Corporations and Venture Investing: Take a Good Look at Yourself

I have long argued that corporations are not well-suited to venture investing (with a few notable exceptions), and that it represents both a distraction and an ineffiencient use of strategic financial resources. Two interesting pieces in today’s Wall Street Journal bolster my arguments, but for entirely different reasons. And in both cases they happen to invoke the name “Google” - I guess like many things do these days…

To set the stage, here are my four key issues concerning corporate VC from an earlier post:

• You are creating a completely new culture within the firm.

This
is a huge issue. It is akin to creating an in-house prop trading desk
inside a Wall Street firm. Every sell-side trader wants to get into
prop trading, and the best ones often are given the chance to move to
the other side of the Wall. This creates a “we/they,” stratified
culture that may be ok for a broker/dealer but is less so for a
collegial, team-driven tech culture dependent upon teamwork and
collaboration. Needless to say, Sales & Trading on Wall Street is
not this way. Is it really worth the potentially adverse effect on
culture to set up such an “elite” unit? I’m not so sure.

• Are
  you going to have deals assessed on a cold-nosed, arms-length basis
  absent of potential synergies, or are you only going to look at deals
  where there is strategic relevance?

This
is a big risk. Remember the 1999/2000 days. EVERY TMT
(technology/media/telecom) company had their own investment arm - Dell,
Microsoft, Intel, Comcast, etc. etc. etc. EVERY one out-of-the-box said
“We only do investments where there is a strategic rationale.” Truth:
bullshit. People got giddy. Investments were all over the map. For most
the story didn’t end well. Intel Capital is still a behemoth, Comcast
Interactive Capital strayed a bit but has returned to its roots, but
most others are on the scrap heap. For this to work a VC arm needs to
be incredibly disciplined - but the temptation to stray is often great.

• Are members of the VC team going to be compensated like VCs or like Company business development employees?

See
the first bullet above. If you want an true in-house VC, then by not
paying VC-type compensation what are you really saying? You are begging
for adverse selection. What VC-quality dealmaker is going to join a
corporate VC arm to get paid salary + bonus? It just ain’t gonna
happen. So if you are going to pay VC-type money (carry, etc.), then
you are going to get the business development brain-drain, as the best
and most talented folks are going to clamor for being in the VC arm,
and if they don’t get their way, sayonara. And they would have been
perfectly happy doing their bus dev thing, until that darned VC arm
reared its juicy head. You’ve got to be very, very careful managing the
politics and cultural issues around setting up such a venture. Be
afraid - very afraid.

• Is the presence of the VC activity going to cause analysts to get distracted, and possibly confused, by performance?

This
was classic back in the go-go days. I remember some of the corporate VC
shops, after the value of the portfolios went parabolic in 2000, saying
to analysts, “Sure, that $250 million this quarter is replicable. We
expect that quarter after quarter. That should be considered part of Operating Earnings.”
I kid you not. Check the call transcripts. Unbelievable stuff. Of
course when the sh*t hit the fan the next year, those same corporate
titans were saying “Oh, that, those are just passive investment losses.
Those have nothing to do with ongoing operations.” Right. Whatever
suits your purpose at the time, I guess. Bottom line: it is yet another
element of possible confusion, something in this world that a growth
company should try and avoid at all costs.

So while
creating an in-house VC arm is certainly seductive, it is not without
its risks and challenges. And these are not to be taken lightly -
whenever you are gambling with company culture, DON’T MESS AROUND.

Ok, so what does the WSJ have to say?

Google’s Rough Ventures

There are many reasons to be skeptical about Google’s
newest initiative, to break into television advertising. They have
names like d’Marc and Orkut, which are just two of the many
unsuccessful brainchildren of the firm’s skunk works and
venture-capital-style deal making.

Google’s attempts to diversify — into radio
advertising, online video and social networking — have flopped,
leaving it dependent on its online ad business for nearly all its
profits. That’s a problem because investors, who value the company’s
stock at more than 35 times forecast 2007 earnings, clearly expect some
of these ventures to pay off.

I guess the key question is: what is Google’s core competency? Do these venture investments and acquisitions somehow enhance its competencies, or simply introduce new and less-well understood risks into the business? It is so tempting for a firm like Google, with its billions of dollars of free cash flow, to toss some of its loot around with an eye towards “diversification.” But in the name of what? Faster growth? A more diversified revenue base? Or the hope that by making such an investment that its desire to become less reliant on paid search will become a reality? Google seems to have more than enough interesting IP knocking around its shop without fishing elsewhere; what it could really use is a better model for commercializing and monetizing this vast IP, which nicely leads into the next article.

Googling Growth

For most companies, reinvention of a core business
doesn’t have to involve such high levels of risk. Bain’s research shows
that nine out of every 10 companies that successfully renewed
themselves in the past decade found the solution in mining their hidden assets — assets they already possessed but had failed to tap for maximum growth potential.

The classic example is Apple. The iPod drew on the
company’s well-known skills in software, user-friendly product design,
and imaginative marketing — all underexploited capabilities. Samsung
focused on a different set of hidden assets — underinvested business
lines — to redefine its core. It shut down or sold 76 businesses,
thereby freeing up resources to invest in its lagging but promising
semiconductor and consumer-electronics businesses. Today, Samsung is a
leader in memory chips and mobile phones as well as in high-end
television sets and flat-screen monitors.

Shouldn’t well-run companies already be using all of
their valuable assets? In fact, large, complex organizations always
acquire more capabilities and businesses than they can focus on at any
one time. But when a company needs to redefine its core, it often
discovers that secondary assets and capabilities of the past suddenly
assume center stage, and are the key to new growth.

Yes, yes, YES! Are Eric, Larry and Sergey reading the WSJ and taking this to heart? You can’t tell me that its treasure trove of IP is inadequate to extend its existing commercially successful product set. They really need to buy stuff and act like a VC in order to find value? Maybe I just don’t get it. Maybe they really do need these small, strategy-extending acquisitions in order to grow its top line. I’m not sitting in Mountain View knocking it around with the Three Amigos. But I’ve gotta say - if the money and effort put forth in buying, integrating and monetizing YouTube was spent on extracting value from Google Labs and its other pots of IP, they’d already have substantial revenue streams augmenting paid search. But maybe I missing the boat. But maybe not.