Boom and bust: Venture-capital king ruled over high-risk realm
By Ariana Eunjung Cha
The Washington Post
DOUG MILLS / AP
President Clinton gets a hug from John Doerr, event host, during a Democratic fund-raiser in 1998 in San Jose, Calif.
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 them as partners for a company he envisioned marrying cable and the Internet to bring more and as yet unimagined programming to consumers.
As perhaps the most famous of the venture capitalists who seeded the Internet boom, Doerr had the money 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 million dollars into At Home. 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 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 — 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, a popular online search and directory site that also happened to be heavily backed by Kleiner Perkins. Excite was losing lots of money, and that made some investors skeptical: Why endanger At Home by exposing it to Excite's losses?
But those concerns were swept aside. Shareholders in 1999 overwhelmingly approved the $6.7 billion merger, the biggest ever between two Internet companies.
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 last February, and the 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 decided which startups lived and died, which investment bankers and lawyers got the deals and who 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 startup. As the startup picked up steam, the fund would distribute some company shares to its investors, usually institutions or wealthy individuals. Those investors would, in turn, sell their shares to the 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 startup funds in one hand; with the other, they pushed for companies to expand quickly and jump into new areas.
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.
Doerr's talk of keiretsu — a Japanese term for doing business among well-known associates — was his catchword for a network of ventures that led to unions like that of Excite and At Home. It has become an epitaph for an era.
Rewriting history
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 is caught up in 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 for comment, have vigorously denied the allegations.
Doerr's failures — Excite At Home, Kirkland's HomeGrocer.com — are as well known as his successes — Seattle's Amazon.com, Intuit, Sun, Netscape. But those failures don't necessarily mean Doerr's insights about 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 is growing.
On the other hand, Doerr helped create a climate in which people thought the potential riches were so large that 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 they — 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 he was sincere in his belief in the future of the companies he financed, and that it's unfair to blame him for others' greed. They note Doerr backed up words with actions: He never sold a single share of his personal stakes in companies for which he was a board member.
"It is in the nature of technological innovations for inventors and the people closest to them to 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 next door to Kleiner Perkins.
Seeds and stakes
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 businesses 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, and Doerr was 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, 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.
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, hoping to 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 and an initial investor in Excite, believes the emphasis venture capitalists placed on size also was a mistake. To be sure, the land-grab strategy of trying to become the Übercompany 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 überbrand' — 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 cellphones, 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 Chief Executive Scott 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. 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 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 Clark once declared, "As a salesman, he's so good he can sell you just as easily on bad concepts."
In recent months, Doerr has all but gone into hiding. Kleiner, like other surviving venture-capital firms, continues to invest but much more conservatively. Some of Kleiner's limited partners are upset because returns are negative. The trade press has begun to write only about Kleiner's failures rather than about new companies Kleiner is funding.
Doerr, like practically every other director of a public business that has been suffering from the stock market's downturn, must contend with corporate-fraud lawsuits and government investigations into Kleiner-backed companies. He is being sued by shareholders of Amazon, Freemarkets, Drugstore.com and Martha Stewart Living Omnimedia. At least three Doerr-backed firms, Martha Stewart, Homestore and AOL, are being scrutinized by regulators.
University of Wisconsin law professor D. Gordon Smith believes most of the flurry of lawsuits against venture capitalists are unfounded.
"When something bad happens we wonder whether someone was evil or stupid. I think it's pretty clear that most of the VCs were not in the first camp. They were not manipulating markets," Smith said. "What they were doing was taking advantage of the situation."
Former U.S. Rep. Rick White, a Republican from Washington and a friend of Doerr's, insists Doerr's views are essentially unchanged. "We don't talk about the New Economy anymore," White said, "but Doerr is a guy who still believes there is a physical power in tech."
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