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.”