Los Angeles Times - 29.08.2019

C2 THURSDAY, AUGUST 29, 2019 LATIMES.COM/BUSINESS

BUSINESS BEAT

CapitalG, a private in-
vestment arm of Google par-
ent Alphabet Inc., has been
in all the right places lately,
generating billions of dollars
in gains. The success is rais-
ing questions about the
company’s strategy and
sprawling influence over the
technology industry.
In the last year and a half,
four of CapitalG’s 36 portfo-
lio companies have gone
public, including Lyft Inc.
and Crowdstrike Holdings
Inc. Airbnb Inc. plans to do
the same. Four others have
been acquired. One of them,
cloud analytics provider
Looker, was bought by
Google itself for $2.6 billion.
At the end of June, Alpha-
bet’s stakes in privately held
companies were worth al-
most $11 billion, with unre-
alized gains of almost $3 bil-
lion.
The company’s private
investing arms have done
more deals in the last two
years than any other corpo-
rate venture investor, ac-
cording to industry tracker
CB Insights. Last year, Capi-
talG made a record nine
“unicorn” investments in
companies worth more than
$1 billion. In second place?
GV, Alphabet’s venture capi-
tal unit, which bought
stakes in three unicorns
among its industry-leading
70-plus deals.
Google struggles to make
big acquisitions in its main
areas of business, partly be-
cause of concern over an-
titrust regulation. Its last
huge deal was Motorola al-
most a decade ago. If the
company can’t buy promis-
ing tech firms outright, the
next best thing is investing
in them. This helps Google
keep tabs on the latest inno-
vations bubbling up in Sili-
con Valley, and means Al-
phabet shareholders benefit
if the creations turn out to be
hits.
Still, there’s so much
scrutiny of large technology
companies that even this
strategy sows suspicion in
Silicon Valley and could
come under the regulatory
microscope.
“Deal flow gives you a lot
of insight into what other
people are doing in the mar-
ket,” said Matt Stoller, a fel-
low at the Open Markets In-
stitute, which studies and

recommends competition

policies. “It’s just one more

tool that they have to exert

power.”

Google’s clout was so

much of a concern for one fi-

nancial technology com-

pany that it ended up reject-

ing money from an Alphabet

investment arm, according

to Pascal Bouvier, managing

partner of MiddleGame

Ventures.

“If Google decides to get

into that line, all of a sudden

you may have a formidable

competitor,” Bouvier said.

He worked at another ven-

ture capital firm when the

deal was spurned and de-

clined to name the fintech

firm involved.

These are questions that

CapitalG executives have

gotten before. They say

they’re not a tool of Alpha-

bet to corner digital markets

and insist their mission is

the same as traditional pri-

vate tech investors: generate

a return on investments.

David Lawee, the 53-

year-old start-up veteran

who heads CapitalG, re-

called a dinner in 2017 with a

group of entrepreneurs and

Google co-founder Larry

Page, at which someone

asked what CapitalG’s pur-

pose was.

Page turned to Lawee,

who responded: “Make mon-

ey.”

“That’s it!” Page said.

Dealing with a company

the size of Alphabet, though,

it’s hard to ignore potential

conflicts. Lawee is on the

board of Lyft. GV bought a

large stake in rival Uber

Technologies Inc. And

Waymo, Alphabet’s self-

driving technology unit,

could compete with both

one day.

To avoid the appearance

of conflicts, Lawee said

CapitalG is careful about

where it invests while main-

taining strict firewalls to

protect trade secrets and in-

tellectual property.

“There’s a few areas we’ve

decided not to be as for-

ward-leaning — self-driving

cars as an example,” he said

during an interview at Capi-

talG’s eighth-floor offices

with postcard views of the

San Francisco Bay. “We’re

not sharing any data back

with Google. But we don’t

want anyone to have that

perception.”

CapitalG is independent

from Google, added Laela

Sturdy, a veteran Google

worker who along with for-

mer TPG Capital executive

Gene Frantz make up the

trio of partners running the

unit. It is also run separately

from GV, which invests in

early-stage start-ups and

shares the same building.

“We operate like any other

investment fund,” Sturdy, 41,

said.

Still, scrutiny is intensify-

ing. Some powerful people in

Washington think Google is

too big, and to them, nothing

the company does is outside

the realm of potential anti-

competitive behavior.

Last month, Rep. David

Cicilline (D-R.I.), who is

leading an antitrust investi-

gation of Google and other

big tech companies, asked

about Alphabet’s venture

capital fund.

