The Google Diaspora
"It's nothing. It's so marginal."
Salman Ullah spits the words from his black Aeron in the corner office that serves as the headquarters of Merus Capital. Sean Dempsey, who cofounded Merus last November with Ullah and another man, Peter Hsing, had just started telling Ullah about a pitch he'd recently heard. The pitch had come from a company that is developing a new Web browser, and Ullah made his pronouncement on the basis of that information alone. It was almost a matter of principle: On a whiteboard that hangs on a wall of the office, Ullah had a few days ago scrawled a list, with the heading "Avoiding the Graveyard," of businesses he does not believe Merus should invest in. Number two on the list was "Freeware, e.g., browsers."
"Tell them to go fuck themselves," Ullah says. "What value do I get as an end user? Why would I install a new browser?"
"You get two pieces of value," Dempsey says. "One is . . ."
I can't write down exactly what Dempsey says now, because that would violate the terms of confidentiality I agreed to in order to attend this meeting. I can say that as soon as Dempsey finishes describing the browser's first supposedly distinctive feature, Ullah laughs and says, derisively, "Shades of 1998." As Dempsey starts describing the new browser's second feature, my eyes drift to the window behind him, with its view of city hall in downtown Palo Alto, California. Hundreds of multicolored porous plastic panels obscure the building's original facade, creating a slightly blurry effect, like a newspaper photograph viewed too close. The new facade only makes sense if you look at it through one of the two telescopes installed at street level, which reveal that each of the hundreds of plastic panels contains almost a hundred small digital photos of houses located in Palo Alto. All together, the panels contain photographs of every single house in the city. Like the new browser Dempsey is describing, this art installation, which the city commissioned several years ago, would also have seemed a lot cooler in 1998. Today, a pedestrian with an iPhone can stand right where the telescopes are and call up a Google "street view" image of any house within miles of here and then, with a few more clicks, spin the view 360 degrees.
Score another point for Google: Without even knowing it was playing, the company bested a piece of municipal art at its own game. That's what Google does: It makes what came before it look old. Atlases, variety shows, newspapers, and diaries, to take just a few examples, wither under the diodic glow of Google Earth, Google News, Google's Blogger, and Google's YouTube. Google likes to say that it launches new products "early and often." Most fail to hit, but the ones that do hit hard.
Merus Capital, as it happens, is itself a new Google product. Or, to be more specific, Merus Capital is the product of a new Google phenomenon. Call it the Google exodus, the Google diaspora, whatever--in almost any given week, blogs and business sections perk up with news that key figures at Google are leaving. It happened last October, the day word leaked about Salman Ullah: ANOTHER DAY, ANOTHER KEY GOOGLER DEPARTS, read the headline on VentureBeat. Ullah and Dempsey, who resigned at the same time, ran Google's corporate-development group. This meant they were in charge of buying and assimilating new companies, spending billions on YouTube and DoubleClick, among others. They also witnessed some of the initial stirrings of restlessness, the trickle of defections and departures that seemed to them a harbinger of the future. Since the late nineties, when they worked together at the top of Microsoft's corporate-development office, they'd considered becoming venture capitalists. But the timing had never seemed right. By the middle of 2007, about three years after having joined Google, the timing seemed urgent. They became convinced that their departing Google colleagues were going to dream up some truly special projects, and they wanted in. So, along with Peter Hsing, who had previously worked with them at Microsoft and was currently that company's managing director of corporate strategy, they abandoned some of the best corporate jobs in the world in order to go into business for themselves.
Merus Capital, both a product of the Google diaspora and an exploiter of it, has become an important node in the increasingly complex web ex-Googlers are weaving around Silicon Valley. The firm's first entrepreneur in residence, and the first beneficiary of Merus funds, was Gokul Rajaram, perhaps the highest profile recent Google departure, a man whom Fortune magazine identified as "one of the godfathers of AdSense" for his role in creating the targeted advertising service that is one of Google's prime revenue sources. Rajaram's start-up, Chai Labs, which is still in stealth mode, was incubated at Merus. In just the past couple years, ex-Googlers like Rajaram and Ullah and Dempsey have started about two dozen new companies and invested tens of millions of dollars in other start-ups. As you would expect, this new breed of Google graduates has already come up with a cute and clever name to describe themselves. They, the ex-Googlers, are Xooglers.
