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Google Ventures Stresses Science of Deal, Not Art of the Deal

June 23, 2013 by Leave a Comment

A friend calls a friend who knows a guy. A meeting is taken. Wine is drunk (at, say, Madera lounge in Menlo Park). A business plan? Sure, whatever. But how does it feel?

This is decidedly not how Google, that apotheosis of our data-driven economy, wants to approach the high-stakes business of investing in the next, well, Google. Unlike venture capitalists of old, the company’s rising V.C. arm focuses not on the art of the deal, but on the science of the deal. First, data is collected, collated, analyzed. Only then does the money start to flow.

Google Ventures and its take on investing represent a new formula for the venture capital business, and skeptics say it will never capture the chemistry — or, perhaps, the magic — of Silicon Valley. Would computer algorithms have bankrolled David Packard or Steve Jobs? Foreseen the folly of Pets.com?

The data provides one answer to those questions, at least for now: Since its founding in 2009, Google Ventures has stood out in an industry that, for all its star power, has been dealing its investors a bad hand. In recent years, an investor would have done better with a ho-hum mutual fund that tracks the stock market than with some splashy V.C. fund. Venture capital funds posted an annual average return of 6.9 percent from 2002 to 2012, trailing major stock indexes, according to Cambridge Associates.

Google Ventures, like all venture funds, does not publicly reveal returns. But its partners can count on one hand the number of its 170 investments that have failed, though it is too early to know how many will succeed, and it has missed investing in some superstar companies. Its successes include companies that have gone public, like HomeAway for vacation rentals and Silver Spring Networks for smart grid software, and start-ups sold to Google, Yahoo, Facebook and Twitter.

Whether Big Data — that label for technology and decision-making that is upending so many businesses — can truly transform the industry that helped spawn it remains to be seen. Few deny that crunching data is increasingly important. But some insist that those old intangibles, like instinct and luck, are still paramount.

“V.C.’s, just like all of our portfolio companies, need to be analytically intuitive in the modern era of data analytics,” said Matt McIlwain, managing director of Madrona Venture Group, which has invested in companies like Amazon.com and Redfin, the real estate site. “But the intuition part is ultimately the biggest factor. And even with all that, a little good luck goes a long way.”

Google Ventures was the first major firm to rely heavily on data. Since then, established funds like Kleiner Perkins Caufield Byers, Sequoia Capital and Y Combinator have followed suit, and new firms like the Ironstone Group and Palo Alto Venture Science have been created to test the strategy.

Many venture capitalists agree that something needs to change. In the tech industry, where engineers believe any problem can be solved with data, the solution seemed obvious.

“If you can’t measure and quantify it, how can you hope to start working on a solution?” said Bill Maris, managing partner of Google Ventures. “We have access to the world’s largest data sets you can imagine, our cloud computer infrastructure is the biggest ever. It would be foolish to just go out and make gut investments.”

Google Ventures has $1.5 billion under management — a pittance in the wider world of Google, which made $50 billion in revenue last year. It employs seven people who gather data, analyze it and present the results to the investors. Jerome H. Friedman, a prominent statistician at Stanford who writes papers with names like “Data Mining, Inference and Prediction,” consults for a few hours a week.

The firm feeds its algorithms data gleaned from academic literature, past experience and due diligence about start-ups and their founders. Even college dropouts who have never started a company have a quantifiable track record, Mr. Maris said.

Google declined to reveal its secret sauce — the algorithms it uses to parse the data. But it has learned a few lessons.

Article source: http://www.nytimes.com/2013/06/24/technology/venture-capital-blends-more-data-crunching-into-choice-of-targets.html?partner=rss&emc=rss

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DealBook: Entrepreneurs Help Build Start-Ups by the Batch

May 28, 2013 by Leave a Comment

Ron Palmeri and Allison Rhodes Messner of MkII Ventures.Peter DaSilva for The New York TimesRon Palmeri and Allison Rhodes Messner of MkII Ventures.

Just two years after its conception, Prism Skylabs has made enormous strides.

