There has been plenty of buzz around the coveted status of the so-called unicorns: privately held tech start-ups that have attained $1 billion valuations. But before there was the unicorn, as in the words of Kleiner Perkins Caufield & Byers venture capitalist John Doerr, there was his firm’s kereitsu, a network of companies bearing the Kleiner Perkins imprimatur of influence. Some, such as Intuit and Visa, remain nimble brands that have adapted along with the vagaries of digitalization. Others, such as Netscape and America Online, are relics of the time of cargo pants and Surge soda.
Back in his days as a senior writer, present-day Institutional Investor Editor Michael Peltz flew out to Silicon Valley to sit down with the venture capital titan and write the following article, which was the June 1996 Americas edition cover story. At the time he wrote: “The Internet can’t handle interactive, real-time, data-intensive video. Indeed, most Web sites are little more than graphics-heavy bulletin boards.”
That is hardly the case two decades later as cable companies and networks scramble to retool in this era of cord-cutting. Only time will tell what unicorn of 2016 might be a dry punch line come 2036. — Anne Szustek
LAST FALL STEWART ALSOP III needed a visionary, and he needed one fast. The computer industry guru and executive vice president of InfoWorld Publishing Co. had built his invitation-only Agenda computer conference into a cult event by attracting top-flight speakers. The high point was invariably the “fireside chat” with a bona fide computer superstar that wound up the three-and-a-half-day affair. During the past few years, Microsoft Corp. chairman and software demigod William Gates III had done the honors.
But as the October conference loomed, Gates was off in China, and Alsop’s second choice, Apple Computer co-founder Steven Jobs, could only make the last day of the meeting — not long enough to provide the conference overview Alsop wanted. So, with the brochures already in the mail, Alsop confidently tapped L. John Doerr.
Who? Venture capitalist John Doerr, general partner of Menlo Park, California-based Kleiner Perkins Caufield & Byers, is not exactly a household name, even in fully “wired” households. But, says Alsop, “Doerr is to his business what Gates is to software.”
Arguably, Doerr is far more powerful and influential in the information world than Jobs — despite the Apple founder’s recent triumph with Pixar Animation Studios, which made the hit movie Toy Story — and perhaps the equal even of Gates. One of the most successful venture capitalists in the U.S. during the past 15 years, Doerr can boast of helping to midwife such enterprises as Netscape Communications Corp., Compaq Computer Corp., Intuit, Lotus Development Corp. and Sun Microsystems.
The Agenda conference audience gave Doerr rave reviews. “Doerr, ironically, was somewhat more facile and less predictable than Gates,” says Alsop. Since joining Kleiner Perkins in 1980, Doerr has ridden three tsunamilike waves of technology: personal computing, PC software and, now, the Internet. His influence extends well beyond the idea-a-minute entrepreneurs clamoring for financing and into the boardrooms and executive suites of large corporations. Just last year he helped engineer a joint venture with cable giant Tele-Communications Inc., called @Home, to develop a high-speed, over-the-cable Internet service (Kleiner owns 23 percent, TCI 77 percent). And he and Kleiner venture partner Regis McKenna last fall helped initiate merger talks between floundering Apple and Sun, on whose board Doerr sits. (The talks eventually broke down over Apple’s steep asking price.)
The whole dizzying structure of interests and relationships Doerr has helped to build (see chart at top) rests upon one precept: growth — in profits, in returns, in jobs. Doerr and his colleagues are at the epicenter of the U.S.’s major growth sector, a set of emerging (and emerged) industries that have driven stock markets to record heights and dispelled gloomy notions that the U.S. is not globally competitive. Doerr himself likes to call the venture-backed technology boom “the greatest legal creation of wealth this planet has ever seen.”
Indeed, conditions have rarely been so good for the venture business, particularly with Wall Street besotted over the past few years by anything remotely associated with technology. “Beginning in 1992 we’ve had a sustained period of good times,” says NEA managing general partner C. Richard Kramlich, who calls this “the golden age of venture capital.” The VC industry invested a record $6.6 billion in U.S.-based companies last year, three times as much as in the early ‘90s, according to Coopers & Lybrand. Last year VC firms also raised $4.3 billion in new money - another record — which should fuel new investments well into 1997.
