Originally aired on March 8 @ 12:30 PM - 1:00 PM EDT
2020 marks Cloudflare’s 10th birthday. To celebrate this milestone, we are hosting a series of fireside chats with business and industry leaders all week long.
In this Cloudflare TV segment, we will have a fireside chat between Nitin Rao and Hemant Taneja, Managing Director at General Catalyst.
English
Birthday Week
Fireside Chat
Welcome, everyone. This is the closing fireside chat for Cloudflare's birthday week. We're celebrating 10 years of helping build a better Internet and what better way than speaking with industry leaders, entrepreneurs we respect, talking about the last 10 years and the next 10 years. My guest today, Hemant Taneja, who's a managing director at General Catalyst Partners. Thanks so much for joining me, Hemant. Thanks for having me. Congratulations on the decade. So we were reflecting on where we were 10 years ago, and I realized I was in a class that you were teaching. So can you talk a little bit about the class you were teaching at MIT and the kinds of ideas that came out of it? Yeah. So I think, as you probably recall, the course was called Founder's Journey. And I had created it in, I want to say, 2009 when I was in Boston. And the whole idea was they would always teach entrepreneurship at MIT in the business school, and you probably recall this. And, you know, as an engineering student, it was always just uncomfortable to be going to the business school to go learn about business. It's just the way the engineering students used to be. So I decided, hey, how about we bring that mindset and teach the fundamentals of entrepreneurship and decompose it into an engineering problem, as you probably remember, and teach it in the engineering school. So that's what we did. I sort of saw myself in those kids and decided, you know, bring the curriculum to them. Got a lot of crap from the business school there because they taught entrepreneurship. It would only be taught in the engineering school, but that was a great class. I mean, we met either in the class or through that class some, you know, great set of folks. You know, Adam, who went on to start Hipmunk, Peter Reinhardt at Segment, John and Patrick, Sajee eventually. That was fun. It was fun doing it with you too. What has changed over the last 10 years? So what has surprised you the most in those 10 years? You know, it's a good question. If I think about, so I've been doing this business for 20 years now. If I contrast what the first decade was like versus this past decade, you know, most of what we used to invest in was software driving some sort of efficiency. So, you know, build software for doctors, build software for supply chain managers and sort of different types of workforces and consumers and so on, but it was all efficiency driven. And I think that happened in part due to the, you know, the iPhone, the computing clouds, and just this digital transformation of starting a society that we began with Facebook and those platforms, you know, entrepreneurs got emboldened. So rather than going after making these sectors efficient, the ideas became a lot bigger all of a sudden. You could rent scale, you could run manufacturing, you run computing, and entrepreneurs started saying, how about we just build a new health system? Or how about we just build a new set of insurance companies and different types of insurance? Or we build transportation companies. And so that transition from going from efficiency based businesses to fundamentally transforming the efficacy is probably the most profound thing. Like just to start, just think about that class and what life was like when we were there versus today with Uber and DoorDash and all the things that got created as a result. And I would also say, I think it was important, the common theme in all those businesses was these data loops. You accessed people or sensors digitally, you learn from them, and you transformed experiences that you were trying to deliver with that data. And the good news is, because there's more than Metcalfe behind that kind of AI and ML, we also saw some negative consequences pretty fast, as you probably saw in the social dilemma and all the things that have happened with social media. So we started doing this transformation, and we also started seeing some issues that pop up in how we did it learn fast. That actually has been pretty profound in terms of all of that happening in a compressed way in 10 years. One of the things that amazed me, and I realize I'm kind of going back and forth, one thing that amazed me about that class was that it felt like almost nobody continued working on whatever idea they were working on in the class, but it was the exact same group of people who went on to start really interesting companies. Well, I don't know if you remember, we gave everybody the option midway to abandon their idea. We actually wanted it to be that folks were just comfortable saying, it's okay to fail, let's start over and try something else. I think hopefully that just became sort of a mindset. As software is eating the world and folks are building these different types of subscription businesses, it's really interesting. Folks are building transportation businesses, healthcare businesses. They're using words like regulatory and making trips to DC. This is not the same as being sort of an IT supplier. That's changed. Absolutely. How do you coach? How do entrepreneurs figure that out along the way? I think the important thing to get this right is recognizing that when you're not just building, you're not being just fundamentally a technology supplier, which has been set up as this unregulated part of the economy, that most businesses, when you start to touch core services in society, are at the intersection of technology, policy, and business. One of the things we actively look for in founders that are going into these markets is, do they have that kind of a systemic view? Have they seen just the spirit of the policy? Why is the policy the way it is? Of course, policies get antiquated, but when they were created, there was some good intent behind them. Are they thinking about how the technology solutions ended up being what they were before? The impact