Google: The World's greatest Angel Investment
Brian Perry
22-Aug-06
We all know what an angel investor is or is supposed to be. For some of us, this conjures up images of near miss financial ruin and for others, a sense of financial bliss. But what does it really mean to have a “hit” with an angel investment? Do we all measure our success by the same results? For some of us, it might be a return of five times our investment over a five year period. For others, it might be looking for “the next big thing” with returns you can’t even fathom.
In the hottest angel investment country in the World, the US, last year had some 227,000 angels and pumped $23 billion into start-ups, up 3% from 2004, according to the University of New Hampshire’s Centre for Venture Research. In 1996 there were only about ten angel groups in the U.S.; today there are more than 200. The single greatest reason for this change is the fact most Venture Capital firms have started to favour larger, later-stage investments and therefore leave a gap in funding for early stage businesses and start-ups.
The UK market is also showing strong signs of angel investment activity. According to the British Venture Capital Association (BVCA), last year their members backed more than 1,300 UK businesses and almost 80% of these were made for less than £2m.
The BVCA’s latest Report on Investment Activity shows that investment in start up businesses last year increased by a robust 67% to £160m.
The number of early stage businesses receiving funding rose by 8% to almost 500 in 2005, representing almost 40% of all companies backed by the industry during the year.
Angel investing isn’t something that has only been around since the 90’s. The common perception is that angels have been around since the days of Broadway and they were the people who “came from the heavens” to aid these hard to finance theatrical “businesses”. The reality is, angel investing has been around for as long as there have been businesses. Perhaps that Marrakesh spice merchant wanting a stand in the local souk 2000 years ago was started with a loan from an investor selling a goat. Chances are, the returns in those days were fairly modest compared to some of today but the fact still remains, angel investing has been around for a very long time and is likely to only increase in coming years.
FAMOUS ANGEL INVESTMENTS
Moving ahead a few years to the 1878 Paris Exhibition, a few highly prominent chaps by the name of J.P.Morgan and Spencer Trask decided to back a crazy idea called “electricity” that was being pitched by none other than Thomas Edison. No need to expand on the success of that angel investment. Some of the more famous angel investments include Ian McGlinn making an investment back in 1976 in an innovative little startup called The Body Shop. Back in 1994, there was a guy in the US selling books from his garage via the internet. 12 angels later and Amazon.com was born, 2005 sales were over $5 billion!
Mark Cuban
The wealthy Texan who sold Broadcast.com to Yahoo for $5.7 billion in 1999, recently signed on as an angel investor in Brondell, a San Francisco based manufacturer of Japanese-style toilet seats that wash and dry your behind. Some have questioned Cuban’s reasoning for doing such a deal. According to Brondell co-founder Scott Pinizzotto, Cuban looks for companies that target the masses. “There are 220 million residential toilets in the United States,” Pinizzotto explains. “That’s our installed base, and that’s what got Cuban excited.”1 In December, Cuban invested an undisclosed amount in the company, opening up the pearly gates for other angels: Brondell has now attracted $1.3 million in seed funding.
Eric Hahn
Eric Hahn is one of Silicon Valley’s superangels, a former Netscape CTO who has completed early stage investments in Good Technology, Opsware, red Hat, and Zimbra. He invests his own money, but only in start-ups that possess hard-to-replicate technology. “For example,” Hahn says, “I would have passed on eBay. It’s a great company, but it was mainly an exercise in building a brand.”2
Andy Bechtolsheim
The second most famous angel investment in recent years (number one to come shortly) was probably the $100,000 check that Sun Microsystems co-founder Andy Bechtolsheim made out to Google after watching Larry Page and Sergey Brin demonstrate their search-engine software. The check was uncashable at first, as a legal entity, Google didn’t exist yet, but once the company’s incorporation papers were completed and filed, the money enabled Page and Brin to move out of their dorm rooms and into the marketplace.
