continued:
"Perhaps you're wondering how this can be, given that KP's funds produce such spectacular
returns. The dirty little secret of the venture business is that VCs can be enormously
successful even though most of their portfolio companies may tank in the public markets.
This stems from the fact that VCs make money on almost any company that gets to an
IPO, because as early private-stage investors, they've likely bought the stock at a price
three or four times lower than the public-offering price. All a fund needs to ensure
fabulous over-all performance is a collection of these modest 3X or 4X returns and a few
home runs (20X or more). For instance, KP hasn't distributed all its Amazon .com stock
yet, but as of now its return from that investment covers more than the entire $328
million of capital committed for that fund.
Such talk of money and returns is not the image the general partners of KP want to
present. Like all VC firms, KP is a private limited partnership and is thus not required to
report investment activities to the SEC or release much of anything to anybody except its
investors. Which is perhaps why, when FORTUNE set out to do this story, KP was
reluctant to cooperate. "To be perfectly frank, we don't like articles focusing on the
partnership," said Brook Byers, Kleiner's longest-tenured partner. Echoed Russ
Siegelman, the newest partner: "We're here to serve entrepreneurs. We're adjunct to what
really gets done." The firm eventually agreed to cooperate, but the partners would pose
for a photo only if it showed them flanked by a large group of KP-funded CEOs.
All this is because the partners prefer to be seen not as financiers, a term they disdain, but
as company builders who work closely with the entrepreneurs they fund. Even though KP
has raised some $650 million in capital in the past four years and clocked annual returns
well in excess of anything most Wall Street money managers could sustain, the partners
insist that making money is not the essence of what they do. Partner Vinod Khosla sums
up: "We're really in the venture-assistance business, helping entrepreneurs and
management teams build great companies. If I was driven by money, I wouldn't be doing
this." That is, actually, believable. Like many bright lights in Silicon Valley, most KP
partners are wealthy enough to retire this instant; if there weren't some higher cause, they
probably wouldn't be turning up every day on Sand Hill Road.
Kleiner Perkins is no place for freshly minted MBAs on the make. Not a single partner
has a financial background--instead, each is required to have operating experience, either
in running a company or in working near the top at a large company. Doerr worked in
sales at Intel and co-founded a chip company that he sold for $125 million. Khosla was the
first CEO of Sun Microsystems. Siegelman worked for seven years at Microsoft. Ted
Schlein ran networking and client- server technology at Symantec. None started with the
goal of becoming a VC. "I wake up most mornings thinking I want to run a company,"
says Kevin Compton, who came to KP as an "entrepreneur in residence" after a KP
company acquired his Kansas City computer-store chain. He intended to stay a year or two
and then launch another company. That was eight years ago.
Talking to KP partners, you get the sense that their desire to be seen as company builders
comes partly from entrepreneurial urges they know they probably can't ever fully satisfy.
"Off and on, a lot of us yearn to go out and start something or run a company. But when
we're honest with ourselves, it's probably not the thing we're best at," says Doug
Mackenzie, who co-founded Eczel, a reseller of microcomputer products, before joining
Kleiner in 1989. Such yearnings are why Doerr, for instance, considered taking the job of
CEO of Netscape before Jim Barksdale signed on, and why he took a six-month leave in
1989 to work at Sun on a workstation project that never flew, and why partner Will
Hearst was sad when it was time to step down as acting CEO of @Home.
Without the Internet, KP's keiretsu approach might have gone the way of some of its
beleaguered namesakes in Japan. The firm tried building networks of startups in at least
three other markets, starting in the late 1980s--pen computing, interactive entertainment
(Anyone remember 3DO?), and wireless communication. All failed to produce any real
returns.
It wasn't until KP funded Netscape and made it the sun around which a host of other
Internet companies could orbit that the concept worked. In 1994, Silicon Graphics founder
Jim Clark called Doerr to tell him about a little piece of software called a browser, written
by this 23-year-old kid from the University of Illinois named Marc Andreessen. Four
years later, the call still ranks as the most significant thing to happen to Kleiner Perkins in
a decade. And perhaps the luckiest.
Funding Netscape wasn't an easy decision. Clark had formed a company around
Andreessen's software and would welcome investors only at a steep, nonnegotiable
price--$5 million for a 25% stake. Silicon Graphics' backers, Mayfield and NEA, told him
"no thanks" because at the time $20 million was a ridiculous value to put on a company
that didn't have a business plan or even a name yet.
Netscape's price didn't seem all that outrageous to Doerr; he'd been on the lookout for
something like this. Every year he and his close friend Bill Joy, a Sun co-founder,
sequester themselves in Aspen to talk about what new technologies the next ten years will
bring. At one of these brainstorming sessions before Clark surfaced with Netscape, Joy
really did predict the future. Recalls Doerr: "Bill looked me in the eye and said, 'John,
someday you're going to back a 20-year-old kid who writes some software that will
change the world,' and I said, 'Right.' We thought it would be some kind of consumer
game software. Well, in fact, the kid was 23, his name was Andreessen, and the product
was a Web browser." Doerr persuaded his partners to vote unanimously for the deal.
Not even Joy could have predicted the hysteria that greeted Netscape's IPO. In the first
day of trading, the stock started at $28 a share and closed at $58; eventually the investment
produced a return of $400 million for KP.
At KP, Netscape inspired a surge of enthusiasm for the Web. This was particularly true of
Doerr, who was quoted in the press repeating mantras like "The Internet is underhyped"
and "The Internet has become the answer to everything." In late 1994, KP launched a
major Internet initiative. It found Internet infrastructure companies like Concentric, a
provider of Net services to small and midsized businesses, and created @Home, a company
using cable-TV wires to offer superfast access to the Net. KP found consumer Web
applications like online travel agency Preview Travel, sports Website Sportsline,
search-engine company Excite, Web bookseller Amazon .com, and online auction site
Onsale. Each returned at least 12 times the capital KP invested.
The trick KP has mastered is to foster an incubator environment in which portfolio
companies want to work together. Sometimes this involves moving executives from one to
another, as when Doerr plucked Mike Homer from GO, a failed pen-computing company
KP backed, and installed him as Netscape's vice president of marketing, or when Doerr
helped Bill Campbell, another GO alumnus, get the CEO job at Intuit. Other times it
involves the CEO of one KP company sitting on the board of another, as when Intuit's
Scott Cook joined the board of Amazon and Jim Barksdale joined the board of @Home,
both at Doerr's suggestion. " |
