Venture Capital Firm Kleiner Perkins Has Long Nurtured Internet Enterprises
By Elizabeth Corcoran
Washington Post Staff Writer
Sunday, October 13 1996; Page H01
MENLO PARK, Calif. Renaissance Florence flourished under the patronage of the Medici family. The U.S. steel industry in the early days of the 20th century had the House of Morgan. And these days, the technology industry of Silicon Valley is flourishing with the help of a renowned venture capital firm known as Kleiner Perkins Caufield & Byers.
Kleiner Perkins, based near Stanford University, has just a dozen partners. Over the past 24 years, it has handed out $880 million in funding to help start more than 260 companies. By the end of last year, more than 100 of those companies had gone public and had a combined stock market valuation of about $84 billion at the end of last year. Partners at the venture capital firm also say that their work has created more than 131,000 jobs.
Companies backed by Kleiner Perkins include America Online Inc., Compaq Computer Corp., Genentech Inc., Lotus Development Corp. and Netscape Communications Corp. The firm's original investment in Netscape, for example, was just $5 million. At the close of stock market trading Friday, that investment was worth $361 million an astounding 72-fold increase.
What makes Kleiner Perkins stand out among the several hundred venture capital firms in the United States is not just its financial record, but its mission of founding industries, rather than just companies. To do that, Kleiner's partners aim to be the ideal confidant and adviser for entrepreneurs. "We're not financiers," said Brook Byers, who joined Kleiner in 1977. "We're service providers we think the key person is the entrepreneur."
Perhaps the most intriguing pillar of Kleiner's work, developed by partner John Doerr, is what he has dubbed the Kleiner keiretsu. He uses the Japanese word keiretsu to mean a network of companies that share experiences, insights, knowledge and information partly by relying on Kleiner partners as the agents who dart from one company to another, spreading insights and contacts along the way.
"The keiretsu is a very original idea" in the world of venture capital, said Stewart Alsop, a longtime industry analyst who recently joined the Menlo Park office of venture capital firm New Enterprise Associates.
Forget about the image of venture capitalists as money spigots, waiting for an entre preneur with a bright idea to come calling. Kleiner partners are activists. At times, they have even decided to create companies and products on their own by pulling together entrepreneurs and technologists. The most recent example is @Home, a start-up company chaired by Kleiner partner Will Hearst. It aims to deliver multimedia information and entertainment using a combination of cable networks and home-grown technology.
This activist approach has contributed to Kleiner's financial record. Since its start in 1972, Kleiner's investments for its limited partners 30 of which are institutions and universities that contribute more than 80 percent of the Kleiner kitty have earned a net return of 34 percent a year. A fund initiated in 1994 that includes Kleiner's stake in Netscape boasts a Las Vegas-like payback of better than 190 percent. "But that's not sustainable," Doerr hastened to add.
"KP is one of the top-tier, more-prolific venture firms that you'll come across," said Rolf Selvig with VentureOne Corp., a San Francisco-based investment research firm specializing in the venture capital industry.
But its activist investing style also has raised some eyebrows. "We're the opposite of [Kleiner]," said David Marquardt of August Capital venture group in Menlo Park, and a member of Microsoft Corp.'s board. "We have no pretense that we can create an enterprise," he said. Instead, August Capital believes that bright people who come together will come up with the most compelling new ideas.
Not everyone in Silicon Valley sees Kleiner Perkins as wonderful. The firm is a relentlessly demanding patron, pushing its portfolio companies to grow faster, pay more attention to their customers and ultimately to make money. Kleiner can be ruthless at times, urging a board to fire a chief executive who doesn't deliver. And no deals are small ones for the Kleiner team, which is always swinging for a home run. That can be a problem for a fledgling firm not quite ready to play in the major leagues.
And winning Kleiner's attention doesn't come cheap. Although the firm is always a minority investor, usually holding no more than 25 percent of a start-up's equity, it can be a company's single largest investor. Its partners profit handsomely from their efforts as well, often taking home about a 30 percent share of the profits.
Even Silicon Valley's workaholics marvel at the pace the Kleiner team sets. The firm comprises just a dozen partners and their secretaries. There are no legions of young associates, ready to crunch numbers or fly out to visit companies. There is no branch office. All told, Kleiner itself has fewer people than staff Max's Opera Cafe, a local eatery in the Stanford shopping center.
