Google's Creative Destruction

Venture-capital firms have been the engine of the United States’ innovation economy. At Google Ventures, the search giant’s investing arm, Google thinks it can build a better one.

Google Ventures managing partner Bill Maris in the future home of his Startup Lab, one of the keys to his investing strategy. | Photo by Chris Mueller

Google Ventures' Twitter account is in the doldrums and Bill Maris isn't pleased. Maris, the intense managing partner of the search giant's venture-capital arm, is sitting in a huge window-paneled conference room with a few members of his marketing team. One of them tries to brighten the mood by noting @googleventures has about 34,000 followers. That's far more than arguably the hottest venture firm in Silicon Valley right now, Andreessen Horowitz (which has about 7,000 followers), though not as many as the A-list Sequoia Capital (around 43,000 followers). Maris isn't satisfied. When he gets excited, as he does now, his voice has a tendency to break into a higher register. "I want us to get not just up to the curve but ahead of the curve."

Maris, a boyish 37, stiffens his small and lean frame and unleashes a litany of questions typical for any good Googler. Why, he wonders, is the Twitter account posting only two or three tweets a day? Wouldn't more tweets attract more followers? Or would that turn people away? Shouldn't someone know the correct number of tweets to post? Maris reveres the clarifying possibilities of data. "We must have done a study internally on the optimal number of tweets per day that is not annoying but still interesting, right?"

Twitter followers isn't one of the typical yardsticks that venture capitalists use to keep score. But little about Maris and Google Ventures resembles the VC establishment and its usual MO. "This isn't the kind of place where doing what everyone else is doing would be considered successful," says Maris, who launched Google Ventures in the spring of 2009 to invest some of Google's prodigious cash hoard in startups. "We're trying to do something completely different, not because it's different, but because we're looking for a different outcome."

Despite the mythology that has built up around venture capital, it has become a slowly moldering investment vehicle. "The past 10 years haven't been very productive," Maris points out. According to the research firm Cambridge Associates, during the decade ending last September, VCs as a class earned a 2.6% interest rate for their investors--less than you could have earned in an S&P 500 index fund. The numbers look slightly better over shorter periods; VCs have delivered a 4.9% return the past three years and 6.7% over the past five, still far from terrific.

Google's insurgent attitude--perceiving startup funding as broken and appointing itself as the fixer--has ruffled some in the insular, clubby world of venture capital. Not on the record, of course. Google Ventures is already big enough that it has participated in deals with almost every prominent Valley investor, and nobody wants to talk ill of a partner. Behind the scenes, though, some question the firm's experience--most of its partners are former Googlers who haven't worked in venture capital before--and its passion. If you were looking for money and were choosing between Google Ventures and such top firms as Andreessen Horowitz or Kleiner Perkins Caufield & Byers, people would tell you to go with one of the other guys.

Photo by Robyn Twomey

Maris understands the skepticism. "If I'm an entrepreneur and I have a term sheet from Sequoia and Kleiner, that's the safe choice. Google Ventures is the brave choice." But Maris argues that won't be the case for long. "We're in the process of rethinking everything, from top to bottom, so that over time, Google Ventures becomes the safe choice."

Maris's formula includes an unusual emphasis on data--and a team of researchers to quantify elements that lead to successful investments. Then there's his Startup Lab. According to just about everyone in the startup scene, including rival VCs, Google Ventures is one of the most hands-on, full-service funders in the Valley. "They have recruiting partners, design partners, engineering partners, user research partners," says Somrat Niyogi, who has raised money from Google Ventures for his social TV startup Miso. "That kind of structure, you just don't get in the VC community. Period."

In 2009 and 2010, Google gave Maris clearance to invest up to $100 million. In 2011, it doubled the commitment. Thus far, he and his partners have publicly announced investments in 70 companies, from consumer tech to energy to life sciences. And Maris is far from done. "The average venture-fund partner does one to two deals per year," he says. "We're doing one to two investments per week." At this pace, Maris's fund will grow to almost $2 billion over the next decade, making him the Valley's most intriguing new power broker.

