Looking inside Alphabet’s $7 billion growth-stage investment arm, CapitalG

Alphabet’s growth stage investment arm, CapitalG, chose partner Laela Sturdy as its new head about a year ago after David Lawee resigned.

Few people were surprised by Sturdy’s promotion. In 2007, she joined Google in marketing, was moved to several departments, and was recruited by Lawlee in 2013, who told CNBC in 2021, “I kind of made it a point to know who all the stars were inside of Google, and Laela’s name came up a lot.”

Many investors say the past year was their hardest. What about Sturdy, a former collegiate basketball standout who says 60% of her squad is diverse or underrepresented? We spoke with her earlier this week at CapitalG’s bright, open Ferry Building office to learn more. Excerpts are gently modified for length and clarity.

Belated congratulations on taking charge. How does your managerial style vary from David’s?

I’m still overseeing investments and on many boards, but I’ve enjoyed focusing more on the team and how we can grow the company. CapitalG has many more amazing investors.

How many investors are on your 50-person team?

Over the last couple of years, we’ve had over 3500 Alphabet senior advisors partner with our portfolio companies to help with pricing analysis, scaling infrastructure, marketing, and sales incentives. Growth-stage firms have many technological and business problems, which we specialize in.

3500 senior advisors are available! How does it work?

In recent years, we’ve teamed with Google’s AI and ML training division for developers. We remarked, ‘Hey, this training is incredibly successful and gets pretty great reviews internally.’ Many of our portfolio firms ask us, ‘How can we uplevel our engineers and our organizations and make them ready to fully take advantage of the trends in AI?’ We teamed with the training organization to provide our portfolio firms with the same training, and hundreds of engineers have taken it. I worked at Google for a long time before joining CapitalG, and their culture of information sharing is great.

The competition for AI talent is fierce. What can you tell portfolio firms that are apprehensive about Alphabet data passing through you?

Everything is opt-in for portfolio firms. We work independently and don’t share. We don’t share portfolio company data with Alphabet or Alphabet data with portfolio firms. We find win-wins as intermediaries.

We don’t force anything on anybody since [Google Cloud] has been a wonderful go-to-market partner, as have all the other cloud providers. We arrange suitable introductions, marketing alliances, and product conversations.

Inside CapitalG, how are choices made? Can you decide who sees a check?

Our investing committee includes myself and three other general partners who are great investors. I’ve worked with Gene Frantz for about 10 years, virtually since CapitalG started. He was an investor at TPG and other places before joining CapitalG. We have a strong GP bench, and our investment committee makes decisions on opportunities brought to them.

You make how many bets annually? What size checks are you writing?

We invest $50–200 million in each startup. We invest in seven or eight new startups a year and often [many] more follow-on [rounds] for our current portfolio since we’re thesis-driven.

Want to own how much of a company?

Our ownership portion is adjustable. Our money-on-money returns at these firms are our focus. I led Stripe’s 2017 Series D round. I guess it was $9 billion. We concluded a prior AI investment with a sub-$500 million valuation, so we’re focusing on the market, how distinctive the firm is, and if we can spend a lot of cash to expand.

Your cash-on-cash returns?

We keep them private. We don’t publish results.

That $9 billion investment in Stripe, whose value reached $95 billion before being reset at $50 billion last year, will perform well. Was the value fluctuation due to market trends or performance?

Stripe is an amazing firm attacking one of the greatest industry possibilities, so I’m quite positive about their performance and future. All public and private values in the recent 18 to 24 months had a reset due to COVID-19, so I wouldn’t read anything from the company’s performance.

Does Alphabet provide you with separate money each year?

Discrete funds—annual funds—are used to invest.

Their size?

We have handled $7 billion in assets since 2013.

You have a lot of money in a poor market. Do you acquire secondary shares now that the IPO market has stagnated and late-stage investors are spending less?

We prioritize CEO and management relationships. We won’t invest without CEO participation and corporate data. We aim to be the best partners for these entrepreneurs, so they recommend us to the finest firms downstream.

What secondary shares did you buy?

I won’t name firms since they haven’t revealed them. Often, secondary sales are arranged like main sales. Your wider pattern of early-stage investors seeking liquidity is intriguing. That fits our approach of selecting the greatest growth-stage firms at an early point of their compounding trajectory; therefore, we’re thrilled to join their cap tables. We collaborate with these firms early and hold them long-term.

You return Alphabet shares nonetheless.

We distribute, but we see the long term.

Do returns matter to Alphabet? Are these investments largely strategic?

We concentrate on returns and employing Google and Alphabet’s skills and experience to be world-class partners for generational digital firms.

Google is clearly investing in AI. Explain your AI approach.

We love AI like everyone else. We have a strong team of individuals focusing on it at CapitalG, and our advisers at Google have allowed us to make more technical bets. An excellent example is cybersecurity. When CrowdStrike had $15 million in sales in Series B, a distinct technological perspective was key to making early cybersecurity investments. We apply the same rigor to AI.

When we look across enterprise use cases, we think a lot of the incumbents are quite well-positioned because they have distribution, customers, and workflows. So where we’ve been looking more is in places where there’s real technical differentiation and where workflow and existing distribution are less important. We sponsored Magic, which builds AI software engineers, because of its technological distinction.

Duolingo, which fired 10% of its contractors last month, has you on its board. At the time, a spokeswoman stated AI reduced the company’s staffing needs. Are your portfolio firms experiencing that?

No comment on Duolingo, but our portfolio firms are looking at how AI may improve the customer experience and other systems and procedures. I suppose that surprises and delights. Many are reconsidering the marketing stack. Many are reconsidering customer support and offerings. Our innings are young. But just as enterprise customers are excited to experiment with AI in their workflow, startup and growth-stage companies are excited to use AI to rethink how they’re building the organization and get all employees focused on the most high-value opportunities. Many intriguing projects are underway there.