Google Ventures into VC Game…but Who will Benefit?

On March 30, Google did something that very few have dared to do in this market. It created a venture capital fund. Though Google has some previous investing …

On March 30, Google did something that very few have dared to do in this market. It created a venture capital fund. Though Google has some previous investing experience in the forms of its philanthropic arm, Google.org, and the sizeable strategic investments that are handled by Google’s corporate development team, this will be its first attempt at profit from venture-style investments.

Though much has been made over this new fund, called Google Ventures, many entrepreneurs, start-ups and small businesses have been left wondering how and if they might capitalize on this opportunity. Google has created a Web site that reveals just the bare bones of what interested parties would need to know before pitching the fund, while its managing partners, Bill Maris and Rich Miner, have given a few interviews that touch on the fund’s intentions. So in order to shed some more light on Google Ventures from the perspective of a potential partner, NuWire has combed through media releases and published interviews to elaborate on the concise answers Google provided in its FAQ section page.

What is the focus of the fund?

Google Ventures noted that it’s interested in creative problem-solvers who are able to make great strides in certain innovative fields, such as healthcare, biotechnology, technology, consumer internet, hardware and software.

Like many other venture capitalists, Google Ventures is sure to look closely at innovative ideas in the clean technologies, life sciences and energy-saving sectors. “A new initiative in the venture capital realm is the emphasis on green, which hasn’t been showcased until recently,” said Steve Bloom, president of Capcom Inc., a consulting firm in Georgia that helps entrepreneurs and small businesses grow.

Bloom is careful to note, however, that Google isn’t likely to pass up an innovative pitch with a lot of potential simply because the business does not lie within one of its key sectors – a point that both Maris and Miner have also carefully emphasized. “Google Ventures is the classic venture capital model, it’s no different,” Bloom said. “They’ll look at anything that really has a saleable opportunity. They’ll probably also want an exit strategy within the next three to five years.”

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How much capital does Google Ventures invest?

Up to $100 million has been allocated to the fund for use over the next year. However, Google officials have continuously stated that this number is not set in stone. Though more money could be added to the fund at anytime, Maris has noted that he and his partner will only invest as much money as they see fit.

Those familiar with venture capital operations will note that this fund is noticeably smaller than other funds out there, even with the downturn. In 2007, the average venture fund was $166 million, according to the National Venture Capital Association. Google Ventures will generally provide anywhere from $10,000 to more than $10 million in seed money to selected companies. Investing $10 million into an idea that may lead nowhere can seem crazy during recession, but Bloom is quick to point out that money is not the issue when it comes to securing venture capital financing. Instead of focusing on the money, Bloom advises his clients to focus on creating trust and building a relationship with the fund’s representatives. Presenting solid business and economic models, Bloom argued, would allow the fund’s managers to see the potential value of the company. This allows venture capitalists to invest not just money, but also trust into the entrepreneur. And though money is at the center of many pitches that venture capitalists hear, Bloom believed that strong management and creating a relationship built on trust are the keys to these meetings. Once these factors are in place, the money will come.

“It’s not the money,” he said. “It’s that there are not sufficient enough opportunities out there that meet [a venture capitalist’s] criterion. Money is not the issue. [The issue is that] we have significant recessionary pressures that have changed the way venture capitalists look at valuation models.” What Bloom was referring to is the dot-com bust, during which time venture capitalists plunked huge amounts of money into companies with high valuation models that lacked sound fundamentals, such as management and experience. They never turned a profit and caused massive losses for venture capitalists. These losses were so great that more than half of the venture capital firms that exited in 2000 have failed, according to panelists who attended the University of Virginia’s Venture Summit, which was held on April 3 and 4. Almost a decade later, Bloom believed that the investment fund world was still reeling from those failed investments. “Now, valuations are lower,” he said. “But sometimes a company’s economic model just does not support the kind of valuation model they have. It’s not distrust, it’s just conservatism.”

Does Google Ventures require a commercial arrangement with Google in order to make an investment?

This has been the $100,000 – or, in some cases, $10 million – question. Google stated that, “We don’t require our portfolio companies to work with Google in any special way, although we certainly think there is a lot to be gained by doing so.” However, many have questioned the sincerity of this statement, being that Google is known for leveraging its products, acquiring promising companies and building strategic relationships. However, being that the fund has so far only invested in two companies, Silver Spring Networks Inc. and Pixazza Inc., it’s hard to say whether Google’s one and only goal is, in fact, to “invest in the most promising and interesting entrepreneurial opportunities, and to build great companies, period.”

In another question posted on its FAQ page, Google Ventures is quick to point out that it will “work with management teams to maximize the impact of our investment and their technology or innovation.” The site also noted that although Google Ventures was not created as a “strategic vehicle to make future acquisitions easier…acquisitions by Google of portfolio companies are possible.” For many, these statements have blurred the goals of Google Ventures. In fact, Miner actually came to Google after his former company, a mobile software start-up called Android, was acquired by the internet giant in 2005.

Does Google Ventures have a geographical focus?

The company stated that the fund is only focusing on North America. It’s clear, however, that some regions may receive more attention than others – especially those that are known as large tech hubs. The investment fund will have offices in Boston and the San Francisco Bay area, both of which have huge biotech and software industries. Staying true to that, Google’s first two investments, Silver Spring Networks Inc. and Pixazza Inc., are Northern California-based start-ups.  Silver Spring Networks, which is utilizing technology to make power grids more efficient, is based in Redwood City, a suburb on the San Francisco Peninsula. Pixazza, which is creating a web publishing tool that would link images with relevant products, is based in Mountain View, where Google maintains its headquarters.

Vermont is another area that may receive a lot of attention. Android, Miner’s previous company, was headquartered in the state. Maris, the fund’s other manager, founded his web hosting company, Burlee.com, in South Burlington about 10 years ago.

Maris, who still owns a home in Burlington, recently told the Burlington Free Press that he wants to hear about the creative ideas that Vermont residents are working on. He encouraged entrepreneurs and small businesses to reach out to him so that he may discover the next great company that comes out of this state.

As the year goes on we’re sure to learn more and more about Google Ventures and whether its intentions remain true or not. Until then, however, entrepreneurs who feel they have what Google is looking for should approach the new venture with enthusiasm, well-researched proposal…and caution.
 

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