'Johnny Appleseed' for a Risky Field
Doerr's Ambition Paid Off -- at First
By Ariana Eunjung Cha
Washington Post Staff Writer
Wednesday, November 13, 2002; Page
A01
Fourth of six articles
REDWOOD CITY, Calif.
The company was born, as were
so many in Silicon Valley in the
1990s, with a single conversation.
"I have an idea for you," John
Doerr said to a group of cable
television executives he wanted as
partners for a company he
envisioned marrying cable and the
Internet to bring more and as yet
unimagined sorts of programming
to consumers. As perhaps the
most famous of the venture
capitalists, the financiers who
seeded the Internet boom, Doerr
had the money at his disposal to
make his ideas reality. In this case,
he even had a name for his new
venture: At Home.
Over the next three years, Doerr,
through his firm Kleiner Perkins
Caufield & Byers and its
co-investors, pumped several
hundred millions of dollars into At
Home Corp. The company
prospered, quickly attracting
nearly 300,000 customers who
paid a monthly fee to get
super-fast Internet access from
their houses and apartments, and
banking several million dollars in
revenue each quarter.
But Doerr was not satisfied.
By late 1998, nearly the middle of
the boom, Doerr told some
company executives that he feared
At Home wasn't moving fast
enough. He, along with the
management team and other
directors, wanted At Home to ally
itself with a company that could
provide the content -- the stories,
sound clips and video -- it needed
to become a media venture. And
the time to do that was while At
Home's stock was flying high.
The target: Excite Inc., a popular
online search and directory site
that also happened to be heavily
backed by Kleiner Perkins. Excite
was losing money -- lots of it --
and that made some investors
skeptical: Why endanger At
Home by exposing it to Excite's
losses? But those concerns were
swept aside. The $6.7 billion
merger, the biggest ever between
two Internet companies, was
overwhelmingly approved by
shareholders in 1999.
Kleiner Perkins, however, did not
wait around for the new company,
Excite At Home, to succeed.
Soon after the merger, it took
company shares worth more than
$1 billion and distributed them
privately to its investment partners
for them to sell if they wished.
Public investors who placed their
bets on the company's long-term
success and held on to their
shares were not as lucky. Excite At Home went out of business this February,
and their stock became worthless in one of the New Economy's most
spectacular failures.
Charles Moldow, a former vice president of At Home who worked on Excite
At Home's business development, believes At Home took a fatally wrong
step. "If we hadn't merged with Excite, At Home would still be around today,"
he said.
But during the boom years, venture capitalists played God, and they largely
decided which start-up companies lived and which ones died, which
investment bankers and lawyers got the deals and which ones got rich. Doerr,
an electrical engineer who became the premier financier of Silicon Valley, did
all that and something more: He was the public face and ultimate salesman of
the obsessively ambitious Internet world.
Doerr's imprimatur on a company gave it instant credibility. But any venture
capital fund's investment began a familiar process, according to Wade
Randlett, chief executive of San Francisco-based Dashboard Technology.
First the fund would send money to a start-up. Then, as the start-up picked
up steam, the fund would distribute some company shares to its investors,
usually institutions or wealthy individuals. Those private investors would, in
turn, sell their shares to the general public. If the company ran into trouble,
Randlett said, "it turned out that the individual investor was the last sucker at
the table."
To fledgling Internet entrepreneurs, venture capitalists held out badly needed
start-up funds in one hand. With the other they pushed hard for the companies
to expand quickly and jump into new areas of business. Now that many of
these companies are in ruins, outsiders point to the obsession with growth and
size as a major factor in the dot-com industry's undoing. And Doerr's talk of
keiretsu -- a Japanese term that became his catchword for a network of
ventures that led to unions like that of Excite and At Home -- has become an
epitaph for a bygone era.
As the history of the boom is being rewritten, so is Doerr's.
He has gone from being known as the "Johnny Appleseed" of Silicon Valley
(Time Digital 1999) to being compared to Henry Blodget (Barron's, 2002),
the Wall Street analyst who hyped shaky stocks and now finds himself being
questioned by government regulators.
Like many other prominent financiers of the boom, Doerr has found himself
caught up in all the scandals that have beset the corporate world in the
aftermath of the bubble. A few of the companies he funded and on whose
boards he served are fighting off investigations by the Securities and Exchange
Commission and shareholder lawsuits that allege wrongdoing including insider
trading and accounting fraud. Attorneys for Doerr, who declined repeated
requests to speak on the record for this story, have vigorously denied the
allegations.
Doerr's failures -- Excite At Home, HomeGrocer -- are now as well known
as his successes -- Amazon, Intuit, Sun, Netscape. But those failures don't
necessarily mean that Doerr's insights about the future of technology were
wrong. Dot-com-era businesses such as online retailing have found a loyal
consumer base. People really do download music from the Web. And the
number of homes paying for the use of high-speed Internet that Excite At
Home promoted has been increasing steadily.