Venture money has a catalytic effect. “In terms of its impact on the economy — the creation of new jobs and new technologies venture capital is pretty profound,” says Harvard Business School professor Joshua Lerner. What makes it all the more remarkable is that venture financing (even in a bull year) represents less than 5 percent of the R&D dollars spent in the U.S. IBM Corp. and General Motors Corp., notes Lerner, each spent far more on research during the past two decades than the entire venture industry. According to a recent Federal Reserve Board study, private equity such as venture capital has been the fastest-growing market for corporate finance during the past 15 years.
The venture industry can lay legitimate claim to fomenting the kind of dramatic job growth that traditional large corporations simply cannot. According to a recent study by Coopers & Lybrand and VentureOne Corp., VC-backed companies grew jobs 20 percent on average from 1990 to 1994. Kleiner Perkins calculates that the companies it has backed have generated 131,000 new jobs, along with combined annual revenues of $44 billion. Their total market capitalization: $84 billion.
Doerr and his colleagues have, of course, profited handsomely from that surge of economic activity. The firm has reportedly racked up average annualized returns of more than 30 percent since its founding in 1972, putting it in the top 1 percent of all venture firms. The industry as a whole has averaged 13.1 percent annual returns over the past two decades, according to research and consulting firm Venture Economics. Attesting to its special status, the firm commands a 30 percent carry charge — the percentage of the profits that goes to its general partners — the highest in the VC industry.
Not surprisingly, compensation at successful venture capital outfits has also skyrocketed since the ‘80s, when partners in venture funds took home base salaries of $150,000 to $200,000, calculated on a 2 to 2.5 percent management fee, less expenses. As the size of the funds have mushroomed while most expenses have remained generally flat, many venture capitalists now pull in two to three times that. Base salaries of $1 million are no longer unusual — and, of course, that doesn’t account for winning investments’ really big payoffs in terms of performance-based fees and personal equity stakes.
Last year VC partnerships posted an incredible 50 percent net return on average. Still, longtime venture capitalists realize that they’re operating in exceptionally heady times. After all, technology booms inevitably are followed by technology busts, and it was only a decade ago that VCs were struggling with single-digit returns. Undoubtedly, the market’s recent obsession with new technology offerings, especially for companies that have any connection, however tenuous, to the Internet, will eventually wane. “Despite the current euphoria,” cautions NEA’s Kramlich, “venture capital still follows the IPO cycle.”
THE FIRST THING JOHN DOERR does when he gets to his office each morning at 2750 Sand Hill Road in Menlo Park is pop his Apple 5300 Powerbook into the ethernet docking station on his large L-shape desk. The portable computer is just one of Doerr’s many electronic connections to the outside world. Other toys that can be found among the clutter of proposals and business plans in his office include the latest in two-way Internet pagers and cellular phones. On the floor in one corner is a small mountain of cable modems.
Folding himself back into his black leather chair, a bespectacled Doerr, 45, is a crackling construction of nervous energy. He fidgets. He twitches. He rocks as he speaks, his feet tapping, as if they’re eager to be on their way. “He’s a live wire, a classic manic personality — go, go, go, work all hours of the day,” says James Barksdale, the former head of AT&T Corp.’s cellular operation, whom Doerr recruited to run Netscape in early 1995. Kleiner health sciences partner Joseph Lacob notes that it’s not unusual for Doerr to send him e-mail at 4:00 a.m. “John doesn’t seem to sleep,” he says.
Not everybody finds it easy to adjust to Doerr’s hyperdrive world. Says S. Jerrold Kaplan, the founder of one of Doerr’s biggest fizzles, hand-held pen computing company Go Corp., “Doerr pins the needle on the enthusiasmator. [But] if you’re not headed in the same direction he is, his boundless energy can be tiring.” But Kaplan is quick to add that he has no problem with Doerr’s style. “The level of Doerr’s involvement [in Go] was breathtaking, far more than any entrepreneur could expect,” says the former Lotus artificial intelligence specialist, who recently founded OnSale, a company that runs auctions of refurbished computers and electronics on the Internet.