“Unlike many other cor-

porate venture funds, our

funds are not designed to

create a pipeline for future

strategic acquisitions,” Kent

Walker, Google’s chief legal

officer said in a written re-

sponse. “These funds run in-

dependently of Google, and

there are strict boundaries

between the funds and

Google to prevent confiden-

tial information about any of

the funds’ portfolio compa-

nies from being shared with

Google or any other Alpha-

bet entities.”

Lawee’s position on Lyft’s

board is one place where

lawmakers might cry foul,

said Michael Kades, director

for markets and competition

at the Washington Center

for Equitable Growth, a

progressive think tank. A

board seat could make it

look like Google has influ-

ence on Lyft’s business, even

if CapitalG is officially inde-

pendent from Google,

Kades said.

CapitalG executives dis-

close few financial details.

Unlike other private equity

or venture firms, they have

only one partner — parent

Alphabet — and don’t need

to raise outside money or re-

turn cash to investors on a

deadline. They typically in-

vest in only half a dozen

start-ups a year, among

more than 5,000 on their

radar.

Lawee’s pitch, when he

started CapitalG as Google

Capital in 2013 with the

blessing of Page and a top

Google lawyer, David Drum-

mond, was to help younger

companies grow by match-

ing them with Google ex-

perts in areas such as artifi-

cial intelligence, marketing

and human resources.

Lawee knew the value of that

expertise, having spent five

years overseeing more than

100 acquisitions for Google,

including DoubleClick and

AdMob.

CapitalG has delivered

on that access, according to

officers at several portfolio

companies.

“They’ve connected us

with probably dozens of peo-

ple,” said Luis von Ahn, CEO

and co-founder of language-

learning app Duolingo. At

one point, his start-up

wanted to start creating its

own instructional videos,

Von Ahn said. “Within two

days, we were talking to the

head of original content on

YouTube.” (In 2009, Google

acquired Recaptcha, anoth-

er company he co-founded.)

Daniel Dines, CEO of au-

tomation technology start-

up UiPath, said he didn’t

need CapitalG’s money

when the firm approached

him. But the chance to work

with Google AI experts

piqued his interest. In a pre-

sentation at a borrowed of-

fice in Manhattan, Capi-

talG’s Sturdy clinched the

deal. “I got the sense her alle-

giance is with UiPath and

not with Google,” Dines

said.

Is Google parent too powerful?

Alphabet investing

arm’s huge gains sow

suspicions about its

influence over the

tech industry.

bloomberg

AT THE END of June, Alphabet’s stakes in privately held companies were worth almost $11 billion.

Dinendra HariaLightRocket

“One more effort ... find
that beat!” shouts Cody
Rigsby, a Peloton instructor,
from the 22-inch screen of
one of the company’s $2,245
exercise bikes.
The 7-year-old exercise
company is now also trying
to work investors into a
lather after filing for an ini-
tial public offering later this
year on the Nasdaq that it
hopes will raise at least
$500m.
Peloton’s $4-billion valu-
ation, at the time of its last
fundraising, rests on the
idea that not only does it sell
fashionable bikes, but it also
is a media company, a Net-
flix of exercise, pumping out
live and prerecorded con-
tent to subscribers who be-
lieve it is a better proposition
than gym classes.
The company says it pro-
duces more than 950 videos
a month from its studios in
New York and London,
which can be watched not
only on bikes but also on
phones or its new treadmill.
A subscription costs $39 a
month in the United States.
Frederic Court, founder
of Felix Capital, which in-
vested in Peloton when it
first expanded out of the
U.S. in 2018, said that he had

“never seen a company with

so much customer love.”

“There is so much enthu-

siasm from the user around

the product. That is quite

rare to see such a commit-

ment.”

Peloton’s growth has

boomed along with the

wider fitness market. In Sep-

tember 2015, one year after it

released its first bike, the

company had about 11,000

monthly subscribers.

Today, it counts 511,202,

plus a further 102,000 sub-

scribers to its digital boot

camp, yoga and running

classes who do not own a

Peloton bike or treadmill, ac-

cording to its prospectus.

The group says it has so far

tapped only a fraction of its

addressable market, which

it pegs at 67 million house-

holds.

According to a 2018 report

from the International

Health, Racquet & Sports-

club Assn., 183 million peo-

ple have gym memberships

worldwide. Peloton is opti-

mistic that a significant

share of those members will

swap their gym cards for a

home bike or treadmill.

But its prospectus shows

how expensive its marketing

campaign has been. Though

revenues more than doubled

in the year to June 30 — ris-

ing to $915 million from $435

million the year before — its

losses rose nearly fourfold to

$196 million.

