Should Google, Apple and Facebook Act Like Venture Capital Firms?

A couple weeks ago, I watched an interesting presentation by Chris Dixon, who talked about risk taking, innovation and disruption:

Big companies are working hard on good ideas that look like good ideas. They want to bet on a sure thing.

Entrepreneurs are in the business of leftovers. They have to go after good ideas that seem like bad ideas to almost everyone else.

Sometimes, those good ideas that are initially perceived as bad ideas by most, turn into huge businesses:

When Google launched in 1998, they were very late to the search engine industry. At the time, search was dominated by large portals like Yahoo, which thought of search as a loss leader. Yahoo’s real business was and continues to be being a portal and putting display ads everywhere. Stickiness was considered the key to business success back then – how to make people to spend more time on your site. Google had the opposite strategy – its technology was so incredibly good at showing search results that people would immediately leave the website. Google tried to sell their technology for a million dollars to any of the big portals. The CEO of one of these large portals tried it and said: “This works too well. People are going to leave my site. Can you make it work less well.” Google had amazing technology, which was considered a very contrarian business idea. No one had any idea how they would make money at the time.

When you are so big and therefore have something significant to lose, you give priority to safety.

“You only need to get rich once”, says Warren Buffett. “If you realize this, you are going to do things very differently.”

You won’t take on big risks. This is exactly how many big companies think and operate.

Big corporations often become victims of their own success. They become lazy, complacent or prefer to play it safe, because the status quo is good enough. Founders and early employees are already rich and prefer to play more than to work. Some of them just leave to start another business. Money doesn’t have the same incentive. New bold ideas are looked with suspicion. Bureaucracy suffocates real innovation. Over time, such organizations become slow, inflexible and prime for disruption. Those that manage to survive and thrive are not shy about using their cash to make smart acquisitions and strategic investments.

Since 1988, Apple has made 54 acquisitions. Since 2001, Google has made 145. Since 2005, Facebook has made 45. Acquisitions are made to protect current positions, to grow and innovate. What about strategic investments?

I am sure that Daimler is glad that it bought a 10% stake in Tesla Motors a year before the electric car maker went public.

I am sure Yahoo’s shareholders are glad that back in the time someone was smart enough to buy a stake in Alibaba. Yahoo also owned a pre-IPO stake in Google, but it sold very early.

Google has taken things a step further and it has created a couple venture capital arms to diversify into fields it does not have the expertise to pursue personally. Many would argue that Google should not act as a VC Fund. It should not try to be an expert in everything and just give back the money to its shareholders. It is a valid argument. Google should do what is best for its shareholders and so far, its private market initiatives have been welcomed by the market. Google is giving its shareholders access to high-growing, disruptive businesses that are not available on public markets to most people.

Apple has chosen a different path. Maybe, because it has more cash that it knows what to do with. Maybe, because its leaders have realized that they should focus on what they are good at, instead of playing VC managers. Apple has chosen the old-fashioned way to handle its cash- paying dividends and buying back shares. I have nothing against this approach and I admire Apple’s relentless pursuit of being the best at only one or two things. It is part of Steve Jobs’ legacy:

People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.

I can’t help, but wonder if the market will give Apple higher valuation if they follow Google’s example and also create a venture capital arm. They have insights about the mobile industry that very few have. They could make so many strategic investments that would end up benefiting its shareholders.

In the meantime, Facebook is doing everything they can to make sure that they are the next Facebook.

In 2012, FB acquired Instagram – it paid $1bn in cash for 30 million users or $33 per user. At the time, Facebook was ridiculed for spending so much money on a company with zero revenue. Today, Instagram has 180 million users and mobile accounts for more than half of Facebook’s revenue. Instagram is considered one of FB’s most valuable assets.

Last week, Facebook spent $19 billion to acquire WhatsApp or $42 per user, mostly in stock. Guess what? The market is valuing each FB user at more than $140. It seems like smart arbitrage if you ask me. Facebook didn’t pay for that acquisition. The market did. Facebook is using its currency (a.k.a. its shares) to secure solid positions in the mobile world.

WhatsApp is the fastest growing messaging app. Less than 5 years after its launch, it has 450 million users. In Zuckerberg’s words, “WhatsApp is the only app that has better engagement than Facebook.”

Facebook should not forget that those 450mm users are not really Whatsapp’s to sell. Companies don’t own their customers. They only rent them and they could keep them as long as they deliver positive experience.

They say that the best business ideas are those that are disguised like bad ideas. Maybe WhatsApp is a great idea in the eyes of FB’s management that looks like a bad idea to almost everyone else. If I have to choose, I’d give the benefit of the doubt to FB. They probably know what they are doing. The market seems to be doing exactly that as $FB is still trading near all-time highs.