of transitioning them and the impact on the overall ecosystems, all the stakeholders. First and foremost, we look for founders that are thinking systemically and try to create a learning environment for them where they're able to continue to deepen their understanding in all those areas as they build their business over time. I know you've spent time in so many sectors and we'll talk about it. Which one kind of frustrates you hasn't moved further along in the last 10 years? I mean, the one that frustrates me a lot and I failed spectacularly at was in energy and climate. I mean, I got into that sector in 2006, mostly because I saw all these researchers and faculty members going after climate change with technologies. I've done policy work since then in the area as well, but I realized the frustration there was that as an investor, you're taking technology risk and market risk and policy risk. The compounding of that just makes it really hard to build businesses in that sector. I'll give you an example. We funded this incredible research team out of Dartmouth to build cellulosic biofuels. All the technology targets that we thought they would hit, they did that and better. But guess what? It was all based on the premise that there was going to be this renewable fuel standard and oil companies were going to be forced to blend ethanol at a certain level or there was a penalty. Well, that was a poorly constructed policy. We know what the oil companies did. They just raised the gas prices and passed as defined to the consumers. And lo and behold, all of a sudden, all that work didn't really manifest itself into any kind of impact. And there's loopholes like this all over the place in that sector that have to be overcome this next time around as entrepreneurs are now trying to get serious there again. And would it be different now, like 10 years later? Yeah. I mean, I think in that particular sector, it's not different now, other than the fact that entrepreneurs are tackling it now from the demand side. A lot of the work was in the supply side, so if you think about the success that Tesla has shown is it's actually turned a one of our energy systems, the fossil fuel sort of combustion engine driven energy system, it's turned it into an app on top of the grid, the electric grid. So all that new demand leads to the need for new infrastructure and you can actually then use that demand to bring new technologies to market. But the question is, can you drive that kind of clean energy demand behavior? And so a lot of the focus that I hear in entrepreneurs that want to get back into the sector is on the demand side, which I do think is going to be likely to be more successful, or I hope. I'm halfway through your book, Unscaled. You talk about how it's never been easier to start something with all the computing horsepower behind you. What's the relationship for the startup with the likes of Amazon and Google? Is that a friendly relationship? Does it stay friendly? What's that dynamic like? I mean, that's interesting, right? I think it was the AOL founders who said all the money's made in bundling and unbundling. I think what happens is you can, today, rent all layers of vertical integration, manufacturing, delivery, warehousing, computing, customer acquisition. So these companies, for the most part, start out as they're really product design and product iteration teams. They build something quickly using running scale. They learn in front of the customer, define who the customers are that might need it, iterate the product, and keep iterating. If you find a really big niche, you start aggregating large customer bases that allow you to become a platform over time, like what happened with Stripe, what you guys have done. And so what happens is once you have earned the right to be a platform, then you can start seeing, can you help another ecosystem develop on top of you? And that's the cycle that the very best companies that end up being also, frankly, where the venture capitalists are the most interested from a returns perspective, end up creating those platforms. And that's where the tension is. So these new platforms, how do they close this with the older platforms? And I think that's just the cycle of innovation. It's going to continue to play on that way. And so I don't want to get at the risk of getting somewhat academic. So you can go up. Do you also see startups going down so that you can put platforms on top of you, but do folks sort of, I guess, compete with their suppliers? Have you seen your startups do that kind of thing? I mean, startups competing with their suppliers does happen, right? I mean, I think you start thinking about engineering out manufacturing partners over time. You start one minute because it doesn't make sense to take on overhead. But at some point that becomes more viable. I mean, private clouds are all about that. Companies get big enough and say, we'll build our own cloud versus you running a capacity from the public cloud. So I think that's just an economic sort of rebundling that ends up happening over time as you reach your own scale. And so in your experience, what are a couple of things that, I guess, separate the startups that do well competing with the big Internet giants versus those that don't? Look, I think first thing is, to be honest, there's a lot of luck involved there. Like, did you get the right entry point? And the companies, so there's founders that get lucky and find the right entry point. A subset of those founders are prescient and think systemically far enough along to say, okay, we have an entry point, but we really need a second act as well to be an enduring business. And they actually are able to take advantage of the learning loop they're in by virtue of being in this interesting vector of innovation. And those founders are able to build a platform or whatever sort of the bigger instantiation of their business can be. And it all comes down to, do you build that kind of a culture where there's sort of long-term thinking inherently in the company? So what are some examples of long-term thinking is a second act and sort of laying that DNA already? I mean, look, if you just look at Stripe, it started out