From Exit to Endurance with Hemant Taneja

How do you build a business designed for the future without knowing what the future holds? As CEO of General Catalyst, Hemant Taneja, told me, by staying in the gray. 

While he embraces ambiguity through his leadership, Hemant's vision is clear: focus on building businesses that stand the test of time.

Resilience was a key theme throughout our conversation as we reflected on how CEOs should lead in today’s fragmented world. I loved his take on focusing on areas where we can each make a difference. It’s a statement that feels immediately intuitive yet one too many leaders have failed to grasp. 

Hemant’s insights inspire resilience as we navigate forward with great intentionality, measuring our leadership by the impact of our opportunities. 

So, you've led General Catalyst and worked with founders across the globe, right? This is pretty unique. What lessons from these experiences inform how you think about leadership today? 

Over the last 20 years, the role of technology in business has profoundly changed. We've gone from building software companies that bring efficiency into the world to redefining critical industries, whether it's healthcare, finance, education, defense, you name it. In turn, the level of responsibility for these technology companies has increased a lot. 

Similarly, so has the scope of what these companies get to do because now, you're not just a technology vendor going after the technology budget of a company, you’re going after the health care spend or the finance spend in a country or the markets that you care about. So, much, much bigger TAMs. For that reason, leadership in those situations is about going from a mindset of exit to endurance.

The question is, how do you build a company that fits into a future healthcare system that's going to serve the population along the lines of what your products are? Or the same in other industries? Asking those questions forces you to think about building companies that are fully aligned on purpose and profit versus being sort of in a short-term profit maximization role, or the way these critical industries have been thought about, which would be, traditionally, impact investing.

Having this mindset as a leader, building what we call responsible companies that have these kinds of mindsets and mechanisms around stakeholders, sustainability, and long-term sort of endurance, that's where we put a lot of focus as we think about building the companies and deciding on which founders to get in business with, as well.

I love that framing, from exit to endurance. That's super powerful. Hemant, I recognize that you're the CEO of General Catalyst, and that's an important role. But being on the boards of many companies as well: How do you balance it all?

Leading an investment firm that's got a lot of companies in there, of course, there are fragmented responsibilities. Doing this you get good at understanding, "At what point do you want to spend time on which portfolio companies?"

And the traditional inclination in our business tends to be either go spend time with the companies that are being very successful, because it gives you brand affiliation and sort of makes you more marketable in the ecosystem, or go work on the companies that are failing, because you want to avoid losing money in the investments you've made.

In my view (and I guide the team on this), we should spend time where our time can make a difference. When you have that kind of clarity, it becomes easy to figure out at any given time, "Which companies are you going to focus on?"

From a governance standpoint, we invest in companies where sometimes those companies start in our offices. We're incorporating them, and then we hold these companies well past the IPO in a lot of cases.

So, our role also has to change during the life cycle of a company. When we're at the beginning, it's not about judging how the team is doing. Instead, it’s about being in building mode with them and giving them psychological safety so they can raise the problems that need to be addressed for progress.

Over time, these become institutions, and you can go into what a traditional board does. Just understanding what stage what company is at and recalibrating your mindset towards that before you enter a boardroom is very important.

Got it. Again, I love this framing of spending time where you can make a difference, right? Quite intuitive, but in a fragmented world, as you said, that makes so much sense. Switching gears here to talk about the VC industry, you've been in this world a while. What are the biggest changes you have seen in the VC space recently? And, in particular, what has surprised you the most?

Venture capital is going through a transition. First and foremost, because the role of technology in society is getting to be far greater. The scope of what we have to do is becoming far greater. 

This traditional mindset of investing in companies at an early stage, getting them to IPO, and exit, generates good return for the asset, but it under-optimizes in the context of what this asset class can actually do. Like when you build a health care company, and we built a company called Livongo. I learned this lesson there, in some ways.

