[LOS ANGELES] CapitalG, a private investment arm of Google parent Alphabet has been in all the right places lately, generating billions of dollars in gains. The success is raising questions about the company's strategy and sprawling influence over the technology industry.
In the last year and a half, four of CapitalG's 36 portfolio companies have gone public, including Lyft and Crowdstrike Holdings. Airbnb plans to do the same. Another four have been acquired. One of them, cloud analytics provider Looker, was bought by Google itself for US$2.6 billion. At the end of June, Alphabet's stakes in privately held companies were worth almost US$11 billion, with unrealised gains of almost US$3 billion.
The company's private investing arms have done more deals in the past two years than any other corporate venture investor, according to industry tracker CB Insights. Last year, CapitalG made a record nine "unicorn" investments in companies worth more than US$1 billion. In second place? GV, Alphabet's venture-capital unit, which bought stakes in three unicorns among its industry-leading 70-plus deals.
Google struggles to make big acquisitions in its main areas of business, partly due to concern over antitrust regulation. The last huge deal was Motorola almost a decade ago. If the company can't buy promising tech firms outright, the next best thing is investing in them. This helps Google keep tabs on the latest innovations bubbling up in Silicon Valley, and means Alphabet shareholders benefit if the creations turn out to be hits.
Still, there's so much scrutiny of large technology companies that even this strategy sows suspicion in Silicon Valley and could come under the regulatory microscope.
"Deal flow gives you a lot of insight into what other people are doing in the market," said Matt Stoller, a fellow at the Open Markets Institute, which studies and recommends competition policies. "It's just one more tool that they have to exert power."
Google's clout was so much of a concern for one fintech company that it ended up rejecting money from an Alphabet investment arm, according to Pascal Bouvier, who is now managing partner of MiddleGame Ventures.
"If Google decides to get into that line, all of a sudden you may have a formidable competitor," said Mr Bouvier. He worked at another VC (venture capital) firm when the deal was spurned and declined to name the fintech firm involved.
These are questions that CapitalG executives have gotten before. They say they're not a tool of Alphabet to corner digital markets and insist their mission is the same as traditional private tech investors: generate a return on investments.
David Lawee, the 53-year-old startup veteran who heads CapitalG, recalled a dinner in 2017 with a group of entrepreneurs and Google co-founder Larry Page, where someone asked what CapitalG's purpose was.
Mr Page turned to Mr Lawee, who responded: "Make money."
"That's it!" Mr Page said.
Dealing with a company the size of Alphabet, though, it's hard to ignore potential conflicts. Mr Lawee is on the board of Lyft. GV bought a large stake in rival Uber Technologies Inc. And Waymo, Alphabet's self-driving technology unit, could compete with both one day.
To avoid the appearance of conflicts, Mr Lawee said CapitalG is careful about where it invests while maintaining strict firewalls to protect trade secrets and intellectual property.
"There's a few areas we've decided not to be as forward leaning - self-driving cars as an example," he said during an interview at CapitalG's eighth-floor offices with postcard views of the San Francisco Bay. "We're not sharing any data back with Google. But we don't want anyone to have that perception."
CapitalG is independent from Google, added Laela Sturdy, a veteran Googler who along with former TPG Capital executive Gene Frantz make up the trio of partners running the unit. It is also run separately from GV, which invests in early-stage startups and shares the same building. "We operate like any other investment fund,'' Ms Sturdy, 41, said.
Still, scrutiny is intensifying. Some powerful people in Washington think Google is too big, and to them, nothing the company does is outside the realm of potential anti-competitive behaviour.
Last month, Democratic Representative David Cicilline, who is leading an antitrust investigation of Google and other big tech companies, asked about Alphabet's venture capital fund.
"Unlike many other corporate venture funds, our funds are not designed to create a pipeline for future strategic acquisitions," Kent Walker, Google chief legal officer said in a written response.
"These funds run independently of Google and there are strict boundaries between the funds and Google to prevent confidential information about any of the funds' portfolio companies from being shared with Google or any other Alphabet entities."
Mr Lawee's position on Lyft's board is one place where lawmakers might cry foul, said Michael Kades, director for markets and competition at the Washington Center for Equitable Growth, a progressive think tank. A board seat could make it look like Google has influence on Lyft's business, even if CapitalG is officially independent from Google, Mr Kades said.
CapitalG executives disclose few financial details. Unlike other private equity or venture firms, they have only one partner - parent Alphabet - and don't need to raise outside money or return cash to investors on a deadline. They typically invest in only a half-dozen startups a year, among more than 5,000 on their radar.
Mr Lawee's pitch, when he started CapitalG as Google Capital in 2013 with the blessing of Page and a top Google lawyer David Drummond, was to help younger companies grow by matching them with Google experts in everything from artificial intelligence to marketing to human resources. Mr Lawee knew the value of that experience, having spent five years overseeing more than 100 acquisitions for Google, including DoubleClick and AdMob.
CapitalG has delivered on that access, according to officers at several portfolio companies.
"They've connected us with probably dozens of people,'' said Luis von Ahn, CEO and co-founder of language-learning app Duolingo. At one point, his startup wanted to start creating its own instructional videos, Mr von Ahn said. "Within two days, we were talking to the head of original content on YouTube." (In 2009, Google acquired Recaptcha, another company he co-founded).
Daniel Dines, CEO of automation technology startup UiPath, said he didn't need CapitalG's money when the firm approached him. But the chance to work with Google AI (artificial intelligence) experts piqued his interest. In a presentation at a borrowed office in Manhattan, CapitalG's Sturdy clinched the deal.
"I got the sense her allegiance is with UiPath and not with Google," Mr Dines said.