The 20-person company, based in San Francisco, uses video surveillance equipment to give retailers Web-like data on customer behavior in their brick-and-mortar stores. It has secured more than $8 million in financing from investors like Pacific Partners and Andreessen Horowitz and has contracts with 70 retailers.

But like many start-ups finding success in Silicon Valley and across the country, Prism Skylabs is not the brainchild of a rookie entrepreneur who risked everything. One of its founders is Ron Palmeri, a longtime Silicon Valley executive. He is among a growing group of professed company builders who are parlaying past successes — along with their own capital and thick Rolodexes — into operating companies and venture funds that work on multiple companies at the same time.

“There’s a group of us who are serial entrepreneurs who know a lot about building something and scaling it,” said Mr. Palmeri, who previously worked with CNET’s founder, Halsey Minor, at Minor Ventures. Minor Ventures used this model to build companies like GrandCentral, now Google Voice, and OpenDNS.

In 2010, Mr. Palmeri started his own operating company, MkII Ventures, with Allison Rhodes Messner, formerly of OpenDNS. The company is working on building out four different ideas.

The concept — often referred to as parallel entrepreneurship — is not entirely new. Back in the dot-com days there was CMGI, which once had a market value of more than $40 billion before dying a slow death and eventually being absorbed by one of its portfolio companies. Idealab, based in Pasadena, Calif., has been doing this for more than a decade, though with mixed results.

What is new is the number of prominent entrepreneurs and investors who are now going this route rather than staking their fortunes on single follow-up acts or taking less active roles as angel investors or venture capitalists.

“Venture doesn’t allow us to explore, only to accept and deny,” said Michael Jones, chief executive of Science, a builder platform in Santa Monica, Calif. He and a longtime entrepreneur, Peter Pham, started Science in 2011 with $10 million in venture backing, followed by $30 million from the Hearst Corporation.

Most of these investors-cum-inventors are motivated by personal passion to create companies. Under this model, entrepreneurs often tap their own networks and wallets to finance their ideas.

“I don’t have any hobbies,” said Max Levchin, a co-founder and former chief technology officer of PayPal. “This is what I do.”

His first version of this model, MRL Ventures, helped start the mobile business-rating platform Yelp and created Slide, a personal-media sharing service that Google bought for a reported $182 million but has since shut down. His new project, called Hard, Valuable, Fun, or HVF, will focus on a few big ideas with longer time frames.

Like Mr. Levchin, many of the builders came out of the recent wave of technology successes. Garrett Camp, a co-founder of StumbleUpon and Uber, has started Expa to develop new products and services and build teams to scale them. In Chicago, two Groupon founders, Brad Keywell and Eric Lefkofsky, put $200 million, primarily their own money, into Lightbank, an operating company. Lightbank has a staff of 20 and 60 projects in its portfolio, including Belly, a loyalty platform, and Frank Oak, an online men’s clothing retailer.

Company builders say they provide a missing link in the life cycle of start-ups and do so more effectively than incubators. “The primary difference is focus,” Mr. Camp said. “I plan on creating just a couple companies per year, and spending significant time with all of them.”

Hunter Walk, a former director of product management at Google, said, “What’s often needed at the early stages isn’t more capital in a vacuum, but people with operational experience who can give their full attention to these companies.” Mr. Walk is raising a venture capital fund, called Homebrew, with another former Google executive, Satya Patel.

Once an idea gains traction, builders typically turn to venture capital firms for additional financing while gradually giving individual teams more autonomy. “It’s like raising children,” Mr. Palmeri said. “There’s a point where they eventually need their own space, but you’ll continue as a trusted adviser.”

Some company builders invest in a mix of their own ideas and early-stage concepts that fit a particular theme. Others, like Mr. Palmeri’s company, focus almost exclusively on homegrown projects, though they will recruit co-founders and teams to expand the companies into independent entities.

“It’s a highly collaborative process,” Mr. Palmeri said. “By the time we look for outside funding, the idea may have taken many different shapes.”

This approach resembles product development at large companies, like Apple or Google, only on a smaller scale. “The cycle of entrepreneurship can be pretty slow, so why not work on several ideas at one time?” said John Borthwick, chief executive of Betaworks, which was founded in early 2008 and is based in New York. (The New York Times Company is an investor.)

