With that risk profile, the younger Alphabet portfolio companies require a different type of assessment. Clearly, an investment in self-driving cars needs a different assessment than an investment in a market-leading search engine.
Investors may ask, “Why is this company turning into a venture fund? Why don’t they leave this to the Sequoia’s and A16z’s of this world?”
That’s a fair question. Why should the company do the capital allocation, when the investor can do it more efficiently?
This is also the reason why conglomerates are not terribly in favor. They are regarded as a leftover from the 1960’s. More often than not their strategies did not work out very well. Companies such as Facebook and Amazon have been criticized for turning into conglomerates. Is Google on the wrong track?
Well, part of Alphabet’s activities may indeed be driven by Google’s founders interest to pursue new endeavors and to reallocate capital.
On the other side, we can see a pattern here. It’s not only Google that invests heavily in new ventures. Two other huge examples are Amazon and Facebook. Amazon is basically a mix of several business. And each dollar of profit that a mature Amazon business generates will be reinvested in a new business. Facebook’s hasn’t been too lazy either. They have been purchasing more mature but high-growth, high-price, high-risk businesses. One of their recent acquisitions was WhatsApp for which they paid an equity value of $ 19 bn. At the time, many observers didn’t understand rationale for the price that Facebook has paid for WhatsApp.
The pattern continues with the corporate incubators, accelerators and venture funds, that are chasing entrepreneurs with a dedication that would make the make sales people in the 1980’s Pulitzer Prize winning play Glengarry Glen Ross look like rookies. These corporates include media business, telecommunication businesses and banks to name just a few. Some of them decide to get in at early stages through accelerator arms or corporate ventures while others focus on acquiring existing high-growth businesses. What they have in common is that are willing to allocate the resources to get into the game.