On the other hand, he helped create a climate in which people thought the
potential riches were so large many made foolish investments and ended up
losing lots of money. "The Internet is the greatest legal creation of wealth in
the history of the planet," Doerr said on numerous occasions. "It's
underhyped," he said. "It may hit 30 on a Richter scale."
Paul Kedrosky, a University of British Columbia business professor who is
writing a book about venture capitalists, said venture capitalists -- and Doerr
in particular -- created a romanticized vision of the world that was hard to
resist.
"He was a blue-eyed believer but his proclamations were so full of hyperbole
that there was no good that could come of them. . . . He made a lot of people
lose a lot of money," Kedrosky said.
Doerr's defenders argue that he was sincere in his belief in the future of all the
companies he financed and that it's unfair to blame him for the greed of others.
They note that Doerr backed up his words with actions: He never sold a
single share of his personal stakes in companies for which he served on the
board of directors.
"It is in the nature of technological innovations for inventors and the people
closest to them to be be excited by what they see. . . . That John Doerr's
enthusiasm was infectious is not John Doerr's fault," said Paul Saffo, director
of the Institute for the Future, a think tank based next door to Kleiner Perkins.
The Origins of Hype
The Internet bubble began with a relatively simple transaction, repeated
hundreds of times. A fledgling Internet entrepreneur whose company often
consisted of no more than a 10-page "business plan" received seed money. In
return, the venture capitalists, located along fabled Sand Hill Road in Menlo
Park, Calif., or some other tech hub around the country, got a stake in the
company.
But the venture capitalists were more than regular investors. In contrast to
investment banks that rarely got involved in the day-to-day activities of the
ventures they funded, venture capitalists nurtured their companies, recruiting
top management, drafting contracts and negotiating deals. It wasn't unusual for
them to take jobs as executives within the businesses.
Kleiner Perkins and the companies it funded were Silicon Valley's elite ruling
party during this time, Doerr their leader. In a reversal of the usual practice,
investors were chosen by the firm, which often demanded an initial
commitment of at least $1 million to get in, according to several limited
partners. Among the groups that placed money in Kleiner were some of the
nation's most prestigious universities and pension funds.
Venture capitalists were known as the long-term guys, the ones who kept
their investments in companies for a decade or more, until they had a chance
to grow into stable enterprises with robust earnings. But all that changed in
1995 with the initial public offering of Doerr-backed Netscape
Communications Corp.
Netscape, co-founded by whiz kid Marc Andreessen, the inventor of the
Web browser, and backed by Doerr, had no profit and only a vague idea of
how it would make money. But its stock jumped 107 percent on its first day
of trading, giving the fledgling company a market value of $2.2 billion.
Over the next five years, nearly 1,000 other companies would go public in the
hopes that they could duplicate Netscape's performance in the stock market.
In the not-so-distant past, venture capitalists would often take months or
years to mull over investments, doing careful market studies about
competitors and even surveys of potential customers. In the go-go days of the
late 1990s, however, some venture capitalists say it wasn't unusual for a
company to be funded almost on the spot, on the New Economy idea that
whoever got the customers first would dominate a sector.
So much money was flowing into venture capital funds so fast that often
companies in the same or similar businesses began to multiply, especially in
e-commerce. Pets.com, Petsmart.com, Petopia.com and Petstore.com, for
instance, all offered pet food and other products for animals. DellaJames.com,
WeddingChannel.com and TheKnot.com offered wedding advice and gifts.
Wine.com, WineShopper.com, WineCountryGiftBaskets.com,
eVineyard.com and VirtualVineyards.com, obviously enough, sold wine.
E. Floyd Kvamme, a Kleiner Perkins partner emeritus who wasn't actively
investing during the dot-com years, said that as an outsider he saw this
haphazard investing style as one of the biggest contributors to the shakiness of
the New Economy.
"For whatever reason due diligence kind of got put aside," Kvamme said.
"Looking at the amount of dollars being thrown at things, it was clearly a
strange time, and the bubble shouldn't necessarily have happened."
Geoff Yang, a partner with Redpoint Ventures, who, along with Vinod
Khosla, one of Doerr's partners at Kleiner, was an initial investor in Excite,
believes that the emphasis venture capitalists placed on size also was a
mistake. To be sure, the land-grab strategy of trying to become the
ubercompany worked for some ventures, such as Amazon.com, Yahoo and
eBay, but those turned out to be the exceptions.
"Clearly in retrospect if we had thought smaller -- 'I will do rational pricing, I
won't worry about being the uberbrand' -- clearly, I think that would have
been better," Yang said.