Maris's first exposure to Silicon Valley venture capitalists was not a good one. In the 1990s, he launched an email and web-hosting company in Vermont, returning to the state where he attended college. The startup, called Burlee.com, cut short a miserable postcollege experience working for a Swedish investment firm in Manhattan. Despite the Internet frenzy and his growing business--Burlee would ultimately become one of the web's largest hosting firms--those go-go Valley VCs gave him the brush-off. "The reason I always got was 'It's in Burlington.'" He raised $1 million from a Vermont father and son, and sold Burlee in 2002 to Interland (now Web.com) for, as he says, "far more money than I had ever anticipated."

While Maris, then in his late twenties, unplugged to travel and reconnect with friends after his five-year entrepreneurial blur, Google, which also found itself flush with cash for the first time, plugged into investments in a surfeit of potentially revolutionary startups. Cofounders Sergey Brin and Larry Page, then-CEO Eric Schmidt, and other execs invested in new ventures through the company's corporate-development division, whose main function is to handle mergers and acquisitions. By 2008, though, David Drummond, Google's head of corporate development, had a mess of a portfolio on his hands. Google had about 50 investments in small and large companies, with no single department overseeing all those positions and no one deciding which ones were working and which weren't. Most controversially, Google invested in Brin's wife Anne Wojcicki's company, the consumer genetics-analysis firm 23andMe, through this channel. So Drummond set out to formalize Google's investing to be focused on its potential for financial returns.

Maris, still knocking around the world, found himself on Google's radar thanks to the one good thing about that postcollege investment-banking gig. He had struck up a friendship with Wojcicki, at the time a fellow analyst. Brin recommended Maris to Drummond, and they met at a cafe at Google HQ in 2008. Drummond liked what he saw. In addition to his background in finance and the Internet business, Maris had a strong grounding in science--in particular, neuroscience and cognitive and visual biology. Although friendly, Maris lacks the glad-handing manner of most VCs. But he made up for it with his analytical rigor, and he even had the kind of bold dreamer streak that's catnip for Googlers. Growing up, Maris says, "I loved dinosaurs, I loved space, and I thought maybe I'd be the first paleo-astronaut."

Photo by Jake Stangel

Maris, who has always been wary of working on anyone else's timetable--he bailed on medical school because it would take too long before he could make an impact--had his reservations about the gig. "I decided to think of it like the Army," he says. "I'll sign up for six months, and at the end of six months I'll make another decision, but I won't evaluate it in between. I'll give it a fair chance."

Maris approached venture investing the way a paleo-astronaut might approach T. rex bones on Mars--he examined the landscape, attempting to puzzle out what had gone wrong in the past. "The model was broken," he says. He decided that one way Google could improve on startup financing would be to flex one of its most natural muscles: It should analyze data. "Not many venture firms have people whose job is to read academic research--on startups, ventures, and entrepreneurs--and gather knowledge from that," Maris says. So he installed a staff of quantitative analysts who aim to ferret out indicators of success in every investment. Even three years in, "we're really just beginning to look at the question, Can the venture business be quantified?" says partner Joe Kraus, who, in 1993, cofounded Excite, a web 1.0 darling and Yahoo rival, and then sold his second startup to Google in 2006.

Kraus says that analysts have discovered research that overturns some of Silicon Valley's most cherished bits of lore. Take that old idea that it pays to fail in the Valley: Wrong! Google Ventures' analysts found that first-time entrepreneurs with VC backing have a 15% chance of creating a successful company, while second-timers who had an auspicious debut see a 29% chance of repeating their achievement. By contrast, second-time entrepreneurs who failed the first time? They have only a 16% chance of success, in effect returning them to square one. "Failure doesn't teach you much," Kraus says with a shrug.

