Why Google Might Just Change the World

May 28, 2014 — 1 Comment

Last night Larry Page, Google’s CEO, posted this entry on his Google+ account, “Google Self-Driving Car Project,” with the video below.

“Just imagine,” begins the company’s description a future with self-driving cars,

You can take a trip downtown at lunchtime without a 20-minute buffer to find parking. Seniors can keep their freedom even if they can’t keep their car keys. And drunk and distracted driving? History.

This is bold. It’s exciting. And it’s just one of several projects Google is juggling that could actually change the world. The company calls these “moonshots” and runs them out of its Google X division, an R&D skunkworks charged with making such bold – though calculated – bets on the future.

But the story here is one part fanboy awe over Google’s investments in ground-breaking innovation and one part befuddlement over how  little other corporations are putting into long-term R&D bets. Fast Company featured Google X with a long article, The X Factor, in its May 2014 edition. It highlights driverless cars, rural wifi delivered through weather balloons, eyewear computers, and hoverboards (yes, it seems Google has spent some time trying to invent hoverboards). The author considers how X fits into conventional models of corporate R&D:

Google X…is an experiment in itself – an effort to reconfigure the process by which a corporate lab functions, in this case by taking incredible risks across a wide variety of technological domains, and by not hesitating to stray far from its parent company’s business.

But why is no one else taking these moonshots? There’s a breach in big innovation, the article argues,

Small companies don’t feel they have the resources to take moonshots. Big companies think it’ll rattle shareholders. Government leaders believe there’s not enough money, or that Congress will characterize a misstep or failure as a scandal. These days, when it comes to Hail Mary innovation, “Everyone thinks it’s somebody’s else’s job,” [Astro] Teller [Google X scientist] says.

Moonshot projects gobble resources and have a high risk of failure. You can’t create self-driving cars with a startup in a garage. They require a lot of really good (and really expensive) engineers to work out the mechanics of the vehicle and its sensors. They require a lot of really good (and really expensive) software developers to churn through all the permutations of code that replace the driver. And to be allowed on the streets of our neighborhoods, they require a lot of really good (and really expensive) lobbyists to argue the case before state legislatures and city councils.

Moonshot projects require resources that come with profitability and scale. This is not the domain of the startup. And, as the article points out, it’s just too risky to trust to the fickle politics of government funding. That leaves big companies, but why haven’t they stepped in to fill the breach?

Too much emphasis on keeping shareholders happy…A willingness to succumb to the Milton Friedman dogma that businesses exist for the sole purpose of increasing shareholder value…A lack of will to fuel their imagination.

Consider the comments below from the managers of the Sequoia Fund, a well-respected mutual fund which has been a major owner of Google shares. In answering a question during its 2011 investor day meeting, one of its directors said the following:

One of the worries that we have is that Google, an extremely ambitious company, is headed by brilliant engineers whose goals may not be to maximize shareholder value. They are out to change the world. Changing the world can require very long term thinking and very high amounts of invested capital and that may not necessarily benefit shareholders.

In most public companies, funds like this own enough of the business to make real headaches for management if management isn’t doing things to make the stock price go up. (For a worst case scenario, see the migraines Carl Icahn has created recently for Apple and eBay.) They don’t tolerate risky R&D investments that reduce short-term earnings. Sure, they say, you can put money behind research, but we’ll punish you if it affects the earnings growth we want to see. We’ll drive down the stock price or band with other shareholders to oust the management team.

The influence of the shareholder has increased over the years, and it should be no surprise that it brings with it a corresponding decline in overall corporate R&D investment. The emphasis is on immediate results; maximizing profits today. R&D, by definition, is a long horizon investment.

Google is, of course, a publicly traded company. So why is it that Larry Page feels free to make comments like the one below when his peers in other large, public companies do not? Again, from the Fast Company article:

…when Page was challenged on an earnings call about the sums he was pouring into X, he made no effort to excuse it. “My struggle in general is to get people to spend money on long-term R&D,” he said, noting that the amounts he was investing were modest in light of Google’s profits. Then he chided the financial community: Shouldn’t they be asking him to make more big, risky, long-term investments, not fewer?

So what makes Google different? What gives it the freedom to make such enlightened responses to needling analyst questions? Why can it keep throwing money at X in ways other huge companies cannot or will not?

Answer number one: It wants to. Those brilliant engineers at the wheel would get bored if all their brain power went into an unceasing cycle of further refining search algorithms to maximize ad revenue. They see Google as a platform for doing more, and its profits are the means for achieving that. It rejects the Friedman notion that business exist for the sole purpose of maximizing profits. That’s part of the mission, no doubt, but there’s a balance to be had with other goals, too. Which leads to…

Answer number two: It has insulated itself from shareholders, which allows for the long-term view. Google has issued multiple classes of shares, splitting economic ownership from management control. Sequoia can buy all the shares it wants, but those shares will not give it the right to do anything more than complain if they disagree with Sergey Brin, Larry Page or a cadre of insiders that control the shares with voting rights attached that. Those insiders with their special shares are the only ones that can change corporate policy, decide on acquisitions, hire and fire managers, and draw up budgets.

This is controversial no doubt. The investment community is not happy about being put into a corner. But this is what allows Google to pursue moonshot projects when no one else is stepping into that breach. This is why Google can invest billions into self-driving cars with those benefits Page outlined in his Google+ post last night. It’s why rural Africa may soon have incredibly cheap internet access via a network of wifi weather balloons.

Google might just change the world with its X projects, and I’m cheering it on with visions of hoverboards levitating in my head.

Paul Dryden


Trackbacks and Pingbacks:

  1. We Wanted Flying Cars… | Paul Dryden - June 16, 2014

    […] at the Founders Fund for attempting to play that role. I applaud Google’s X labs for working on their own initiatives to change the world. My hope is that they prod more investors to take a long-term […]

Leave a Reply