It should be noted that the Xoogler network's profile is out of proportion with its size. Any large company, especially one that went public four years ago and is beginning to see its first generation of pre-IPO employees become fully vested, is going to experience some attrition. It is a testament to Google that the departures so far constitute more of a trickle than a flood. Still, the stature of some of the people leaving--the creator of Gmail, the company's head of information security, its head of wireless--makes it a force worth paying attention to.
It seems quite possible, in fact, that the next big thing to come out of Google won't come out of Google at all.
And it might just touch down at Merus Capital.
One thing about the next big thing: It's not, apparently, going to be a new Web browser.
Ullah eventually cuts Dempsey off.
"Some clown could build this for a Mozilla plug-in!" He shakes his head. "We're not meeting with them."
Whenever possible, all three of the Merus principals like to sit in on pitches, as they are doing today. When confronted with new business ideas, they say, Hsing is the optimist, Dempsey the pragmatist, and Ullah the skeptic. Hsing and Dempsey each followed fairly typical paths into the corporate world. Ullah's background is different: Born in Germany to Pakistani parents, raised in England, he studied physics at Oxford University, then received a Ph.D. in theoretical physics from Stanford. He entered the world of business late. But this unusual medley of a background made him a prototypical leader at Google, which prides itself on hiring more Ph.D.'s than any other company.
"In terms of our growth map," Gil is saying, "our first focus right now is on building an infrastructure and trying to . . ."
Ullah, who is sitting across the table from Gil, interrupts. "I think you'll have no trouble raising money, but if you want my help, learn how to do bullets." He waves dismissively at the screen. "Because the spacing drives me insane."
"You don't like these bullets?"
"You don't have any fucking space between the bullet and the letter! You need the ruler to do that. I can help you with that."
"Okay," Gil continues, "so I think we actually have four phases to this. Phase zero is changing our PowerPoint slides. Phase one, we focus on seeding the data . . . and SEOing. . . ." The grammar of a meeting between VCs and entrepreneurs--the PowerPoint slides and geekspeak and acronyms--ROI, LP, SEO (search-engine optimization)--can easily tip over into self-parody, and every party at this table knows it. But this is the music that goes with this particular dance, for better or for worse, and so far these dances have led Merus to shack up with six different start-ups.
The Peninsula Fountain & Grill in downtown Palo Alto, a few blocks from the Merus offices, is a place where VCs and entrepreneurs often meet. It's noisy--hard to eavesdrop in--maybe that's why.
I'm here meeting with Jason Shellen, an entrepreneur who's not currently connected directly to Merus, at least no more than all ex-Google employees are connected to one another. He went with a different venture firm, Polaris Venture Partners, for his funding, and Polaris just led a first round for his start-up, securing it $1.6 million. That should last him a year or so.
Shellen's experience at Google, and his reasons for leaving, are fairly typical. He joined Google in 2003, part of the team Google adopted when it purchased Pyra Labs, creators of Blogger, one of Google's biggest early acquisitions. "We were their first acquisition of live human beings," he says. Shellen's first big project at Google was to create an entirely new product, Google Reader, a collaborative blog-reading site.
At the time, Google had about six hundred employees, making it less than one twentieth of its current size, but that was still a big leap from the handful of people Shellen had worked with at Blogger. "Even at the size Google was then, there was already a little bit of process to keep Google Reader from being the product that I had hoped it would be. . . . The person who I reported to didn't like the idea, so I essentially went shopping for a new boss internally who would sponsor it, and she had certain caveats to what it would be. . . . It sort of ground me down to the point where I didn't feel like creating another product at Google. I was having trouble feeling like I would be rewarded in the same way as at a start-up."
So shortly after his stocks fully vested, he left. He wanted to do something entirely new, entirely for himself. He won't say much about his project, called Plinky, other than it's a "content-encouragement system," which he admits sounds "sort of buzzy and weird." But he will say he's having a great time. Start-ups of any size carry an excitement hard to duplicate when you're just one employee out of thousands. "No one joining Google today can ever go back to the garage with Sergey and Larry," he says.
