Google parent’s investing arm battles suspicion in Profit Quest

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 influence over the technology industry.

In the last 18 months, 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 $2.6 billion. At the end of June, Alphabet’s stakes in privately held companies were worth almost $11 billion, with unrealized gains of almost $3 billion.

The company’s private investing arms have done more deals in the last 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 $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, the next best thing is investing in them. This helps Google keep tabs on the latest innovations bubbling up, 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.

“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 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 financial tech company that it ended up rejecting money from an Alphabet investment arm, said Pascal Bouvier, 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 Bouvier.

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, 53, the 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.

Page turned to Lawee, who responded: "Make money.''

"That’s it,'' Page said.

Dealing with a company the size of Alphabet, though, it’s hard to ignore potential conflicts. Lawee is on the board of Lyft. GV bought a large stake in rival Uber. Waymo, Alphabet’s self-driving technology unit, could compete with both one day.

To avoid the appearance of conflicts, 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 at CapitalG’s eighth-floor offices with views of San Francisco Bay. “We’re not sharing any data back with Google. But we don’t want anyone to have that perception.”

Still, scrutiny is intensifying. Some in Washington think Google is too big, and to them, nothing the company does is outside the realm of potential anticompetitive behavior.

Last month, Democratic Rep. David N. Cicilline of Rhode Island, who is leading an antitrust investigation of Google and other big tech companies, asked about Alphabet’s venture capital fund.

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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.

CapitalG executives disclose few financial details. Unlike other private equity or venture firms, they have only one partner — 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.

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.

"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, von Ahn said. "Within two days, we were talking to the head of original content on YouTube.''