Despite his pulsing energy, Doerr has mastered the low-key style characteristic of many engineers. “There’s no pretension, he’s just John,” says Roger McNamee, who met Doerr while he was running T. Rowe Price Associates’ Science and Technology Fund in the late ‘80s. In 1991 McNamee moved to Silicon Valley to start a private technology fund, Integral Capital Partners, from a back corner of Kleiner’s offices (the firm remains a limited partner in Integral). “He doesn’t make enemies,” adds McNamee. “People are willing to talk to him, so he won’t get shut out of the intellectual flow.”
Indeed, being part of the flow is critical to implementing Kleiner’s investment philosophy. “What we do is look for markets that are going to change at least by an order of magnitude, technologies that can make it possible, and great teams — because strategies are easy, it’s execution that’s everything,” says Doerr. The firm’s basic approach isn’t all that different from that of most other venture capitalists. What is different is Kleiner’s ability to attract the very best deals. The firm reviews some 2,000 business plans a year, of which 200 get serious consideration and 20 to 25 actually get money.
Doerr has been inserting himself into the information flow for years. Born in 1951 in a middle-class section of South St. Louis, Louis John Doerr III was the eldest of five children. His role model was his father and namesake — “He’s Lou,” says Doerr, “I’m John” — a successful sales representative for Ohio-based Aro Corp. In the early ‘70s the elder Doerr, a mechanical engineer by training, quit the air tools company to buy a small St. Louis specialty pump maker, Charles Lewis Pump Co., which he built into the world’s largest supplier of sulfuric acid pumps.
The young Doerr also showed entrepreneurial stirrings. Around the time his father was buying Lewis Pump, Doerr was studying electrical engineering at Rice University in Houston. There he and two college friends started their own company, Warren Rowe & Associates, which wrote graphics software for Burroughs computers. After graduating from Rice in 1973 with bachelor’s and master’s degrees in engineering, Doerr was bought out by one of his partners.
The next stop in Doerr’s training was Harvard Business School, which has probably produced more venture capitalists than any other institution. Still, Doerr has always fancied himself more of an entrepreneur. “It sounds weird, but I never really wanted to be in venture capital,” he says. “I really wanted to be starting a company with some friends.” Nonetheless, following his graduation from Harvard in 1975, Doerr tried to land a venture job because, he reasoned, it might provide the experience and money to start his own business.
In those days venture capital was a much smaller, and more exclusive, business than it is now. Indeed, in the mid-’70s, with a vicious bear market gripping Wall Street, IPOs were all but dead, and venture funding had dried up. Most venture firms were either sole proprietorships or small partnerships and had little choice but to band together on deals.
Kleiner Perkins itself had been launched earlier in the decade by two prominent Silicon Valley figures. Eugene Kleiner was a veteran of Bell Laboratories and Shockley Semiconductor Laboratory, the Valley’s first transistor company; he was one of the famous Shockley defectors who formed Fairchild Semiconductors, the company that spawned the Valley’s chip industry. Thomas Perkins was a Harvard MBA and Hewlett-Packard Co. veteran. Both men easily fit into the venture network growing up around Palo Alto. Kleiner Perkins’s first fund was a mere $7 million.
Doerr failed to land a venture job after Harvard. On the advice of several venture capitalists, including Brook Byers, who now oversees Kleiner’s life sciences business, he instead took a marketing position at chip maker Intel Corp. (co-founded by Kleiner’s former colleagues Gordon Moore and Robert Noyce). Doerr had another reason for taking the job: the presence at Intel of a young software engineer named Ann Howland, whom he’d dated at Rice; Ann and John Doerr have been married 18 years.
Doerr spent five years at Intel. At one point, he made the unusual request that he be transferred from the Santa Clara headquarters to the Chicago sales office. “He needed to be a field salesman, to live that experience, which had been his father’s career,” says Bruce Ravenel, one of the designers of Intel’s 8086 chip (which powered the original IBM PC) and now head of TCI’s Internet services unit. (Ravenel worked down the hall from Doerr at Intel.) Ravenel says that Doerr became one of Intel’s top systems sales field reps.