We took the company public in 2019 and sold it in 2020 for $18.5 billion. We were serving about 500,000 people with chronic conditions. And you would say, "What a great exit." But the other way to look at it is to say, "Boy, we only addressed 500,000 out of 37 million people in the United States alone and hundreds of millions worldwide." So, did we maximize the return and the impact of that opportunity? Not really. This mismatch of what innovation and innovation-centric businesses can do and what the asset class is designed for is an interesting structure.

The second thing that's going on is related to the trend of AI. While it's a great innovation tool, most of the value will be captured from a transformation perspective, going and transforming industries. And I know you all at McKinsey are spending a lot of time with that.

If the role is around transformation, then, again, the time scales you have to think about when you go in and say, "We're going to transform these businesses in these large industries," has to be much, much longer. So, it's forcing us and others in the industry to think about, "What is the capital solutions format, and how do we help these founders really go from inception to endurance in these long journeys around the transformation of these major industries?” 

That really resonates. As you look at the world more broadly, it's hard to escape a conversation today: high inflation, high interest rates. There's complex geopolitics that’s impacting nearly every industry. Those are major headwinds. In the context of these headwinds, though, there's also opportunity. How do you think about investments in light of these headwinds today?

It's a great question and I would parse the two. Interest rates and inflation, I would focus on how it impacts, from a short-term perspective, our focus on investments. And I'll talk about the geopolitics stuff from a long-term perspective because that's how they impact in my view.

When you have high interest rates, it impacts DCF, and multiples go down. Multiples go down in public markets, then six months later, that sentiment creeps into private markets, and valuations need to get readjusted. That's the name of the game.

To curb inflation, raise interest rates, and multiples went down. Now that we know rates are going to come back down, the multiples are going back up. Understanding that the companies will just have to deal with that perturbation and making sure you're always thinking about your entry prices into these companies in the context of steady-state multiples. That's the prudent way of investing. We stay focused on that so we can smooth out these short-term gyrations around these two parameters. 

The complex geopolitics is a much more complicated topic because you've got the great power competition, re-globalization, and AI as a technology trend.

As an illustrative example, we have this company, Helsing, in Europe, which is helping different defense companies AI-enable their capabilities and think about new products that different countries need in Europe and then Europe’s needs as a whole from its own peace and prosperity perspective.

So, "How do you build a company that is going to handle the needs of sovereign institutions as well as build a global company?" is an interesting challenge. And a new playbook is emerging around that. As these supply chains are re-globalizing, there's a lot of value that will shift from places like China to places like India.

For example, here in the U.S., we're talking about onshoring a lot of manufacturing. Wherever there are tectonic shifts like that, for venture capital, that's a great opportunity, because we are in seismic changes.

Whereas the geopolitical stuff is a much more enduring trend. And we have a whole thesis called global resilience, which in some ways is akin to the resilience work that you all are doing, that is all around these critical industries, and how businesses and supply chains are reconfiguring there, and, "What's the role of technology there?”

Thank you for that, Hemant. You and I have been in conversations together where we talked about economic pressures and the role of productivity growth, right, productivity as a way to drive GDP, as a way to drive job creation. We debated why we’re not seeing productivity in the numbers. But we do have productivity superstars: individual companies that are doing well. 

From your vantage point, are there industries that you think drive productivity most effectively or other things that you're seeing in your companies in your portfolio that are most interesting and relevant?

Yeah, this is a fascinating question. When you think about technology's role in society over the last 34 years, you would argue that we've not become more productive. You could also argue that we have become productive, but that got extracted by very few companies and technologies in terms of economic rent, and it didn't get passed through to the rest of the world, which might be a better explanation for why there's all this unrest from a societal perspective.

With AI, and because it's a transformation advantage, companies that have customers will, in the end, be the beneficiaries, which is good, because this time, productivity will be much more diffuse. You're seeing that in two specific use cases in companies for sure.

One is around writing code. The productivity around how quickly you can build products and innovate now using the GitHub Copilot and a lot of other companies (we're investors in a company called Codeium that's building a really novel technology around that, and there are a few others trying, as well), I think that industry is demonstrating productivity.