“Over time, you can build common tools, databases, analytics — all the things that give each idea a head start in the marketplace,” Mr. Borthwick said.

One of the biggest advantages to working on several companies simultaneously is the ability to share resources.

“The dollars used in the early stages of start-ups are often highly inefficient because you spend a lot of time and money just to get the business going,” said Mr. Jones at Science. His operating company has 25 people on its staff, specializing in areas like human resources, marketing and real estate.

“The early days of a company should be spent thinking about strategy and technology, not worrying about negotiating leases,” Mr. Jones said.

When start-ups fail, he said, often it is not because the ideas are flawed but because management did not have the tools or resources to execute the idea, were pulled in too many directions or did not move fast enough. Mr. Keywell and Mr. Lefkofsky noticed the same pattern in previous companies they had started or financed.

“We decided to bring those competencies inside of Lightbank,” Mr. Keywell said. “The whole model is designed to reduce risk and increase reward.”

Though some of the large venture capital firms have invested in ideas hatched by company builders, the concept has its skeptics.

“It’s very difficult to manufacture innovation,” said Andy Rachleff, a lecturer at the Stanford Graduate School of Business, former general partner at Benchmark Capital and chief executive of Wealthfront, an online financial advisory firm. “The reason most start-ups are successful is they had great insight, and the likelihood of having that killer insight more than once in a career is exceptionally low.”

While this approach allows individual teams to focus on ideas without having to worry about the nuances of running a business, it can pull the company builders in too many directions.

In 2011, Evan Williams and Biz Stone, who founded Twitter, and Jason Goldman, another former Twitter executive, restarted Mr. Williams’s Obvious Corporation as a builder platform. Recently, however, they said they would each focus more on individual ideas rather than work on several ideas at once.

“Turns out, we like focus,” Mr. Williams wrote in an explanation on the company’s Web site.

Nevertheless, proponents of parallel entrepreneurship argue that the odds are better for those who pursue multiple ideas. “The percentage of companies that are successful should be greater than the traditional portfolio,” Mr. Jones said.

Venture partners can regard company builders as “a monstrous insurance policy,” he added. “If something goes wrong with one of our portfolio companies, we can quickly dive back in and make things work.”

Article source: http://dealbook.nytimes.com/2013/05/27/entrepreneurs-help-build-start-ups-by-the-batch/?partner=rss&emc=rss

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Technology Investors Turn Wary on Ventures

August 10, 2011 by Leave a Comment

REDWOOD CITY, Calif. — Even as Wall Street trembles, the market for investing in tech start-ups remains white-hot. Still, some investors are proceeding with extreme caution.

Saying they learned their lesson in the dot-com boom and bust, and the 2008 recession, the institutional investors — pension funds, university endowments and foundations — that put money in venture capital funds are more selectively choosing the firms in which they invest, doing exhaustive research before handing over money, and in some cases driving hard bargains for more favorable management fees and shares of profits.

Though most say they remain bullish on venture capital, they know that as the limited partners, they would be the ones to feel the pain if a bubble bursts. After all, they put up most of the money.

And as they watch the stock market gyrate, they remember all too clearly the nightmarish consequences of having too much of their money tied up in illiquid assets like venture capital in late 2008 and 2009. They have recently slowed their investing in venture funds and could cut back more.

“Whenever there’s market tumult, people get more nervous about how illiquid and long-dated their portfolios are,” said Chris Douvos, co-head of private equity at the Investment Fund for Foundations. “My worry is if you have continued tumult, it’s going to scare people away.”

Even before last week, the days when institutional investors threw money at venture funds because they felt lucky just to be able to invest were gone. More recently, they want more transparency from the famously tight-lipped funds, and in some cases, they are getting it. One firm has started giving limited partners files with its portfolio companies’ financial information, a rarity. And limited partners say venture capitalists are increasingly available for one-on-one meetings.