"I've never seen anybody with the interest and intensity" of Doerr, said James Barksdale, chief executive of Netscape, who was wooed to the Internet start-up from the top job at McCaw Cellular Communications Inc., largely through Doerr's efforts. "He's as bright as a whip and works so hard at it he's always on the go."
Kleiner's other partners are no slouches, either. All sport the "Kleiner belt" a two-way pager and cellular phone strapped around their waists, making them accessible to entrepreneurs day and night.
Home for the Kleiner gang is an airy, ski-lodge-like office on Sand Hill Road, with large glass-walled offices for each partner. Administrative assistants sprint literally from one corner to another, delivering papers or connecting an anxious caller with the right partner. A buffet lunch is set up every afternoon so partners don't have to waste time going out to eat.
But apart from Mondays, when the partners gather to review the progress of their companies and assess possible new investments, they spend little time on Sand Hill Road.
"Sixty to 70 percent of our time is spent with our existing companies," said Vinod Khosla, who joined Kleiner in 1986. "Another 20 percent is spent getting educated" in new technologies by attending conferences and meeting people. That leaves about 10 percent of the time for assessing new businesses, Khosla calculated.
Not that Kleiner ever finds itself short of prospective investment opportunities. Kleiner each year receives more than 1,600 business plans, from which the partners cull as many as 300 for closer study. Fewer than 100 of the strongest candidates are eventually invited to make hour-long presentations at Sand Hill Road before the assembled partnership.
From those invited to pitch their ideas, the firm will invest in about 30 new companies a year, each of which will become the responsibility of a specific partner. A majority of the partners must approve a deal and a single nay can veto it. That way, should any of the investments get into trouble, all the partners feel responsible.
"When I bring a deal up for partnership approval . . . [the criteria is]: `Are you prepared to spend your time on it for the next five years? Are you excited enough about it?' " Khosla said. "That's the key question not is our ROI [return on investment] going to be great."
Although Kleiner Perkins has long concentrated its investments in high-technology businesses, five years ago it began picking about a half dozen more narrowly focused concentrations, aimed at supporting Doerr's keiretsu approach.
Current areas include the Internet and related networking technology, software for business enterprises and medical devices. Once they've picked those targets, Kleiner partners think through what complementary technologies and companies their community of investments will need to thrive.
Take the Internet. Kleiner's original $5 million investment in Netscape is only one of about two dozen investments in Internet-related businesses. Others examples include Shiva Corp., which builds hardware for remote networking, and software maker Macromedia Inc., which makes a hot tool for Web-page designers known as Shockwave.
For companies, becoming part of the Kleiner keiretsu means gaining entree to a network of corporate contacts and ideas, along with the expertise of the Kleiner partners themselves.
"There are a lot of VC [venture capital] firms that can add value," said Jeff Bezos, founder of Internet bookseller Amazon.com Inc., which recently became a Kleiner investment. But Kleiner and Doerr "are the gravitational center of a huge piece of the Internet world," he said. "It's the equivalent of prime real estate, and we can get a lot of value from that."
Like other VC firms, Kleiner spends considerable time helping fledgling companies develop their management teams. To cite the most remarkable example, Kleiner helped Netscape recruit its widely praised CEO, Barksdale, along with six vice presidents.
And they are always on call. "I sometimes jokingly refer to them as the fire department," said Jerry Kaplan, who heads on-line auction house OnSale Inc., one of Kleiner's most recent investments. Kaplan's previous start-up, Go Corp., also was funded by Kleiner. "When you call them in, they come running, [so] you don't call them in every day."
Even on holidays, Kleiner partners are not far from a telephone. It was the Friday after Thanksgiving last year when Bill Homer, Netscape's vice president of marketing, realized he needed a Kleiner hand. Netscape's executives had learned that Microsoft was planning to launch its Internet initiative in early December, and they felt they needed a strong countermove. They already had talked with their counterparts at Sun Microsystems Inc. about coalescing an industry-wide project based on Sun's "Java" software language. Now, the timing was key.
