This needs a revisit:
"10/26/98
Fortune Magazine
Time Inc.
Page 128+
(Copyright Time Inc. 1998)
For more than three years, Scott Kauffman fended off phone calls from recruiters. This
was in the mid-1990s, when Kauffman was known as one of the few executives in the
media business who could make sense of this new thing called the World Wide Web.
Non-tech companies wanted him as their Internet guru. Media conglomerates wanted him
to help figure out how the hell to turn old media into new media. Kauffman, the vice
president of online services at CompuServe, wasn't interested.
Then one day came a different kind of call. Kauffman remembers it this way: "This guy
on the phone sounded like a radio announcer, and it was like his voice was coming through
the fog. He said he'd been hired by Kleiner Perkins to recruit me as CEO of one of their
companies." Kauffman hung up, turned to his wife, and announced, "Honey, this is it. That
was Kleiner Perkins."
For people looking to hit it big in the exploding world of high tech, the name Kleiner
Perkins can have that effect. Kauffman quit his job, sold the house, packed up the family,
and moved to Palo Alto to become chief of AdKnowledge, an Internet advertising startup
funded by KP.
Silicon Valley is rich with top-tier venture capital firms like New Enterprise Associates,
Sequoia, Mayfield, Institutional Venture Partners, and Accel. But none has the same
let's-pull-up-stakes-and- head-for-California magnetism as KP. By the magic of its name,
Kleiner Perkins gets to see many of the Valley's most promising companies before they
seek funding from rival investors, a golden edge in a market where too much money is
chasing too few deals. KP's name helps attract skilled executives to its ventures in Silicon
Valley, where such talent is both desperately scarce and widely thought of as the No. 1
factor in determining whether a company sinks or swims. It figures that America's most
famous VC firm would have the industry's only celebrity venture capitalist, John Doerr.
Founded in 1972, Kleiner Perkins Caufield & Byers got famous in a hurry by funding
pioneering businesses that today are familiar names- -Genentech, which almost
single-handedly launched the modern biotech industry; Sun Microsystems, which
spearheaded the world's shift from mainframe to client-server computing; Compaq
Computer, the PC maker that rose to unseat IBM; and Lotus, the king of the PC
spreadsheet.
Only recently has KP hit jackpots that have given it cachet beyond any other VC firm.
Beginning in 1994 with Netscape, KP has funded some of the most important and richly
valued companies to have emerged from the Internet-- Amazon .com, @Home, AOL,
and Excite, to name a few. It's done so with a strategy almost perfectly suited to the Web
boom: nurturing alliances and partnerships among the companies it creates, weaving a web
of relationships so dense you need a map to find your way (which is why we've provided
one on the opposite page). Other VCs talk of building "networks" or "families" of
companies, but KP speaks of a keiretsu, a metaphor Doerr came up with in the 1980s,
when everyone thought Japanese conglomerates would eat American tech companies for
lunch.
Despite the buzz, few people not directly associated with Kleiner Perkins know much
about how it works. Only after lots of digging, for example, will you uncover the
extensive synergy and communication among companies in the KP keiretsu--far more than
exists, say, among divisions at many large companies. Everyone in Silicon Valley can
rattle off names of KP-funded triumphs, but few ever notice that many publicly traded KP
companies aren't doing so spectacularly. And hardly anyone, for that matter, knows just
how much money this firm makes.
According to Kleiner investors FORTUNE spoke with, the money is extraordinary. KP's
returns regularly rank among the top 5% earned by VC firms. Its recent funds, invested
heavily in Internet companies, have been some of the best in its history, returning more
than 70% a year. By examining SEC filings from portfolio companies, FORTUNE
estimates that over 1996 and 1997, Kleiner Perkins made at least $210 million (a
conservative figure, given that it doesn't include money KP made when private companies
were acquired). That $210 million represents the 30% slice of the profits KP's 12 general
partners take from its funds. Known as a carry charge, KP's cut is larger than that of any
other venture firm (others charge either 20% or 25%). Another $482 million or so of
profit went to KP's limited partners, investors that put up most of the capital for the
funds--mainly institutions, including university endowments like those of Harvard,
Stanford, and MIT, and nonprofits like the Ford Foundation. As portfolio companies go
public or are acquired, KP distributes returns to itself and its limited partners, usually in
the form of stock (of course, it's up to the partners to then sell or hold the shares). Only
when a fund closes, typically after ten years, is the original capital returned. KP's $210
million "carry," by the way, is pure profit, because a VC firm's expenses are covered by
an annual management fee equal to 2% of its funds. In the case of KP's most recent fund,
with $328 million in capital, that's $6.6 million annually kicked in by investors.
Can you personally get in on all this profit? You could have, if you'd bought shares in
companies like Amazon and Excite and gotten out before the recent market drop. But if
you'd bought other KP companies like Corsair, Prism Solutions, Digital Generation
Systems, or CellNet Data Systems, you'd be deep in the hole--these companies' shares have
rarely traded above their IPO price. Between 1990 and 1997, KP took public 79 infotech
and life sciences companies that have not been acquired since. If you'd bought each of
those stocks immediately after the first day of trading, you would have lost money on 55
of them. That's right, a loser rate of 70%. If you'd invested $100 in each of the 79
companies, you'd now have $11,716; if you'd invested that $7,900 in a fund tracking the
NASDAQ index, you'd have $15,718. " |
