Niko Bonatsos, Managing Director at General Catalyst on Deal flow and Investment Thesis

You don't have an alternative. Unless you're hanging out on your own thinking about how the world is going to look like, you definitely keep your mind active because every day you're talking to your partners, to your portfolio company founders, to new prospective founders that you may want to invest in. So if you're just—we won't be paying attention, that you're not like opening 15 different tabs on your computer screen, or if you are just enjoying a good coffee chat with somebody, right? Basically, you have to keep your mind active. Like, our business is to be present at all the meetings that we're participating in and try to understand what the founders are saying, if their version of the future really jives with what you think, and if that's the case, how—what can we do to get into their hearts and minds and win the opportunity, especially in this very competitive market.

How many times? I have water in my desktop. Sorry, how many tabs do I have open on your Chrome browser? I don't know. Brave, Firefox, whatever you use. How many tabs do you open as you're researching, or do you keep them active at the end of the day as well?

Oh, I really appreciate it. Wow, you did a great job. I should have taken down more notes. I'm glad you recorded it, so thank you.

I mean, honestly, I didn't know much. That's the truth. It happened to me: the right person at the right time for the right thing. There were a ton of other people coming out of Stanford in 2009, 2010 trying to build a social network. Not a new idea—hundreds of others were doing it at the same time. Clearly, our company didn't go anywhere, but during that time I met a lot of VCs, and one of them really encouraged me to check out the venture capital industry and gave me the chance to join the industry and become a founding team member of GC in our Palo Alto office, because we didn't have a presence till then. We were just focused on the East Coast for the first 10 years of our existence. So I joined the industry and the firm because I really loved the people who I met at the time, and they gave me a chance. I joined as an associate. At the time, the industry was much smaller than what it is today. Companies used to go out to raise a $750,000 seed round. After three months, they would have raised $490,000 and they would be like, 'You know what, it's enough. We can make enough progress for a year.' I don't know how many companies that haven't been able to raise a full seed round, especially when they have a lead two, three times over. And then, secondly, back then, Series Bs were getting done at $40, $50, $60, $80 billion valuation if they were really good companies, for like a $10 to $15 million check. And now these are the prices of the—we're not so sure how hot the Series A rounds are. It's a lot has changed since then. Firms became much bigger with a lot more capital. Growth investing became widespread. We didn't have solo VCs back then. We didn't have so many micro VCs as we did today. We didn't have as many crossover funds or they became also themselves early-stage investors. It was a very different time. And, you know, in the venture capital industry, you have a few ways to come in: either because you're a notable founder or operator and you join a VC firm or you start one because you want to be the dream board member that you never had. The other option is to come in, join as an investment team member, and maybe you get lucky and you grind it out and you can climb through the ranks. So I ended up on the second route.

Yeah, look, your brand is what other people are saying about you. And in the world of venture capital, you gotta continue to evolve your brand as well as invest in unbelievable founders who will be the category-defining company CEOs of the future. And GC—when we at GC when we got started in California, nobody knew us because we had spent 10 years out of Boston. And also, the best companies we had at the time—Kayak.com, Demandware, HubSpot, Brideco, Vitru—people thought of them as Silicon Valley companies because Accel, Sequoia, others had invested in them after us. But this changed for the firm when we invested in Stripe, when we invested in Airbnb, when we invested in all the YC companies that were going through the incubator for a few years, and then added a bunch of the other awesome companies that you mentioned, as well as a lot more. So VC firms don't have a product. They don't have any unique IP. We don't have any revenue. What we have is our brand, the decision-making processes, and the talent that we employ at any given moment in time. And every single day, the talented VC firm employees walk in and out of the office, or in today's world, log on and log off their Zoom account. So you gotta earn people's hearts and minds every single day as you go through your day. And what you say online, what you're saying in person or Zoom meetings, can make a difference. But what's even more important is the people that you work with, what they say about you. And that's something we always keep in mind. So the firm has evolved, and our brand has evolved. So we're now about the stage-agnostic firm—we're not that before. We have global ambition—we're not that before. We invest a lot in many sectors, including healthcare, for example, that we didn't have a presence before. So like every year, we try to do a couple of new things and do them really well, and that's how the brand evolves.

I mean, the most important one, honestly, is knowing where your own superpowers lie and quickly figuring out if you can do it. Otherwise, move very quickly to your next set of partners who may be the ones that have a much stronger personality fit with that particular set of founders. The thing that we always have to be cognizant of is that sometimes the CEO is not the decision maker—not the sole decision maker—but the other founders may actually be the real decision maker or key participants in the decision-making of which firms they want to work with. Like, always know how to read the Zoom or the room in the old world, and find the best people on our side that can get it done. Sometimes it could be individuals working for the firm; sometimes it could be our portfolio founders or executives at portfolio companies who really can tell our story and our strengths in a few instances better than us or more convincingly than us.

And I love how you talk about how competitive the market is today. And oftentimes, I've heard many LPs actually mention that speed is a competitive advantage in today's market, especially when startups are fundraising for larger and larger checks. And who knows, you have a highly competitive A that could be like $50, $60 million range that you might not have had like a decade ago, per se, right? As a notable firm like General Catalyst, how do you balance speed and diligence in an increasingly competitive market of venture?

That makes sense. As you go on in valuation and rounds, you take far less risk, but they're more expensive to be on the cap table again. In today's environment, you don't always take less risk. Like, you take the same risk because there's so many firms and folks who want to deploy capital, and there are a few founders who really have a knack for fundraising and they happen to be in the hot market, or both. So this is the day.

