Google Forms Venture Group to Find "Next Big Thing"

Posted by: Rob Hof on March 31, 2009

Once companies grow large, it’s always tough for them to come up with great new innovations like the one that built them. As Harvard Business School professor Clay Christensen has outlined in detail in his books, once companies are successful, they tend to focus on serving their existing customers better, often leading them to miss or actively avoid producing new products that might disrupt their business.

That “innovator’s dilemma” is one that Google, like many large tech firms before it, faces today. So this morning, it announced one way to avoid missing the next big thing: Google Ventures. Unlike most other corporate venture funds, Google Ventures will seek to make returns, not just support existing Google businesses. It will invest up to $100 million over the next year. The “partners” in the fund will be William Maris, a onetime entrepreneur who joined Google last year, and Rich Miner, a cofounder of Android, a mobile phone software startup that Google acquired in 2005.

Google Ventures has made two investments so far: Silver Spring Networks, which helps utilities manage electrical grids, and Pixazza, an online ad firm that I wrote about last week. Already, many startups have looked to a Google acquisition as an exit strategy during a time when public investors have little appetite for initial public stock offering. Now, as many venture firms are cutting back thanks to their limited partners suffering in the economic downturn, a lot of startups will be looking to Google to help fund them at the outset.

Here’s the post, and I will add more from Maris and Miner after I talk to them later this morning:


Today we’re excited to announce Google Ventures, Google’s new venture capital fund. This is Google’s effort to take advantage of our resources to support innovation and encourage promising new technology companies. By borrowing the best practices of top-tier, financially focused venture capital firms and bringing to bear Google’s unique technical expertise and brand, we think we can find young companies with truly awesome potential and encourage their development into successful businesses.

At its core, Google Ventures is charged with finding and helping to develop exceptional start-ups. We’ll be focusing on early stage investments across a diverse range of industries, including consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven’t thought of yet. Central to our effort will be our fellow Googlers, whom we view as a critically important resource to help educate us about potential investments areas and evaluate specific companies.

Economically, times are tough, but great ideas come when they will. If anything, we think the current downturn is an ideal time to invest in nascent companies that have the chance to be the “next big thing,” and we’ll be working hard to find them. If you think you have the next big idea, or if you just want to to learn more, please see our website at www.google.com/ventures.

UPDATE: Maris and Miner say the fund will indeed span a wide range of potential investments, and that Google Ventures could add more partners to do that at some point.

The central thing Google wanted to avoid was the usual corporate venture model of making investments directly related to Google’s own strategy. “If you focus at the start on strategic considerations, you might limit yourself,” Miner told me. “We might limit the startups.”

Some VCs, such as Fred Wilson at Union Square Ventures, have suggested that such a fund is not a great idea for Google. As he wrote when word of the fund came out recently:

All businesses are about talent and the best talent in the venture industry doesn’t work in large companies and won’t work in large companies. So corporate venture investors start with a big talent handicap and eventually face employee churn in their venture groups.

And to make matters worse, corporate investors don’t really share the profit motive with the entrepreneurs. Let’s say Google (or any other corporate VC) invests in a startup and buys 20% of it for $3mm. Let’s say that startup is a huge success, sells for $1bn and Google (or any corporate VC) makes $200mm on the deal. None of the employees who made that investment get rich. The founders of Google and the CEO of Google don’t get rich (they are already but that’s not my point). The company “gets rich”. But Google makes $1.5bn of pre-tax profits every quarter. So this big win generates another 12-13% to the bottom line, but just once. It’s not a recurring gain.

And that’s the big problem with corporate structures for venture investing. One time gains in corporations don’t make anyone rich. Wall Street ignores the gain. The company can’t put the gain into the pocket of its management. So it just doesn’t matter very much.

He has a point, but I also think any gain to the bottom line is nothing to sneeze at. “If we hit one home run in the portfolio, that makes a significant benefit to Google’s bottom line,” notes Maris. And I think running the fund as a relatively independent venture outfit potentially could produce better results than most corporate VC efforts.

The main uncertainty is whether Miner, Maris, and whoever else comes on as a partner have the expertise and sufficient investing savvy to invest in the right companies. That won’t be obvious for years to come. But ultimately, says Miner, Google Ventures is “just another way for Google to invest in innovation.”

Reader Comments

Frank Goodman

March 31, 2009 2:19 PM

How very Cisco like.

richard

March 31, 2009 2:26 PM

I wonder if there will be a 'firewall' in place - most VC firms won't sign NDAs, and in this case you might be signing up with your biggest competitor - so even if they don't invest, they see the ideas...

Bander Alfraikh

March 31, 2009 2:58 PM

you seem to have made a good diagnoses of America's current economic dilema. Google's venture may prove to be a good solution.And google may find itself in the banking world soon.
You also have the resorces,other than financial,to help new industries such as you mention:solar energy,bio-tech,etc.
good luck

Bill

March 31, 2009 4:52 PM

The key here for the next big thing is to have a way to monetize your investment. Twitter spent 20 million and did not have a monetization method. A company I have been trying to find information on is http://www.boomja.com. I think they will be the next big thing on the internet because they have a monetization method, are already creating revenue, are delivering a great product for their target audience, and creating limitless jobs by partnering with their users. Imagine combining Wikipedia with Google. Boomja uses humans to organize the internet, splits advertising impressions with editors, and creates targeted search categories. This is a natural fit for Google because they use Google’s AdSense ads to generate revenue.

Jay F

March 31, 2009 5:06 PM

Intel has been doing this for years, so all Google is doing is following in other, more mature hi-tech corporations. Who do you think is funding Clearwire, which really is a push into creating WiMAX as the defacto future 4G solution for future Intel platform solutions (but this is just one of many examples)?

john

March 31, 2009 5:13 PM

Is funny since Google is the lapping dog of Sequoia Capital (a Venture company), so A venture company inside other venture company.

Mike Reardon

March 31, 2009 7:12 PM

At the end of last year with Google's Project 10^100, they asked for an open call for new ideas to help people that could be brought to market. They must have found something really good inside the ideas that were submitted.

All Together

March 31, 2009 8:24 PM

Most VC Firms will not sign NDS's. One way to protect yourself is to have your product and business up and functioning before you present your company to any VC's.It's always good to show you have some skin in the game. Also you can protect your dea with a Provisional Patent. In some respect you have to trust yourself and whom you are showing your idea to. Personally I would speak to an attorney before I presented to any company to make sure I'm protected. That's said, this is very cool that Google is doing this. IMHO

adil

October 7, 2009 4:29 PM

Does Google offer little support for some one has a big idea? The reason I ask is that I have a very practical but innovative idea about the future transportation that use solar energy (use existing technologies). As a former engineer with physics background, and independent researcher, I have very clear idea about the layout of this future transportation project.

Based on my research, I would say this project is a very viable. In terms of technology, business, and finance power, I think the companies like GE, Honda, Ford, etc. capable to implement this type of project, and can make it reality in next 5 to 7 years.

This project would not only benefit the United States of America, but this model will benefit whole world in the future, because, it will create unlimited market worldwide (in North and South America, Europe, Asia, Middle East, Africa, and Asia) this would be a win-win opportunities for the governments, businesses, economy, people, and environment for the earth.

If any body interest to my idea about this future project, please contact me at elzynnet@gmail.com would be really appreciated. Thanks

A.J.A

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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