Google is not a conventional company. We do not intend to become one. Throughout Google’s evolution as a privately held company, we have managed Google differently. We have also emphasized an atmosphere of creativity and challenge, which has helped us provide unbiased, accurate and free access to information for those who rely on us around the world.
Now the time has come for the company to move to public ownership. This change will bring important benefits for our employees, for our present and future shareholders, for our customers, and most of all for Google users. But the standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future. Therefore, we have designed a corporate structure that will protect Google’s ability to innovate and retain its most distinctive characteristics. We are confident that, in the long run, this will bring Google and its shareholders, old and new, the greatest economic returns. We want to clearly explain our plans and the reasoning and values behind them. We are delighted you are considering an investment in Google and are reading this letter.
Sergey and I intend to write you a letter like this one every year in our annual report. We’ll take turns writing the letter so you’ll hear directly from each of us. We ask that you read this letter in conjunction with the rest of this prospectus.
Sergey and I founded Google because we believed we could provide a great service to the world—instantly delivering relevant information on any topic. Serving our end users is at the heart of what we do and remains our number one priority.
Our goal is to develop services that improve the lives of as many people as possible—to do things that matter. We make our services as widely available as we can by supporting over 97 languages and by providing most services for free. Advertising is our principal source of revenue, and the ads we provide are relevant and useful rather than intrusive and annoying. We strive to provide users with great commercial information.
We are proud of the products we have built, and we hope that those we create in the future will have an even greater positive impact on the world.
As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same. In our opinion, outside pressures too often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations. Sometimes this pressure has caused companies to manipulate financial results in order to “make their quarter.” In Warren Buffett’s words, “We won’t ‘smooth’ quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you.”
If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this. We would request that our shareholders take the long term view.
Many companies are under pressure to keep their earnings in line with analysts’ forecasts. Therefore, they often accept smaller, but predictable, earnings rather than larger and more unpredictable returns. Sergey and I feel this is harmful, and we intend to steer in the opposite direction.
I have been reading Memex 1.1 on Google's decision to float. In particular, Memex examines Google's 'LETTER FROM THE FOUNDERS: "AN OWNER'S MANUAL" FOR GOOGLE'S SHAREHOLDERS' (the introduction to which is quoted above):
I have a lovely image of the dour officials of the Securities and Exchange Commission having to lie down in darkened rooms at this point. I've never seen a prospectus like this — nor, for that matter, has Wall Street. Instead of the constipated legalese warning investors to expect nothing, there is plain English promising risks and adventure and an exhilarating ride. Instead of promises of penny-pinching, cost-squeezing management, there are undertakings to expand the range of employee benefits. Instead of the usual, corrupt IPO 'placing' of shares with investment bankers and their plutocratic clients, there is to be a public auction. There is an undertaking to set up a charitable foundation. And a commitment to values which are elsewhere honoured more in the breach than in the observance."We believe strongly", Brin and Page write, "that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company.... We aspire to make Google an institution that makes the world a better place. With our products, Google connects people and information all around the world for free. We are adding other powerful services such as Gmail that provides an efficient one gigabyte Gmail account for free. By releasing services for free, we hope to help bridge the digital divide. AdWords connects users and advertisers efficiently, helping both. AdSense helps fund a huge variety of online web sites and enables authors who could not otherwise publish. Last year we created Google Grants — a growing program in which hundreds of non-profits addressing issues, including the environment, poverty and human rights, receive free advertising. And now, we are in the process of establishing the Google Foundation. We intend to contribute significant resources to the foundation, including employee time and approximately 1% of Google's equity and profits in some form. We hope someday this institution may eclipse Google itself in terms of overall world impact by ambitiously applying innovation and significant resources to the largest of the world's problems."
Like I said, was there ever anything like this on Wall Street before?
And this is John Battelle's take:
The letter states, among other things, that 1. We don't need to do this for the money; 2. We have no plans to run our business to satisfy Wall Street's need for smooth earnings predictability; 3. We plan to give no earnings guidance, not at least as it's understood on Wall St.; 4. Don't ask us to do so, we'll simply decline the request; 5. We'll do odd things that you won' t understand; 6. We will make big bets on things that may not work out; 7. We run the company as a triumvirate, so there will not be clear leadership from one person like most other companies; 8. We bridge the media and tech industries (interesting), which are in flux, so we've chosen a two-class stock structure similar to the NYT, WashPost, and WSJ that helps us avoid being taken over by those forces; 9. We plan using an auction model, as it feels fairer and we understand auctions from AdWords; 10. Don't invest in us if this scares you at all, or the price feels too high; 11. Don't even think about asking us to cut expenses with regard to our employees; 12. We believe in the idea of Don't Be Evil; 13. It's evil to pay for placement or inclusion (a swipe at Yahoo); 14. We hope to bridge the digital divide through Gmail type free services and a foundation with at least 1% of profits and equity to help make the world a better place; 17. Betting on Google is a bet on Sergey and Larry (this was said multiple times, making me wonder if there wasn't some odd future blame being assigned here by the VCs or bankers); 18. This letter is our way of answering the questions we can't answer in the coming months due to the IPO quiet period.