Despite his success at Intel, Doerr remained intent on breaking into venture capital. In 1980 he contacted Byers, by then a partner at Kleiner Perkins, and arranged to meet him one evening at Stanford University’s track, where Byers liked to run. “We really connected,” says Byers. “He’s hyper, I’m hyper. And we must have gone around ten miles — well beyond my capacity.” Soon after, Byers offered Doerr a job as a Kleiner Perkins associate, which essentially meant bird-dogging deals. Doerr accepted, but with the stipulation that Kleiner Perkins would back him if he decided to pursue his own start-up.
Later that year at a conference on very large scale integration, he met California Institute of Technology professor Carver Mead, who had written software that could automate the design of increasingly complex integrated circuits. Doerr was intrigued, quickly realizing that this was just the sort of high-tech enterprise he’d been looking for, so he arranged a lunch for Mead to meet Perkins, who agreed on the spot to fund the chip-design venture, a company that came to be named Silicon Compilers.
For the next two years, Doerr spent about half his time running Silicon Compilers, in which he had a small equity stake, along with Mead and his former CalTech students Ed Cheng and David Johannsen. Before long the company was producing highly complex chips for customers like Digital Equipment Corp. But in 1982, with the Reagan recovery gaining momentum, Kleiner Perkins managed to raise venture capital’s first megafund, a then-unheard-of $150 million, and asked Doerr to come back full time. In 1983 he returned to Kleiner Perkins — but as a general partner.
By then Doerr, still in his early 30s, was something of a phenomenon in the computer world. He had the technical background, the contacts, the feel for the operational challenges of high-tech start-ups, the intense energy needed to thrive in the Valley. Moreover, his own marketing skills honed peddling Intel chips - fit nicely with a firm that recognized the long-term benefits of self-promotion. Says David Gleba, chairman of San Francisco-based venture research firm VentureOne: “They’re very proactive in marketing. They know the importance of promoting their brand, particularly to entrepreneurs.”
The firm’s current partners choose to view the Kleiner Perkins legacy — the two founders retired a decade ago — as more of a franchise than a brand. “Brands matter in consumer marketing. Reputation and values matter in service businesses,” notes Doerr. Wes Sterman, founder of Heartport, a Kleiner-backed company that has developed minimally invasive coronary-bypass surgical procedures, says that the firm’s backing brings instant credibility to a company. “As an entrepreneur,” he explains, “having Kleiner Perkins as an investor helps significantly because they’re so well known and because their companies have a history of doing so well.”
Even at Kleiner Perkins, Doerr’s marketing skills stand out. “He has a huge influence on the success of KP’s portfolio companies by making them seem larger than life,” says investment banker Frank Quattrone, who recently decamped with his technology group from Morgan Stanley & Co. to Deutsche Morgan Grenfell (but stayed in Menlo Park). “He uses his own visibility to get the market focused on a company.”
Quattrone should know. His group at Morgan Stanley led the August 1995 IPO for Netscape. Quattrone says that Doerr was instrumental in persuading Netscape to go public just as the equity markets were discovering the Internet (post-IPO, Kleiner Perkins holds 11.5 percent of the company). The enormous press coverage of the offering, in turn, drove sales of Netscape’s Web browser. “The IPO was one of the best marketing things we could have done,” says Netscape founder James Clark. “The investment banking commission we paid was well worth the advertising we got.” Doerr says going public as early as possible also helps create liquidity for acquisitions, since “most innovations are outside a corporation, not inside.”
MUCH IS MADE OF RELATIONSHIPS in finance. But in venture capital, far more than on Wall Street, relationships are more than just sentiment and good will; they can range from an ownership interest to a pragmatic exchange of technical information to personal gossip.
At the core of Kleiner Perkins’s relationship network are the more than 250 companies in which it has invested. Doerr himself calls them “our most important off-balance-sheet weapon.” Robertson, Stephens & Co. managing director Robert Emery, who has done IPOs for companies backed by most of Silicon Valley’s venture capital firms, considers Kleiner’s relationships critical to its success. “People hire Kleiner Perkins for their knowledge and their ability to make things happen in a variety of industries,” he says. Expanding from the core companies, Doerr and his colleagues have taken venture capital to the next level by building extensive bridges to other companies through alliances and joint ventures.
