When you’re starting a company, capital can be one of the most challenging aspects of your journey. On one hand, it can be so rewarding to see your idea become a reality and start generating revenue. On the other, raising capital can be extremely difficult.
If you’re just starting out or operating on a small budget, it can be difficult to secure funding from investors who aren’t already backing your idea.
Fortunately, Google has been there before and understands what you need to succeed as well. Google is one of the most successful and well-funded tech companies in the world. It’s also a classic startup — one that didn’t have many friends when it was starting out.
In this blog post, we’ll explore Google’s experience as a startup and how you can take note of their success in order to raise capital as effectively as possible.
Google’s Initial Funding
Back in 1998, Larry Page and Sergey Brin founded Google as an online directory, but they soon realized that they had stumbled on something much bigger.
They built a search engine that could identify and return relevant documents to users, including advertising. It seemed like a huge success, but it was only the beginning.
At the time, advertising on the web was still new. The search engine’s success led to a lot of interest from industry players and investors.
In February 1998, Amazon.com founder Jeff Bezos and entrepreneur Ram Shriram invested $350,000 in Google. Page and Brin had previously approached Shriram for funding and advice, and he invested $250,000 in Google.
Google was able to open its original shop in Menlo Park, California thanks to $1 million from early stage investors, friends, and family.
Google instead reinvested the money back into the company, leading to what would later become a questionable business strategy.
Google’s original business model had a lot of promise, but it was also clearly unsustainable. Trying to build a business around advertising alone was always a risky bet. The advertising market is highly competitive, and companies that focus solely on ads are very vulnerable to the whims of their customers.
Google Raised Series A and B Funding
Google’s strategy was to build a giant online platform that attracted a lot of users, including companies that wanted to buy ads on its platform. Google’s growth was impressive, but it was also highly dependent on its user base. The platform was worth a lot, but the company was strong at searching but not at generating revenue.
Google raised its first major funding round in 1999. The company had around 40 employees at the time and was generating revenues from the sale of ads placed on Google’s search engine.
The funding round was led by Kleiner Perkins, Sequoia Capital with Microsoft and New Enterprise Associates also participating. The amount raised wasn’t large — $25 million — but it was enough to give the young company some additional capital to grow.
Kleiner Perkins and Sequoia Capital planned to retain a larger percentage of control over Google, so they were initially reticent about investing jointly. However, Larry and Sergey insisted on taking investments from both firms, and so the joint investment was made.
Additionally, in order to strengthen its internal management in 2001, Google’s investors decided to hire Eric Schmidt as the company’s chairman and CEO.
Google went public in 2004, and Google sold $1.67 billion worth of stock to raise $23 billion in an online Auction format.
Below we discuss three key learnings of the Google success with raising capital in its early years.
Key learning 1: The right leadership matters
In 2000, Page and Brin hired Frank Quattrone, a veteran Wall Street banker, to lead the company’s financing efforts. Quattrone wanted Google to be a public company and didn’t understand the company’s strategic limitations.
He pushed Google to expand too quickly, and the company struggled to keep up with the growing demands on its service. Quattrone’s mistakes led to major challenges for Google. Page and Brin weren’t happy with Quattrone either, and they quickly replaced him with Eric Schmidt as chairman.
Schmidt was brought in to help clean up the company’s finances and get it ready for an IPO. Instead, he ended up taking over some key product decisions and gradually took over more and more of the day-to-day operations of the company.
Schmidt set Google in the right path as he led the company through a successful IPO followed by exponential growth and successful acquisitions of companies like YouTube abd DoubleClick.
Schmidt was indeed brought in Google in the right time where it was going through major leadership crisis. However, before hiring him, Page and Brin resisted hiring other people until finding the right fit for the position. As one of VC partners of Google said “they resisted hiring ordinary people, and that’s a wonderful tribute to them.”
Key learning 2: Launch a prototype quickly and improve it iteratively
One of the key learnings from the Google’s early funding rounds is that you need to launch a working product to attract investors. This is a classic startup challenge, and it’s also something that many experienced investors struggle with.
Google’s ability to continue to make improvements with each iteration is a key part of the company’s success. Every subsequent Google product, such as Gmail and Google Books, has been based on the launch and subsequent iteration method that Google utilized with its successful search algorithm. Prototyping and launching even an early version of the product has been an important aspect of Google success with its investors.
Investors want to see a prototype of the product that you plan to launch. You don’t necessarily need to build the final product, but you do need to have an idea of how you plan to build it.
Investors want to see a demo of your product and validation data to see whether and to what extent the demo or prototype satisfies the customer.
Once you get investors on board, you can start outlining a detailed plan for building the product.
Key learning 3: Focus on the user and all else will follow
One of the key messages that Google shared with Kleiner Perkins was that they didn’t want to build a huge marketing machine. They wanted to build an online platform that relied on word-of-mouth advertising to get its users to share content and invite others to use the service.
Google’s revenue model was based on the idea that users would pay for the service, and once they did, they would promote it to their friends. When Google first started out, it wasn’t focused on growing the number of users on its platform. Instead, it was focused on driving quality traffic to its website. Once that was in place, the company could start focusing on monetizing its website.
They make sure that Google’s new Internet browser or homepage tweak will ultimately serve the user, rather than their own goals or bottom lines. Their homepage interface is clear and simple, and pages load instantly. No placement in search results is sold to anyone, and advertising is not only clearly marked as such, it offers relevant content and is not distracting.
All these means early traction in large numbers. This has been their exponential growth engine in the past 20+ years and has legitimized their business to investors. Once you have many users, it is much easier to test new ideas, at scale, and monetize your business.
Bottom line
Google is an outstanding example of how to raise capital as a startup. The company’s first investors were rich, experienced individuals that were willing to trust the young founders with their money.
Google was also a good bet because the company had a clear business model, a user-focused product, and a product that users liked. Google also benefited from hiring seasoned investors with experience at firms like Kleiner Perkins, Goldman Sachs, and Morgan Stanley.
The key lesson that can be learned from Google’s funding rounds is that you still need to focus on your core product. Once you have that in place, investors will line up to fund your venture.
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