Buzzy start-ups are now asking late-stage investors, "What else can you do for me?" Google Capital has one answer.
In recent years, even some of the most scorchingly hot startups have grown hesitant to brave the transition to public markets. They’ve been staying in the nest well past infancy, achieving a sort of sheltered adolescence, trading the traditional IPO for multiple helpings of private capital.
That in turn has affected what they’re seeking from the people who invest as the startups mature. Now it seems that what the most rarefied cadre of young private companies—the so-called unicorns, with valuations of $1 billion or more—want from the swarms of eager venture capitalists is something more than cash. They’re increasingly asking late-stage investors, “What else can you do for me?”
Google Capital is answering that demand. The search giant’s $300 million growth-equity investment fund touts itself as a bastion of Google-ified resources for startups of a certain age.
Sure, VCs have always nurtured the fledgling enterprises they invest in. Newbies need help with the basics, like creating a human resources department or Marketing 101.
But unicorns, and startups that are about to get their horn, need guidance on thornier, higher-stakes problems, like hatching an international strategy or dealing with regulatory scrutiny. Take Renaud Laplanche, CEO of online credit site Lending Club. In May 2013, Laplanche had lined up a nine-figure funding round from private equity investors. He didn’t need more money.
But before the funding closed, David Lawee, a partner at Google Capital (we’ll call it G-Cap for short), convinced Laplanche that his firm could help. Along with providing a cash infusion, Lawee recruited experts from Google GOOG to help Lending Club with its security IT and its search-based marketing. Looking back, Laplanche calls it “the most value-added investment we ever had.”
G-Cap is led by Lawee, who previously oversaw some 100 acquisitions as M&A chief for the parent company (soon to be renamed Alphabet). The 16-person unit has backed 16 companies since it launched in 2013. Beyond an early win with the 2014 IPO of Lending Club, it’s too early to tell whether G-Cap’s “helping hand” strategy will lead to superior returns.
G-Cap entered the advanced-stage investing game just as such deals began to proliferate. From 2010 to 2014, the number of those financings, defined as a company’s fourth round of funding (Series D, in the vernacular) or later, increased nearly threefold, according to CB Insights.
That helps explain why Google created a separate fund for late-stage investments when it already had a VC arm, Google Ventures. Adding to the confusion, the parent corporation takes occasional strategic stakes. (Within the new Alphabet holding-company structure, G-Cap and Google Ventures will be stand-alone entities.)
So far, hedge funds and mutual funds, chasing pre-IPO slices of hot companies, have dominated the surge in late-stage investing. Fidelity Investments, for example, has backed Uber, Zenefits, and Hootsuite. But Fidelity and its peers are passive players. Beyond some basic IPO advice, says Andrew Boyd, head of global equity capital markets at Fidelity, “all you’re getting is capital.”
This is where G-Cap, which is attached to a $71 billion (revenues) organization full of experts, believes it has an edge. The team routinely taps that know-how. Already 300 Googlers have worked with G-Cap’s portfolio companies. In typical Google style, the process is structured, with clear deadlines and measurable outcomes.
That expertise is what persuaded ZenPayroll CEO Joshua Reeves to choose G‑Cap when raising $60 million in Series B funding in April. “No other VC firm has a pool of 30,000 to 40,000 people who would love to mentor us,” he says. Moreover, their advice is up to date. “There is nothing like talking to someone who is currently dealing with these challenges and their full-time job is executing on this,” he says. “[Googlers] just happen to do it at a really high scale.” Within two weeks, G-Cap created 10 working teams to help ZenPayroll with things like choosing a new office location (Denver) and developing a plan to beef up its customer-service team.
When jobs site Glassdoor, a rumored IPO candidate, taps the public markets, it will tout its international growth. For that, it can thank G-Cap partner Laela Sturdy. She schooled Glassdoor on Google’s rule for international growth, which states that every new feature should be shipped in as many languages as possible, even if it slows the pace of new releases. The strategy proved critical for Glassdoor, which now operates in eight countries, with 25% of its traffic and its fastest growth outside the U.S. “It’s extremely convenient when you’re facing a hard problem to be able to ask the question, ‘I wonder what Google did on this?’ ” CEO Robert Hohman says.
G-Cap’s advantage might not persist. Private equity firms already have armies of Six Sigma ninjas ready to parachute into portfolio companies, and firms like KKR are edging into startup territory. “As the [late-stage] market becomes more competitive,” says David Weisburd, a managing director of advisory firm Growth Technology Partners, “more firms will provide services like Google Capital to differentiate themselves.”
A version of this article appears in the September 1, 2015 issue of Fortune magazine with the headline “When unicorns want more.”