Doerr calls this relationship network “the Kleiner keiretsu,” after the Japanese system of extensive cross-ownership within a family of companies, nearly always with a bank coordinating efforts at the center. Kleiner, which acts as the bank in this case, encourages its companies to work with one another whenever possible, providing introductions and suggesting projects. Its efforts can lead to licensing or marketing agreements, research collaborations or joint ventures or, as in the Sun-Apple talks, even merger discussions. “We don’t invest in directly competing companies,” Doerr explains. But, he adds quickly, “we don’t decide what our companies do either. That means they may choose to compete [with one another] from time to time.”
Doerr traces the Kleiner keiretsu back to at least the early ‘80s, when two start-ups called Lotus and Compaq formed an alliance. That deal was actually brokered by Kleiner Perkins’s co-investor in those deals, Sevin Rosen venture capitalist Benjamin Rosen (now chairman of Compaq). Doerr in turn brought in Kleiner start-up Businessland, one of the first retail computer chains, to market Lotus software and Compaq PCs.
Today, by all accounts, no one works the Kleiner keiretsu better than Doerr. Recently, he’s been spinning alliances between Netscape, Intuit, Macromedia, Sun and other Kleiner companies deeply involved in the Internet.
The keiretsu conceit aside, the Kleiner partners’ role in Silicon Valley may in some ways be closer to that of the Hollywood moguls of the ‘30s and ‘40s, whose success was built on their ability to lock up stars, directors and writers. Kleiner Perkins has similarly amassed a pool of talent. “If you’re well regarded as a manager in their stable, you’re going to be used over the years,” says Frank Ingari, whom Doerr tapped to run networking software company Shiva Corp. in 1993.
Like the studio bosses, Kleiner Perkins partners have a reputation for being hard-nosed. “They drive tough financial deals,” says Robertson Stephens’ Emery. “Their argument is that they bring more to the table, so they should get more in return.” According to Kleiner CFO Michael Curry, the firm likes to end up with at least 20 percent of a company by the time it goes public -”although that doesn’t usually happen,” he admits (typically it has a 15 percent stake after the IPO).
The firm prefers to invest at either the seed or first-stage level, but it will also put money into already profitable companies that are close to going public, such as Shiva or personal-finance-software developer Intuit. The firm will also occasionally invest in struggling public companies, such as Platinum Software Corp., that represent potential turnarounds. And every year the firm tosses a few hundred thousand dollars at entrepreneurs with little more than a nifty idea.
Doerr himself readily acknowledges that Kleiner Perkins rarely participates in a deal unless it is the lead investor and gets a board seat. But that doesn’t mean that the firm is bent on control, insists Doerr, who worries about being misperceived as vulture capitalists. “You can neither build a great company nor make a great investment by cutting a tough deal with an entrepreneur,” he says. “What you need to do is be ruthlessly honest about where the risks are in a project and take the precious early dollars, time and energy and focus on removing those risks.”
Critics, however, charge that sometimes Kleiner goes too far, forcing companies to collaborate instead of pursuing outside possibilities. Says Go founder Kaplan, “The keiretsu can be a mixed blessing, because there’s a fine line between what’s right for a company in isolation and what’s right for the portfolio of companies.”
Kleiner Perkins’s sway over Silicon Valley no doubt also derives something from Doerr’s formidable skills as a negotiator. John (Bud) Colligan got to see him in action from the other side of the table when his company, Authorware, was being acquired by Kleiner’s Macromind-Paracomp in 1992. Despite having faced off against Doerr over the terms of the merger, Colligan was impressed enough with the venture capitalist to agree to stay on as president of the new Macromedia, which develops advanced multimedia software. “I was glad to get him on my side,” adds Colligan, now CEO, who has come to rely on Macromedia board member Doerr for strategic advice and key recruiting.
Much of Doerr’s power and influence comes from the hundreds of managers he’s placed in pivotal jobs over the past decade. He reportedly puts as much energy into interviewing marketing and technology recruits for his companies as he does interrogating CEOs. “He’s a great recruiter,” says Netscape’s Barksdale. Doerr, like each Kleiner partner, has a support staff of one, an administrative assistant. “I can’t see John Doerr asking an associate to do a reference check or attend a conference for him,” says information sciences partner Vinod Khosla.
