Google to Extend Reach With Venture-Capital Arm

Google Inc. is working on plans to start a venture-capital arm, according to several people briefed on the discussions.

The group will be led by David Drummond, Google's senior vice president of corporate development and chief legal officer, according to two of these people. Google has hired William Maris, a 33-year-old former entrepreneur who has worked as an investor, to help set up the venture. How the group will be structured and what sort of investments it is likely to target remain unclear.

Google executives previously have bandied about the idea of launching a venture-capital unit, and the plans could still fall through. Mr. Maris couldn't be reached for comment.

The move would make Google the latest technology giant to take on a more-formal role in seeding start-ups. Intel Corp. has had a large venture-capital arm for years, as have Motorola Inc., Comcast Corp. and many others. In the consumer-Internet area, Walt Disney Co.'s Steamboat Ventures has invested in a number of Web start-ups. So has Amazon.com Inc., which has funded a number of young companies without structuring a formal fund.

Their track records have been mixed. Corporate venture-capital arms have been hampered by challenges that traditional venture-capital businesses don't face. Venture capitalists invest in private start-ups at an early stage, usually in hopes of a big payout if the company is sold or if its stock goes public.

Many start-ups fear that taking corporate money limits their options and comes with strings that could turn away other potential investors -- such as a right to buy the company at a later date. Some funds with less competitive compensation have struggled to retain managers, and corporate venture funds often don't allow senior employees to invest personal money in their funds, while other venture funds typically do.

Corporate venture capitalists' share of overall venture-capital dollars invested in U.S. companies fell to 7% in the first half of 2008 from 8.4% in 2007, according to PricewaterhouseCoopers and the National Venture Capital Association. Corporate venture capitalists were involved in roughly 20% of the venture-capital deals signed during the first half of 2008, compared with 21% in 2007.

With an abundance of venture-capital money available today, Google will have to convince entrepreneurs that it has something to offer that other investors don't. It has several advantages, including a brand admired by start-ups and the ability to offer sizable technical resources.

The Mountain View, Calif., Web giant has long preferred to buy companies rather than invest in them, and has plenty of cash to keep doing so. But it has invested millions of dollars in companies ranging from Current Communications, which offers broadband Internet over power lines, to Meraki, a wireless-Internet-equipment manufacturer. The company said last year that it intends to invest hundreds of millions of dollars in renewable-energy projects in conjunction with its philanthropic arm, Google.org. Google also has launched a number of informal funding programs, including contests for software developers.

The new venture could help formalize those efforts and could help Google expand the footprint of some of its online-software products geared at small businesses. Other corporate venture funds have made investments as a way to gain experience in new product areas and markets.

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