Shrugging off Google's miss
Despite the search giant's profit disappointment, VCs and entrepreneurs are still believers.
By Om Malik, Business 2.0 senior writer

SAN FRANCISCO (Business 2.0) - After its latest earnings, is Google's future in doubt? Wall Street's kneejerk reaction: Yes. Silicon Valley's response: No.

Entrepreneurs and venture capitalists in Northern California and elsewhere are shrugging off the fourth-quarter earnings miss that drove shares down 12 percent in after-hours trading on Tuesday. For a company that has grown at breakneck speed, single-handedly revived the online advertising industry, and touched off a new wave of entrepreneurial activity in the Valley, it's just growing pains, they say.

"It doesn't have any impact on startups," says Scott Potter, a general partner at venture capital firm San Francisco Equity Partners. "Ad dollars are continuing to shift online."

Says Fred Wilson of Union Square Ventures, "Google announced a quarter in which they generated almost $2 billion of revenues and almost $500 million in cash flow. If that puts a chill on consumer Internet investments, I'll be surprised."

Unless Google's stock keeps on a southward trajectory, Wilson doesn't see any long-term impact on Google and the startup landscape.

Jeff Clavier, managing partner of SoftTech Venture Consulting, points out that Google, which sells ads on its own Web sites as well as ones run by other publishers, is shifting more ad revenues to its own network. According to Clavier, that indicates that Google's core business of search is improving.

The portion of revenues Google shares with its partners, known as "traffic acquisition costs," fell from 34 percent of sales in the third quarter to 33.2 percent in the fourth quarter.

"The miss doesn't mean that the online ad model is crumbling," says Clavier.

Toni Schneider, an entrepreneur who recently left Yahoo to become a partner with San Francisco-based True Ventures, sees parallels between how Google and Yahoo were treated by an over-optimistic Wall Street.

"The numbers are pretty good and everything is growing," says Schneider. "I don't see any gloom or doom."

Still, Wall Street isn't the only party counting on more growth from Google. For the many businesses which buy ads from Google in hopes of acquiring customers, more is always better, says Scot Wingo, CEO of ChannelAdvisor, a company which assists online retailers in maximizing sales on, eBay, Google and Yahoo.

"Our customers are interested in more high-value traffic," says Wingo. "Google should put [search ads] everywhere -- Google News, Google Maps, et cetera."

At Google's current size, expanding fast enough to please both Wall Street and customers is a challenge. "Size is the enemy of growth," observes Potter, the venture capitalist.

To keep up, Google may have to tap new areas of growth beyond Internet search keywords. That appears to be the logic behind the recent acquisition of dMarc Broadcasting, an automated platform for placing radio advertisements and a deal with the Chicago Sun-Times to sell newspaper ads. Will those experiments keep Google growing? We'll just have to Google the answer next quarter.


Business 2.0 recently forecast four scenarios for Google in the years to come, three positive and one negative.

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