Letter #170: Neil Mehta and Mood Rowghani (2016)
Letter #170: Neil Mehta and Mood Rowghani (2016)
Founder of Greenoaks and Partner at Bond Capital, Kleiner Perkins, & Summit Partners | Investing in Fast Growing Companies Globally
Hi there! Welcome to A Letter a Day. If you want to know more about this newsletter, see "The Archive.” At a high level, you can expect to receive a memo/essay or speech/presentation transcript from an investor, founder, or entrepreneur (IFO) each edition. More here. If you find yourself interested in any of these IFOs and wanting to learn more, shoot me a DM or email and I’m happy to point you to more or similar resources.
If you like this piece, please consider tapping the ❤️ above or subscribing below! It helps me understand which types of letters you like best and helps me choose which ones to share in the future. Thank you!
Today’s letter is the transcript of a fireside chat with Neil Mehta and Mood Rowghani at Slush 2016 on Investing in Fast Growing Companies Globally. In this conversation, Neil and Mood discuss growth equity, focusing on scaling and internationalizing companies, as well as the investment landscape in Europe and the US. They talk about the global opportunity, Kleiner Perkins’ Digital Growth fund, the payments industry, growth equity, the winds of change, talent export, risks, time horizon, and much more.
Neil Mehta is the Founder of Greenoaks Capital, where he has invested in companies such as Coupang, Rippling, Brex, Databricks, Airtable, Canva, Checkout.com, Discord, and Stripe. Prior to Greenoaks, Neil was a Senior Investment Professional for special situations investments in India, the Middle East, and Southeast Asia for Orient Property Group Ltd., a Hong Kong-based investment firm financed by a fund managed by D.E. Shaw. Neil also previously worked for Kayne Anderson Capital Advisors.
Mood Rowghani is a General Partner at Bond Capital. Prior to Bond, Mood co-led Kleiner Perkins’ Digital Growth Fund, where he invested in companies like Ring, Stripe, Uber, and Waze. Before joining Kleiner Perkins, Mood led the Internet & Media practice at Summit Partners. Mood started his investment career as an associate at Highland Capital. Prior to investing, Mood was a consultant with McKinsey & Co.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
Relevant Resources:
Greenoaks
Portfolio Companies
Coupang
Coupang Podcast - Spotify, Apple Podcasts (2 hours)
Coupang Research Report (Full Report: 75 pages)
Stripe
Snowflake
Kleiner Perkins
Investors
Portfolio Companies
Transcript
Host: Hey, Slush, everybody here. It's great to be here. Right now we're going to have a very interesting session on international growth and scalability. And the guys we have here are growth stage investors. Seed, venture, growth. So that's a big, big rocket fuel, what these guys have.
And today with me, right here, Neil Mehta, Founder and Managing Partner of Greenoaks Capital. Neil, you're a former investor at DE Shaw. You help the open the Hong Kong office there. You founded Greenoaks Capital. And now you manage over $1bn investing in internet-enabled businesses. You've had great home runs: Coupang, Deliveroo. Great to have you here.
And Mood Rowghani, a general partner from Kleiner Perkins. You've been with Kleiner Perkins since 2011, focused on investments in firm's digital practice, targeting high growth internet companies that have achieved strong adoption and scale. We were just having the talk on the backstage. It's so easy when you have it on your website. Neil is more modest. There's nothing to be found on this guy. So listen up. You don't get this opportunity very often. And, also, talking about... your track record is mind blowing. You have Uber, Waze, Slack, Stripe. Mood, we're really glad to have you here.
And first of all, we don't see this as an audience, because if you would be audience, you would be just listening. But we want to think this as you, the slush attendees, what you're going to get out of it. So all of us, Neil, Mood, myself, we're here to serve you. And looking at everything we're do, the umbrella focus is international growth and scalability. And to go right to it, I crowdsourced some of the questions from people who are founders, and earlier on this stage, just to give them a view what you do, Chris Sacca told us that he wants to have material impact on the companies. So let's say they want a new CTO--that's why he mainly invests in the US. What about yourself, guys?
