Google has announced a flurry of deals in Europe from its venture capital fund, but a key partner has left and there are rumours of dissent within Google Ventures’ London outpost.
Other VC firms also wonder whether Google Ventures in London is too small (it manages $US100 million), and may be getting priced out of the best deals.
In 2014, Google hoped that opening its first international Google Ventures expansion would let it tap into the growing technology scene in London, Paris, Berlin, and elsewhere in Europe.
The line-up of general partners for Google Ventures Europe included some big names from the European tech scene:
- Angel investor Tom Hulme, who founded OpenIDEO and was previously managing director of British sportscar company Marcos.
- Angel investor Peter Read, who previously invested in companies such as Citymapper, EyeEm, Farfetch, GetYourGuide, LoveFil, ROLI, Skype, and YPlan.
- Eze Vidra, who was the head of Google’s Campus in London, which is home to lots of small startups and tech companies.
- Avid Larizadeh Duggan, who was the cofounder of online fashion retailer Boticca.
- MG Siegler, the former TechCrunch writer who joined Google Ventures back in 2013 and moved to London to help the firm’s European wing get started.
But Google Ventures partner Peter Read left the VC fund in July, and gave no reason for his departure.
The news came at the same time as rumours of disagreements within Google Ventures’ European wing, and whispers that it was relying too heavily on Google’s algorithm rather than the knowledge of its human staff in terms of pricing and executing deals. Neither Read nor Google responded to requests for comment.
There’s something you probably don’t know about Google Ventures: It’s ruled by robots. Not actual metal robots, of course, but an algorithm that helps investors decide whether to proceed with a deal.
It sounds great, in theory: A computer program takes a proposed deal, runs it through a database of past tech investments, and tells you what to do in order to make the most money. But what if it’s not such a good thing?
Google Ventures has made some significant investments since its launch in 2009. It has invested in Uber, 23andMe, Nest, Medium, Product Hunt, About.me, Pocket, Periscope, Jet, and Slack amongst many others. That’s an impressive line-up.
Sure, Google finds deals the traditional way, but it also relies on its algorithm to signal whether it’s a good or bad deal. Here’s how The New York Times described the algorithm back in 2011:
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.
Google engineering director Graham Spencer explained in an on-stage interview at the Web 2.0 Summit in 2011 why Google uses data for its investments:
Google has some of the world experts in statistics, economics, machine learning, and so we thought it would be worth at least doing an experiment to see if we could take some of their knowledge and techniques and apply that to this domain of entrepreneurship and venture capital. When we as VCs sit around the table thinking about a company, we look at all kinds of data qualitatively. We look at the entrepreneurs and what they have done in the past, we look at the market, we look at the product. What we’re trying to do is take all of those heuristics or rules of thumb that VCs are always using, and trying to see which sets of those rules can be turned into something quantitative.
But is it such a good idea to use an algorithm to help investors make decisions? Well, the jury is out. Business Insider spoke to multiple investors in London about Google’s data-driven approach to venture capital. Many expressed misgivings about Google’s robot investor, speculating that it results in investment decisions that track past deals for similar startups. That strategy can cause a fund to focus on similar startups that mimic previous success stories. Conversely, an algorithm can’t properly value a wildly new company doing something completely unique in a competitive field of one.
But Google Ventures has one built-in advantage: Its investments tend to trigger successive follow-on rounds of investment that drive the value of the company higher.
Others investors told us that the use of an algorithm can help investors who already use data in their deals to gain a clearer insight into what decision to make. No investors wished to speak publicly about Google’s algorithm, and many told us that was because they didn’t wish to publicly criticise Google’s venture capital fund.
To Google’s credit, it hasn’t made any mistakes in Europe yet. It’s one of the most high-profile VC funds here, and it’s too early to tell whether its investments have been successful or not. It’s different in the US, where Google Ventures manager partner Bill Maris referred to Secret (a company that his fund invested in) in an interview as a “bank heist” after it shut down.
Google Ventures recently announced a flurry of deals in Europe. It was quiet for over a year, announcing just one deal: A £40 million investment in music publishing company Kobalt.
But in June it announced that it was investing in an Oxford University fund, and that was followed by investments in e-commerce company Yieldify, and children’s book startup Lost My Name. Recently it contributed to a $US60 million (£38 million) round for Secret Escapes, a luxury travel deals website.
What we haven’t seen from Google Ventures in Europe is investment in big-name fintech startups, arguably Europe’s biggest hope for startup hits. There are more fintech startups in London than there are in either New York or Silicon Valley, and fintech startups tend to have one massive advantage over consumer-tech products: automatic cashflow from Day 1.
Google Ventures has been most successful in the US when contributing to later stage rounds for larger companies such as Uber, but in Europe it has focused on smaller companies. Instead, other US investment firms like Andreessen Horowitz are making the big fintech deals in Europe, including leading a $US58 million (£37 million) Series C round in London fintech startup TransferWise, which processes cheap international currency transactions.
One reason why Google probably isn’t investing in later stage startups in Europe is that it simply doesn’t have that kind of money to spend. Its European fund is $US100 million (£64 million), compared to $US1.2 billion (£773 million) under management in the US as of 2013, and $US300 million (£193 million) to invest each year.
Last month we ranked VC funds in Europe according to how much money they have to spend. Index Ventures topped the ranking with $US706.16 million (£455 million) across its funds. The cutoff for the ranking is $US200 million (£128 million) to spend. Google Ventures’ $US100 million looks small in comparison, and thus it didn’t make the list.
Google Ventures’ small size is a handicap. These days, $US100 million just doesn’t go very far in London. (It’s only £64 million, after all.) Gone are the days when a big London startup deal involved a $US10 million round. The really interesting moves today start at €20 million ($US22 million), like the new deal for Germany’s consumer bank interest product SavingGlobal, the $US70 million deal with London’s Deliveroo, and the Sophos IPO which raised £125 million ($US194 million) at a valuation of £1 billion ($US1.6 billion).
None of this is bad for Google, of course. It was exciting when Google first announced it was committing real resources into Europe. But it is still early days for the European fund and its first year of existence has felt experimental. The loss of a partner and internal debate about the value of the algorithm look like part of that experiment.
To observers at other VC funds, the small size of Google is the main issue. That could change anytime, of course. Google has massive resources internationally and can no doubt deploy them at the drop of a hat. But right now Google Ventures seems to be carefully fighting below its weight.