Yeah, it's not just my decision. It's a team sport. At least at GC, we believe in radical collaboration, and each one of us picks on different traits that the founders have. In the beginning, if it's just the founders and the idea, we only evaluate these two, and we lean in particular on the founder traits. So we want to invest in some people who are learning really quickly, or very ambitious, can recruit complete teams, have very strong storytelling capabilities which could help with recruiting, fundraising, future customer acquisition, as well as individuals who are authentic, like doing something that doesn't sound like they're mercenary, but it's like the founder narrative is very, very strong. So we pick on different traits. I just mentioned a few of the important ones. We like people who are really product obsessed, and this shows in the quality of their product roadmap or even the product itself if they have a prototype or they've launched it. Now, as the company goes on in their lifetime, they have a launched product, they have customers or users or revenue, and the more data you have, the better it is because you can see that indeed they have product-market fit. You can definitely see that they figured out how to scale the customer acquisition, and then you can see all these curves and how they compare with everybody else in their market. If it's like faster than anything else you've seen before, you can take more risk and price an A, B, C, D round. So it's different stages or different filters we apply. And also within our firm, there are other partners who specialize. So I don't do much in growth, for example. I have other amazing partners who do most of our growth work, and they care a lot more about how big is the market opportunity, is this company growing faster than any of their peers. They care more about numbers, in other words. I care more about the founders. Is the timing really great for what they're doing? And in the case of like early A's or B's, early evidence of product-market fit.

Yeah, so let's say I meet you today. I really like what you're doing. Immediately, I will send a text or an email or Slack message to a few of my relevant partners who I'll mention that I met you, I'm very excited about what you're doing. I'll ask them if they've seen anything else in the space. And with GC having a global pretty much footprint, very quickly we'll identify the other companies like in a few hours, if not minutes. And then we'll very quickly be like, okay, this is indeed the best opportunity in front of us right now. Let's try to understand it within a few days, if not the next day. We'll get on a Zoom or an in-person meeting with you, and we'll try to unpack what you're saying and have a couple of key questions. And if we can dream all together about how big the outcome could be assuming you're right, then within a few days, the whole partnership will be calling you to share their excitement and try to make a deal with you. Now, the other aspect of it is, at GC, because we decide our economics in the beginning of a fund, I'm not personally incentivized to only invest in companies that I come across. Like, I'll make the same amount of money if I invest in a company I met the founder on my own or somebody else sources it for me, right? And that's important so we don't suffer from that 'not invented here' kind of syndrome.

The timelines have compressed now. And the volume of opportunities has gone up significantly. Zoom and the crazy heated market we're in makes both sides—meaning the founders and the investor side—to be a lot more efficient than they were. For example, for a lot of the out-of-geo investments that we've made the last year and a half, we haven't visited the companies. And historically, we would have had to do that. Most often, if you're really interested in the founder, you would do a couple of dinners with them before you got to a decision so that both sides would know each other. In the Zoom universe, only recently we started happening again. Just give you a few examples. And now that we're in the zoomification of everything, how—I mean, I talked to a couple of VCs earlier in the pandemic, and they're like, 'Oh my god, investing without ever meeting the founders in person is quite a learning curve, and that required some more diligence, that required a few more conversations.' What does that look like for you or for GC? Do you have more conversations, or are you doing more diligence, and what does that typically look like?

That makes a lot of sense. I didn't—every year we also start a few companies too, right? I think you have this incubation, like executives in residence at GC as well. Where—yeah, it's not the—the execs are more like operating partners or another one starting the companies. But like every year, we do incubate like three or four companies in-house. Not so much in consumer, but like in healthcare and fintech, like more deterministic places. If I were to know how the next YouTube or Discord is gonna look like, probably I would leave DC, you know, and do it. But I don't have this imagination, unfortunately. Not as gifted. I mean, consumer is one of those plays, as you know yourself, it's a hit-driven business. Either you hit it out of the park, or the vast majority don't hit it at all. As we learn every single day, it's hopes and dreams that sometimes they say hopes and dreams, you know, or evolve to hopes and tears.

I mean, honestly, the lazy option is to go and find other people to invest in their ideas. Like, incubating a company is a lot of work. You're doing it because you can't find somebody on the outside and you're obsessed with the idea, and you try to problem-solve for a specific market gap. You got to go out and recruit the founders. And the way it looks like is basically we identify the problems based and identify a couple of founders. Ideally, you know, they can work together. They spend some time with us. If indeed it looks like the space is promising and they're really excited about the idea, we'll fund it with a seed investment. Then, assuming they make some more progress, we'll fund it with a Series A investment. So after like the seed, we'll own like 30, 35% of it. But it is much harder to do that. Like, you can do maybe one, max two of these, and it's like pretty much a full-time job. You wouldn't do any outside investing, right, as a partner. Whereas, you know, I can do like one investment every week in this market.

Yeah, look, there's some very good places that have opportunity and pay really well. But historically, as you know, media doesn't pay really well, and there are a ton of ups and downs in the headcount when the ad rates are plummeting or distribution... to build their own pipeline, their own content, to own their own content and audience. Yeah, that's definitely a trend, and it's on the right side of history. Some people can do it, but it's a grind, right? Like, if you are a bit older, you have family, you have student loans, you can't do it unless you have...

Honestly, I just have some 'why' questions: why did you do this, why do you think this is going to work? That gauges the quality of thinking, how detail-oriented they are, how deeply they understand the customer they're building for, and the quality of their instinct. If you ask someone ten times the 'why' question about the features they introduced or the ones they killed—which is often harder to do—and what's on the roadmap, you'll understand if they're a product person or someone who wants to hack it together. Business people don't do that; they hire someone to do it.

I don't think there's much more science. In the first 30-minute pitch meeting, it's important to gain someone's product thinking, especially in consumer.

Sounds good. Our CFO will be thankful.