out of college?

My number-one priority when I was in college was to find a job so that I could stay in the US. At the time, the obvious jobs for people that had interests in business were banking and consulting, neither of which I was particularly excited about. What I optimized for was trying to find something a little bit more entrepreneurial but where I could develop within the business context and learn from smart people. I spent some time senior year hustling for alternative opportunities that weren’t constrained to banking and consulting and got lucky. A close friend named Saul Klein (who now runs Local Globe, a seed fund in London) came to Boston to join a startup and he offered me a job. I spent the first three years, post college, working at two startups. One was a venture-backed startup, and the other was a spin-out from a big corporate. Then after three years, I took a job as a junior at a venture capital firm in London.

In your early career you were involved with the founding and scaling of LOVEFiLM, which was then acquired by Amazon. Could you share how the company was kickstarted?

I joined a firm called Arts Alliance as an associate in the summer of ’99, right when the market was bubbling up. We were doing early-stage investing in both Europe and the US back then. Then post 2001, the environment got pretty gloomy because the bubble had burst. There was a huge tech recession. There was not a lot of opportunity and fewer people were gravitating towards entrepreneurship. Most people that were excited about graduating from school and going to work in tech were all going back to work in consulting and banking.

It was at that time that my partner, Thomas Hoegh, had the idea to start moving away from more traditional venture capital to actually incubating companies in our firm. Around 2002, we had three or four big initiatives within media that we wanted to incubate, one in the cinema space, one in the digital cinema space, and one in the streaming space. I took the ball on the kind of Netflix-for-Europe project and became the founding CEO of what was LOVEFiLM. I was involved full-time in the incubation and early management phase for about a year and a half and then I was on the board representing the shareholder. Because we had incubated the project, we owned a vast majority of it. It wasn’t like a traditional venture capital setup. I continued in that role for about four or five years with the company. Either way, I was probably spending between 25 and 50% of my time helping them develop into a company.

What was a particularly tough experience in your career working on the management team of a company?

In 2008, I got involved with a very good friend of mine named Ynon Kreiz in the management of a major television production and distribution company. He was appointed as CEO and brought me along to be global head of digital media. We joined right as the financial crisis came into full steam in late 2008. Within six months of being there, our business had been significantly impacted by the crisis: we saw a massive decrease in advertising spend, then in revenues and finally in profitability of our customers with the broadcasters, who, in turn, decreased their programming budgets for buying TV shows from people like us.

It was certainly very tough and intense, but it was also a massive learning experience. I started to understand how big global companies really function and also how, in times of distress, innovation just disappears. It all becomes about survival and the focus moves to cash generation and profitability, which are not always in line with innovation. Just understanding how big companies think and act is hugely important in the startup world because so often what you’re trying to do is disrupt or displace more traditional businesses or partner with those businesses in order to make progress. Understanding how these organizations function, both in good times and bad, is very useful.

Do you believe that your experience working as part of several companies was important to you later on?

Working within various companies was critical for my development, but it doesn’t mean everyone needs to do it. The best path to get into venture capital depends much more on you and the type of person you are and how your brain functions. In my experience, most people will find it hard to have a very successful, impactful career as a venture capital investor without having some operational experience.

But if you look at the very best venture capital investors in the world, most of them have not done anything but that. Out of a hundred people that will be good, successful venture capital investors, there are probably five or 10 that can get there a different way. Those are usually the best ones, and they’re probably people that have a very strategic, analytical way of understanding how the world works. There are lots of examples of very successful investors whose careers have been almost all in venture capital such as my partners Hemant Taneja and Niko Bonatsos.

Over the course of your career, what changes have you seen in the challenges that founders face? Has it gotten tougher to be a founder?

I would say that the period we’re in now may be one of the most favorable periods in history to be a founder.

