Why Did Google Invest in Sergey's Wife's Start-Up?

TechCrunch, AP, et al, are reporting that Google just invested $3.9 million in a biotech start-up run by Sergey Brin's wife.  The company, 23andMe, immediately used this money to pay back a $2.6 million loan Sergey had personally extended to the company. For several reasons, this transaction is bizarre.

First, given the obvious conflicts of interest (perceived or otherwise), why would Google do this?  As far as I know, Google is not normally in the business of investing in start-ups, especially biotech ones.  So what's the strategic imperative here?  What Google business logic could possibly offset the scrutiny that such an investment would receive?  Even if a Google investment makes all the business sense in the world (and if it does, I need some help understanding why), it looks terrible, and Google obviously knows that.  So what gives?

Second, why didn't Sergey just make this investment himself?  Yes, $3.9 million is chicken feed for Google, but it's also chicken feed for Sergey (the AP reports his current net worth at $16 billion).  Sergey could fund 1,000 such start-ups before breakfast and never miss the money.  Sergey's idol, Warren Buffett, would NEVER let Berkshire Hathaway invest in his wife's start-up.  So, again, what gives?

I understand that Google is "a different kind of company," but, in this case, I'd like it to be different by explaining more about why this investment was made, who approved it (the Audit Committee, apparently--but why?), and why Sergey didn't conclude that it wouldn't be better for all involved if he just made the investment himself.  Inquiring minds want to know.

UPDATE:

NYT has more detail, including the names of a couple of other start-ups Google has invested in.  The decision still sounds strange, but better than it did initially.  The situation could have been helped with clearer upfront communication.

(Hat tip to Rick Stratton)

 

Comments

[Preston]

I think Sergey and Wolfowitz should hang out (heaven knows Paul will have the time). Why Sergey would do this is beyond me...

[tom]

the level of greed and hubris in this world knows no bounds and this joker just reached the top

[ren]

i'm the last guy to criticize google's do no evil maxim. i really don't mind some of the things that others fault them with. but this just reeks to high high heaven.

[erik]

Finally, the true colors of Google are showing! These guys have been slippery for years, but have done a great job of branding themsevles with their "do no evil" mantra. Hopefully this is the first crack that rips off the boy scout sheen around sergey and larry. Yes, they have built a great company, but no, they don't actually walk on water.

[Annabel Buxton]

Obvious - too create a media storm of protest (without any serious consequences) hence generating lots of publicity for the startup. The sort of cynics that will get their DNA tested are the sort that will read stories about Google scandal. My question is a different one. If her husband is worth 16 billion why is she doing a startup - shouldn't she be pregnant by now?

[Victor]

I've been consistently bullish on goog for a long time, as you know Henry, but I agree this is absolutely opprobrious behavior. It raises all sorts of red flags about the ethical standards of the triumvirate running the company. Sergey should apologize to Google shareholders for this patent conflict of interest and his role in it.

[Ray]

I'll be the contrarian here.

I agree that this looks bad, but I think that it would have been unethical for Sergey not to get Google in on the ground floor of this. It is his obligation as a major shareholder, employee and director to act in the fiduciary interest of Google's shareholders. This action is in their interest.

If Google's mission is to organize all the world's information, then one of sources of information of interest to humans is genetic information. This is also one of the largest areas of potential growth.

My understanding of 23andMe is that they are attempting to catalog and create tools for searching, sorting and organizing genetic information. In a very short time it will possible for every human being to know their entire genetic sequence and that of their immediate ancestors and descendants, opening up a huge business opportunities in medical research, testing, diagnosis and treatment and in other area that have not been imagined.

If this is correct, and I don't think that anyone denies the general outline, and 23andMe is a significant player in that market, then for Google to acquire a stake in them at that time would be enormously expensive, and just wouldn't happen because of Sergey's stake. Think about how much you would be complaining in 5 years if Google was paying $3.9B for 23andMe. For similar reasons, because of Brin's conflict of interest, Google would be awkwardly positioned in attempting to acquire a 23andMe competitor.

Basically, Sergey's stake in 23andMe prohibited Google from investing in an area of enormous growth potential. For $3.9M, "chicken feed" to both Brin and Google, Google was able to remove a significant impediment to growth. Not making this deal would be unethical, in spite of how it looks to outsiders.

Don't you want Sergey acting in the best interest of Google, instead of in his own personal best interest, even if doing so "looks" bad?

[Henry Blodget]

Ray, that's a fair point, but I'd find it more persuasive if Google did this for a living. Are we to conclude that of all the start-ups around the world, 23andMe is so compelling and complementary that Google should ignore the optics and make an unusual investment? I agree that "looking bad" should not stop a decision that otherwise should be made, but given how seriously Google professes to take its fairness ethos, at the very least, I'd like an explanatory sentence or two:

"We realize that this looks strange and/or questionable, and we are sorry about that. It is true that we don't normally invest in start-ups, but in this case we felt the upside was so compelling that we couldn't pass on the opportunity. We hope that, in several years, our long-term shareholders will agree that this was the right decision."

[Ray]

Henry, obviously you follow this more closely than I do, and more closely than the New York Times, but the article in the Times cites a Google spokesman claiming that Google has made investments in other startups in the past. I don't know how many there have been, but we would have to look at the entire portfolio of these other investments to see how strange this investment is.

If you have looked at the entire portfolio and you say that this is a completely unusual, out of the ordinary, investment for Google I'll take your word from it, but in any case, I'd argue that the thing that was truly unusual here is that Google business development opportunities were being hindered by a situation that only arose through Brin's marriage.

Spending $3.9M for an opportunity that other members of the Board favor - Genentech has a stake in 23andMe and a seat on Google's board, although that was apparently another conflict that had to go before the audit board - and to remove a longer term business problem doesn't seem that bad to me.

[Henry Blodget]

I haven't looked at the investment list. (Can anyone post this?) I remember their taking stakes in Baidu and AOL, but those were both for clear strategic reasons. It's possible they've made a cottage business out of this, but if so, it's the first I've heard of it.

[TheShadow]

Ray,

Your argument would seem more reasonable - if Sergey's action had simply led to Google investing in the company - and NOT the subsequent and immediate use of the the money to repay a loan Sergey had made to the company.

If this kind of action is what they are willing to reveal in public - it makes one wonder what sort of deals take place behind their closed doors.

[dub dub]

You let the youtube deal slide (billions to bail out a major google VC, then-represented on google's board), but this is what you decide to complain about? :)

Anyway, I hope it was a zero-interest loan...

[King Troll]

WOW couldn't someone worth $16 billion find someone a little better looking. This broad is hideous

http://23andme.com/anne_large.jpg

[Steve]

What will happen when the "other" investors come in to fire his wife and the entire mgnt team for under-performance?

a) Sergey will give the company an up round in a new round and keep mgnt in place
b) Comcast will acquire the company
c) Cisco will acquire the company
d) Microsoft will acquire the company
e) All of the above

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[KHS]

Completely agree Henry - just seems plain stupid to do this. I can't imagine any business reason good enough to justify the investment - if anything they should have bought the company outright. A $2.3 million investment surely can not be seen as anything then nepotism and putting own interest ahead of the shareholders.

[more]

"If her husband is worth 16 billion why is she doing a startup - shouldn't she be pregnant by now?"

Huh? Wrong century, Annabel. We don't live in your twisted world anymore where women are just vessels for the progeny of their husbands.

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