Google Ventures Opts for In-house Technical Due Diligence
You may have read earlier this year that the search giant Google has launched a $100 million venture capital fund called, appropriately enough, Google Ventures.
The part of the announcement that caught our eye related to how they’re planning to do the technical due diligence on the investment opportunities that they identify:
“The company will look to its employees to help evaluate both specific start-ups and investment areas in general”
From the outside, this sounds like a risky strategy; in our experience, using internal expertise for technical due diligence is often a mistake. Pulling an engineer from his or her day job to consult on an investment opportunity has a lot of potential to cause problems.
First of all there’s the issue of politics. No one likes to see their employers investing in an external company that might pose a threat to their own work, or standing in the organisation. Once those thoughts enter the head of the assessor an impartial evaluation is impossible.
Secondly, it’s often difficult to find an exact skill match from within the existing workforce. The business development team, in a rush to get the deal done, ends up approaching engineers with an imperfect suitability for the job. Of course, that engineer, unwilling to look incompetent in front of the boss and enticed by the prospect of involvement in an exciting project, might not make these shortcomings known, and the venture team ends up with an inappropriate technical advisor.
Yet another concern was pointed out to me recently by an entrepreneur who had himself been the subject of technical due diligence performed by his investor’s own in-house technical team.
“They look for the wrong things” was his blunt assessment. He explained that internal assessors, technically skilled but unused to investigative work, tend to become preoccupied with scientific minutiae that are irrelevant to the deal. Rather than protecting their employer’s interests by adopting a broad commercial focus, the “engineers instinct” takes over and they’re distracted by irrelevancies.
I mentioned all of this to a Microsoft employee recently, who responded that they do things very differently in Redmond. They too have a venture group (some 30 people strong) but due diligence is done by dedicated experts or external consultants, not engineers plucked from their “day job”.
On a roll with this topic, I put the same thing to a member of Intel’s venture team. Like Microsoft, he informs me, Intel has a dedicated in-house technical group who’s sole job it is to perform technical due diligence on investment prospects. He too agreed that drawing expertise from elsewhere in the organisation is a recipe for trouble.
These days, you might consider the young and dynamic Google to be more likely than the more mature giants like Microsoft or Intel to identify and invest in the next big thing, but on this evidence it sounds as though the old(er) guard might have the better approach.