as slash dev slash payments 10 years ago, right? And think about what they've become today. They had a great instinct to go solve a problem for themselves. Turned out there were many, many developers that were going to start in the next decade. And that's the prescient insight that they had takes off, but that's not going to stop, right? They've turned that into a software ecosystem, a financial sort of products ecosystem around this. And that takes a certain kind of leadership to build the kind of team that's thinking that way and not getting complacent and constantly sort of learning. Amazon's obviously the ultimate example of that. And, but there are also examples where companies end up getting a great start and perhaps aren't able to figure out how to translate to the next level. Dropbox dealt with a lot of those issues. Drew's a close friend and he built an amazing business, but they certainly had to live through those challenges to figure out what sort of second act. And so it's really remarkable when you think about how many companies have figured that out over the past decade and become these incredible platforms. Yeah. And I know that everyone's trying to storytell in their own way about second acts and third acts, but I've always been amazed by how it's hard depends on your social contract with the customer, which is you can describe yourself however you want, but like, is the customer bought into this idea of the second act? Are there enough folks who are really excited about that? I think that's right. That's right. One of the things you've written a lot about that I thought would be fun to talk about is about, you know, the move fast, break things changing. What is, I guess, so one, can you describe that, but also can you describe like the thought process of like, do you have to, do you just start a different way or do you have to go through like a bunch of experiences and the shocks? I think move fast and break things was a software engineering design principle. It was not a societal design principle. And I think when the role of entrepreneurs changed from creating, you know, again, that sort of efficiency or entertainment content, whatever they were doing to building financial or healthcare education or transportation or workforce kinds of companies where they were responsible for those kinds of functions. I think this idea that you can run a series of experiments and just AB test the impact on human beings in the context of those dimensions, healthcare and finance and so on, that's not okay. Right. And the good news is because of the data feedback loops and the fact that these are all data -driven decisions in these products, we can build algorithmic canaries and measure the second and third order effects of our products on society as a whole. And I think bringing that mindset in from the beginning and thinking about minimum virtuous products, perhaps versus minimum viable products is a mindset that we sort of talked about in that paper. I mean, look, if you go back 150 years and if you and I were steering at the very first internal combustion engine and somebody told us it's going to transform society, but it's going to cause climate change. How would we have relived the last 150 years of electrification? Data and feedback loops give us that power to avoid those unintended consequences. Sorry, go ahead. So I think that consideration, especially living through the last decade and seeing what it's done to sort of the social discourse and our democracy and just the echo chambers of biases, sort of learning from that to say, hey, as we continue on this digitization of society, let's not let that happen. That's a lot of what we talked about there. What's today's combustion engine that we're all excited about, but we don't really understand? It is machine learning, right? It is the intelligence that powers your progress in the digital world. I mean, data is in the oil, that cliched statement that gets it. I mean, I think there's a lot of analogous dynamics that we're living through. I want to sort of switch gears a little bit. It won't be a Haymonth interview if I didn't mention that you got five degrees from MIT. You've spent time in energy and healthcare and finance and different sectors. Maybe just day to day, how do you spend your time? How do you learn? How do I spend my time? Look, I think I do different cuts of my time to see that I'm spending it the right way because ultimately that's the most important currency that we all have. One of the things I always look at is balancing between work and family. In the context of my work time, I really do try to split it into learning and helping because I think that's going to be learning things and then passing that on and helping. There's no pattern to it. There are founders. I may be an investor in them, but sitting with them is more for my benefit than I learned from them. I learned a lot from John and Patrick, for example. I learned a lot from Sandy to Samsara. Then there's founders that we partnered with and started businesses from scratch. We can then sort of apply that learning and go bring interesting new things into the world. To me, the time has to be in the context of that feedback loop and make sure it's got the right balance. As we were talking earlier before the interview, choosing your friends well and spending time with smart people so that you're in that kind of a knowledge chamber, it's something I really do strive for proactively. It feels like you get a lot of leverage from my interactions. You always had a bias to action to not spend too much time on things because time is a valuable resource. That makes a lot of sense. Tell me more about some of the non-profit organizations you're involved in. You were on the board of the Khan Academy for a while. How did you get involved and what do you do as a board member to help? Sal and I went to college together. We're obviously longtime friends since undergrad. I did this deep dive in education. I want to say in 2011-2012 when I moved to the valley. I sort of concluded it's a tough place to build very large businesses. At the time that was true, I think things are changing now as well. I really wanted to have an impact