In that garage, Sergey Brin and Larry Page built their empire on the basis of a simple and powerful idea that now seems obvious: Create a better search engine by taking into account not just a page's content but also its connectedness. The most popular pages would show up ahead of the lonelier pages in search results. This idea was so central to the Google experiment that its demo-stage name was "BackRub," as in, "You rub my site's back, I'll rub yours." It's this same basic idea that drives interest in the Google diaspora. Not only are Xooglers bright, entrepreneurial, and wealthy, but their links to one another and to Google endow them with a real-world ranking bonus--VC doors open wider; the press is more intrigued.
Of course, not all the people leaving Google are starting companies themselves. Some assume new roles at other companies. Google is still hot and young, but it is no longer the hottest, or the youngest, established company in Silicon Valley. Nor is it the only company here built on the value of connectedness. About twenty-five minutes into lunch with Shellen, he recognizes four former Google colleagues walking past the restaurant, and all are wearing Facebook employee badges.
The Merus founders can get pitch requests from a dozen entrepreneurs a week, and the few meetings they choose to set up usually take place in a glass-walled conference room, around a shellacked, Swedish-looking table made from blond- and burgundy-colored wood. A little shelf at one end of the room contains bottles of water; a few abstract, African-looking sculptures; and a vase of fresh, exotic flowers. The fancy conference room belongs not to Merus but to Regis, a wealth-management company. The decisions of Ullah, Dempsey, and Hsing to leave their jobs--decisions made with the knowledge that they were sacrificing combined stock options running well into the seven figures--were spurred in part by Regis's guarantee of a $5 million investment and a deal on office space. Unlike some other Xooglers investing in ex-Google start-ups--people like Aydin Senkut, Google's former international sales manager, who organizes occasional Xoogler get-togethers and cashed out of Google with tens of millions--the Merus guys are not stratospherically wealthy, at least not by Silicon Valley standards. They've got money--the name Merus, which means "pure" in Latin, was inspired by a favorite cabernet from Hsing's wine collection--but they still need to work for a living. (Senkut owns a Lamborghini; Ullah drives a Volvo wagon.) Rather, the value of their stints at Google is not how much money they left with but whom they worked alongside. Their particular jobs required them to get to know people from every area of the company. Those contacts, and the knowledge base that came with it, is what they hope they can now spin into gold.
In the borrowed conference room this afternoon, Elad Gil sits behind a black ThinkPad laptop, queuing up a PowerPoint slide that is being projected at the far end of the room. Gil and Othman Laraki, who's sitting next to him, are both newly minted Xooglers and have come to present details on a company they've dreamed up. When they were at Google, Gil played a prominent role in the development of the company's mobile infrastructure and Laraki worked on collaborations with the Mozilla Firefox browser. The slide onscreen charts the various stages they see their start-up growing through over the next year and a half, if they receive the low seven figures in funding they're looking for.
Ullah and Dempsey used to work with a guy named David Friedberg in Google's corporate-development office. He left Google a year before they did, and his departure added fire to their plans for Merus.
"We had a hypothesis that these were the kinds of things that were going to happen," Ullah says. "You know: Very smart guy--he likes Google, but he has this idea that doesn't fit the franchise."
Had Merus existed when Friedberg was looking for seed capital, the firm likely would have been happy to provide it to him. As it was, Ullah invested $50,000 of his own money in Friedberg's company, WeatherBill.
On a recent afternoon at his office, Friedberg, twenty-eight, wearing jeans, a black T-shirt, and a zip-up jacket that looks like a Members Only but isn't, explains how he got the idea for WeatherBill: He used to live in San Francisco's Embarcadero district, down by the water, near a bike-rental place called the Bike Hut. He'd drive by the Bike Hut all the time, and he started to notice that whenever it rained a lot, they'd just pull in the bikes, lower the shutters, and close shop--nobody wants to rent a bike on a rainy day.
"I thought, Well, that's such a shitty business," Friedberg recalls. "Every week, the guy's gonna make--or lose--money based on how much it rains."
And then Friedberg started to notice all sorts of other businesses with similar problems: Movie theaters full on rainy days, empty on sunny ones. The bar down the street, with its big outdoor patio, just the opposite. So he did some research.
