Venture Capital

Eric Schmidt’s Newest VC Fund


(Corrects Berman's employment background in the fifth paragraph.)

Last December, 16 aspiring tech entrepreneurs were picked to compete for the chance to build a Silicon Valley startup. After an intensive, 48-hour session of team-building exercises and brainstorming, a group of three people who hadn’t previously known each were chosen to create a business: Charles Wang, 36, a psychiatrist; Monisha Perkash, 37, founder of a college financing service; and Andrew Chang, 27, a former energy analyst for Al Gore’s climate change nonprofit. With $150,000, free office space in downtown Palo Alto, and a roster of industry veterans as mentors, the trio tested out dozens of different ideas over the next five months. The team considered businesses around food supply chains, smart grids, and more. Ultimately they decided to make a high-tech remedy for back pain.

This isn’t a plot line for a reality show. It’s a new business development program offered by Innovation Endeavors, a one-year-old tech investing firm funded entirely by Google (GOOG)‘s executive chairman and former chief executive officer Eric Schmidt. The fund has already made small investments in 16 companies, helped two of them get acquired, and nearly completed the pilot round of its Survivor-esque startup-building program, called Runway. While Schmidt provides the backing and big-name managerial gravitas, Innovation Endeavors is run by 33-year-old Dror Berman, an Israeli technologist with no formal investment experience. “You have the fantastic pairing of Eric Schmidt, who is one of the great luminaries of the Internet, and Dror, who is young and hungry,” says Travis Katz, founder of Gogobot, a travel site that received money from Innovation last year.

Over the next four years, Berman expects to spend up to $40 million of Schmidt’s cash investing in as many as 40 startups. That’s not much more than a rounding error for the guy who took Google public, a multi-billionaire who donates tens of millions to charity each year. Still, Schmidt is taking a leap of faith in Berman, who was a standout student in a course Schmidt taught on entrepreneurship at the Stanford Graduate School of Business in 2009. Soon after the class ended, Berman pitched an investment fund geared toward entrepreneurial development. Schmidt agreed to back Innovation Endeavors and handed Berman complete control.

Innovation is Schmidt’s second fund. TomorrowVentures, launched in 2009 under the direction of serial entrepreneur Court Coursey, has made over 50 investments. It may no longer be a one-man show: Earlier this year, Schmidt told Coursey to seek additional investors for the fund, according to a person familiar with the exchange. Brad Holden, the investment counsel of TomorrowVentures, says, “While we do not discuss who our limited partners are … we are not currently taking new LPs at this time.” Schmidt declined to comment.

Berman designed his small, fourth-floor office in Palo Alto to look like the office of a scrappy Web startup. Practically every piece of furniture is on wheels, so the place can shapeshift to accommodate a meeting of any size. The only conference room is entered through a slide-down garage door. “This is my first startup,” says Berman, who previously served in the Israel Defense Forces and as an engineer at security company Nice Systems.

Venture capital firms typically focus on a few tried-and-true industries; Innovation’s investments are intentionally all over the map. “Ninety percent of the world’s entrepreneurs are working on solving 10 percent of the world’s problems,” says Berman. “We’re trying to find entrepreneurs who want to solve the other 90 percent.” He’s backed startups as wide-ranging as Project Slice, a service for organizing shopping receipts in an e-mail inbox, and ReBloom, a sleep-inducing soft drink.

Given the serious financial backing from Schmidt, Berman doesn’t have to spend time courting investors as other venture capitalists do. “This would allow more attention to be devoted to the other aspects of being a VC, especially coaching entrepreneurs,” says Mark V. Cannice, professor of entrepreneurship at the University of San Francisco’s School of Management. Berman can also tap Schmidt and his star power to get the inside track on hot startup investments and to find mentors for young companies. One night in July, Schmidt met with more than 30 founders of Innovation-backed startups to share lessons on entrepreneurship. “It was inspiring,” says Scott Brady, CEO of Project Slice. “He can choose to take his money and go buy a boat or something, but he is choosing to do this.”

The bottom line: Eric Schmidt has chosen an unproven Israeli technologist to invest in as many as 40 startups over the next four years on his behalf.

MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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