Hemant's Year-End Letter to LPs

December 20, 2022
min read

This letter was originally sent to our Limited Partners in December 2022

Year-end reflections and a call for change

Why we need to embrace responsible innovation more than ever before

There’s an old Chinese proverb:  ‘May you live in interesting times.’

No question we are indeed living in interesting times today. The combination of economic, societal, political, climate, and pandemic challenges have made this an unprecedented time for the world, the technology sector and the venture business.  At the same time, we’re entering an equally ‘interesting’ business climate...where market headwinds are strong and strengthening, where businesses are still navigating post-pandemic challenges, and where the jolting effects of re-globalization are just beginning to be felt.  

As a technology investor for over 20 years, I have always believed (and still do) that technology holds the power to solve our biggest societal problems.  But we have to admit that technology is also creating and exacerbating them.  I’ve written extensively about the dangers of the unintended consequences of innovation.  Those unintended consequences are deepening and accelerating at an alarming pace, thanks to Moore’s and Metcalfe’s laws.  It took 150 years for us to see the unintended consequences of the combustion engine in the form of climate change.  It’s taken only 15 short years to see the unintended consequences of social media platforms in creating a highly fractured and divisive society and testing the limits of our democratic system.

So, we find ourselves confronting a strange reality:  the legacy of one of the greatest periods of innovation and investment in human history is that we lack inclusive prosperity, we have eroded respectful society, and we are threatening the sustainability of our planet.  We have some serious problems ahead of us; now is the time for us as an industry to get serious about how we’re going to address them. The magnitude of these problems are far beyond what the venture industry has historically tackled.  As such, we have to transcend the traditional VC mindset if we're going to make a difference.  The way we're going about solving these things right now is not going to get it done.

The truth is, the venture business (as a whole) has not risen to the occasion.  Despite a decade of extraordinary growth and prosperity, venture capitalists, for the most part, have abdicated responsibility for the kinds of companies we help create and their impact on the world.  Dare I say it: venture has gotten comfortable and lazy.  As an industry, we think our only job is to spawn companies, ‘disrupt’ markets, deliver strong returns for our LPs and personal wealth for ourselves…and assume society will figure out the rest.   This is not the way to build enduring companies or leave a meaningful legacy.  We have to ask ourselves: is the role of venture just to create great tech teams that get absorbed by big tech platforms to make them even bigger? How does that make a difference in the world?  In the early days of venture, there was a greater focus on funding and fostering truly transformative technologies.  We have gotten away from that and need to find our way back.  

The feeding frenzy of the last few years has also spawned a whole lot of undisciplined business behaviors in the venture space:  paying far ahead; investing at the peak of the market; the SPAC mania; buying public stocks; the crypto craze;  poor governance; a ‘growth at any cost’ mindset…all fueled by a hubris that we somehow know better and are smarter than everyone else.  

At the same time, there have been loud, prominent voices in and around the tech ecosystem railing against ‘ESG’--suggesting it is at best a distraction, at worst ‘the devil’.  I’ll admit it: ESG as a framework is flawed.   ESG is about measuring outputs for large scale existing companies; it doesn’t perfectly apply to venture–which needs to look at inputs in order to navigate the ambiguity of our business and build and scale companies over long time horizons.  But its intent is right and ever more essential.  We need new frameworks to govern how we build these next generation platforms…because the scale, scope and import of the technology companies that are being built today are greater than ever.  Tomorrow’s most important technology companies will impact billions of lives and livelihoods in ever more profound ways–as we seek to become a true digital society and reorganize all aspects of life and business online. The nature of what we’re building is fundamentally different than it once was. As investment and tech leaders, we must step up and take responsibility for the companies we help create and scale.  You need to look no further than the FTX meltdown to understand the consequences of new technology frontiers exploited with little governance,  oversight or integrity.

Simply put, we need to do better.

GC avoided many of these missteps but we were not entirely immune.  Our well intended  SAIL vehicles (our version of SPACs designed to align stakeholder incentives and promote long-term company building) are winding down as the IPO markets remain challenged;  we, too, made a handful of investments that were paying far ahead.  But we largely avoided public market investing and sidestepped the crypto craze, recognizing that, at this speculative stage of the market, the ‘killer app’ was greed itself.