Neil Mehta: Sure, I'm happy to start. First of all, thank you for having me here. It's my first time to Helsinki. It's a great place. So thank you. We do invest globally. So Greenoaks started in 2010. We invest everywhere outside of China--we don't invest in China--but India, Southeast Asia, Korea, Latin America, US, Europe, all places we've invested. And the reason we're maybe different to what Chris Sacca said this morning is--when we started Greenworks, there was about 20mn smartphones being shipped globally. And we thought it would get to 100mn or 200mn back in 2010. Obviously, the number's well north of a billion. And so to us, the opportunity set to find what we think are great compounding franchises being built on the back of mobile phones, of smartphones, and on the back of the Internet, is a global opportunity. And we think that the characteristics that define the great companies being built globally are universal. They're not just in the US. And so many of our best investments, over 50% of our portfolio is actually outside the US. And many of our best investments are businesses being built in places like Korea or India or here in Europe.
Host: And, like here, today in Slush, we have attendees from all over the world. So this is for majority of people.
Mood Rowghani: Well, Chris Sacca's comments resonate with me, because we're a firm that's been around about 50 years. And for the majority of that 50 years, we only did early stage investing. And it's only been for about six years that we've had this Digital Growth Fund, which is a billion dollar fund. We're now in the third version of that fund, which is another billion dollar fund. But early stage investors need to have direct hands-on involvement in the companies that they almost really treat themselves as founders when they back the entrepreneurs that they invest in. And it's not really the case when you're a growth stage investor that you need to be that hands-on that you need to treat yourself as a founder. And in fact, for us, part of what we're looking for is a company that already has the flywheel spinning, that already has captured the magic of product market fit. And part of what we do is get out of the way from that magic continuing to proliferate and succeed. And then we're looking to really pour jet fuel on what's working. And in high octane situations, whether it's BD, whether it's helping these companies scale, whether it's adding to the management team, whatever it may be, really move the needle to allow that company to really achieve what it's capable of. And in terms of where we're looking, we're much more international than early stage investors because we don't need to be there day in and day out. Currently, about a third of our portfolio is international investments in companies like JD.com, Waze as you mentioned, and Stripe, which is, although it's based in the US, it's very international, and Spotify.
Host: Okay, excellent. Now, just to give our audience, our attendees, a view, if you would have the magic wand, like everything is perfect right now, what would be the company that you would you invest right now? What would be the industry? What are you looking at? What would be the three things you would take? If you would start, Mood?
Mood Rowghani: How about a real time verification platform for presidential candidates to make sure they're telling the truth? I would do that in a heartbeat. I think from a commercial perspective, what's happened--I would say two things. First, in payments, you're seeing--and many of you may have read the most recent funding announcement that was reported on for Stripe--when you understand payments, not just as a transaction sort of flow, but as really redefining the commerce stack and how that can be applied in a mobile and an online and offline way, in a world where any publisher can set up shop instantly, I think payments has a lot of runway. It's got a lot of runway internationally, it's got a lot of runway based on the secular trends that Neil just alluded to on mobile. And I think... the definition of who is a publisher is also become very pervasive, so that really anyone today who's on Facebook, anyone who has a mobile device, ought to be able to sell stuff. So I think payments is huge. I also think mapping and search technology, in a local mode, is something that we've really touched the surface on. So I think we're finally at the point in time where I think search technology isn't good enough. So I think in this next generation, which in internet time is about five years, I think you're likely to see another new innovation in local search.
Host: Okay, so if you're in search, now is the time. What about Neil?
Neil Mehta: Yeah. So I think there's a couple of characteristics. We have sort of a latticework of mental models when we think about growth equity investing. And typically--and I don't think Mood will be too different--we will look for real unit economics, real contribution margins, real payback on customer acquisition, business is scaling in a very large market with sort of multiple ladders to the opportunity, run by founding teams that have high energy, they're intellectually honest, they're extraordinary capable. So those are the characteristics we're always looking for in any business. I think there's one thing for us, that's changed in the last, I don't know, year or so, which is we spent a lot of time around machine learning and how that might affect various businesses we're in. And our conclusion has really been that it affects everything we're in. And so where we're spending a lot more time today is understanding, when we look at a business, and on sort of the growth side, that has those characteristics that I just talked about, how will machine learning change their ability to take advantage of the opportunity at hand in the future? And that's been a dramatic change for us over the last 12 months.
Host: Okay. Did you have a comment on that?
Mood Rowghani: No, we just made a bet in the back as to who was going to use the term machine learning first.