Aside from the commonly talked about angel investment successes of Amazon and Body Shop, even the likes of Apple, Kinko’s and Starbucks all got their starts with the help of angel investors, as did current rising stars such as Digg, LinkedIn, and Simply Hired.
However, as any angel is fully aware of, not all angel investments go as planned and produce those big hits all are striving for. Doug Richards knows this very well as an investment angel on BBC 2’s “Dragons’ Den”, one of a team of elite business people able to dash the hopes or make dreams come true for eager entrepreneurs with ideas to sell.
During the first two series, Richard made eight investment offers of which two were accepted. Unfortunately for him, one of them has already failed but to a philosophical entrepreneur like Richard, that’s no big deal. “It’s part of the life of being a high risk angel investor,” he says. “I don’t begrudge the investment – but I lost it. £60,000.”3
One thing all angels tend to agree on:
“Devote only a small portion of your portfolio, say 3% to 10%, to such risky investments.”
Google: The World’s Greatest Angel Investment
Here is a brief summary of Google’s humble beginnings and straight from the company itself:
According to Google lore, company founders Larry Page and Sergey Brin were not terribly fond of each other when they first met as Stanford University graduate students in computer science in 1995. Larry was a 24-year-old University of Michigan alumnus on a weekend visit; Sergey, 23, was among a group of students assigned to show him around. They argued about every topic they discussed. Their strong opinions and divergent viewpoints would eventually find common ground in a unique approach to solving one of computing’s biggest challenges: retrieving relevant information from a massive set of data.
By January of 1996, Larry and Sergey had begun collaboration on a search engine called BackRub, named for its unique ability to analyze the “back links” pointing to a given website. Larry, who had always enjoyed tinkering with machinery and had gained some notoriety for building a working printer out of Lego™ bricks, took on the task of creating a new kind of server environment that used low-end PCs instead of big expensive machines. Afflicted by the perennial shortage of cash common to graduate students everywhere, the pair took to haunting the department’s loading docks in hopes of tracking down newly arrived computers that they could borrow for their network.
A year later, their unique approach to link analysis was earning BackRub a growing reputation among those who had seen it. Buzz about the new search technology began to build as word spread around campus.
1998: The search for a buyer
Larry and Sergey continued working to perfect their technology through the first half of 1998. Following a path that would become a key tenet of the Google way, they bought a terabyte of disks at bargain prices and built their own computer housings in Larry’s dorm room, which became Google’s first data center. Meanwhile Sergey set up a business office, and the two began calling on potential partners who might want to license a search technology better than any then available. Despite the dotcom fever of the day, they had little interest in building a company of their own around the technology they had developed.
Among those they called on was friend and Yahoo! founder David Filo. Filo agreed that their technology was solid, but encouraged Larry and Sergey to grow the service themselves by starting a search engine company. “When it’s fully developed and scalable,” he told them, “let’s talk again.” Others were less interested in Google, as it was now known. One portal CEO told them, “As long as we’re 80 percent as good as our competitors, that’s good enough. Our users don’t really care about search.”
Touched by an angel
Unable to interest the major portal players of the day, Larry and Sergey decided to make a go of it on their own. All they needed was a little cash to move out of the dorm — and to pay off the credit cards they had maxed out buying a terabyte of memory. So they wrote up a business plan, put their Ph.D. plans on hold, and went looking for an angel investor. Their first visit was with a friend of a faculty member.
Andy Bechtolsheim, one of the founders of Sun Microsystems, was used to taking the long view. One look at their demo and he knew Google had potential — a lot of potential. But though his interest had been piqued, he was pressed for time. As Sergey tells it, “We met him very early one morning on the porch of a Stanford faculty member’s home in Palo Alto. We gave him a quick demo. He had to run off somewhere, so he said, ‘Instead of us discussing all the details, why don’t I just write you a check?’ It was made out to Google Inc. and was for $100,000.”