there. It's obviously something that's touched us as immigrants in our lives. We always feel indebted to the institutions that taught us. I feel the same way about MIT. Very cyclical, very seasonal. Basically, what I decided was the best way to spend time and have an impact in this sector is to do non-profit work. Sal and I discussed and he was looking for some help trying to scale his organization. I joined the board there and helped him for a few years. In fact, as part of that, we also ended up starting a school which follows his One World Schoolhouse book that he wrote. This sort of flipped classroom model and a lot of the principles that bring you back to that mastery-based teaching model. We built that school. Both our kids and other friends from MIT and at this point many other families all go there as well. That was sort of a great life experience to help him and then also create something that our kids are part of now as well. I also started Advanced Energy Economy with Tom Steyer. Tom and I essentially built on this core insight that energy is local. This organization does a lot of policy work in 30 plus states now. It's all about accelerating the innovation and adoption of advanced energy. Advanced means clean, affordable, secure. I still chair that organization. There's a bunch that we're doing in healthcare similarly. Generally, when I get involved in the sector, I think about not only investing in businesses or starting businesses but also what are some not-for-profit needs that need to be looked at to have that stakeholder alignment and make sure everybody is benefiting from these new businesses that are being built. Can you talk a little bit about incubating new businesses? I think there's the classic entrepreneur approaches the investor with a fairly baked idea. Investor writes a check but you've also had other situations where the idea has already been born at GC, for example. Can you describe what's the difference between the two and what are examples of incubating ideas really early? Honestly, there's really no patterns. Sometimes we have had some ideas and we have put a team together to go after this. There are examples of those. I have a healthcare infrastructure company that I put together called Camure. Sometimes you meet a really interesting person that you know can be a change agent in an industry and you go build a company with them. We did that with Glenn and we built this company called Livongo in the chronic management space in our offices. And congratulations on that transaction. That's very impressive. Yeah, thank you. We built Kayak in our offices. We put Paul and Steve together and my partner, Joel, was a travel entrepreneur himself. He had a lot of great insights and he said, hey, let's go tackle this. We built that business in our offices. It's no patterns. Some investors are very much classically trained. They find teams and they're backing them and judging them. Some investors are really builders at heart. I call myself a B entrepreneur, but I still enjoy it a lot. We keep taking a shot at problems. Personally, for me, doing a little bit of both is the harmonious state. For the last 20 years, I've always operated that way. Just to follow up on that, where do you get involved? Where do you not get involved? Now that I have been in the industry for a while and time is sparse, it first and foremost starts with where can my time make a difference. That requires having the humility and self -awareness of where you truly can be positively impactful versus not and also understanding it's not about driving things yourself as well as creating the best outcomes. As you mature over time, you understand that. I was an early investor in Snap. Honestly, I spent de minimis time on that because there's nothing I really could do. We were lucky that they allowed us to invest and it was a great investment. Then there was Livongo, which we hired everybody, designed the initial product, led every round, wrote the S1, we did everything. I think it really is no pattern in terms of our approach. We have a couple of minutes left. Let's focus to the next 10 years. What are you excited about? In unscaled, I said this is a 30-year cycle. If you remember in 2016, we've had this long run, market's going to burst. I've always maintained the view that this is not a technology cycle. This is a centennial trend. We're rebuilding society online. I think that continues. The responsibility is more grave for founders and investors. The governance and company building has to be much more serious. We have to grow up. We're not a portfolio. We're building a modern Honeywell, a modern Lockheed Martin, a modern Bosch. These are amazing companies. These are amazing founders. I think all parts of the industry are going to see new market leaders emerge. Then as a builder, healthcare is where I've been spending a lot of my time because now I've been pretty deep in this. We have a point of view, which I wrote my second book on called Unhealthcare, which is we need a second system of healthcare that's fundamentally focused on funding the cost curve, preemptive care, and bringing the same standards of consumer design as other industries. We've got a long roadmap and pretty focused in terms of what are some new ideas that frankly wouldn't happen on their own and could benefit from a catalyst like us. It's been a lot of time there. What concerns you about the next 10 years? Everybody, these last few months, folks ask, how's it going? I always say business is great, but the world sucks. That's not a harmonious state. I think as a technorati, if Silicon Valley was a living organism, we have a lot to do with it. I'm pretty sure if we build for the next 10 years with the same apathy as we did the last 10, it's going to explode. This is not going to be sustainable. What does it mean in terms of a framework for responsible innovation, creating some best practices, getting behind them as an industry? That's a huge part of my focus as well at the moment. That makes sense. Well, this has been a ton of fun. Thanks for helping join our birthday celebrations. We're excited about the next 10 years. Congratulations, and thanks for having me on here. Thanks, Ivan. Bye-bye. Bye.