BUSINESS BLOGS
BUSINESS BLOGS
category: business
07 Oct 2006

Please indulge me. 

I’d say there is a “10% partial semi-probablity this might be somewhat true.”

Google’s Pedigree 

As we all know, Top Tier Venture Capital firms Sequoia and Kleiner Perkins Caufield Byers each invested $12.5M in Google back in 1999 for a 10% stake and a board seat; with Michael Moritz representing the latter and John Doerr repping the latter.  These two men are arguably amongst the ten most successful VCs I can think of, though that is up for debate for sure.

Going Dutch

Anyway, when Google filed to go public, the plan was that each VC would sell 10% of their shares in the primary offering.  When the market showed a lukewarm response to Google’s $100 price and forced the company to issue shares in their Dutch auction at the $85 range, the VCs smartfully (in hindsight) shelved their shares and opted to sell their shares in subsequent, secondary offerings.  It’s a good thing they did that.

After Google, there was YouTube

Over the years, Sequoia went on to back another successful California startup, namely, YouTube.  I tried to do some digging to see what percentage, if any of Kleiner and Sequoia’s holdings in Google remained unsold.  By the looks of it, it’s a high number.

Priced to Perfection

Today Google is worth some $120 billion.  It has the potential to go on rising in value, further benefiting the original backers, founders, investors, employee/shareholders and post-IPO investors.  But, as the stock market tends to do sometimes, Google also has the potential to come crashing down.  After all, Google is priced for perfection, and while there is nothing to suggest that Google’s upcoming quarterly results will disappoint, as Yahoo! has shown, all companies do slow down at some point (note I own shares in Yahoo! and remain extremely bullish in the firm’s mid/long term potential as advertisers continue adopting and increasing online advertising budgets).

No More Products, Please!

The current P/E of Google’s stock suggests that investors are betting not only on an acceleration of profits, but also for Google’s genius staff to keep on launching great, new profitable products.  But, of course, apart from Ad Sense, few products have made a material impact on the company’s financial statement.

GMail is great (my Gmail is up to over 80% capacity, by the way, I challenge anyone to beat that!)
Google Maps - fantastic.
Google Earth - use it at work.
I can go on.

But the impact thereof on Google’s books has been immaterial.

Remember MySpace?

Last year, when rumor of MySpace’s sale began to brew, the potential acquirers remained largely Viacom and News Corporation.  The desperation meter for old media was running high, new media firms remained bullish on prospects, the idea of paying anything in the $580 million range for MySpace’s parent Intermix was deemed impossible.

The Snowball Effect

Of course, MySpace was acquired by News Corp.  Over a year later, the social networking site continued to grow and Google - mainly in what I and many consider a defensive and not an accretive move - shelled out a whopping $900 million over three years for the rights to power search results and serve contextual ads on News Corp.’s Fox Interactive Media media properties, including but not limited to MySpace.  I do not think that click through rates are high enough on MySpace to make that deal very accretive.  But of course, Google does not share all data with partners, let alone far-flung journalists and analysts, so who knows.  That deal had the intention of pushing back Microsoft and Yahoo!’s search aspirations.

Hindsight is Always 20/20

Alas, the point is that Google learned that instead of paying out $900 million over three years, it could have, perhaps just perhaps, shelled out less up front, and bought MySpace outright…

Note that last week, RBC Analyst Jordan Rohan came out and said that given MySpace’s growth, and projecting Facebook, YouTube’s potential value, and that of Google’s market cap, he foresaw MySpace being worth $15 billion by 2009.  That is a Blogdet-esque call, but the fact remains: MySpace is worth a lot more than $580 million now.  Just ask Intermix founder Brad Greenspan.

As a side note, Google says that it does not buy content companies, but MySpace is a platform for users around the Web to create content.  In this framework, MySpace would have (I am admitting that I am only saying this in hindsight folks) been a fantastic fit with Google.  Google indexes websites’ content and makes money off of it, and MySpace gives a platform to individuals to create content… on MySpace.  The parallel is enormous.

All to say, this year, when YouTube usurped MySpace’s place as the flavor du jour, no wonder Google would show an interest.  Allow me to say that indeed these rumors were largely speculative, but who cares, it is not crazy.  YouTube co-founder Chad Hurley was in the Googleplex this week, though for the Google Zeitgeist.

The Sequoia Connection?

The main link worth considering however between the two firms is the fact that Sequoia invested in Google along with Kleiner, but in the case of YouTube, I believe the only VC backing the firm in its history is… you guessed it: Sequoia.  Sequoia put up an additional $8 million after an additional $3.5 million placement.  That shows how bullish the VC was, but it also means that Sequoia alone holds the trump card. 

Chad Hurley has said that the company would not raise additional money, and just a couple of weeks ago said that the company would try to go in alone and either file for an IPO or sell.

Yet suddenly, these rumors of a sale to come up Google?  Why?  Again, these could all be blogosphere-fed rumors, but the fact remains: if Sequoia is the lone VC investor in YouTube, and Sequoia still has a lot of its shares in Google, would Sequoia be better off or worse off to encourage a sale to Google?

Think of it, YouTube is uniquely different in that they are, like Mark Cuban points out every chance he gets, one lawsuit away from being Napstered.  Unless YouTube is profitable, and it’s possible that they are, Sequoia knows that YouTube will eventually need more money.  After $11.5 million invested, unless it sees some path to profitability or an exit strategy in sight, it might not want to risk more… That’s highly unlikely with talks of a $1.6 billion price tag.  But that is no guarantee, an old media company would not want to take on the copyright liability.

An IPO is unlikely since they have way too many risk factors as is.  A sale to any company would be fine, but any company other than Google will leave/create considerable downside risk to Google’s shares, especially if YouTube pulls a MySpace and Google continues to find new “Ad Sense” wonders rare. 

But a sale to Google ensures that in the event YouTube does pull a MySpace and further explodes, the rise in value is reflected under Google’s share price; and if Youtube were to fizzle out, well, at least they cash out before YouTube goes the way of Friendster, who lost its early lead to MySpace.

Who doesn’t love a good conspiracy theory…