The investment created a small dilemma. Since there was no legal entity known as “Google Inc.,” there was no way to deposit the check. It sat in Larry’s desk drawer for a couple of weeks while he and Sergey scrambled to set up a corporation and locate other funders among family, friends, and acquaintances. Ultimately they brought in a total initial investment of almost $1 million.
Everyone’s favourite garage band
In September 1998, Google Inc. opened its door in Menlo Park, California. The door came with a remote control, as it was attached to the garage of a friend who sublet space to the new corporation’s staff of three. The office offered several big advantages, including a washer and dryer and a hot tub. It also provided a parking space for the first employee hired by the new company: Craig Silverstein, now Google’s director of technology.
Already Google.com, still in beta, was answering 10,000 search queries each day. The press began to take notice of the upstart website with the relevant search results, and articles extolling Google appeared in USA TODAY and Le Monde. That December, PC Magazine named Google one of its Top 100 Web Sites and Search Engines for 1998. Google was moving up in the world.
1999: On the road again
Google quickly outgrew the confines of its Menlo Park home, and by February 1999 had moved to an office on University Avenue in Palo Alto. At eight employees, Google’s staff had nearly tripled, and the service was answering more than 500,000 queries per day. Interest in the company had grown as well. Red Hat signed on as its first commercial search customer, drawn in part by Google’s commitment to running its servers on the open source operating system Linux.
On June 7, the company announced that it had secured a round of funding that included $25 million from the two leading venture capital firms in Silicon Valley, Sequoia Capital and Kleiner Perkins Caufield & Byers. In a replay of the convergence of opposites that gave birth to Google, the two firms — normally fiercely competitive, but seeing eye-to-eye on the value of this new investment — both took seats on the board of directors. Mike Moritz of Sequoia and John Doerr of Kleiner Perkins — who between them had helped grow Sun Microsytems, Intuit, Amazon, and Yahoo! — joined Ram Shriram, CEO of Junglee, at the ping pong table that served as formal boardroom furniture.
In short order, key hires began to fill the company’s modest offices. Omid Kordestani left Netscape to accept a position as vice president of business development and sales, and Urs Hölzle was hired away from UC Santa Barbara as vice president of engineering. It quickly became obvious that more space was needed. At one point the office became so cramped that employees couldn’t stand up from their desks without others tucking their chairs in first.
No beta search engine
The gridlock was alleviated with the move to the Googleplex, Google’s current headquarters in Mountain View, California. And tucked away in one corner of the two-story structure, the Google kernel continued to grow — attracting staff and clients and drawing attention from users and the press. AOL/Netscape selected Google as its web search service and helped push traffic levels past 3 million searches per day. Clearly, Google had evolved. What had been a college research project was now a real company offering a service that was in great demand.
On September 21, 1999, the beta label came off the website.
Still Google continued to expand. The Italian portal Virgilio signed on as a client, as did Virgin Net, the UK’s leading online entertainment guide. The spate of recognition that followed included a Technical Excellence Award for Innovation in Web Application Development from PC Magazine and inclusion in several “best of” lists, culminating with Google’s appearance on Time magazine’s Top Ten Best Cybertech list for 1999.
2000: Built-in innovation
At the Googleplex, a unique company culture was evolving. To maximize the flexibility of the work space, large rubber exercise balls were repurposed as highly mobile office chairs in an open environment free of cubicle walls. While computers on the desktops were fully powered, the desks themselves were wooden doors held up by pairs of sawhorses. Lava lamps began sprouting like multihued mushrooms. Large dogs roamed the halls — among them Yoshka, a massive but gentle Leonberger. After a rigorous review process, Charlie Ayers was hired as company chef, bringing with him an eclectic repertoire of health-conscious recipes he developed while cooking for the Grateful Dead. Sections of the parking lot were roped off for twice-weekly roller hockey games. Larry and Sergey led weekly TGIF meetings in the open space among the desks, which easily accommodated the company’s 60-odd employees.