The Department of Commerce estimates unpredictable weather has the potential to negatively affect up to $4 trillion worth of business in the U. S. every year, or about one third of the entire GDP. Sixty percent of weather-related financial losses are due to relatively small weather events, and there's often nothing businesses can do to protect themselves. "It's this huge problem that no one does anything about," says Friedberg. So he, together with fellow former Googler Siraj Khaliq, founded WeatherBill.
The company crunches large amounts of historical and forecasting data with proprietary algorithms in order to determine the best-guess probability that virtually any weather-related scenario will take place, and then sells risk-hedging contracts based on those probabilities. For example, a ski resort in Vermont might be able to buy a contract from WeatherBill for, say, $80,000 that would pay out $1 million (up to $10 million) for every degree above freezing that the average temperature strays during the upcoming ski season. WeatherBill sells its own risk to reinsurers, which theoretically means it could survive the sort of cataclysmic Katrina-level payouts that a bad string of weather events might bring. In fact, Friedberg himself is bullish on global warming and its resulting tempests. "Extreme weather is kind of ridiculously going off the charts right now. Stuff that used to be 10 percent likely is now 30 percent likely. The good thing for us is that it means people are more cognizant of [these extremes], and we get more customers. It's the fact that citrus farmers got frozen out and wiped out [last year] that we got the calls [this year]."
Near where I'm meeting with Friedberg, an intern from Berkeley is working on a WeatherBill white paper that identifies the Third World countries whose economies are most dependent on weather. Meanwhile, a WeatherBill sales manager is trying to get in touch with a minor league ball club, the Charleston RiverDogs, that stands to lose at least $50,000 if its big Fourth of July event is rained out. Meanwhile, automatically, revenue pours in from Priceline, which is currently offering a Sunshine Guarantee that offers full reimbursements to any customers whose Priceline-booked vacations are affected by a prespecified amount of rain. Priceline is covering all of its risks with WeatherBill, purchasing individually tailored contracts for every vacation package. Friedberg shows me, on his laptop screen, the latest batch. Since a high contract price indicates a high probability of rain, it's a good bet there will soon be a lot of wet, happy vacationers in Vancouver.
The firm has invested almost $13 million so far: $5 million in Airline Intelligence Systems, which uses proprietary algorithms to improve airline flight scheduling and routing efficiency; $1 million in DeviceVM, creator of Splashtop, a product that enables a PC to sprint from powered off to functional in seconds; $550,000 in TheStoreBook, which gives small, unwired businesses the means to advertise daily specials online; $3.5 million in Debix, which helps protect its customers from identity theft; $2 million in Adroll, which connects small networks of complementary Web sites and allows them to leverage their combined size to sell advertising space; and $350,000 in Chai Labs, which they won't say much about at all.
Ex-Googlers directly founded Chai Labs and TheStoreBook, but every company in the Merus portfolio becomes a de facto part of the Xoogler phenomenon, since each benefits from Merus's own network of advisors, not to mention the buzz and curiosity that surround a venture-capital firm that, its founders admit, is "mainly known for Google." This buzz leads a steady stream of entrepreneurs to Merus, and the firm anticipates investing in at least another eighteen start-ups over the next two years.
I promised not to publish many details about Gil and Laraki's plan, but I can say that although they are no longer a part of Google, their emulation of their former employer starts at a basic level. The company, though a single entity, will contain two different teams working semi-independently on two distinct products. As Gil explains during the meeting, this structure was inspired by Google's "20-percent time" policy, which encourages employees to spend a fifth of their working hours on projects outside their main purview. "Twenty-percent time really helps drive innovation," Gil says. "Originally we were thinking, Well, should we just do a company of 20-percent projects, in which we do five different things? But we decided to hone it down to the two big markets that we thought were the most intriguing."
Their hiring strategy, also, is Google-esque. "I think the way we phrased it at Google was, you know, we're looking for athletes versus specialists. So we're looking for people who are very, very sharp and who can do a variety of things."
Finally, they've appropriated their former employer's confident, playful nonchalance when it comes to the earnings side of their business.
"When do you think you'll get your first dollar of revenue?" Ullah asks.