The other is around customer support. We have a lot of companies in the Valley that are of reasonable scale that have reduced the number of tickets and the time to address their tickets by 30-40% because of AI. And they're in the early days of adopting some of the AI capabilities.

Those two areas as business functions are probably showing the quickest promise. We are seeing work in other areas, like marketing and others, as well. Every business function will eventually see this addressed, and that'll be an industry-wide perspective.

Got it. Hemant, you briefly mentioned earlier the modern defense and intelligence space. And I think you talked about global resilience and the initiative you have from that. Would you just mind sharing more about your thinking behind that? Why is that an area of interest with General Catalyst? And how have you framed global resilience?

Yeah, the global resilience theme for us is about helping nations build robust supply chains in critical industries. That applies to defense, manufacturing, health care, and energy transition. And so, we're looking at it, saying, "What are the innovations, and who are the entrepreneurs tackling those industries that we want to be investing in?"

And I'll tell you, these are massive ideas, and some interesting entrepreneurs are getting into it. It's probably one of our best-performing sectors when you think about the potential going forward. And there's a company, as I mentioned earlier, called Helsing. There's a company in the U.S. in defense called Anduril where we've been involved effectively from the beginning.

We’re also investing in manufacturing businesses, a lot of the tooling around it, and how to revamp and make it more technology-enabled. But health care is a big industry because no country wants to rely on just the U.S. or China for vaccines when the next pandemic hits. So, how do you build your own capabilities there?

We are also big believers that with the emergence of India, there are these tectonic shifts in supply chains, and there's an interesting U.S.-India corridor emerging from a technology collaboration perspective, just given the alignment of the values and the fact that so many U.S. businesses already operate in India effectively. That corridor itself is a very interesting place to create value, as well.

Hemant, the last question for you: As you lead through all of this, what have you been doing to build personal resilience for yourself as a leader? What are the things that you've found most effective?

In this dynamic world where so much is changing (technology shifts, geopolitical shifts, short-term perturbations, long-term perturbations), it's important to understand and embrace ambiguity. What happens to most leaders is they lean towards, "The world is black or white," and they become dogmatic about that being their raison d'être.

Whereas I like to stay in the gray and embrace that we don't have all the answers. Take AI, for example. We don't have all the answers. We don't need to regulate it today. And we shouldn't go be naive that this couldn't create unintended consequences. But let's be mindful of that and navigate that with great intentionality.

That’s important for leaders making key decisions and, frankly, advancing these fields today, because we just don't know where the world's going to turn up. 

We need to be comfortable changing course as we learn as opposed to being too dogmatic.

Hemant Taneja is an investor, founder, author, and CEO of General Catalyst. He is an early investor in market-leading companies like Stripe, Livongo (acquired by Teladoc in an $18.5B merger, the largest in digital health history to date), Samsara (NYSE: IOT), Snap (NYSE: SNAP), Fundbox, Grammarly, Gusto, Applied Intuition, and Anduril.

To support his mission for Responsible Innovation, Hemant is co-founder and chairman of Responsible Innovation Labs, a non-profit consortium of leaders aiming to create standards of innovation to serve the needs of a global society, and to help build enduring companies that re-center technology as a force for good.

Alongside his work at General Catalyst, Hemant serves on the Stanford School of Medicine Board of Fellows, has worked on climate and energy issues as the co-founder and Chairman of Advanced Energy Economy, and is a founding board member of Khan Lab School, an innovative K-12 school.

Asutosh Padhi is a senior partner and the managing partner for McKinsey in North America, leading the firm across the United States, Canada, and Mexico and serving as part of McKinsey’s 15-person global leadership team. He is also a member of McKinsey’s Shareholders Council, the firm’s equivalent to a board of directors.

He is the co-author of The Titanium Economy, a book that explores the industrial tech sector and the bright future that it can help create. It’s available now.

This interview was recorded on March 27, 2024. Any mentions of organizations or individuals are not endorsements by McKinsey & Company.