Google Ventures Out

What do you do when, despite the hard times, you still have too much money to spend? Try setting up your very own venture capital fund. That's what Google did yesterday when it announced Google Ventures, a $100 million fund to invest in "consumer Internet, software, clean-tech, bio-tech, health care and, no doubt, other areas we haven't thought of yet."

At first glance, a recession may seem like an odd time to start throwing around money, but as Google Ventures managing partners Rich Miner and Bill Maris point out, innovation often occurs precisely during economic downturns, when the world is in flux and the old ideas don't seem to work anymore. Google should know; its search advertising business took off during the last recession, as the market for display ads dried up.

Still, why now, especially when Google already has an internal product development division and a philanthropic venture capital arm, Google.org? New York Times reporter Miguel Helft argues that Google has been rethinking Google.org for quite some time, and that with this new VC fund, the company will shift much of its energy investments over to its for-profit arm. (In fact, one of its first investments is Silver Spring Networks, a firm specializing in electricity grid management, which has long been one of Google's pet philanthropic projects.) In addition, VentureBeat's Camille Ricketts notices that managing partner Rich Miner used to work in Google's Android mobile platform division, leading to speculation that Google Ventures will focus heavily on the emerging smartphone market.

Still, some question the wisdom of a major company setting up VC funds that are best managed outside the corporate milieu. Such in-house funds haven't exactly had stellar performance in the past, and Union Square Ventures partner Fred Wilson explained why in a blog post last year. (Thanks to Silicon Alley Insider for flagging Wilson's post.) First, the kind of personality that thrives in the venture capital world simply can't stand working in large companies. Second, he claimed, the profit motive just doesn't work the same way in big companies.

"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 $200m 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. ... 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.