The informal atmosphere bred both collegiality and an accelerated exchange of ideas. Google staffers made many incremental improvements to the search engine itself and added such enhancements as the Google Directory (based on Netscape’s Open Directory Project) and the ability to search via wireless devices. Google also began thinking globally, with the introduction of ten language versions for users who preferred to search in their native tongues.
Google’s features and performance attracted new users at an astounding rate. The broad appeal of Google search became apparent when the site was awarded both a Webby Award and a People’s Voice Award for technical achievement in May 2000. Sergey’s and Larry’s five-word acceptance speech: “We love you, Google users!” The following month, Google officially became the world’s largest search engine with its introduction of a billion-page index — the first time so much of the web’s content had been made available in a searchable format.
Through careful marshalling of its resources, Google had avoided the need for additional rounds of funding beyond its original venture round. Already clients were signing up to use Google’s search technology on their own sites. With the launch of a keywordtargeted advertising program, Google added another revenue stream that began moving the company into the black. By mid-2000, these efforts were beginning to show real results.
On June 26, Google and Yahoo! announced a partnership that solidified the company’s reputation — not just as a provider of great technology, but as a substantial business answering 18 million user queries every day. In the months that followed, partnership deals were announced on all fronts, with China’s leading portal NetEase and NEC’s BIGLOBE portal in Japan both adding Google search to their sites.
To extend the power of its keyword-targeted advertising to smaller businesses, Google introduced AdWords, a self-service ad program that could be activated online with a credit card in a matter of minutes. And in late 2000, to enhance users’ power to search from anywhere on the web, Google introduced the Google Toolbar. This innovative browser plug-in made it possible to use Google search without visiting the Google homepage, either using the toolbar’s search box or right-clicking on text within a web page, as well as enabling the highlighting of keywords in search results. The Google Toolbar would prove enormously popular and has since been downloaded by millions of users.
As 2000 ended, Google was already handling more than 100 million search queries a day and continued to look for new ways to connect people with the information they needed, whenever and wherever they needed it.4
Ram Shriram
Is there really any need to give you “the rest of the Google story”? We all know Google today as a common household name. With their recent IPO and surging stock prices, they have become one of the largest companies in the World. Wow, would I have ever loved to be an angel investor in Google! Wait a minute, what about those two guys briefly mentioned in “Google Lore”; Andy Bechtolsheim, who we always seem to hear about as the “golden boy” of Google and Ram Shriram. Who was that last one? Ram Shriram? Who is this Shriram angel investor and how come we don’t hear more about him? Did he make any money? Is he still part of the company? Let’s take a closer look.
Ram Shriram Joined the Google board at its creation. Prior to that, Shriram was vice president of business development at Amazon. com, reporting to Jeff Bezos, founder and CEO. During Shriram’s tenure at Amazon.com he grew the customer base from 3 million to 11 million users. Prior to Amazon. com, Shriram was president of Junglee Corp., a company that Amazon acquired in 1998. Before joining Junglee, Shriram was an early member of the Netscape Communications executive team. He initiated and built relationships with a targeted set of partners worldwide, helping Netscape to build market share and revenue momentum. In 1996, Shriram crafted Netscape’s indirect channels of distribution worldwide, and managed several hundred people with 16 direct reports across three continents (North America, Europe, and Asia), producing well over half of Netscape’s $346 million annual revenue. A year later, Shriram oversaw the OEM and website sales functions at Netscape, and helped generate more than $100 million in revenue from Netscape’s high-traffic website alone.
Shriram also serves on the board of Yodlee.com and Elance.com, and is a leading angel investor in Silicon Valley.
Does Ram Shriram really have the Midas touch (as recently ranked by Forbes magazine as number 3 on their Midas List)? Is he in fact the greatest angel investor of all time? Really, who is this man?
In a recent interview with John Heilemann from Business 2.0, Heilemann gives us some insight into “the man with the Midas touch”.