While my summary of the letter may sound negative, it's my honest and initial response: to me, the letter comes off pretty strong, and likely will anger many on Wall Street. But I have to commend the founders for sticking to their beliefs, and using the IPO as something of a megaphone/soapbox. It is brave, unique, and rather commendable to very publicly state that the founders are controlling the company, and the founders will decide what is best for Google, not Wall Street. They've set themselves a very high long-term bar, claiming they will best the system, in essence. I think it will be very interesting to see how Wall Street responds. There is a chance, in the end, that the Street will feel slighted, and turn its back on the company.
And there's this from venturepreneur:
Google's future: The most surprising thing in this prospectus -- which is full of surprises -- is that the company does not articulate a growth story in the Prospectus Summary. If you are concerned about Google's future, as every investor should be, you want to know what's next. That information is simply absent. Their business model is simply stated: "We generate revenue by delivering relevant, cost-effective online advertising." Later in the prospectus: "Advertising revenues made up 77%, 92%, 95% and 96% of our net revenues in 2001, 2002, 2003 and in the three months ended March 31, 2004." Internet advertising is the only source of revenue! Unbelievable. What year is this?
If you dig into the prospectus a ways, as I have done, you will find these lame attempts at telling a growth story:
* "Our business has grown rapidly since inception, and we anticipate that our business will continue to grow." (p. 38) The basis for this expectation? Not explained. Indeed, the text that follows this assertion emphasizes an ominous point: operating margins are declining.
* "We have experienced and expect to continue to experience substantial growth in our operations as we seek to expand our user, advertiser and Google Network members bases and continue to expand our presence in international markets." Again, the basis for this expectation is not explained. In a world where search is becoming more competitive, Google grows only if the size of the pie grows. While it seems reasonable to assume that the number of internet users will increase over time, we have no indication that the increased number of users will result in more profits for the company ... particularly the kind of profits that would be necessary to sustain a valuation of $25 billion.
* In their discussion of competitors, Microsoft and Yahoo are named. "Most of the products and services we offer to users are free, so we do not compete on price. Instead, we compete in this area on the basis of the relevance and usefulness of our search results and the features, availability and ease of use of our products and services." And as for the future? "We believe that we compete favorably on the factors described above. However, our industry is evolving rapidly and is becoming increasingly competitive. Larger, more established companies than us are increasingly focusing on search businesses that directly compete with us."
Bottom line: The prospectus is worse than I imagined it could be. I assumed Google would have a difficult time telling a growth story, but I thought that they would give it the old college try. Instead, their growth story is nothing more than a celebration of past accomplishments. "Don't you just love our search technology?!"
Then there's this from Mitch Kapor:
I applaud Google founders Larry Page and Sergei Brin for their principles and their courage in standing up to Wall St. in setting their IPO terms. There will be no feeding of IPO shares to "special friends" who flip them for an instant profit. There will be no games played with analysts in providing guidance about quarterly earnings.
It's too bad it took nothing less than the leverage of these presumptive billionaires to make this happen. This is the only way Wall St. would listen.
I truly hope they are able to continue to manage the company for innovation in the face of inevitably mounting financial and competitive pressures.
What I hope even more is that their bold moves will stimulate a whole series of debates about the ways in which venture capital and Wall St. do and don't work to promote the development of technology, like Google's, which genuinely serves people's needs.
Finally, Memex 1.1 on the fuss Wall Street and London are making about the "affrontery" shown to investors in Google's Manual:
What makes this cant so comical, of course, is that it comes from a segment of society which (a) encouraged mugs to blow trillions of dollars during the last technology bubble, (b) took billions in fees from the IPOs of fatuous dot-coms, (c) employed 'analysts' like Merill Lynch's Henry Blodget who hyped technology shares long after it was clear that they were doomed and (d) overlooked (and in some cases cheered on) Enron-style corruption and fraud for decades.