Firstly, there’s no question that there has never been greater availability of startup capital than there is today. You can see that by the number of venture capital deals that are done in the US or Europe or anywhere else. You can see it by the amount of capital that’s being deployed. You can see it by the number of funds that exist, by the size of the funds and how much capital they have to deploy. Any way you look at it, this is a period of overabundance of capital, which is good for stimulating activity. The downside of that is that capital availability also means there’s way more competition. In a world of high competition between startups, you see a massive inflation in customer acquisition costs and an erosion in customer lifetime value because users have more choice and can switch between providers.

Additionally, it’s just so much easier to start a business today since all the components that are required to build a company have become productized in software. If you need servers and storage and all the infrastructure to build an online offering, you’ve got AWS. If you need any kind of analytic software, you’ve got Looker and Segment. If you need payments, you’ve got Stripe. If you need a website to sell goods, you’ve got Shopify or BigCommerce. If you need tools for your engineers to communicate, you’ve got Slack and Atlassian’s products. Everything is right there. You just need to register for an account. That is a big, big deal.

Given that all these tools are now accessible from a Wi-Fi connection and a laptop, how have you seen the growth of ecosystems outside of Silicon Valley such as Boston, New York, LA, London and other international hubs?

By and large, Silicon Valley has dominated in the internet phase of history. Today in the US, it feels like half of the activity occurs in Silicon Valley while the rest is split between major places like Boston, New York, LA, Seattle, Austin, Chicago, Toronto etc. New York and Boston are still the largest non-Silicon Valley US hubs and I think they will continue to be really important.

However, there’s no question that the fact that building a startup has been productized to this extent has democratized entrepreneurship, allowing for all kinds of cities to become relevant, so long as they have a population of developers. Talent in Silicon Valley is very expensive as well as harder to retain due to the range and number of available openings, which provides an opportunity to other geographies.

Are you optimistic about Europe’s tech scene?

I think it’s hard not to be optimistic about tech in Europe if you actually dig in and look at the numbers. Firstly, entrepreneurship and venture capital activity in Europe has grown three to five-fold across all metrics in the last six years. That’s not just in terms of investment in new companies but also regarding output and exits. We are seeing $5 to $30 billion valuations on a consistent, repeated basis, from Spotify to Zalando to Supercell to Farfetch to King.com.

Also, Europe is becoming a hub for fast-growing software-as-a-service (SaaS) companies, which previously did not really exist as a category. The most famous example right now is this company called UiPath, which came out of Romania, which has grown to over 500 million in revenue over the last few years.

In addition, according to reports there are more developers in Europe than the US, so roughly five and a half million versus four and a half million in the US. In Europe there’s generally thought to be about 150 cities that actually have a meaningful population of developers that could build viable, significant tech companies.

Even if you have a negative view on the growth of Europe’s whole economy, you know that tech is going to have an increasing impact on the traditional economy. You may not always be betting that the economy is going to grow, but you can bet that tech is going to significantly impact the existing European economy in every category, whether that’s fintech or insurance or automotive. I think the bet in Europe for the next 10 years is about investing in companies that are going to disrupt the traditional players and then investing in companies that are going to equip the traditional players to survive in this new world.

Of your recent investments, what’s something that you’re particularly excited about that you want to share?

In 2018, we invested in a UK company called Monzo, which is a mobile-only bank for UK consumers. The company essentially offers a bank account with no hidden fees and built for millennials and generation Z. It includes not only traditional banking features but also a lot of payment functions. The company excels massively on things like customer service and responsiveness and has built very strong trust with its customers. They started off with a prepaid card-based account and, once they became a fully regulated bank, launched a current account at the beginning of 2018. Monzo has quickly become the fastest-growing bank in the UK, adding over 150,000 new customers a month, driven by organic and referral, so that’s even before spending a lot of money on customer acquisition. The founder, Tom Blomfield, and his team are just immensely committed to their mission of improving the banking experience by building more trust and love into it. We led a growth round in 2018 alongside Accel and have been very excited about the developments of that company.

