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April 30, 2004

Wanna invest in Google? Trust The Founders and Think Looo0ooong Term

By Arun Natarajan

Fairy tales of the Silicon Valley kind continue to come true.

Good guys (especially, if they are smart as well) do seem to finish ahead.

Are these guys for real?

These are some of the thoughts that ran through my mind when I was reading through the letter that Google's founders - Larry Page and Sergey Brin - reportedly included along with the company's filing for a $2.7 billion IPO.

Also, it made me draw parallels to the founders of India's Infosys Technologies--who have managed to defy convention (at least, in the Indian context) and pull it off magnificently.

The main focus of the letter--never mind the amusing promises of not "being evil" and "making the world a better place"--was to communicate that Google, even after it becomes public, would retain its focus on the long term. And the best way to ensure that, the founders believe, is to leave them in control.

The public Google would continue support "high-risk, high-reward projects" and not be distracted by the need to "produce smooth earnings for each quarter". "Do not be surprised if we place smaller bets in areas that seem very speculative or even strange". The founders point out that Google AdSense (the content-targeted advertising program) and Google News were prototyped during the "20 percent time" that the company allows its employees to work on pet projects.

"Many companies are under pressure to keep their earnings in line with analysts' forecasts. Therefore, they often accept smaller, but predictable, earnings rather than larger and more unpredictable returns. Sergey and I feel this is harmful, and we intend to steer in the opposite direction." The company will therefore not be providing quarterly earnings guidance. "If asked we will respectfully decline. A management team distracted by a series of short-term targets is as pointless as a dieter stepping on a scale every half hour".

In order to help the founders retain control over the direction of the company, Google will have a dual-class shareholding structure. (Under this structure, the "second class" shareholders - presumably public investors - won't have voting rights). Why? Because the founders feel "the standard structure of public ownership may jeopardize (the company's) independence and focused objectivity".

Claiming that Google bridges the media and technology industries, the founders say they "have set up a corporate structure that will make it harder for outside parties to take over or influence Google (for instance, via a hostile takeover)". They point out that such a ownership structure is common among media companies (including the publishers of The New York Times, The Washington Post and The Wall Street Journal) that "allows them to concentrate on their core, long-term interest in serious news coverage, despite fluctuations in quarterly results".

What about the many "unusual benefits"--including free meals, doctors and washing machines--that Google provides to its employees? The founders believe those have "long-term advantages" too. "Expect us to add benefits rather than pare them down over time. We believe it is easy to be penny wise and pound foolish with respect to benefits that can save employees considerable time and improve their health and productivity".

As part of the founders' goal of "making the world a better place", they are setting up The Google Foundation, which is to receive 1% of Google's equity and profits. "We hope someday this institution may eclipse Google itself in terms of overall world impact by ambitiously applying innovation and significant resources to the largest of the world's problems".

Essentially, Google's founders want to have their cake (i.e., go public to provide liquidity to investors, employees and themselves) and eat it too ("retain many of the positive aspects of being private").

Will they be able to get away with it? Given the way in which their dreams have come true in the past, I wouldn't bet against it. Nor want to.
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Arun Natarajan is Editor of TSJ Media. He can be reached at arun(at)tsjmedia.com
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