That, however, wasn't Doerr's style.
During the late 1990s, Doerr always seemed to be multi-tasking,
simultaneously trying to manage beeps on his two cell phones, laptop and
pager as he sought to carry on a conversation. He rarely drove, instead riding
in a chauffeured van where he could fiddle with his electronics in the back
seat, invariably dressed in a dark suit with a blue tie.
Sun Microsystems Inc. chief executive Scott G. McNealy described the
rail-thin Doerr as "the Energizer Bunny on steroids."
Louis John Doerr III, the eldest of five children who grew up in a middle-class
area of St. Louis, studied electrical engineering at Rice University, went to
business school at Harvard and then took a marketing position at chipmaker
Intel Corp. Six years later, he joined Kleiner.
Doerr was an almost instant success, funding a string of successful companies
in the late 1980s and early 1990s before the general public knew what a
venture capitalist was. But his real fame didn't come until the dot-com years.
Between 1991 and 1993, author Michael Lewis noted in "The New New
Thing," Doerr promoted "pen" computing, a technology that would allow
people to enter data with a stencil on a tablet instead of typing on a keyboard.
When that didn't work out, he started talking about the future of interactive
television that would allow purchasers to watch shows and do things like chat
online at the same time. A few years later, he hit the right trend, promoting the
riches that were sure to come from the commercialization of the Internet.
A sampling of Doerr's other predictions:
"All Silicon Valley homes will be connected at high speeds by 2001 -- and
still want more."
"By 2001, I believe set-top computers will be as important as PCs, only cost
about $300 to make, and may even be subsidized by the cable companies.
They'll allow users to not only view programs but pay bills and purchase
products as well."
"Much sooner than a PC on every kid's desk, we'll have a handheld in every
kid's pocket."
Things didn't turn out exactly the way Doerr imagined. But he was so
successful at making others believe in his ideas that former Netscape chairman
James H. Clark once declared, "As a salesman, he's so good he can sell you
just as easily on bad concepts."
Artificial Demand
No idea was more associated with Doerr, and Kleiner Perkins, than keiretsu,
a Japanese term that refers to a network of interdependent ventures that help
each other. Some critics now see it as a not-insignificant cause of the dot-com
bubble.
During the late 1990s the Kleiner keiretsu companies, which included
e-retailers, optical-networking toolmakers and software companies, would
sometimes get their initial revenue from online ads, equipment and services
they bought from each other.
SportsLine, for instance, had a deal with Excite At Home to provide the Web
site's users with up-to-the-minute game statistics and news; Excite At Home
partnered with Healtheon/WebMD to create a 24-hour 'virtual health center';
fine-jewelry retailer BlueNile had a home on the merged
WeddingChannel/DellaJames site; and WeddingChannel promoted
WineShopper.com's selection of chardonnay and merlot.
The result, some critics say, was an artificial demand for the companies'
products that was deceptive because it wouldn't have existed without the
involvement of Kleiner partners.
Eric Von der Porten, a money manager with Leeward Investments LLC in
Silicon Valley, says that while there is nothing inherently wrong with the
keiretsu way of doing business, there are questions about whether it was
abused, producing an "illusion of prosperity without the economic substance
to match."
"During the bubble, [keiretsu] partnerships were one of the most certain ways
to 'get big fast.' Many partnerships created enormous amounts of temporary
stock market value, but it's not clear that many created lasting economic
value," Von der Porten said.
Doerr was at the center of many of these cross-promotional deals.
Managers at Kleiner-funded companies say it wasn't unusual for them to
wake up to find e-mails from Doerr sent in the middle of the night making
introductions between two companies and suggesting why they might make
good partners.
It wasn't a demand exactly, says one entrepreneur, but it wasn't a casual
invitation, either. "You knew you had better respond," said Peter Sisson, chief
executive of the now-defunct WineShopper.com.
"There was pressure" to work with a keiretsu company, Sisson said, but he
added that he was never overruled when he chose a non-Kleiner company as
a partner over a Kleiner company. "The partners always respected the CEO's
final decision to do what was best for the company."
From Merger to Meltdown
In an era defined by the spectacular implosion of one upstart after another,
Excite At Home's was arguably the biggest.
Within a few months of the merger's close, the company found itself on
precarious ground as it used up the last of its cash, $350 million, to purchase
an online greeting-card company even as its losses were mounting. Within two
years, Excite At Home filed for bankruptcy protection. Within three years, the
company closed its doors, its assets sold at fire sales, its 2,500 employees left
without jobs.
But when Excite and At Home merged in 1999, the $6.7 billion stock-swap
deal was celebrated as marking a new era in the development of the Internet.
