For almost three years I've bet on every Kleiner child I could get my hands on.
Only one of their children did I lose a little money on, and that was OnSale which since has merged with Egghead.
Never under-estimate the power of the Keiretsu.Trust me.
Btw
Thanks for pointing out the article.
>MARCH 13, 2000
Keiretsu West
By Bill Alpert
Master of the Universe.
That worshipful name once belonged to the investment banker. These days it more properly belongs to the venture capitalist, who has pulled the world's center of mass from Wall Street to Menlo Park, California. You'll find there the market's new masters at firms like Sequoia Capital, Benchmark Capital and Kleiner Perkins Caufield & Byers.
The inflationary universe of finance is now truly their domain. Consider that venture capital disbursements soared to $48 billion last year, from just $10 billion in 1996, according to the National Venture Capital Association. Word is, the moguls of Menlo Park and their East Coast counterparts are sitting on $40 billion in funds that they've yet to dispense. And when Wall Street brings those investments public, in today's wooly-bully market, those dollars can grow explosively by as much as 1,000-fold.
Look at venture capital's track record, and you'll concede it's not just a bull market -- it's brains. Warren Buffett earned immortality with compound returns of 29% over 37 years. But Kleiner Perkins averaged gains of 34% annually over 24 years -- before the Internet market delivered yearly gains upwards of 350%. Now, Kleiner Perkins' average tops 37%. Those are the best returns since the Medicis, excluding art investments.
If Joe Doaks hasn't yet heard of John Doerr, Doaks has been reading the wrong business journals. Doerr, the pre-eminent eminence at Kleiner Perkins, is arguably the most powerful person in the universe of venture capital, and as deserving of celebrity as anyone in that sunset empire called Wall Street.
Along with an eye for spectacular investments, Doerr championed a strategy quickly adopted by other venture capitalists. That strategy is known by the Japanese term keiretsu, which describes cross-investments and other aid exchanged by companies gathered under the umbrella of a holding company (like the much-admired CMGI) or a venture capital firm (like Kleiner Perkins).
In the American-style keiretsu, the venture capitalist encourages his portfolio companies to cross-license, endorse and even merge. Doerr sits on the board of 15 companies, among them Amazon.com, Sun Microsystems and Intuit. Not only do these companies return each other's phone calls, when the need requires, they also ride to each other's rescue. Thus, in 1998, Kleiner's Netscape evicted Yahoo (a spawn of the SoftBank keiretsu) from Netscape's Netcenter portal in favor of Excite. Excite, in turn, promised Netscape $70 million over two years. Trouble was, Excite had only $25 million in cash, so it borrowed money from Kleiner-sponsored Intuit -- a loan later repaid from the proceeds of an Excite secondary offering. The boost in revenues to Netscape, and in traffic to Excite, certainly didn't hurt the prices fetched when they were acquired, ultimately, by Kleiner-backed AOL and @Home.
Points pile up quickly when a public company plays its Keiretsu Kard. Witness Viant and Scient, two consulting firms that help companies build "legendary" e-commerce Websites. Both of these builders of the New Economy get large hunks of revenues from a relatively small number of clients. Not a few of those clients, in turn, have paid for those services with money raised by Viant and Scient's venture capitalists.
Viant's two largest VC backers were Mohr Davidow Ventures and Kleiner Perkins. In a prospectus for a secondary offering in December, Viant noted that its five largest clients accounted for approximately 59% of 1998 revenues. Chipping in "more than 10%" of those 1998 revenues were Kinko's Corp., Lucent Technologies and Compaq Computer. The latter two clients enjoy a Kleiner Perkins connection.
Even more striking is how keiretsu membership has its privileges for Scient, a company backed by Benchmark Capital and Sequoia Capital. In the fiscal year ended March 1999, 40% of Scient's $20.7 million in revenues came from customers in which Benchmark or Sequoia were substantial shareholders or controlled a board seat -- companies like PlanetRx.com, eBay and WebVan.
In Scient's formative years, says financial chief Bill Kurtz, its venture-capital backers helpfully required dot.com businesses to become Scient clients, as a condition of venture funding. And before funding a new dot.com, says Kurtz, venture capitalists sometimes ask Scient to evaluate the business plan.
"When many of us were getting started, it was a very early stage in the industry," says Kurtz. "We needed help from Benchmark and Sequoia to gain entrance and get our name established." Now that Scient's got a name, he says, many clients come from other venture portfolios, and some 60% of Scient's work is building online sites for established firms like Chase. Benchmark and Sequoia affiliates are now down to around 10% of revenues apiece.
I'm not out to prove that venture capital's bubbly champagne flute is half-empty. My green eyeshades often keep me from being a "visionary." But investors should appreciate that a good chunk of Scient's sales were literally "spec'ed in" -- especially when $1 passed from the balance sheet of one keiretsu company to the income statement of another can add $50 to the latter's market cap. That's quite a nice return for the venture investor that drew up the specs, by the way.
Apparently, the idea has become popular among the public companies spawned by venture capital. For example, in November '99, Scient's executive officers formed an investment fund that may make independent investments in Scient clients. "We're putting some skin in the game," says Scient's Kurtz. "If we do it right, we'll both benefit."
Amazon.com recently bought stakes in a bunch of other firms belonging to the Kleiner Perkins clan. For its investment, Amazon will receive, in turn, $217 million in revenues from those firms over the next five years -- if, of course, the companies survive that long.
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