The expected launch of Google’s later-stage corporate venturing unit will fill out the US-listed search engine provider’s suite of investment tools while making little dent to its about $48bn in cash and short-term investments on its balance sheet. Its launch will also likely help move Google further up the corporate venturing dealmaking charts, which Google Ventures has topped for the first time in the second quarter, according to Global Corporate Venturing.
Google Capital is expected to formally launch later this summer and while it is still in its “exploratory” stage of development, its first few portfolio companies indicate its general remit: later-stage, private technology companies where Google has no expected interest in acquiring the portfolio company but it can offer help beyond cash. David Lawee, previous head of corporate development and ran Google’s mergers & acquisitions group since 2008, is leading the development of Google Capital and recently hired Gene Frantz from private equity firm TPG Capital after a prior career as a corporate venturer at database provider Oracle, while Scott Tierney joined Google in 2011 from consumer sector-focused investment firm Steelpoint Capital Partners.
Lawee is is an observer on two of Google Capital’s current portfolio, Lending Club and SurveyMonkey. A third, undisclosed investment by Google Capital has also reportedly been made.
Lawee was unavailable to comment on his plans but David Goldberg, chief executive of SurveyMonkey, which in January sold $444m of stock at a $1.35bn valuation to a syndicate including Google, said Lawee and Google had invested for financial rather than strategic returns to make positive returns on its cash balance sheet.
The strategy is similar to other growth-equity investment firms, such as Institutional Venture Partners (IVP), which has generated top tier returns. Pension fund Calstrs said IVP had a 26.6% annual rate of return from its 2007-vintage fund, while US Treasury debt – so-called T-bills – had a yield of 0.66% for three-year notes and 3.5% for 30-year paper.
Goldberg added that, in return, Google wanted to help SurveyMonkey expand internationally. The types of attractive companies to Google Capital would be large, pre-flotation companies where its parent had a view on their success but no interest in acquiring them, Goldberg said.
This complements its existing corporate venturing unit, Google Ventures, which has reportedly invested more than $1.5bn in more than 170 earlier-stage companies since launching in 2009. Google also maintains a philanthropic investment vehicle through Google.org and remains an active acquirer of private companies having acquired more than 100 companies, including DoubleClick, Waze and AdMob, since 2001.
Google declined to comment but from April to mid-May, about eight of its ventures unit’s portfolio have acquired a peer or been snapped up, according to research by Global Corporate Venturing.These deals include Google-backed:
DocuSign buying Cartavi;
RelayRides acquiring Wheelz;
Nest Labs snapping up MyEnergy;
About.me picks up Wefollow;
HubSpot acquiring two companies, Chime and PrepWork; and
Egnyte agreeing to buy Bema.
And Google Ventures has been active in turning over its portfolio of more than 150 companies, with Facebook buying Parse and Yahoo acquiring Astrid.
Don Harrison, Google’s vice-president of corporate development, who replaced Lawee as mergers and acquisitions head, at the Bloomberg Next Big Thing conference last month, said sought takeover targets using the “toothbrush test” to assess if a potential target was used by consumers at least “once or twice” per day.
Harrison said Google had been “excited” to see how Google Ventures had grown – from an annual $100m per year commitment to $300m per year just in the US after it took over a basket of about 50 minority equity investments in companies around the world and across multiple sectors – and become established in Silicon Valley, California.
As well as being in the “exploratory” phase for Google Capital, Harrison said Google was looking at alliances with private equity firms to help it structure deals.
Buyout firms can assist an acquirer by providing needed financing or advice on how a target could be restructured or carved up after a deal closes. While Google may invest cash to get a return on the investment, it may also take part in a deal to acquire an asset, Harrison said.
At the same Bloomberg summit, Kenneth Hao, managing partner at technology-focused buyout firm Silver Lake, said he was “excited companies like Google are showing proactive interest in private equity”.
And while its corporate venturing units have financial returns as their focus, they can also help keep Google’s information flow into new technologies and strategic developments sharp.
In April, Google Ventures set up a seed investment fund to back developers of applications for the parent company’s spectacles called Glass.
Bill Maris, managing partner of Google Ventures, said venture capital firms Kleiner Perkins Caufield & Byers (KPCB) and Andreessen Horowitz (AH) had joined its Glass Collective. KPCB previous ran a fund targeting technology company Apple’s IPhone’s developers and another on social networks – called iFund and sFund respectively – in which Google committed as a limited partner in 2011.
At the time, Maris said: “Glass is a potentially transformative technology. It’s a window into the world’s information, and a new way to share experiences with those you care about. Smart entrepreneurs and engineers are going to develop amazing experiences through Glass.”
It is the information flow that remains important for Google’s strategic interest as it wants effectively everything to be available and hence searchable so it can make money from targeted advertising. While this has caused some recent disquiet among some entrepreneurs and venture capitalists about letting in Google Ventures into its private funding rounds, the company has been applying similar thinking to how it created the algorithms for information to be searched to what data was useful in making venture investments.
News provider New York Times (NYT) in an article published last month said “Google relies on cold hard data in a field dominated by intuition and connections”.
This data shows it is better to invest in someone who started a company in a good year with mediocre results rather than one who started a business in a mediocre year for returns but who did well; an entrepreneur who has started a successful company is more likely to do it again; and start-ups based in tech hubs like the San Francisco Bay Area are more likely to succeed.
Other data analytics and algorithm-focused venture investors include Ironstone, a venture firm started by legendary ex-investment banker William Hambrecht, Thomas Thurston’s Growth Science International, who wrote a guest comment for Global Corporate Venturing in 2010 on the subject, Palo Alto Venture Science, Silicon Valley Bank, Correlation Ventures and two nascent initiatives by Paul Campbell after his recent departure from Netherlands-based healthcare company Philips and Chris Farmer, former entrepreneur-in-residence at Bessemer who is launching SkyFire to provide data on the people behind successful businesses.
Ironstone’s algorithms estimate that a start-up’s founding team has only 12% predictive value, while 20% of Ironstone’s analysis focuses on the start-up itself, and the rest is on the market it is entering. But while there is plenty of analysis on venture investing, there has been less on the organisation and people skills required inside an investment organisation.
Google Ventures says its “hands-on teams work with portfolio companies full-time on design, recruiting, marketing and engineering” as well as potentially mergers and acquisitions as part of a so-called full-service venture capital model. It also divides carried interest, the profits from successful investments, among all of its 60 employees, holds weekly meetings on a Tuesday and limits veto power just to its managing partner, Bill Maris, according to the NYT profile.