In a period where many investors are still nursing portfolios wounded in the dot-com bust four years ago, that’s more than a stock pick: it’s a dilemma worthy of Kierkegaard. So much attention, in fact, will be spent contemplating a bid in the Internet auction that will determine who gets to buy $2.7 billion worth of Google stock that many may miss the dramatic chords in what’s whimsically called “an owners manual” for potential shareholders. “I’ve never seen anything like it in an IPO prospectus,” says David Walek, an adviser to companies on public offerings and governance issues. Colloquially written in the first person by Larry Page, 31, and placed over his signature and that of his cofounder, Sergey Brin, 30, it is a stern prescription for a focused business and a cri de coeur bemoaning the get-rich culture that may interfere with it.
First some background. In case you’ve missed a cover story or two, that little Internet search engine that does so well in producing information on lawn-care products, the weather in Biloxi and next Friday’s blind date, is the product of two Stanford graduates who formed a company around it in 1998. They followed the classic trajectory, hiring wizards like themselves, pleasing customers by allowing them to use their services for free and obtaining seed money from the Valley’s most famous venture-capital firms, Sequoia and Kleiner Perkins.
Unlike many Internet companies, however, Google knew how to make money. So much money that the company didn’t seem too eager to engage in the logical next step in the trajectory: a public stock offering.
To the dismay of the founders, the IPO became viewed as a Silicon Valley watershed, something to wash clean the bubble residue and start inflating the tech economy once again. “What would anyone extrapolate from our going public?” asked an annoyed Brin some weeks ago. “That it’s good to invest in students from Stanford? If we make that decision, we will do it purely on what’s best for the future of Google, and in service to the world–not based on the hopes of the greater Mountain View area or Wall Street.”
But even as the cofounders and their CEO, Valley veteran Eric Schmidt, pondered the pros and cons of going public, there really was no way around it. For one thing the venture capitalists, with employees granted stock options, wanted liquidity for their shares. (For $12.5 million each, Sequoia and Kleiner Perkins are now 10 percent owners of the company.) And then came an April 29 deadline: the Securities Act of 1934 requires companies to report financial details within a certain period after accumulating 500 stockholders. That means you have to report as if you were a public company, but don’t get the loot from offering shares to the public.
So it was time, and maybe it wouldn’t be so bad. “I have always believed that an IPO is a good thing, and should occur,” said Schmidt earlier this year. “But it shouldn’t affect the company, which should be run based on the principles that have done so well for us.” And so Sergey and Larry determined that Google’s IPO would be done their way.
They could get away with it because, as outsiders finally learned, Google is an awesome cash machine. Before last week, nailing down the numbers behind this secretive start-up was harder than getting Dick Cheney to identify his energy advisers. It turns out that Google has been in the black since 2001. Last year it made more than $100 million in profit on revenues of just under $1 billion, and the trend is skyward: in the first quarter of 2004, its profits are already around $64 million. “We all knew they were doing well but seeing it in print–in a federal filing–is pretty stunning,” says Mitchell Kertzman, partner in the Hummer Winblad VC firm. “This is an amazing business.”
Wall Street prognosticators now estimate that when Google stocks are issued some weeks from now, the company will be valued at as much as $30 billion, making Brin and Page (who each own about 15 percent) worth more than $4 billion each. But personal wealth is clearly not the obsession of the cofounders, who share a cluttered office in the campus dubbed the Googleplex. As evidenced by their “owners manual,” they have been grappling with a deep question: how can they preserve their company approach, culture and vision if it is to be publicly traded and beholden to shareholders? And they have come up with some answers.
A public company owned by the public. Google is obsessed with democracy. The basis of all its wealth springs from the Google search algorithms, which search through and index the Web in such a way as to capture the collective intelligence of its users. It’s kind of a democratic process, and apparently this idea carries over to who should own shares. Google is loathe to be associated with the go-go (and, ultimately, gone-gone) supernovas of the dot-com era, and to discourage speculation Page and Brin outline “a fair process for our IPO that is inclusive of both small and large investors.” They propose an auction that will bypass the daytraders and fat cats and, hopefully, reach their ideal investor–a wise soul willing to hang in for the long haul.
When it comes to control, though, Google’s leaders believe that it should rest with them. The company will have two classes of stock, one of which has greater voting rights owned by them.
Sticking to long-term planning. Sounding dangerously like a fortune cookie, the cofounders write, “A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour.” Google won’t fall for that, they insist. There will be no attempt to massage quarterly results to please Wall Street. And if you ask them how things will go in the next couple of months, “we will respectfully decline” to offer guidance.
Maintaining a quirky, employee-centric culture. Brin and Page knew that doubters predicted that going public would be the end of Google’s employee amenities like free lunches cooked by Jerry Garcia’s former chef and rubdowns on call. But “when you look at the financials, that costs nothing,” said Brin recently. “It’s less than a rounding error.” He and Page are telling shareholders to “expect us to add benefits rather than pare them down over time.”
Decentralized management. Brin, Page and CEO Eric Schmidt run the company as a messy triumvirate. However, they do include spats between them as a possible risk factor. And the chain of command will be further complicated by their requirement that the board chairman should not be an insider.
Official Do-Gooding. In case there was any doubt about Google’s priorities, Page and Brin put it in black and white: “We aspire to make Google an institution that makes the world a better place.” The company motto is “Don’t be evil,” and shareholders should be aware that this could impact stock price. Google is putting 1 percent of its wealth in a foundation that someday “may eclipse Google itself in terms of overall world impact.”
All fascinating but not really an answer to that big question: should you get in on this? That will depend on how Google can maintain its amazing momentum in the face of some very tough competitive challenges. The risk factors lay out the problems pretty well: Microsoft is gunning for its business, and Yahoo has a huge base of registered customers. Ad sales might stall, or new technology might block them. “Index spammers” might affect the quality of users’ search results. And Google might not be able to manage its spiraling growth effectively, or keep its newly flush employees in the ‘Plex.
Finally, there’s the question of whether going public, despite the best efforts of the founders, might force an idealistic young company to, well, grow up, following the well-trodden path toward accommodating the desires of the shareholders and the Street.
But so far, Brin and Page, following a muse morphed from Warren Buffett and the Justice League of America, have managed to build a consistently innovative money-making engine without consulting the standard rule book. Why should Google’s journey as a public company be any different?