“I call it the Madoff effect,” said Jordan Silber, a partner in the venture capital group at the law firm Cooley, speaking recently at the Venture Capital Investing Conference here in Redwood City, outside of San Francisco. “We’re seeing extremely deep dives and due diligence and looking at people and their track record in a way we’ve just never seen before.”

Despite the fervor over companies that have gone public or are on the verge of doing so, like LinkedIn, Facebook and Groupon, and even though venture capitalists are investing more money in start-ups than they have for the last two years, institutional investment in venture capital funds is near the five-year quarterly low.

Limited partners invested $2.7 billion in 37 funds in the second quarter, half of which went to a single firm, Accel, an investor in Facebook and Groupon. Investment was down from $7.6 billion in 42 funds in the first quarter, according to the National Venture Capital Association, though it was up 28 percent from the same period last year.

Limited partners say they are wary because venture capitalists are investing in start-ups at valuations several times higher than a year ago.

“I look at some of the companies and they really don’t have a business model, so I’m afraid,” said Kelvin Liu, a director at Invesco Private Capital, at the conference, which was hosted by International Business Forum. “To people who are willing to pay at $5 or $10 billion valuations, I say: ‘Why are you doing that? Take your money out.’ ”

Venture capital attracts universities in particular, which have followed the so-called Yale model by investing in alternative, illiquid assets. But universities and other institutional investors froze in late 2008. Suddenly faced with shrinking investments in public equities, many, including Duke, Columbia and Harvard, sold or considered selling their stakes in illiquid venture funds on the secondary market or sharply decreased the amount they invested in venture.

Now, just as limited partners are tiptoeing back to the asset class, talk of a another stock market crash as well as of a tech bubble is making them skittish, even as they say they remain long-term investors and are heartened by recent initial public offerings.

“We are absolutely positive, and it’s been a great exit environment over the last six months,” said Nicole Belytschko, who leads venture capital investing at C.M. Capital. “But at the same time, while we’re getting a lot of capital back from very good exits, our managers are deploying capital at very expensive valuations.”

Article source: http://feeds.nytimes.com/click.phdo?i=7872fd316a97b89b7683a483adc4c420

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Google Spending Millions to Find the Next Google

July 19, 2011 by Leave a Comment

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

Other pedigreed tech companies are doing the same, as venture capital dollars coming from corporations approach levels last seen in the dot-com 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 says it has a weapon to guide it in picking investments — a Google-y secret sauce, which means using data-driven algorithms to analyze the would-be next big thing. Never mind that there often is 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 Bill Maris, the managing partner of Google Ventures, the corporate investment arm. “If you have a match, you should light it.”

Corporate venture funds invested $583 million in start-ups in the first three months of the year, according to the National Venture Capital Association, up from $443 million in the same period last year and $245 million in 2009, before tech investing began its rapid turnaround. Today, 10 percent of venture capital dollars come from corporations, nearing the previous bubble-era high of 15 percent in 2000.

Facebook, Zynga and Amazon.com 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 $327 million it invested last year. Google Ventures says it has invested as much money in the first half of this year as in all of last, and 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 to 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 Andrew S. Rachleff, who teaches venture capital at Stanford and was a founder of Benchmark Capital, the venture firm. Mr. Rachleff also questioned Google’s reliance on its algorithms. “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 analyze,” he said. “You have to apply judgment.”

Although even Mr. Maris compares venture investing to “buying lottery tickets,” Google says 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 27,770 employees for engineering, recruiting and business advice, and offering office space at the Googleplex and classes on building businesses.

Mr. Page, who declined a request for an interview, has already promised Google Ventures $200 million this year and says a virtually unlimited amount is available, Mr. Maris said, as Google reconnects with its start-up roots. “I’ve had conversations with Larry when 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 says its approach is paying off. One of its investments, Ngmoco, was acquired by a Japanese gaming company, DeNA, for up to $400 million, and another, HomeAway, for renting vacation homes, received a warm welcome from investors when it went public last month. A third, Silver Spring Networks, a smart grid company, 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 runs similar information about potential investments through the algorithms to get a red, yellow or green light.

Article source: http://feeds.nytimes.com/click.phdo?i=26765bf97a355e0d3c31d80aaa9a5f64

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