One way Doerr hardwires his network is by placing Kleiner CEOs on the boards of other corporate members of the keiretsu. Software company Semantic Corp.’s chief, Gordon Eubanks Jr., for instance, joined the Collabra Software board just three months before that company was acquired by Netscape last fall in an effort to bolster its position against Lotus Notes. The CEO of video game maker Crystal Dynamics, Randy Komisar, one of a number of Go veterans now running Kleiner companies, sits on the boards of two Kleiner-associated companies, Total Entertainment Network and MNI Interactive. CEO John Kernan of Lightspan Partnership sits on the board of fellow educational software company Academic Systems. Netscape’s Barksdale is a board member of Kleiner-TCI joint venture @Home. And Shiva CEO Ingari holds down the Kleiner seat on the board of Internet news service provider Individual.
The network has been buttressed by the firm’s “CEO-in-residence” program, which brings temporarily out-of-work top executives into Kleiner Perkins to review business plans, do a little strategic thinking and help with recruiting. William Campbell, the former Go chief, became the first CEO-in-residence, after AT&T acquired the start-up in 1993 (Ma Bell shut Go down in 1994). A year later Doerr recruited him to fill the position of president and CEO at Intuit. “John spent a long time convincing [Intuit founder and chairman] Scott Cook and me that it was the right thing for both of us,” says Campbell, who accepted the job in April 1994. (Campbell also sits on the board of two other Kleiner companies, Hands-on Technology and OnLive! Technologies.) The most recent CEO-in-residence is former Apple marketing chief Daniel Eilers, who was fired by Apple CEO Michael Spindler last fall, not long before Spindler himself got axed.
Doerr and his partners also keep up — intellectually and personally — by regularly making the rounds of computer shows and conferences. “We’re sort of geeky scientists in suits,” says Byers. “Entrepreneurs can identify with us.” Doerr, in fact, stumbled upon the idea for @Home at the December 1994 Western Cable Show in Anaheim when he and TCI’s Ravenel discovered a small Motorola telephone-ready cable box that could be adapted to provide a broadband computer link to the Internet.
Kleiner organizes several of its own industry meetings each year to nurture the network. Last summer the firm hosted a three-day investor conference at the Aspen Institute. Representatives from most of its limited investors showed up (many with their families). One of the highlights of the program was a spirited debate on the future of the Internet between Sun cofounder and technologist William Joy and America Online chairman Stephen Case.
Kleiner’s investment in Netscape was a molder of Doerr’s own still-evolving vision of the Internet. Ironically, in the spring of 1994, Netscape founder Clark actually shopped the deal first to two other firms, NEA and Mayfield Fund, before showing it to Kleiner Perkins. At that time, Clark had recently left Silicon Graphics — which he had founded in 1982 and had been backed by NEA and Mayfield — in a huff because of a dispute over compensation. Thus, when he approached the two firms, he offered a stripped-down, “half-hearted” pitch, he says. And he didn’t let them meet 24-year-old wunderkind Marc Andreessen, whom Clark had recruited from the University of Illinois to develop a more advanced version of the Mosaic Web browser he had originally created for the university.
Clark also priced the deal aggressively. He told NEA and Mayfield that he was personally putting up $3 million and pricing his concept at another $3 million, for an initial valuation of $6 million. The former Stanford University computer science professor wanted a multiple of three times, which would value the start-up at $18 million (a critical calculation used to determine the percentage of equity taken out by the venture backers).
Mayfield, however, never called Clark back, and NEA told him they would only offer a multiple of two. Clark, who had already shared an early version of his Internet idea with Doerr over breakfast back in January 1994, felt free to follow up with Kleiner Perkins. Doerr was intrigued by Andreessen — whom he first met a few months later — and impressed by the potential size of the Internet market. Kleiner had earlier invested in America Online, but the Netscape deal was a bet that users by the millions would want to surf the larger universe of the World Wide Web. Doerr recalls thinking: “Would I mind being in trouble with this group of people? Because whatever we do, we’re going to get in trouble one way or another.”