Neil Mehta: Yeah, I won that.
Mood Rowghani: Neil won.
Neil Mehta: And with nine minutes left, still.
Host: That happens. And Mood, while you brought it on, there's a winds of change in the political environment of the US. Would that be... nice way to say it? Excellent. The question that popped up, and this is political issue, but let's let's face it. Will the President Elect make it easier to attract talent to Europe in the future? Does it have any difference? Does it make any difference to the way you're looking at it?
Mood Rowghani: I think it depends on whether you have a cynical view of presidential politics or not. I happen to have a very optimistic view on governance, but a very cynical view on how campaigns are run. And so I think false advertising is rampant. And I think the current... sort of the president elect, put on a clinic in terms of the power of false advertising and how to really allow that to proliferate en masse. But I think, from a policy perspective, if you really cancel out the noise, I don't think from a policy perspective, people should be really that concerned. There's not going to be a wall built. I think a lot of Republicans have commented that Trump actually isn't very Republican. So you can see his policies perhaps being somewhat middle of the road. And so I think, really, the reaction that you're hearing, is an overreaction. So there may be some volatility initially, but once the dust settles on the first quarter, first couple of quarters of his presidency, I think things are going to be back to normal.
Neil Mehta: Yeah, I would probably agree with that. I'd say... there's... so, I don't think it's going to change, the ability for Europe to aggregate talent. I think there's a couple of reasons why. One, I think what's happening the US is not particular only to the US, or unique to the US. I think it's happening in a lot of other places, including the UK. And so I think if you're a startup founder sitting in Silicon Valley building a company, you don't really care that much about what's happening at this sort of presidential level, you're just focused on building a business and finding product market fit. I think the other component--probably to Mood's point--is that there's a limited sort of view, at least that we have, of what the President Elect can do. There's exceptions to that, which I think--people like us would get worried if, for example, Jeff Sessions cancels H-1B visas or something like that so it's harder to aggregate talent. So I think we're more worried about the ability to continue to bring in talent into high quality businesses, rather than sort of a talent export.
Host: Okay, glad you're hear, because that's something that people are pondering upon. But let's also look at the side, on your businesses. What keeps you awake at night? Give us an example. One that you're--feel free to share.
Neil Mehta: Sure. So I think what keeps us up at night--when we're investing, there's already product market fit, they're already typically market leaders. But we're playing in large markets, with what are sometimes very large prizes. And so the competitive dynamic, especially, I think that's probably faded a little bit in the last 12 months. But over the last four years, I think it's been a very real dynamic where a lot of our companies have had to use large amounts of capital. I mean, in some cases, many billions of dollars.
Host: That's a large. Many billions is large.
Neil Mehta: To be able to compete effectively to win what is eventually a very large market opportunity. I think that's faded a little bit for us in more recent times, in the last 12 months or so. But it's still something that, as a byproduct of that, we always worry that our companies haven't built the right capabilities, the right systems and processes to be able to operate with a lower amount of capital. And so that's something we're keeping an eye on. I wouldn't say it's necessarily a problem that keeps me up at night, but certainly something that we think a lot about.
Host: Okay, excellent, thank you. What about you, Mood?
Mood Rowghani: The ebbs and flows of the market and how that impacts growth investing is something that gives me anxiety, depending on kind of which year you ask me. And it's because what I'm most familiar with, and what we as growth stage investors are most familiar with, is the type of risk that we've generally outlined here: a company that has strong product market fit, strong momentum. And really, it's mostly about scaling the business model and continuing to execute. Lots of linearity, lots of things you can analyze, and a lot of analysis that's quantitative in nature. And there are other elements too, around the positioning of a company. But fundamentally, that's the lens under which you evaluate a growth stage business. When the markets get a little silly because there's a surplus of capital in it, what you find is venture risk being taken in the growth asset class. That can be a company that literally has existential risk, hasn't found product market fit, but is raising $100mn of capital. And that is a hallmark of a market that has a surplus of capital. It doesn't allow us to do the type of work that we know how to do, it forces us to take venture risk. And frequently, the kinds of participants in that market are non-growth stage investors that believe what we--frankly, make a mockery of our craft, because they don't apply the same scrutiny that we do apply. So those are the kinds of things, the timing in the market, that creates that type of risk that keeps me up at night.