"In a few months," Gil says. "We're estimating $1.2 million a year." He waits a beat, then adds, with exaggerated precision. "One point two five."
All four Xooglers laugh.
"It's just like, you know how Google raised, what was it, pi?" Gil adds, referring to Google's initial public offering, prior to which Brin and Page filed an SEC form declaring that they wanted to raise $2.718281828 billion.
"It was e," Ullah corrects him, and it was.
"We assume that, either way, our revenue will be irrational!" Gil continues, to more laughter all around.
"I discriminate against white people," Ullah tells me one afternoon. "You should know that. I do. I also discriminate against brown people. The discrimination is subtly different. With the white guy, I know he's stupid. Whereas with the brown guy, he better be fucking brilliant. So I'll take the meeting with the brown guy, because I want to give him the benefit of the doubt. I will never give the benefit of the doubt to the white guy. But the bar is lower for the white guy, much higher for the brown guy. It's weird. It's this weird off-diagonal thing."
"This is great PR for the firm," Dempsey says softly from his desk.
The guys are working today on a one-page mission statement that they intend to send out to all their investors. They show the draft to me, ask for my comments. One of the key lines reads:
"Within the software/Internet sector, we are focused on early-stage investment opportunities supported by one or more of our three major investment themes: algorithm-intensive solutions, multisided aggregation platforms, and next-generation productivity solutions."
I point out that the word solutions is used twice and offer that, in general, the term "next-generation" is used so often, it's basically useless. They change the line, replacing the first solutions with services, and writing "Web-centric" in place of "next-generation."
Then I tell them that the sentence is still, from my nontechnical perspective, pretty opaque.
"It's not self-explanatory," Ullah admits. "But that's a good thing. That's why they need us. We're like those priests in the temple. Can I talk to God? No. You talk to me. I will then talk to God." Anyway, the themes are just guidelines,and flexible ones at that.
"I mean the whole thing is a joke," Ullah says. "All of these [other firms], their portfolios are all over the place."
But the guys do genuinely believe that keeping these three investment themes in mind will help them sift through all of the pitches they hear each week and spot the nuggets amid all the worthless gravel. More important, they believe they know how to identify the gravel.
Although Merus Capital is the beneficiary of a species of buzz--of this idea that there is something special about Xooglers--the Merus founders have learned to be skeptical of buzz in general. For example, one of the buzziest little start-ups in the Valley these days is, they think, a lousy business. It's called Twitter. It allows you to write 140-word "tweets" all day long, from your cell phone or wherever, and post them to your Twitter page, a sort of short-attention-span blog. Lots of people are using it. And it doesn't hurt that Evan Williams, Twitter's cofounder, worked at Google until 2004. Twitter is just the sort of portfolio-jazzing start-up that some venture capitalists like to name-drop over cocktails, and it has raised $22 million so far. "But it's nothing we would invest in," Dempsey says. "Despite the excitement, we don't see the economics behind it."
After they finish editing the letter, they start brainstorming possible Merus slogans.
"Changing the Landscape," Hsing offers.
"Everyone says that," Ullah says.
"Not everyone says that."
"Kleiner says that. Sequoia says that."
"First Round doesn't say that."
"I don't know what the fuck First Round says."
There's a lull. Then Dempsey makes a suggestion: "Want to know what Google's doing? Come have a quiet conversation with us."
So what is Google doing?
During my lunch with Jason Shellen, he'd mentioned a meeting he had a few years ago with Susan Wojcicki, Google's vice-president of product management, about the problem of employee retention. Wojcicki was Google's fourteenth hire and the owner of the Menlo Park garage in which the company incubated. They'd discussed, among other things, whether it might be possible to create a "Google Ventures sort of thing" that would allow entrepreneurial employees with ideas to "spin projects out" while keeping them close by. The idea, Shellen believed, had never gained traction.
Six weeks after my conversation with Shellen, and days before this story went to press, an article appeared in The Wall Street Journal: GOOGLE TO EXTEND REACH WITH VENTURE-CAPITAL ARM.
The details are still vague, and Google hasn't confirmed anything, but here's one safe bet: Even Google doesn't want to miss out on the Xoogler action.