Doerr and his partners immediately accepted Clark’s conditions. “John Doerr, God bless him, had the courage to pay what looked like a high price,” says Institutional Venture Partners senior partner Norman Fogelsong, a longtime friend, and competitor, of Doerr’s, as well as a former Harvard classmate. Kleiner Perkins’s original $5 million investment was worth $600 million in May. “Kleiner Perkins made their whole partnership in a year in one deal,” says Clark, whose own net worth, fueled by his Netscape holdings, now tops $1 billion.
MONDAYS ARE SACRED AT KLEINER Perkins. During the rest of the week, the firm’s ten general partners spend most of their time out of the office — recruiting, visiting companies, going to conferences or attending board meetings. But on Monday mornings they ritually gather at Sand Hill Road headquarters for the weekly partnership meeting, which begins by 9:00 a.m. in a spacious glass-enclosed conference room with a soaring cathedral ceiling. The gathering stretches late into the afternoon. Sitting around a massive wooden table — “the world’s largest surfboard,” jokes CFO Curry — the partners review their existing investments and explore potential new ones. Formal presentations take place at 11:00 a.m. and 2:00 p.m. and rarely go beyond an hour.
The approval — or rejection — process doesn’t take long. At least two sponsoring partners have already spent considerable time working on each potential deal, so by the time they hit the meeting, investment decisions can usually be made the same day. “The valuation process is not numbers-crunching. It’s really based more on experience,” says Curry. “If you can’t do the math in your head, it’s probably not a venture deal.”
Each deal has to pass one crucial test: Would its advocates be willing to sit on the company’s board of directors? Since every partner typically shepherds at least two new investments every year and the firm holds board seats on 80 percent of its companies, the time commitment can get hefty. That’s one reason that Kleiner concentrates its investments on the West Coast, within a two-hour flight from San Francisco. For East Coast deals, Kleiner will join up with one of the elite local venture firms, such as Greylock Management in Boston or Venrock Associates in New York.
The partners’ meetings have always been conducted with a brisk, no-nonsense tone. “Tom Perkins wanted a no-bullshit atmosphere, where people rolled up their sleeves and got something done,” says partner Lacob. “[At first] I was a little surprised at how direct, even brutal, these discussions can be.” In theory, all partners have an equal voice, because anyone can veto any deal, and everyone is expected to participate actively. Still, no voice carries more weight than Doerr’s. “John is very inventive and resourceful,” says information sciences partner E. Floyd Kwamee. “He’s also one of these people who isn’t wed to every idea he puts on the table.” Adds Douglas Mackenzie, another member of the information sciences group, “Because of all his experience, he is very persuasive, but he’s also open and approachable.”
By the time Doerr brought Netscape to the partners’ meeting in June 1994, he and several information sciences partners had already met a number of times with Clark and Andreessen to hammer out a business plan. Eschewing handouts or slides, the pair explained how their Web browser software could become a window on the Internet, which they argued was going to change the way business was done — with or without Netscape. “They saw this as a platform to a whole new world,” says info sciences partner Kevin Compton. This wasn’t as obvious then as it appears now; Gates, for instance, was slow to grasp the significance of the Internet and has scrambled to catch up only in the past few months.
The Kleiner partners voted to invest in Netscape in just 30 minutes.
In retrospect, Netscape now appears to be the first step in a major strategic Internet initiative engineered by Doerr. The firm has invested — and plans to invest further — in a host of companies designed to exploit various aspects of what it views as a major new marketplace; indeed, each general partner has taken on more than one Internet investment. “In the 1980s PC hardware and software grew into a $100 billion industry,” says Doerr. “The Internet could be three times bigger.” Kleiner Perkins now has stakes in more than a dozen pure-play Internet companies, including: Com21, Concentric Network Corp., Diamond Lane Communications, Excite, @Home, Healthscape, Individual, OnLive! Technologies, Netscape, Precept Software, SportsLine USA, Total Entertainment Network and VeriSign.