The listing also comes at

a time when consumers are

being flooded with fitness

and wellness apps, hacks

and memberships. In-

vestors are wary that too

much capital has flowed into

the industry, allowing com-

panies to pursue growth

over profits. According to

the most recent report from

the Global Wellness Insti-

tute, the fitness and medita-

tion industry was worth $595

billion in 2017.

Peloton sees its main ri-

vals as high-end gyms and

the likes of SoulCycle and

Flywheel, which have both

found cultlike followings for

their high-intensity cycling

classes.

It now has 2.4 times as

many riders as SoulCycle,

which pulled its own plans

for an IPO, according to data

from the analytics company

Second Measure.

SoulCycle and its high-

end gym operator owner,

Equinox, were also recently

hit by calls for a boycott be-

cause they are owned by

Stephen Ross, the Donald

Trump-supporting proper-

ty developer.

Peloton itself is locked in

litigation after it used music

in some of its beat-heavy fit-

ness videos that music pub-

lishers allege were not prop-

erly licensed. When the com-

pany removed some of those

classes from its catalog, it

encountered backlash from

its riders.

It faces other companies

encroaching on the fitness-

at-home market. Mirror, for

example, offers fitness

classes beamed out of a mir-

ror-like screen on the user’s

wall. It reached a $300-mil-

lion valuation in June. Zwift

also offers a virtual cycling

experience.

Paul Davies, head of

leisure research at Mintel,

has also warned that users

outside of the United States

do not appear as keen on the

company and that roughly

98% of Peloton’s equipment

sales have been in America.

“Awareness of Peloton is

actually very, very low in the

U.K. There are a lot of people

out there who probably ar-

en’t aware that you can pay

for streamed workouts at

home. I think part of this in-

vestment will be about

boosting the brand,” he said.

John Foley, Peloton’s

founder, who told the Finan-

cial Times in a 2015 interview

that it was “bone-crushingly

hard” to raise money ahead

of its launch in 2014, wrote in

the prospectus that Peloton

“sells happiness.”

But as the company iden-

tified in the risks to the busi-

ness outlined in the S-1 filing,

it will join a roll call of loss-

making tech companies, in-

cluding Uber, Lyft and Pin-

terest, which could put in-

vestors off.

“We have incurred op-

erating losses in the past, ex-

pect to incur operating

losses in the future, and may

not achieve or maintain

profitability in the future,” it

said.

Copyright The Financial

Times Ltd. 2019. All Rights

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Times are trademarks of the

Financial Times Ltd. Not to

be redistributed, copied or

modified in any way.

Peloton will make a run at investors with IPO

The company has a

cult following — and

lots of competition.

By Alice Hancock
and Eric Platt

PELOTONusers can tune in to a virtual exercise class on treadmills or bikes.

Peloton frames itself as a media company, pumping out live and recorded content.

Ethan MillerGetty Images

Forever 21 Inc. is prepar-

ing for a potential bank-

ruptcy filing as the fashion

retailer’s cash dwindles and

turnaround options fade, ac-

cording to people with

knowledge of the plans.

The company has been in

talks for additional

financing and working with

a team of advisors to help it

restructure its debt, but ne-

gotiations with possible

lenders have so far stalled,

the people said. So focus has

shifted toward securing a

potential debtor-in-pos-

session loan to take the com-

pany into Chapter 11, they

said, even as some window

remains to strike a last-min-

ute deal that keeps the issue

out of court.

A bankruptcy filing

would help the Los Angeles

company shed unprofitable

stores and recapitalize the

business, said the people,

who requested not to be

named as discussing private

negotiations. Representa-

tives for Forever 21 did not

respond to a request for

comment.

Co-founder Do Won

Chang had been focused on

maintaining a controlling

stake in the company, which

limited its fundraising op-

tions. A faction of Forever 21

officials, without Chang’s

approval, had asked its big-

gest landlords to consider

taking a stake in the com-

pany amid a disagreement

within its leadership,

Bloomberg previously re-

ported.

Launched in Los Ange-

les’ Highland Park neighbor-

hood in 1984, Forever 21 rose

to prominence a decade ago

as a purveyor of fast-fashion

trends for young women. It

soon leaned hard into ex-

pansion mode.

The company operates

more than 800 stores world-

wide.

Ronalds-Hannon and

Coleman-Lochner write for

Bloomberg.

Forever

21 may

be near

Ch. 11

Retailer’s talks with

possible lenders have

stalled, sources say.

By Eliza

Ronalds-Hannon

and Lauren

Coleman-Lochner