Google Ventures: start me up

Remember when Yahoo invested $10m in a little start-up called Google? That was 14 years ago. Now Google is on the other side of the table. Google Ventures, with $1.5bn under management, has launched a new $100m fund focused on Europe.

Part of its mission is to support the next generation of entrepreneurs. But it is also a smart way to invest cash. Google had a staggering $59bn in cash at the end of last quarter - more than three times annual cash flow from operations. Google Ventures does not disclose its performance, but its investments ought to attract better returns than Treasuries. Start-ups are also eager to be backed by such a big name, which gives GV access to the best opportunities. The fund, launched in 2009, has invested in more than 250 companies, including Nest (a maker of smart thermostats and smoke alarms) which was bought by Google earlier this year. Google is hardly alone in its enthusiasm for VC. Other US tech companies, such as Intel and Comcast, also have active VC arms. Indeed, in the first quarter of this year, corporate funds accounted for a third of total VC funding in the US, according to CB Insights.

Europe, however, has never had the same level of VC activity: last year total VC funding in Europe was €4bn ($5.4bn), according to EVCA. That's less than half the level of US funding in the second quarter of this year). And a third of European VC comes from government agencies. So Google's new fund is partly an arbitrage play, taking advantage of a market in which VC funding is scarce (at least relative to Silicon Valley, where even an app that only says "yo" can raise $1.5m). Europe has produced a number of tech successes, such as Spotify and SoundCloud. But its start-ups have been hampered by smaller markets; they often need to cross the Atlantic to raise funds.

Google's new fund will help to breathe life into some European start-ups. The question is whether it will also stir up froth. As Google and others increase investments in Europe, the arbitrage opportunity will shrink. The risk is that at some point, there will be too much money chasing too few deals. But until then, it sure beats Treasuries.

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