The firm has also urged many of its affiliated companies to target the Internet. Sun has not only developed Java, a programming language that could dominate the Internet, but it has also entered into alliances with a number of other Kleiner companies, such as Netscape,Intuit and Macromedia, as well as with Microsoft, which recently agreed to license Java. “Virtually every software company is now an Internet play,” says CFO Curry.
These sorts of paradigm-spawning industry initiatives are nothing new at Kleiner Perkins. “Kleiner Perkins has always been willing to take large bets on a particular industry,” says Harvard’s Lerner. “The firm has vision, and they’re willing to try to implement it.” Adds Doerr: “I don’t consider betting on a technology that doesn’t work a mistake, because we’re supposed to take risks. In fact, I think technology risk is much better than market risk.” It’s the soundness of the technology that matters, he says, not market cycles.
Nonetheless, Doerr and his partners ruminate a lot about risk. Kleiner’s first law is, “Get the risk up front and out of the way early.” What does that mean? The firm tries to remove financing risk by putting up its own money and by ensuring that entrepreneurs get access to other sources of capital if they need them. The firm’s vast experience in crafting business plans, recruiting management, hiring professional support, dealing with Wall Street and even setting up equipment leases reduces operating risk. “After a while you become very immune to risk,” says partner Lacob. “You know what you need to do to make a company successful, and risk doesn’t bother you.”
Doerr is now taking the next step in his Internet strategy, creating a high-speed, broadband network that can serve as the highway for exponential increases in data. The @Home joint venture with TCI — being run on a day-to-day basis by Kleiner partner William Hearst III — has already begun to design the infrastructure that would theoretically allow cable companies to provide Internet access through cable modems at speeds 100 times faster than anything currently available. Skeptics say that the technology, which is to be unveiled this fall, isn’t the problem — generating content is. “For Home to be of interest to cable companies, there has to be something on the Internet designed for that speed,” says computer industry guru Alsop, who just this month left InfoWorld to join venture firm NEA.
Currently, the Internet can’t handle interactive, real-time, data-intensive video. Indeed, most Web sites are little more than graphics-heavy bulletin boards. Macromedia is working with @Home to change that. The software developer’s new Shockwave for Director program is designed to allow users to create multimedia education and business applications and interactive games that can only be accessed over a broadband network like @Home’s. Last November the two companies provided a glimpse of their vision of the future in the form of an interactive high-speed Internet multimedia and video game demonstration at the Western Cable Show. They used a beta version of the then-newest Netscape Navigator to view it. Kleiner Perkins and Doerr have a lot riding on the Internet initiative. According to CFO Curry, the firm has $42 million invested directly in Internet companies and many millions more in related technologies. But even if the Net eventually unravels, the phenomenal initial success of Netscape should ensure solid returns for Kleiner’s 1994 $250 million limited partnership — assuming, of course, that Netscape shares don’t collapse before September, when restrictions on selling the stock expire.
Despite the plethora of small companies buzzing around the Internet, some observers view the battle for dominance of cyberspace as primarily a clash between two giants of a quite different sort: Gates’s Microsoft empire and the looser confederation of companies gathered around Doerr and Kleiner Perkins. “Kleiner Perkins has been one of Gates’s biggest challengers, because their goal is to upset the status quo, and Microsoft has become the status quo,” says Crystal Dynamics CEO Komisar. This, in fact, is a conflict that has been building for at least a decade, starting with Lotus’s 1-2-3 spreadsheet, expanding to the face-off between Sun’s Unix-based workstations and PCs loaded with Microsoft’s MS-DOS and Windows, and now taking place on the Internet, where Microsoft has played catch-up to Netscape.
Still, this is hardly a zero-sum game — particularly in industries growing as explosively as these. As Doerr himself says, “No one is going to own the Internet — it’s too big — so it’s important that companies work together.”
As Doerr and Gates battle to dominate the Internet, the one clear winner is likely to be the U.S. economy. Although Netscape’s meteoric rise will be hard to match — the software company has nearly tripled the number of its employees to more than 750 since its IPO last August — the host of companies springing up on and around the Internet should ensure new job growth, greater profits, perhaps even greater productivity in the economy at large.
Doerr and his colleagues, of course, should make out quite nicely as well.
Follow Michael Peltz on Twitter at @mppeltz.
