Google has done much right. It sources ideas widely and encourages staff to build internal support for concepts among peers (rather than through hierarchy) to move them forward. Then it invests very small amounts of money and time to build early prototypes and trials these with real users via GoogleLabs. Many ventures are killed before they end up costing the company anything substantial. The survivors have been vetted through market-like mechanisms. Granted, the software industry is particularly well-suited to this innovation model, but Google has made the most of its context in being a paragon of the marketplace of ideas.
By contrast, the company made a bet on its Android operating system for mobile phones that presumed uncertainty about how the market would develop. The project was expensive, to be sure, but it was flexible about how it would make money. Now mobile advertising is on pace to generate over $1 billion in annual revenue for the company.
Google's move into display advertising through purchasing Doubleclick was a good example of pursuing portfolio strategy. While many corporate growth portfolios consist of either very modest initiatives or swing-for-the-fences big efforts, Doubleclick fell squarely in the middle. It was a reasonably safe bet built on a solid track record. To make an analogy to personal investing, in a world where companies seem to own either Treasury bills or cement plants in Uzbekistan, Doubleclick was a moderately-risky value stock.
Moreover, both Android and Doubleclick strategically leveraged the core. They exploit existing advertiser relationships, move the company into adjacent markets, and defend against disruption through asymmetric sources such as firms focused on mobile search. While these moves create the next waves of growth, they are far from random bets on new markets.
Many firms would have whacked away innovative efforts when early projects created few results. While the company has scaled back on its Google Earth-type moonshots, it has consistently maintained investment in smaller ventures even when the doubters' chorus grew loud. As venture capitalists will attest, there are few sure bets in new markets. Those who succeed must have enough ventures in play to assure that a handful will be winners.
Google today reported that its new ventures were generating more than 10% of revenue. The businesses are profitable and highly scalable. As a result Google looks less like an investment in paid search and more like a broader play on improving how people get useful information -- an industry with seemingly limitless headroom for growth and innovation. While being an execution machine in paid search, it is a venture capitalist (with enormously strategic and proprietary assets) for the information economy.
Few companies manage to pull off this feat -- it requires careful thought and balancing of priorities. Yet success can be exceptionally lucrative, as Google's $20 billion gain today illustrates quite well.
This post was written by Steve Wunker. Click for more of New Markets' thinking on innovation capabilities.