Heilemann states that “Ram Shriram is by nature a cheerful, easygoing guy, but if you want to get him a little miffed, just call him an angel investor.” What! He doesn’t want to be called an angel investor? Why not? Should he not take pride in the fact he is possibly the greatest angel investor to have ever lived on this planet?
Shriram likes to think of himself as a “start-up sherpa . Through his operating company Sherpalo, Shriram says he operates a very basic operation with no staff and no offices. How could this “start-up sherpa”, Google God and the managing partner of his investment firm Sherpalo not have an enormous infrastructure with staff buzzing all around? Shriram admits “I have no staff, no office, no institutional scaffolding. There are times I think it might be nice to have deep-pocketed limited partners to provide me with some cushion. But I enjoy having no responsibilities except to myself, financially. And so far it’s turned out quite well."5
Hey wait a minute, are we talking about the real Ram Shriram here? Shriram’s angel investment in Google’s IPO netted him more shares than any other solo investor, 5.1 million which he literally paid pennies for each (not public knowledge but most expect his original investment was between $100,000 - $200,000 USD). Last count has him owning 2.8 million shares and guess what Google’s stock was trading at when this article was written? Are you sitting down? $418 per share. Yes, my calculator said “error” as well when trying to calculate how much this investment made him and how much Google stock he presently owns.
So how did this regular man develop his Midas touch? Of course it all isn’t a matter of luck. Shriram has a fairly impressive resume and has worked with a great number of top US firms, pre and post bubble. He appears to me a man driven by working on only startups. Could that be the secret? If you visit his website, he makes it very clear what sort of companies he is looking to invest in;
Disruptive technologies, i.e. technology that addresses an existing customer base and provides a product or service that meets an existing need more cheaply and/or more efficiently. For example, when CDs were introduced to the music business, they were a disruptive technology, changing the status quo, and requiring users to purchase new hardware, despite there being a significant installed-base of record players and record collections. (See The Innovator’s Dilemma by Clayton Christensen, copyright 1997, Harvard College.)
We are especially interested in:
- Break-through ideas in consumer Internet services;
- Patent pending technology with mass commercial appeal; and/or
- Creative new business models that alter the status quo and make the world a better place as a result.6
Perhaps success comes to Shriram because he states his formula is relentless independence. “My only loyalty is to what’s best for business, not to any set of constituents,” he states. “Sometimes that means going against the founders, sometimes against the VCs. So my judgments may be wrong, but they won’t be biased judgments.”8
If Google wasn’t enough to keep this happy angel happy, he continued building his portfolio which now includes the following companies:
- Plaxo
- 247customer.com
- Elance
- CombineNet
- Yodlee
- Tellme
- Business Signatures
- Zazzle.com
- PodShow.com
- Naukri.com
- Platial.com
Acquisitions:
- Junglee (sold to Amazon.com)
- Enosys (sold to BEA Systems)
Some reports are coming in that at least a couple of his portfolio companies are not performing very well. If they ultimately fail like so many other high risk start-ups will that tarnish the reputation of arguably the World’s greatest angel investor (sorry, “start-up sherpa”) ever? I wouldn’t count on it. Perhaps some people might think we only remember the failures in life but when you have a $1 billion plus (and counting) angel investment windfall with a return of somewhere around 10,000 times your original investment, you will be remembered for that for a long time to come. If his portfolio companies continue to grow and become a success, I can only imagine what sort of legacy this man (“sherpa”) shall leave behind. Ram Shriram has lived behind the public spotlight, unlike so many other high profile angels, and perhaps we can all learn a lesson or two from the man who made the greatest angel investment of all time.
Sources Include:1, 2 Michael V. Copeland, Business 2.0 magazine, Cable News Network LP, LLLP
3KnowledgeRICH 06/06
4Google Inc.
6Sherpalo Ventures www.sherpalo.com
5, 7, 8John Heilemann, Business 2.0 magazine, Cable News Network LP, LLLP
