Article 7 of 200
Entrepreneurs
Follow The Money/Venture Capital Status seekers
BY Luisa Kroll
01/25/99
Forbes
Page 70b
Copyright 1999 Forbes Inc.
IF YOU'RE PLANNING to hook up with a venture capital firm, everyone
knows you should reach for the top drawer, right? The most famous firms
have plenty of money to throw around. Their connections can lead you to
management talent, big-ticket customers, strategic partners and, of
course, prestigious investment bankers who can take your company public
at the highest valuations. They're pretty good buzzmeisters too, hyping
your startup when the word needs to get around.
Surprise: It turns out that in the public markets, at least, pedigree is
no guarantor of success. Sure, some of the best-known firms backed
several of the most spectacular successes of late: Kleiner Perkins
Caufield & Byers, Sequoia Capital and Oak Investment Partners backed
Amazon .com, Yahoo and Inktomi, respectively; but these represent grand
slams in portfolios full of doubles, singles and strikeouts. On the
whole, the best records, as measured by average annual return of initial
public offerings, even including these blockbusters, did not belong to
the flashiest venture capital outfits (see table, opposite).
That sounds like heresy, of course. But it's the conclusion of Venture
Economics Information Services, a Newark, N.J.-based research firm,
which calculated the average annual return of more than 300 venture
capital firms, based on how the share prices of their portfolio
companies performed since going public some time over the last five
years. (The survey does not track performance pre-IPO; since there are
no disclosure requirements for the firms, not all publish their internal
rates of return.)
The results: The best-known venture capital firms weren't always top
performers; quite a few landed in the bottom half. When companies were
screened for four or more IPOS, Kleiner Perkins showed up in the middle
of the pack, posting just a 32% annual return, beaten out by the likes
of El Dorado Ventures, Boston Capital Ventures and Trident Capital. Some
notable firms fared very badly--Weiss, Peck & Greer, New Enterprise
Associates and Menlo Ventures among them.
Why? Partly because the better-known outfits get more deals, take more
chances--and spread their attention more thinly. A Kleiner Perkins has a
better chance of scoring with a blockbuster like Excite, and striking
out with lemons like Visionary, Inc., which develops scanning software
(shares have tumbled 92% since the public offering), and On Technology,
a software developer for local area networks, down 93% to a recent $1.
More deals mean less risk but also a smaller chance of a huge average
return.
Some folks claim they get more personal attention and better strategic
advice from smaller venture capital outfits. "The top firms are just
okay," says Robert Bernard, chief executive of Whittman-Hart, an
information technology provider for businesses, backed by Frontenac Co.
and Platinum Venture Partners, both of Chicago. "Smaller firms are
definitely closer and more intimate." Bernard's company has done well
since its May 1996 public offering; the stock is up nearly sevenfold.
Sometimes, but not always, entrepreneurs can get more generous terms
from a smaller venture capital firm. Harold Ruttenberg, founder and
chief executive of retailer Just For Feet, Inc., had many premier
outfits wooing him, but turned them down because they wanted too big a
piece of his company. "Some venture capitalists are greedy," he says.
"They want to put in their own people and ideas." Ruttenberg was finally
won over by Weston Presidio Capital in San Francisco, which was willing
to take an operational backseat.
Don't avoid prestigious venture capitalists; they can still make amazing
things happen. But they aren't the only game in town. -LUISA KROLL
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