Location, in fact, plays a larger role in determining an entrepreneur's odds than failure, according to the Google Ventures data team. A guy who founded a successful company in Boston but is planning to start his next firm in San Francisco isn't a sure bet. "He'll revert back to that 15% rate," Kraus says, "because he's out of his personal network and that limits how quickly he can scale up." Google Ventures has also found a positive correlation in the distance between a venture fund's office and a given startup's headquarters. When Valley-based VCs invest in a startup that's far away, the deal is more likely to turn out better. Why? It's more likely to be a stellar company. VCs aren't going to get on a plane for board meetings at the next me-too mobile-local-social app. Maris and his partners have beaten the bushes to find worthwhile investments around the country: 33 of its 70 announced investments are in companies based outside of Silicon Valley.

Maris and Kraus haven't completely turned over the firm to the stat geeks. "We use data as a decision-assist tool rather than a decision-making one," Kraus says. For example, when the quant analysts recommended that the partners institute a formal interview checklist for pitch meetings with potential portfolio companies to keep them focused on the founding team rather than get too deep into product details, the partners decided against the proposal after concluding that a regimented set of questions wouldn't help them better assess founders.

One piece of data, however, has informed Maris's strategic direction for Google Ventures more than any other. In 2010, the stats guys told him that if he wanted to strike it big, Google Ventures needed to put its money into between 80 and 100 seed-stage companies every year. But how could a VC fund manage so many investments? VCs usually want a seat on a company's board in exchange for an investment, limiting a typical partner to one or two new deals a year. "You can only be on so many boards," Maris notes. If venture investing was truly broken, here's where it fractured: A single partner, Maris realized, could no longer solely manage the relationship between a startup and the fund.

Photo by Chris Churchill

A few miles from the Googleplex sits a low-slung office building that looks all but abandoned from the outside. The parking lot is empty when I drive in one afternoon with David Krane, a Google Ventures partner who once worked as the search company's first director of communications. Krane, voluble and energetic, assures me we're in the right place. As we enter the lobby, Krane points to a window through which we see rows and rows of old baby cribs--half of the building is being used for storage for Google's on-site day care. These days, much of the rest of the space is meant for another kind of incubation: The building houses Startup Lab, the physical and spiritual embodiment of Maris's solution to reimagine how a VC could guide its investments to greater success.

"Money is a commodity," Maris says, so Google Ventures aims to provide more hands-on help to its portfolio firms than traditional VCs offer. Ventures has 50 employees, but just 7 of them are investing partners. Many of the rest are experts--in technical recruiting, interface design, marketing, public relations, data management, and even crisis response. According to the more than 10 Google Ventures portfolio companies that we interviewed, this is crucial assistance. "Google Ventures has more operational talent than any other venture fund I've seen," says Charley Moore, founder of online legal service Rocket Lawyer.

I see this for myself when I visit. Just off the lobby, half a dozen founders are waiting for a one-on-one session with Steve Souder, a Google server engineer who's one of the world's foremost experts on making websites faster. When Souder walks in, he's greeted like a hero. And he cements that status when he tells the group that he's reviewed their sites and he's already found ways to make some of them twice as fast.

In 2011, before Nest launched its learning thermostat, Google Ventures set up an unusual security test for the new device. "We wanted to make sure it wasn't prone to getting broken into," says Randy Komisar, a partner at Kleiner who coinvested with Google on Nest. "You don't want people playing with other people's thermostats." The Google team tore into the device, and they soon discovered that it was not as secure as previously thought. "We ended up improving the security thanks to them," Komisar says. "I think what they do is very unusual, and it's also very real."

Photo by MATTHEW MAHON

To pay for this full-service treatment, Maris has restructured partner compensation. "I know of a venture fund in the Valley where there are six partners who could not agree to limit their salaries to $5 million a year each," he tells me while we sit in his small understated office on the top floor of Google Ventures' two-story headquarters, down the street from the main Google campus. "When you're paying $30 million a year to yourselves, that limits other things your fund can do." Maris's modest surroundings and dress--his desk is festooned with Darth Vader bobbleheads and he's wearing jeans, a Google Ventures hoodie, and generic running shoes whose only expressive affectation is a set of neon-green laces--underscore his argument about all that's wrong with the high-flying venture industry centered a few miles away on Sand Hill Road. Partners at Google Ventures get paid a relatively small salary and a portion of the fund's return on investment.