From a cellular phone on a train, Homer "dialed the magic number and there [Doerr] was," Homer recalled. (Actually, Doerr was in St. Louis with his family.) Homer explained he needed to track down Sun's top executives. Doerr's response was, "I'll find them," Homer recalled.
By the time Homer had reached home, one Sun executive had left a message on his voice mail, calling in from a vacation in Hawaii. Another interrupted a hiking trip out West to call Homer a few hours later. They clinched the deal in a few days. "Doerr was the one who tracked them down. I couldn't have done it," Homer said.
When Scott Cook, founder of Intuit Inc., decided in 1990 to accept venture capital funding from Kleiner Perkins, he wanted not just the money, but a board member who was "centrally tied to the cutting edge of PC technology," Cook recalled. Doerr seemed ideal, but Cook had two concerns: Would Doerr be available when he was needed? And would he try to micromanage the firm?
As a precaution, Cook said, "we asked him to write down views about how VCs worked with a company." Since then, Cook has never once had to remind Doerr of his promises. "I don't even know where the document is now," Cook said.
That philosophy of being available without trying to run the company is religion among Kleiner's partners. "The only time I call [a chief executive] is if I'm on assignment," said Kevin Compton, who joined Kleiner in 1990. "We become the VP [vice president] of whatever the company needs at the moment."
Added Khosla: "My job as a board member is to ask the tough questions, force management to anticipate issues and . . . be a real pain in the butt." But once a company's executives have picked a course, Kleiner will fully back the decision, he added. "In the end, a company can't work on two conflicting strategies at the same time," Khosla explained.
Kleiner nonetheless keeps a close eye on its investments. Every quarter, the partners gather for a marathon day-long examination of their 100 most active investments. Every company is rated on seven parameters, including its financial status and the performance of the top officers. Every Kleiner partner must update the "three goals" to help the company.
Doerr, who spent the first six years of his career at Intel Corp., said he "shamelessly stole" the idea for such intensive reviews from Intel's chief executive, Andrew S. Grove.
Quick With Advice
Kleiner partners, when asked, are ready with advice. When Intuit's proposed merger with Microsoft dissolved last spring, Cook convened his top executives to design a new strategy. At the meeting, "Doerr penned out by hand six or eight overhead slides on the Internet," Cook recalled. Since Intuit had been focused on working Microsoft's proprietary Microsoft Network for months, it hadn't given much thought to the Internet, Cook recalled.
Doerr's enthusiasm for the Internet was contagious. Within three to four weeks, Intuit had launched a program to move its personal finance software to the Internet. By last month, the company had consolidated this new strategy. "The speed with which we moved and the fundamental shift is entirely related to John Doerr," Cook said.
Companies that seem to be stumbling are earmarked for Kleiner's "intensive care unit" which means that several partners may jump in to advise the executives.
"It would be easier to say, 'The product doesn't work, you're behind schedule,' " said Byers. After all, with its diverse range of investments, Kleiner will succeed regardless of the fate of any single investment. But Kleiner's partners hate to call it quits. "Our motivation is our pride," Byers explained. "We get nice feedback because entrepreneurs know that we don't give up."
To be sure, Kleiner has had its share of flops, notably including Go Corp. and Dynabook Technologies, two firms that tried to develop a technology known as "pen computing," in which users could make handwritten notes on the screens of hand-held computers. Kleiner partners were passionate about the technology even as the companies began to crater.
Go "would have been dead many times over if it hadn't been for the ongoing work of Kleiner partners," recalled Kaplan, who was chief executive of the venture. Even so, the best they could do was to sell the remnants to AT&T Corp., which eventually shut it down.
"Would it have been better if the company died sooner?" Kaplan asked. "They went to heroic means to extend the life of the organization," he said, "and as an entrepreneur, that's what you want."
A COMPANY PHILOSOPHY
Kleiner Perkins uses the Japanese term keiretsu to describe its approach toward investing. Keiretsu is a network of companies linked by mutual obligation. This obligation leads to the sharing of experiences and information among the 175 companies it invests in. Here is a look at some Internet companies that are members of Kleiner's keiretsu.
Consumer Platform Software Equipment
@Home Citrix Systems Ascend Communications
America Online MacromediaCom 21
Excite! Netscape Shiva
Intuit OnLive! Sun Microsystems
© Copyright 1998 The Washington Post Company