Hemant Taneja, managing director at General Catalyst Partners, talks to the New York Stock Exchange about venture capital trends, evolving economic models and his observations on the future business landscape.
What’s the biggest trend you’re seeing in the venture capital world today?
Hemant Taneja: The unbundling of large companies in retail, education, payments, health care and many other areas. One of the biggest advantages for a large company used to be economies of scale, but that has changed. A typical startup today can essentially rent all the layers of vertical integration from other companies. That allows them to focus as an organization on what matters most — building a better product for its target customer. When that’s been accomplished, it can rely on partners to scale up its operations to meet demand as needed. Entrepreneurs are applying this mindset to an increasing number of industries and finding ways to quickly take market share from the incumbents.
Unbundling means that entrepreneurs can use big data to rethink actuarial risk and create new and differentiated insurance products, invent new ways of managing chronic diseases like diabetes, or bring more desirable consumer packaged goods to market. Venture capital investing used to be focused on selling software to improve workflow efficiency in these sectors, but now there is strong interest in funding companies that are redefining the products and services themselves from first principles.
I think we're just at the beginning of the unbundling trend and that it will last for the next couple of decades. Then we will get the inevitable rebundling for the startups that become market leaders as they look to expand into new categories.
Can you give an example?
HT: The Honest Company is one of our investments. Their initial idea was to focus on millennial moms, coming to market with diaper products made from organic materials rather than petroleum. Their diapers were better, resulting in fewer rashes, and the company’s approach to creating sustainable products helped them develop a relationship with their target consumer. Today, Honest looks like a mini Procter & Gamble Co. (NYSE: PG), because it sells cleaning supplies, lotions and many other products. Essentially it unbundled the diaper vertical, and then started rebundling to provide a family of products to the same moms.
Do you think that big companies still have the advantage when it comes to going to market with new products?
HT: Not really. Think about how marketing has changed. Today, you can reach a billion people on Facebook and other social media platforms, and you can micro-target people that are ideal customers for you, in a place where you can immediately sell them products. Mass media advertising isn’t much of a differentiator anymore, because you can access people on Facebook, Twitter, Pinterest, Snapchat and other platforms. Manufacturing and distribution are no longer advantages either, because those can be outsourced to partner companies, even at the beginning when volumes are low.
The CEO of Snapchat, one of the companies in your portfolio, recently announced that the company is planning an IPO. As an investor, how much influence do you have on those decisions?
HT: Our level of influence really varies depending on various circumstances. In the case of Snapchat, we invested in the Series B round, and we are not on the board, so we’re not so involved day-to-day, though we do work with them on select opportunities. In general, we tend to follow the lead of the founders in terms of exit timing, because they have a great pulse on the business. And when there is a decision to go public, we definitely help the companies get ready to do so.
You recently created the GC Stripe Platform Fund to invest in companies that use Stripe, the web and mobile payment company you are backing. Is this a new twist on the VC model?
HT: The idea in particular isn’t new. I think our friends at Accel started a fund around Facebook [fbFund] dedicated to developing Facebook applications. With Stripe, we saw there was an ecosystem of companies starting to gain early success building on top of the Stripe Connect platform. Some of these companies are going to be very large businesses. So for us it’s a twofer: We catalyze interesting companies around a platform company that we are investors in, which in turn creates new opportunities that are right in our wheelhouse.
What has you most excited in the tech sector these days?
HT: Technology for small businesses. Small businesses behave like consumers. Before, small business owners weren’t very tech savvy, but now every small business owner carries a smartphone and has apps for everything they do in their daily life. When they go to work and start doing manual payroll, for example, they say, “Gosh, isn’t there an app for this?” And there probably is. So tech adoption in small businesses has greatly increased, and that has opened up great opportunities. That’s why Square, ZenPayroll and various other companies have seen tremendous growth selling to this sector.