Host: Okay. I had a chance to talk with a Singularity University alumni. And she said that, at some cases, three years is a short time to build a meaningful company that would have a very large impact. And her question was, what about longer term projects? Starting a 10 years plus fund. So not necessarily a moonshot, but high risk, high reward. Let's go food technology, synthetic biology, like really big things. What are your thoughts on that?
Neil Mehta: Yeah, so I would agree with that. Three years is an incredibly short time to build value. We underwrite on a 10 year plus basis, and I suspect most growth equity investors that are true growth equity investors think about it the same way. It's very difficult to build what we think are some of the best companies, big companies in the world, in a short amount of time. I think one of the byproducts of what's happened over the last few years with lots of capital coming into growth equity is the time horizon has shortened pretty meaningfully. And for certain investors that aren't traditional growth equity investors, they've needed data points, sort of year after year, or quarter after quarter, in order to validate what they think--when they've mispriced risk--in order to validate what they think might be the opportunity. I think having a long term time horizon, like a 5+ year, 10+ year time horizon, is a natural competitive advantage. And so for us, we only underwrite to those types of scenarios. We are not looking for 2-3 or 3-5 year timeframes.
Mood Rowghani: A short term outlook, I think, damages every aspect of our culture. Presidential politics... I mean, there's just get rich quick, fix it quick, a fast food appeal to everything. And it's no different than investing. And I think that's not a great thing in terms of building durable value. The companies that are a flash in the pan, part of what feeds that is this mentality of trying to flip it. And that's not what we're trying to do, by any means. But the problem when you're a growth stage investor, and when you're not a public market investor--Neil will do some public market investing, we in general will not--the outlook on that for an internet company that's scaling, that generally, from startup until going public, might be seven years, maybe 10 years. If you get in after they've already scaled, you're gonna have a 3-5 year outlook before they go public. So that tends to be our time horizon. Not because we're not long-term minded, but when you think about how long it typically takes for a successful consumer internet company to scale and then have a liquidity event, that tends to be the time horizon.
Neil Mehta: I will say something in addition to that, which is, and this may be counterintuitive, but I think it's helpful for founders to hear, which is, as you scale your business, as you find product market fit, as you start to hire that team that's going to take you to an IPO, your time horizon should actually extend rather than decrease. You start to make investments for what is long term profitability rather than short term free cash flow. When you're early in the business, your iteration cycles are really fast, you're trying to sort of get feedback quickly, you have a limited amount of runway. The best thing we see--the best thing our founders do, when they get to sort of that inflection point where they know they have a sustainable business and so that attacking are really long term opportunities. They make huge investments, in a very distant future, which maybe in the short term look a little crazy, but in the long term, we think optimize for free cash flow.
Host: Excellent. And I'm sure many of our founders, our venture investors here, they're happy to hear that everybody's--most of us are looking at the durable value in those companies. Guys, I'd love to have you here. There are so many things we could talk about. At this point. I want to thank you for being here. And whatever you find here, just keep an open mind, and wishing you all the best. Ladies and gentlemen, Neil Mehta and Mood Rowghani. Thank you so much.
If you got this far and you liked this piece, please consider tapping the ❤️ above or sharing this letter! It helps me understand which types of letters you like best and helps me choose which ones to share in the future. Thank you!
Wrap-up
If you’ve got any thoughts, questions, or feedback, please drop me a line - I would love to chat! You can find me on twitter at @kevg1412 or my email at kevin@12mv2.com.
If you're a fan of business or technology in general, please check out some of my other projects!
Speedwell Research — Comprehensive research on great public companies including Constellation Software, Floor & Decor, Meta, new frameworks like the Consumer’s Hierarchy of Preferences (Part 1, Part 2, Part 3), and much more.
Cloud Valley — Easy to read, in-depth biographies that explore the defining moments, investments, and life decisions of investing, business, and tech legends like Dan Loeb, Bob Iger, Steve Jurvetson, and Cyan Banister.
DJY Research — Comprehensive research on publicly-traded Asian companies like Alibaba, Tencent, Nintendo, Sea Limited (FREE), and more.
Compilations — “A national treasure — for every country.”
Memos — A selection of some of my favorite investor memos.
Bookshelves — Your favorite investors’/operators’ favorite books.