The toothbrush test
A few weeks ago, I was introduced to Google’s Toothbrush Test.
Contrary to the images that the name inspires, this test does not involve sticking a web-enabled toothbrush into your mouth to collect data on your molars. Instead, it relates to how Google allocates capital.
Google wants to provide services that are the business equivalent to brushing your teeth. In other words, services that are critical to use several times a day. Whether it is email or searching online, Google offers services that become part of a daily routine. As Don Harrison, head of M&A at Google has said: “We ask ourselves, ‘Is this something people use once or twice a day and does it solve a problem?’”
While one little phrase might not seem like much of a big deal, there is power behind the words. Google has succinctly summarized how it wants to allocate capital as an organization. It is a big positive that Google has not only defined its strategy and process, but has boiled the most important concepts down to a simple phrase that everyone in the organization can grasp.
The existence of a proactively defined culture around capital allocation is something we look for in all our investments. How an organization allocates capital ultimately plays a pivotal role in whether it will generate wealth for shareholders over time. And whether it’s a “Toothbrush Test” or a more detailed acquisition strategy, it doesn’t really matter so long as management teams have created prudent processes, set appropriate hurdles, and shaped how their organizations think about the money they spend.