Then we have another company that we invested in January called Rapyd, which is also a fintech company. Their mission is to essentially democratize payments for the world, taking into account the fact that most people actually don’t have credit cards. A lot of the famous payment companies are built for the card rails, but there’s a huge portion and increasing portion of the global economy that is driven by cash payment, bank payments, eWallet payments. They have built a set of APIs to enable any global merchant, bank, telco marketplace to tap into their network of non-card-based payments in every country in the world.

What is your investment philosophy?

As a firm, we have a pretty broad focus within software and internet. The way that I am focused is thinking about next-generation consumer companies that are rebuilding the customer experience in traditional industries that need a shake, so things like insurance, financial services, automotive. Examples in our portfolio include companies like Monzo, Vroom and Lemonade.

Then on the other hand, I’m interested in software companies that are applying AI to help traditional players function more effectively and compete in a changing world. For example, if you look at the report of profits of banks like JPMorgan or Lloyds, these are strong companies that will be around for many more generations, but they are companies that have to rise to meet the modern, contemporary challenges in their businesses. There’s a huge opportunity to sell software to incumbents that are trying to evolve how they operate. Generally, I try and stay focused on industries that I understand from the consumer side.

What’s the most rewarding part of being a venture capitalist for you and the toughest?

By being a venture capital investor, you make the decision not to be on the front line. You’re not the star in the show. You make the decision to be a supporting player, and that can be really rewarding, especially when you somehow find a way to play a role in a company where the founders really flourish and scale. Companies are never successful because of the venture capital investors on the board, but it is possible in some instances for the investor to have played a role in either accelerating or magnifying the success.

Also, I think the part that is really enjoyable is having the opportunity to work with some of the most talented founders around. By the time a founder actually gets funded by us, they’ve generally managed to raise a seed round and then a seed-plus round. They’ve made some significant developments with their business as well. It’s a very privileged position to be in since you are learning from what I’d describe broadly as a pretty elite group of founders and then picking a few to develop much closer working relationships over time and hoping one or two of them really thrive and scale. The really good founders are constantly changing, learning more, evolving as they scale, so you actually see a massive transformation in people over time that is ultimately very rewarding.

I think on the flip side, early-stage investing is, by definition, a very difficult job because, even if you’re very good at it, you’re going to be wrong a significant portion of the time. The question is, out of the companies that you invest in, what impact do those companies that don’t do so well have on your life? It can be very challenging because you’re dealing with failure. You’re dealing with people’s lives. You’re dealing with hiring and firing. There could be any number of unpleasant issues that you have to deal with, people that have left their safe jobs at big companies to come work at the company, maybe partly because you were involved. There’s a very unglamorous part of the job that I think a lot of people don’t fully appreciate, but part of what defines investors, firms and people is how they deal with adversity and what they’re like in those situations.

What advice would you give undergraduates today?

The first thing is to go work with brilliant people because nothing has a more profound impact on your development than the people you work with early. You can see this all over. It’s hugely important to go work for people that you respect and you think you can learn from. Just surrounding yourselves with people that you can learn from, people that you can learn the right things from, is hugely important, often easier said than done, especially when you’re coming out of college with debt and just trying to find a job.

Second, although it may sound a bit cliché, is to do stuff that you’re very excited about. It doesn’t have to be a lifelong passion in that industry, but it’s something that you can get very excited about, and you can spend every moment that you’re awake doing because that’s what it takes. If you don’t get totally lost in what you’re doing and give it 150%, you won’t get really good at it. I don’t think there’s any other way other than total commitment, putting in 150%.

For people that want to start a business, then you genuinely need to go find a space that you’re extremely passionate about and absorb everything you can about it so that you can develop insights that are truly unique. You can’t pretend, and you don’t want to be a poseur, someone who’s talking about, “I’d love to start a business for the sake of starting a business.” Being an entrepreneur is not easy, so you have to become consumed by the purpose because otherwise you will be unlikely to go the distance.