GV
Founded in 2009 as Google Ventures and rebranded in 2015, GV was the corporate venture capital (CVC) arm of Alphabet, the parent company of Google. According to PitchBook data, GV was the most active CVC between 2014 and 2018, and it invested $5.3bn in 82 deals in 2018 alone.
Becoming the largest CVC did not make GV representative of the industry, however. In fact, it was a clear outlier in how it weighted strategic and financial value, and it had been for quite a while. In a 2019 survey conducted by Global Corporate Venturing, GV claimed that it solely focused on generating financial returns, a mandate it shared with just 6% of CVC arms. This was not the first time GV’s partners asserted independence from their corporate parent’s strategic interests. Bill Maris, who founded GV and ran it before leaving to start his own venture capital firm in 2016, told Google founders Larry Page and Sergey Brin from the very beginning: “If we invested for Google’s strategic goals, which are always shifting anyway, that would be a bar no investor could pass without dumb luck.”
Still, GV was not simply an institutional VC firm housed within Google. It had a fundamentally different way of thinking about financial returns than its counterparts in the institutional VC industry. The key variable, as Maris explained to Recode in 2014, was time. Simply put, GV was a much more patient investor in innovation:
“If I were to leave and raise a venture fund, I would have to find 10 or 100 LPs [limited partners], they would all give me a bunch of money and I would take a percentage of that to pay myself. They would expect me to invest that over the next three years, and they want that money back in seven or eight years. So now they have put a timeframe on innovation. That is a problem.”
There was arguably no greater proof of GV’s prioritisation of financial value over strategic value than the diversity of its investment portfolio. GV invested in startups across a wide range of industries, including enterprise software, life sciences, healthcare, artificial intelligence (AI), cybersecurity, robotics and transportation. Such breadth of investment activity was highly unusual in the CVC industry, where strategic considerations typically played a much larger role.
In addition, the portfolio had little overlap with Alphabet’s core online advertising business, most notably Google search. And while Alphabet surely had its “other bets”, highly publicised but relatively nascent in-house efforts of a similar vein in fields ranging from life sciences to autonomous driving, these initiatives, as of 2019, still generated little of the company’s revenues.
To some degree, the emphasis on financial returns at GV was a function of Alphabet’s multiplicity of investment vehicles. Besides GV, Alphabet had established CapitalG, a growth equity fund, and Gradient Ventures – an AI-focused vehicle that invested off of Alphabet’s balance sheet, unlike GV and CapitalG, which were structured as funds. Other units within the company, such as Sidewalk Labs, an urban innovation platform, X, a research and development organisation, and Launchpad,an accelerator program, also made investments in startups. And, of course, the core Google division, whose prodigious cashflow generation funded virtually all efforts within Alphabet, periodically bought stakes in new ventures. Against the backdrop of so much startup investment activity, it was perhaps unsurprising that GV had not just carved out a financially focused niche inside its parent corporation, but also fundamentally differentiated its approach from its more strategically oriented brethren across the CVC industry.
Salesforce Ventures
Founded in 2009, Salesforce Ventures needed only two years to join the ranks of the 10 most active CVCs and remained extremely active over the course of the 2010s. As of January 2019, it had invested over $1bn in more than 280 portfolio companies, 15 of which ended up going public. This flurry of activity reflected the CVC’s strategic importance for its corporate parent, one of the leading enterprise SaaS companies in the world.
Salesforce gave its CVC unit a clear mandate that weighted the strategic value of investments above all else, including financial returns. John Somorjai, who oversaw Salesforce Ventures as Salesforce’s executive vice-president of corporate development, put it bluntly: “Financial returns are not the priority for the fund.” Instead, CVC, for Salesforce, was an important way to gain “access to new technology, [forge] commercial relationships, [build] its M&A pipeline, and [expand into] new markets”.
Matt Garratt, the managing partner of Salesforce Ventures, explained in a press release the unit’s mission by highlighting how much it differed from the returns-driven approach of institutional venture capital firms: “We are the strategic investment arm for Salesforce, ‘strategic’ being the operative word. By contrast, most institutional investors are primarily financially motivated. What is really unique about Salesforce Ventures is we’re the only enterprise-focused corporate venture arm that is investing 100% in cloud companies… In many cases, we are able to help accelerate our portfolio companies into the market. Most institutional investors just do not have the same focus and value proposition that we do.”
Ultimately, Salesforce Ventures served as a vehicle to both expand and defend its parent’s core business. To achieve these two strategic goals, Salesforce Ventures only invested in startups that “integrate with Salesforce, build on the Salesforce platform, or implement Salesforce solutions”. Salesforce Ventures also invested in a way that mirrored its parent’s business mix geographically. And, from a technology perspective, this meant that the CVC unit mainly focused on identifying promising new ventures that developed business and productivity software, AI and machine-learning tools, and software development toolkits. This was especially important as the lines blurred between different categories of enterprise software. According to Garratt:
“We view AI as more of a backbone now, in terms of how the leading enterprise software applications are being built. We are at a point now with AI where it is reasonably consumable and approachable through platforms such as Salesforce Einstein. So you do not really need a roomful of data scientists and engineers to build an app that has AI in it. You can use a platform like Einstein and plug it in. We used to delineate between cloud and non-cloud companies. And we used to delineate between AI and non-AI companies. But now all companies are weaving in AI, democratising it and making it accessible.”
Salesforce Ventures purposely designed both the investment and post-deal integration processes to maximise value capture through strategic alignment. Garratt described the tight linkages between the CVC unit and the parent corporation’s operations: “Uniquely, for every investment we make, we have an executive sponsor who is a general manager – someone typically running product. Before we even make an investment, we are really able to align around product roadmap and product vision. And long term, we are able to provide guidance and advice for these companies and their founders, such as sales advice and go-to-marketing strategy.”
Thomas Wendt and Elizabeth Spaulding, “Five Things Companies Get Wrong about Corporate Venture Capital,” Bain & Company, prepared for Stanford Graduate School of Business by Joseph Golden (MBA 2018), Amit Sridharan (MSx 2018) and Professor Robert Burgelman prepared this case as the basis for class discussion, with editing for length.