Excite was just a portal -- an Internet directory and search engine -- at the
time, but people like Doerr had grand visions that it would become an
incubator for new multimedia content that would allow a computer to act as
television, radio and stereo at the same time. With At Home's extensive
distribution network, the combined company would be able to control what
the country watched and listened to.
Doerr was far from alone in his belief that the convergence of entertainment
systems would throw into upheaval the way Hollywood did business. He
measured the new company's value not only by paid subscribers but by
"eyeballs," the number of visitors to its Web site each day. Visitors were
assumed to be a proxy for revenue, an idea that became the basic premise of
the New Economy.
"John is not afraid to try to do things that are significant," said Milo Medin, a
former NASA scientist who helped design the At Home network. "He likes to
do things that make a difference. If it's incremental, he's not interested." At
Home was a hybrid between New Economy and old-line companies -- it had
a young, big-thinking management team that defined the era but had to clear
many of its moves with the old-line cable companies that were its partners.
Excite in many ways typified the "dot-com." The search-engine company was
financed by Vinod Khosla, Doerr's partner, and founded by six Stanford
University buddies. Lots of people were visiting the site, but the company
hadn't quite figured out how to bring in revenue.
At some point in 1998, when their stocks were flying high, both companies
separately began shopping for merger partners.
At Home began talks with Yahoo and Lycos. Excite looked at Microsoft
Corp., Yahoo and others. But by early 1999, At Home's management had
decided it wanted to do the deal with Excite. There were various reasons,
people involved in the discussions say. They felt Excite's technology was
superior to its competitors. Plus, it was close by -- its next-door neighbor, in
fact -- which would make integration easier. The fact that it, too, was a
Kleiner company was also a big part of their decision.
In retrospect, said Richard Gingras, a senior executive with At Home, "We
didn't do as thorough of an analysis [of Excite's financials] because they were
a Kleiner company. . . . They were on a downward slide."
Investors have grumbled on online message boards that Doerr and Khosla
never really believed in the merits of the merger but orchestrated the deal to
create enough buzz so the shares of Excite At Home would jump long enough
for Kleiner Perkins to sell off its holdings.
But several insiders say that just wasn't the case.
Doerr and Khosla, who were members of the boards of directors of their
respective companies, may have strongly advocated the deal, they say, but
they did it on the belief that the combined company would thrive.
"Kleiner clearly wanted it to happen. There were folks there that recognized
that Excite's fortunes were on the downswing. They thought At Home was so
strong that any negative effect from Excite wouldn't matter. In fact, they felt
that At Home could better leverage the Excite property," Gingras said.
The day the merger was announced, Doerr hired a plane to fly over the
companies' Redwood City, Calif., offices with a banner that said
"CONGRATULATIONS T.J. & GEORGE." T.J. was Thomas A. Jermoluk,
the chief executive of At Home and now a partner at Kleiner. George was
George Bell, chief executive of Excite.
Publicly, Doerr continued to promote the benefits of the merger, but privately
his company quietly "distributed," or handed control, of many of its Excite At
Home shares to the investors who had put their money in Kleiner's control.
These limited partners could sell or hold their shares, but the fact that the
venture capital firm distributed them is often taken as a signal to sell.
Kleiner did not have to disclose the distribution, experts say, because it is
technically accounted for as a private transfer of ownership of stock and
doesn't count as a sale under securities law.
Stanley Sporkin, a former head of enforcement for the Securities and
Exchange Commission, said he believes that there should be more obvious
disclosure about such moves by venture funds, especially if one or more of
their partners sits on the board of directors of the company in question. That
way other shareholders would be able to make better-informed decisions
about what to do with their own investments.
"If insiders are selling or bailing out either directly or indirectly, they should be
required to disclose that," he said.
The Excite At Home merger document states explicitly that venture capitalists
who sit on boards of public companies may have dual loyalties: "When
considering the recommendations of At Home's and Excite's boards of
directors, you should be aware that certain At Home and Excite directors and
officers have interests in the merger that are different from, or are in addition
to, yours."
The paper, which was mailed out to shareholders, specifically names Kleiner
Perkins, Doerr and a fellow partner who was also a board member, William
Randolph Hearst III of the famous newspaper family.
Before the merger was announced, Kleiner's 1.6 million shares of At Home
were worth $164.2 million; its 1.4 million shares of Excite, $94.5 million. By
April 26, its At Home stake was worth $258.5 million and its Excite holdings
$224.7 million.
Securities filings show that Doerr didn't sell any of his personal holdings: He
had 576,000 shares that were worth around $58.7 million when the merger
was announced and climbed to $92.4 million by the time the deal was
completed. But Kleiner's distributions seemed to contradict what Doerr
himself told everyone about the promise of the company and what he had
repeatedly told people in the tech community -- |