Reflecting back on the last few years, we have been on our own transformation journey…evolving from one fund to five funds (creation, ignition, endurance, health assurance and customer value) and remaking ourselves as an institution that goes above and beyond traditional early stage capital (but retains it at our core).  We have been re-architecting ourselves to become the investment firm of the future.   It is said ‘fortune favors the prepared mind’, and we have been comparatively well prepared, thoughtful and intentional in how we’ve been building the platform over the course of the last several years. As a result of this (and admittedly, some serendipity) we’ve found ourselves well positioned to capitalize on the changing market dynamics.  We started formulating our health assurance thesis in early 2019…a year ahead of the global pandemic and the accelerated digital transformation of the healthcare sector; we expanded our platform to create new tools to help founders fund customer acquisition (our Customer Value strategy) a full year ahead of today’s market downturn and during a time we believe that product has found excellent product-market fit; we published our Responsible Innovation thesis as early as 2019 (The era of move fast and break things is over) and formed the non-profit RI Labs over a year ago, well before the growing demands for more tangible action by many LPs.  We committed to articulating our mission, vision and values back in 2019, and that framework has served as a powerful true north for the firm and the difference we’re committed to collectively making in the world.  We believed then (as we do now) that tomorrow’s most financially successful, compounding businesses will be those that operate in the best interest of society.

As I look to the year ahead, we will continue to focus on the areas of meaningful transformation where we think the greatest opportunities will be created. True to our name, we see ourselves as ‘agents of change’--accelerating the transformation of companies, industries and society at large.  We’re focused on what we believe are the biggest epicenters of transformation, including healthcare (where we are determined to accelerate our lead in investments and partnerships through the lens of our health assurance thesis); fintech and crypto (where we are focused on the convergence of those two ecosystems and what that means for a more inclusive financial system); AI (with a renewed focus on its responsible use and deployment); climate (admittedly we are in the early stages of this, but its importance is undeniable); the digital transformation of India (where we see tremendous opportunity to spawn some truly globally important companies); and the need to build more globally resilient systems in the areas of education and workforce transformation, security, defense and intelligence.  These are a handful of things we’re working on.  The list will evolve and change (part of our organizational growth mindset) but everything we seek to do will revolve around creating enduring companies that begin to address society’s biggest problems.

In this year-end reflection we at General Catalyst are calling for a change: for our industry to double down on the principles of Responsible Innovation and to commit to new behaviors as we build and scale companies in this brave new world.  Specifically, we’re advocating for the following 9 ‘reframes’:

1. From celebrating disruption to embracing ‘radical collaboration’ (committing to working with innovation-minded leaders within the industries we’re actively trying to transform)

2. From pure serendipity to greater intentionality (leaning into the power of a prepared mind; having a clear point of view and thesis on how the world is changing and how it needs to change–and working to advance that thesis through thoughtful strategic investments)

3. From elitism to inclusive opportunity (acknowledging that our industry has contributed to the consolidation of wealth and power among a select few and by committing to create inclusive opportunity as part of a fairer and more sustainable society; always asking the question: ”who wins and who loses?”)

4. From just backing or even building companies to transforming industries and society (taking a broader perspective on the large scale changes we’re trying to affect)

5. From ‘exit’ as the sole endgame to building enduring enterprises that also create liquidity for investors (truly acting in service of building enduring, compounding businesses that stand the test of time)

6. From financial OR societal benefit to financial AND societal benefit (abandoning the false choice of doing good or doing well)

7. From ‘ESG’ (focused on corporate outputs) to responsible innovation (focused on a new set of inputs–purpose built for the venture space–at all stages of company building)

8. From a ‘cult of personality’ to a ‘cult of purpose’ (abandoning the egoic worship of the individual investor or founder in favor of a sense of shared purpose and outcomes)

9. From investment partnership to cohesive company (where team, mission and culture really matter and we become enduring businesses in our own right)

I know there’s a lot of inherent cynicism in the world and in our industry.  Some critics might dismiss this call to arms as the privilege of someone who has already enjoyed success and now has the luxury to consider impact and legacy.  But I would argue that it is a necessity for our business as we move forward.  This is a movement and it is growing…as evidenced by the exceptional and diverse talents outside our own investment team who are joining us on our journey.  And supported by all of my magnificent partners at General Catalyst, including our chairman and my mentor Ken Chenault, who set us on this path and continues to inspire our progress.  I believe our resolve to lead here will best prepare us for success in the future.

You can interpret the Chinese proverb as a curse or a blessing. We are short-term cautious about the days ahead, but long-term optimistic, driven by a belief that these interesting times will yield some of the world’s most interesting and impactful companies.