As a sign of its growth, Startup Lab is leaving the baby cribs behind in its current 12,000-square-foot space and building a new 24,000-square-foot one, where it can offer portfolio companies more free office space and meeting rooms. Plus, it will add a user-experience lab and a large lecture auditorium. "Last time I was here, there was a guy sleeping on our couch," Krane says. "To me, that's the sign that we're doing something right, when entrepreneurs are spending the night here."

The success of Google Ventures won't be measured in nights slept at the office. It will be in financial returns. So how is it doing? "We have already generated tens of millions of dollars of profit for Google," Maris says. "That's almost unheard of in the venture industry for a firm our age." The three-year-old firm has scored via the 2011 IPO of the vacation-rental marketplace HomeAway and the acquisition earlier this year of Dasient, which makes web-security tools, by Twitter. The price was not disclosed, but Maris says it was a healthy return. The Dasient sale also underscores the VC firm's independence from Google. In the pursuit of financial return, Google Ventures is willing to let its portfolio companies go to the search giant's competitors. "Google has its big-boy pants on," Maris says with a smirk. "If Google wants to buy one of the portfolio companies, it can write a bigger check." (Last March, it did just that, reportedly outbidding Facebook for Milk, an app incubator.)

Google being Google, its ambitions are more complicated and grandiose than just healthy profits. Maris isn't just talking smack when he says his larger aim is to upend how the VC industry works. For that to happen, Google Ventures needs to create such outsize returns that the rest of the industry is forced to respond. "I want to change the conversation in venture capital," Maris says, from one where VCs are chosen mainly by reputation to one where startup founders also pick investors based on how actively they can help foster the young company's goals.

This is a devilishly circuitous plan. Google is building a VC firm in order to improve how startups are created, so the industry can produce more innovations that, one day, may positively impact the search company's business. Follow that? The road map resembles the logic behind Chrome and Android, products once initially dismissed as quirky indulgences of a company that had more money than sense. As Google's web browser and mobile operating system have emerged as the most prominent players in their respective markets, Apple, Microsoft, and others have had to improve their products. And the net gain for consumers has indirectly benefited Google by accelerating digital adoption.

Maris is quick to crow when he sees any glimmer of rivals mimicking Google Ventures' practices. In January, when Andreessen Horowitz announced a new $1.5 billion fund, partner Ben Horowitz bragged in a blog post about the many large and small ways his fund has worked to help its portfolio firms, including connecting them with engineers and designers and offering PR expertise. Last year, Greylock Partners hired former LinkedIn data specialist DJ Patil to use analytics to help it discover companies getting early traction. "I'm not bothered when other VCs start hiring great designers, or start recruiting," Maris says. "That's the direction I'd like it to go."

"We've got huge leverage to invest in anything we want," he continues. "The power of that lever, $200 million a year--to change the future of health care or mobile apps or gaming or you name it--that's hundreds of companies and lives that we're changing." His voice breaks higher, signaling his enthusiasm for what lies ahead. "We're on a great trajectory to get it done."

Additional reporting by Christina Chaey

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5 Comments

  • Naru Narayanan

    A lot depends on how Google sources deals.There are a lot of big ideas that must be escaping the radar of Google. In addition, they also need to showcase some of their wins.

  • Raul Mihali

    Not an expert, but to the followers part, I'm certain it's not just about a study around the number of tweets a day... it's a dynamic and complex alchemy. Do you have a relationship with the followers, can you make them feel valuable or understand the value you bring to them. Do you achieve enough focus or you're spreading your energy through satellite twitter accounts that take from followers etc.