I wouldn’t be buying Google stock, and I don’t know anyone who would
— Silicon ValleyEntrepreneur, Inventor and Futurist Jeffery Kaplan on Google’s 2004 IPO
One of the more amazing powers of overwhelming and undeniable success is its power to change the collective recollection of the past, even the relatively recent past. Alphabet, with an $800 billion+ market cap, hundreds of millions of active daily users, and stable duology with Facebook for the bulk of web’s advertising revenue has inarguably succeeded since IPO went off 15 years ago today (Aug. 19, 2004).
It has succeeded so commandingly that one can get a false impression that it was always a foregone conclusion that it would do so. However, Google’s winding history to its IPO 15 years ago had all kinds of places where it might have gone off the rails. Larry Page and Serge Brin, Google’s founders, didn’t much like each other at first. Once they got over that and built a search engine — they couldn’t find anyone interested in investing in it. They tried to sell themselves to Yahoo And AltaVista in 1998 for $1 million. Both took a pass.
The firm’s first big Cinderella moment was in August of 1998 shortly before Google incorporated when Stanford Professor David Cheriton and a business associate of his Andy Bechtolsheim each wrote them a check for $100,000.
Yahoo got a second, albeit more expensive bite at the apple in 2002, two years before Google went public, with months of negotiations between the firms. But, ultimately, Yahoo wanted to pay around $3 billion for Google, and then Yahoo CEO Terry Semel balked when Google firmly insisted on a $5 billion sale price.
“Five billion dollars, 7 billion, 10 billion. I don’t know what they’re really worth – and you don’t either. There’s no [expletive] way we’re going to do this!” Semel reportedly told his staff.
In fairness, in 2002 Yahoo’s entire market cap was $5 billion in the post dot com bubble burst world — and the Google deal was mainly a merger, not an acquisition. Yahoo’s annual revenue was approximately eight times of Google’s at the time. Less than five years later, Google had decimated Yahoo’s search advertising revenue, and by 2017 Google was the second-largest company on the planet, and Yahoo was basically no more, sold off to Verizon for, ironically, a little less than $5 billion.
However, while it is easy to judge the errors of the past as shortsighted — the problem of Semel’s thought, or later Jeffery Kaplan’s on the eve of the Google IPO 15 years ago, wasn’t immediately apparent. Google — later Alphabet — has been overwhelmingly successful.
At the end of its IPO 15 years ago, one might not have predicted that.
The Rocky Road To The Public Markets
Google had high hopes for its core mission on the eve of its IPO — a fact we know because of the investor letter they released just before it happened in 2014:
Our intense and enduring interest was to objectively help people find information efficiently. We also believed that searching and organizing all the world’s information was an unusually important task that should be carried out by a company that is trustworthy and interested in the public good. We believe a well-functioning society should have abundant, free and unbiased access to high-quality information. Google therefore has a responsibility to the world.
Their ideals were high — the execution of the IPO itself was … less so.
The run-up to the IPO is also remembered as a comedy of errors — Google executives were reportedly “too casual” during the pre-IPO roadshow, bankers didn’t get how the search engine concept was going to make money, the company was frequently panned and mocked in the media (“Giggle” was a commonly recurring nickname on The Drudge Report) and, perhaps most damagingly, the smartest people in the room in tech circa 2004 were all very sure Google had no future.
“I’m not buying. … Past experience leaves the taste that a few people — never ourselves — will make out the first day, but that it’s not likely to appreciate a lot in the near future or maybe even the long future,” Apple co-founder Steve Wozniak told The Times.
Further adding to the IPO complication picture — the Google IPO adopted the somewhat unusual Dutch auction format. In a Dutch auction, investors enter their bids for the number of shares they want to purchase as well as the price they are willing to pay. The highest bidder gets their allotment until all shares are sold down. This, at the time, was found incredibly confusing by just about everyone.
Throw into the mix an incredibly ill-time interview with Playboy magazine, a Securities and Exchange Commission investigation, the fact that at $100 per share the stock was already trading at roughly 40 times earnings and the fact that tech stock on the Nasdaq spent most of 2004 in the basement — and it is no small wonder that the run-up to the IPO is often remembered as a catastrophe that could have quickly sunk Google.
Ultimately, however, the run-up was worse than the experience itself. When the IPO went off on Aug. 19, 2004, Google brought in $1.8 billion and ended up pricing 19.6 million shares at $85 — meaning it just cleared the low end of its revised price expectation of $85-$95.
It was not the result Google had hoped for — the desired outcome was to sell 25.9 million shares somewhere between $108 and $135. However, Google did manage to end the day with an 18 percent bump to a stock price of $100.34. Wasn’t the wholesale blowout some had hoped for before the wind-up went so wrong, but it wasn’t quite the disaster some had forecast either.
The Next 15 Years
So, of course, a stumbling beginning didn’t end up being all that predictive. By the end of the year, Google’s stock price had doubled. By early 2006 Google’s share of the search market had grown to 67 percent, while Yahoo’s had fallen to less than a third.
Remember Ask Jeeves?
That’s OK, no one else did either within three years of Google’s IPO.
Also, Google is no longer the same company it was during the 2004 IPO — starting with that it is no longer Google at all — as of 2015 it became Alphabet and Google became sub-branch. The expansions have rolled in fast and frequent since then: in 2006, it bought YouTube and became a media company; in 2008, it launched the Android operating system for mobile; in 2011, it launched its third incarnation of a wallet and began its long, twisty road through the payments ecosystem; in 2016, it launched the Google Home smart speaker; and earlier this summer, it launched its newly redesigned shopping program.
And that, of course, is just an abbreviated list.
The moral of the story is that the little search engine no one wanted and almost no one understood at first, the one that kind of flubbed its initial public offering has, 15 years later, proved to the world the real value of building the best search engine. One might end up creating the home page for the global internet around that search function — and get an opportunity to build an entire and very sticky consumer ecosystem around it.
That part is a much steeper hill to climb, now 15 years later and where the competition for search isn’t Yahoo or Ask Jeeves or even Bing, but Amazon, merchant aggregators and, increasingly, voice. Exactly what the next 15 years of Google is all about.