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Venture capital, done the Google way

Google Ventures has made 10 investments over its first year in operation, and has about $100 million to spend this year. How will it distribute that cash?

MOUNTAIN VIEW, Calif.--After a little over a year in the venture capital business, Google now has 10 start-ups under its wing and plans further growth in 2010.

A mobile payments company called Corduro became the latest start-up to accept funding from Google Ventures on Monday, as fund executives hosted a wide-ranging discussion on the state of Google Ventures at Google headquarters. Google wants to invest about $100 million this year in interesting emerging start-ups, said Bill Maris, managing partner of Google Ventures.

Bill Maris Google Ventures
Bill Maris, managing director of Google Ventures Google Ventures

Google Ventures launched in March 2009, but the company had not said very much about its activities in the intervening year. Over the weekend, Google Ventures launched a new Web site and disclosed that its team of full-time employees had grown to 16.

A company most known lately for snapping up start-ups left and right, Google has separate goals in mind when considering venture investments, said CEO Eric Schmidt. Schmidt, who is an assistant instructor for a venture capital class at Stanford University, said Google wants to emulate the strategies and tactics followed by the traditional venture capital firms that turned groves of fruit orchards in the southern Bay Area into Silicon Valley, but with a Google twist.

Google is interested in compelling start-ups that have computational problems, be they risk analysis, algorithmic processing, or some other complicated type of numerical challenge that is hard for a small company to pull off but second nature to Google. Companies that accept investment from Google can draw upon individuals from among Google's engineering team for specific needs: one Google user-interface design engineer, Braden Kowitz, helped an image-recognition company called Pixazza improve the usability of their Web site and tools.

This is a completely separate project from Google's mergers and acquisitions team, Schmidt said. When Google buys a company it's usually because a project team has identified a need and researched the available companies, or when an interesting company reaches out to Google looking to get bought, he said.

Venture investing, on the other hand, involves "new speculative high-risk investments," Schmidt said. It's also distinct from the investments Google has made through its arm or the energy investments it has made in that it is being run with a for-profit mentality, he said. Schmidt also moonlights as an investor in Tomorrow Ventures, which does not list him among its partners but which he mentioned briefly to clarify that it was a completely separate operation from Google Ventures.

Google accepts employee recommendations for potential investments, reasoning that its employees are in tune with innovative start-ups in their respective fields.

"Googlers know a lot of people, and the employee base that Google Ventures can tap are people who understand subtleties that the average VC firm can't tap," Schmidt said. "That doesn't mean we are better investors, but it means we understand this stuff."

So where is Google putting its dollars? So far, Google Ventures has put money into start-ups that align with Google's broader interests, such as OpenCandy, a software-distribution and ad network, and English Central, which analyzes video on the Web to help students learn English.

But there is no overarching goal or philosophy behind Google Ventures, Maris said. Google's leadership triumvirate (Schmidt and co-founders Sergey Brin and Larry Page) does not decide where specific investments are made, although they do set the budget for the fund, which will likely vary on a year-to-year basis.

Still, Maris was mildly surprised to learn for the first time during the roundtable discussion that Schmidt wants Google Ventures to expand overseas in the near future.

Right now, mobile applications are the hot venture investment area because of the low cost of capital needed to get a couple of developers off the ground and the potentially high reward as mobile technologies continue to develop. Google is obviously eyeing that trend with investments like Corduro, but it's important to avoid a "herd mentality" when it comes to venture investing, Maris said. Schmidt took great pains during the discussion to paint Google Ventures as something complementary--rather than competitive--to the existing venture capital industry. Google has plenty of money and technological expertise but it does not have nearly the experience that seasoned VC firms bring to the table, he said.

However, Google Ventures can learn a lot from those firms, he said.

"Venture is a phenomenal achievement of America. My entire life has been defined by the people who created the venture industry," Schmidt said.