When Alphabet listed its shares in 2004, the founders of the business formerly known as Google wrote to potential investors promising that it would not be a normal company.
When Alphabet listed its shares in 2004, the founders of the business formerly known as Google wrote to potential investors promising that it would not be a normal company. Not only would it eschew “evil”; it would also make speculative bets in new and strange areas outside its core operations.
On this latter point at least, Larry Page and Sergey Brin have been true to their vision. Alongside the group’s successful search engine, they have used their controlling stake to direct Alphabet’s cash into a plethora of start-up projects, each intended to be a bet on some multibillion-dollar business segment of the future. These include driverless cars, internet balloons and even the pursuit of eternal life.
Investors might have been forewarned but that has not stopped these so-called moonshots becoming contentious. Last year, under pressure about the time and capital they devoted to new ventures, Messrs Page and Brin agreed to restructure the group and release more information about the progress of their risky portfolio. This week they announced that their moonshots cost Alphabet $3.7bn last year, an 83 per cent rise on the amount spent in 2014.
Spending might have gone up, but it is hard to see what harm Alphabet’s adventures have done it. The search group remains the world’s second most valuable company by market capitalisation - behind Apple. Their cost is a fleabite compared with the $23.4bn profit that Alphabet reported for last year, let alone its $75bn in sales. And should one of these ventures come off, investors will doubtless feel very fortunate to have come along for the ride.
Even so, outsiders are entitled to set limits on the company’s enthusiasm. The founders may have the shareholder votes to deploy cash flows as they choose, but that is not the same as a moral right. With an economic interest of 13 per cent in Alphabet, they are bound to take the views of those whose capital they are chancing into account.
The perils of moonshot investing may seem slight in a group of Alphabet’s size, but they are real. Throw too much capital behind madcap adventures and the risk is not simply financial. Moonshots could potentially divert attention and capital from the core business on which the company’s value depends. Indeed Alphabet’s new structure could actually make this more likely to happen. It frees Mr Page to deploy all of his considerable clout within Alphabet to channel resources into these infant ventures. The challenge then is not just about exercising discipline over the size and number of the company’s bets. It is about dumping projects that do not make the grade.
Google is an unusual beast as few companies have its combination of colossal scale, rapid growth and reliable cash flows. Yet that has not stopped others from investing in so-called frontier technology. Facebook, for instance, has poured money into virtual reality, including spending $2bn on the headset maker Oculus.
Meanwhile Uber is looking beyond its (lossmaking) transportation app to becoming a player in driverless vehicles. It remains to be seen which, if any, of these ventures will be successful at both carving out and dominating the technologies of the future.
There is, however, an important difference between those companies that are able to fund their bets out of cash flow, such as Alphabet, and those that depend on external investors for the capital they require. It takes more than conviction to bring a project to fruition. That is why moonshots, like private space travel, remain ultimately the preserve of the very rich.
