Thursday, July 21, 2011

Google rushes to discover the next Google

MOUNTAIN VIEW (California): Google thinks it can be young and crazy again. And it is betting US$200 million (S$240 million) that it is right.

In the hottest market for technology start-ups in over a decade, the Silicon Valley behemoth is playing venture capitalist in a rush to discover the next Facebook or Zynga.

Other pedigree tech companies are doing the same, as venture capital dollars coming from corporations approach levels last seen in the bubble era of 2000.

To some, it is a telltale sign of an overheated industry, symptomatic of a late and ill-advised rush to invest during good times. But Google said it has a weapon to guide it in picking investments - a Google-y secret sauce, which means using data-driven algorithms to analyse what would be the next big thing.

Never mind that there is often very little data because the companies are so young, and that most venture capitalists say investing is more of an art than a science. At Google, even art is quantifiable.

'Investing is being in a dark room and trying to find the way out,' said Mr Bill Maris, managing partner of Google Ventures, the corporate investment arm. 'If you have a match, you should light it.'

Corporate venture funds invested US$583 million in start-ups in the first three months of this year, said the National Venture Capital Association, a rise from US$443 million in the same period last year and US$245 million in 2009, before tech investing began its rapid turnaround.

Today, 10 per cent of venture capital dollars come from corporations, nearing the previous high of 15 per cent in 2000.

Facebook, Zynga and are investing in social media start-ups.

AOL Ventures restarted last year after three previous efforts, and Intel Capital expects to invest more this year than the US$327 million it invested last year.

Google Ventures said it has invested as much money in the first half of this year as in all of last year, and Mr Larry Page, the company's co-founder who became chief executive this spring, has promised to keep the coffers wide open.

Corporate venture arms have sprung into action before during boom times like the early 1980s and the late 1990s, but they have had mixed records.

'When the corporate guys get involved, it usually means that we're at the top of the market,' said Professor Andrew Rachleff, who teaches venture capital at Stanford and was a founder of Benchmark Capital, a venture firm.

He also questioned Google's reliance on its algorithms, saying: 'There's no analysis to be done when you're evaluating a company that's creating a new market, because there's no market to analyse. You have to apply judgment.'

Although even Mr Maris compares venture investing to 'buying lottery tickets', Google said it has faith in its algorithms.

At the same time, it is taking the unusual step of providing the chosen start-ups with access to its 28,770 employees for engineering, recruiting and business advice, and offering office space at the Googleplex and classes on building a business.

According to Mr Maris, Mr Page, who declined a request for an interview, has already promised Google Ventures US$200 million this year and said a virtually unlimited amount is available as the company reconnects with its start-up roots.

'I've had conversations with Larry in which he says, 'Do as much as you can, as fast as you can, in as big and disruptive a way as possible',' he said.

Google said its approach is paying off. One of its investments, Ngmoco, was acquired by Japanese gaming company DeNA for up to US$400 million. Another, HomeAway, for renting vacation homes, received a warm welcome from investors when it went public last month. A third, smart-grid company Silver Spring Networks, filed to go public last week.

Google Ventures invests in various areas - the Web, biotechnology and clean technology. It puts large amounts of money into mature companies, but it is also investing small amounts in 100 new companies this year.

To make its picks, the company has built computer algorithms using data from past venture investments and academic literature. For example, for individual companies, Google enters data about how long the founders worked on start-ups before raising money, and whether the founders successfully started companies in the past.

It collects similar information about potential investments before giving them a red, yellow or green light.