Incorporated: 1972
NAIC: 52391 Miscellaneous Intermediation
Kleiner, Perkins, Caufield & Byers is a leading Silicon Valley venture capital (VC) firm. Partner John Doerr told the Washington Post in 1990, "We don't just try to launch successful companies. We try to launch successful industries." The firm reckons that the hundreds of companies it has backed--including such household names as Sun Microsystems, Compaq Computer Corp., Lotus, Netscape Communications Corp., America Online Inc., and amazon.com--have a combined market cap of about $650 billion and have created 250,000 new jobs. KPCB's involvement with companies goes further than writing checks. The firm's partners assemble management teams and often sit on boards of the companies they sponsor. An informal version of the Japanese "keiretsu" system encourages resource sharing and deal making among KP-backed companies.
Thomas J. Perkins studied engineering at MIT and picked up an MBA at Harvard. He began his career at Hewlett-Packard Co., eventually being picked to lead its new computer division in 1965. At the same time, he was starting a small company to build a low-cost laser he designed. It eventually merged with Spectra-Physics. This deal inspired his career in venture capital.
Perkins called on San Francisco investment banker Sanford R. Robertson for advice. Through Robertson, Perkins met his first partner, Eugene Kleiner, one of the founders of Fairchild Semiconductor, the hugely successful Silicon Valley chipmaker.
Kleiner Perkins, as the firm was called, raised $8 million for the first fund. It would average a 41.5 percent return over ten years. The $1.6 million the firm invested in Tandem Computers Inc. in 1975 was worth $203.4 million in 1982. Genentech was an even better investment, with a return of 200 to 1 in two years.
However, eight of the 18 investments were considered losers. One of these, Advanced Recreation Equipment Corp., was launching a combination snowmobile-motorcycle in time for the Arab oil embargo, which crushed the off-road market. Losses in a tennis shoe resoling company and a waste treatment company proved the company's expertise lay in high tech.
The second fund, set up in 1978 with $15 million, would grow at a compound rate of 99.3 percent in its first five years. A subsequent $55 million fund launched in 1980 grew at a compound rate of 62.3 percent in its first three years.
To achieve these kinds of returns, Kleiner Perkins got involved in ventures at their earliest stages. The firm worked closely with the scientists, engineers, and entrepreneurs who founded them. Perkins later told the New York Times his two criteria for investment. One was insight into an emerging new market. The other was a competitive advantage through technology.
Next, KP methodically tried to eliminate risk in all areas of the venture: technological risk, financial risk, operating risk, and market risk. In its first decade, Kleiner Perkins invested in about 50 companies, mostly high-tech Silicon Valley start-ups, through three funds totaling $78 million. These funds were reportedly averaging annual returns of 50 percent.
In 1982, Morgan Stanley & Co. teamed with KP to raise $150 million for what was then the largest venture fund ever assembled, according to Business Week. The deal broadened KP's already considerable fund-raising ability, while allowing Morgan Stanley an inside track on high tech companies as they matured into sizeable enterprises.
Kleiner stepped down from an active role in the firm in 1982. By the early 1980s, Kleiner, Perkins, Caufield & Byers, as the firm was then called, had expanded to five partners, including Frank J. Caufield, a former U.S. Army intelligence officer, and Brook H. Byers, an expert in electronic and medical technology with a degree from Georgia Tech. Two other former partners, James G. Treybig and Robert A. Swanson, left to lead the companies they founded, Tandem and Genentech, respectively.
L. John Doerr and James P. Lally joined the firm from Intel Corp. Doerr, who had been a top sales rep at Intel, would back some of KPCB's biggest deals, including Sun Microsystems, Cypress Semiconductor, Compaq, and Lotus Development. Investments could only be made through a consensus of all of the partners.
The venture capital business had changed in the 1980s. Money had flooded into Silicon Valley, hoping to cash in on the new technology of computers. Young MBA's earning colossal starting salaries at investment banks would become a symbol of the decade's lust for deal making.
One of KPCB's more notorious investments of the decade was in Go Corporation, whose purpose was developing a pen-operated computer. The company collapsed after spending six years and $75 million on the project. This did not slow down KPCB. KPCB VI, the firm's sixth fund, raised $173 million in 1992; it would return $878 million in the next ten years.
KPCB started a "CEO-in-residence" program in 1993 with William Campbell, formerly head of Go, which had just been sold off to AT&T. He was later picked to lead Intuit, the maker of Quicken accounting software.
Investors of all stripes had a good year in 1995, and Kleiner Perkins was on top of the VC pile as numerous tech companies had their initial public offerings. Kleiner Perkins had stakes in 13 companies that went public in 1995; these holdings were valued at $1.1 billion at the end of the year. KP's 13.3 percent share of Netscape Communications, acquired for $5 million, was worth $455 million by the end of the year.
KPCB had added an office in Palo Alto, California, a couple of years earlier, and in 1996 moved to a ski lodge-styled building on Sand Hill Road in the pricey San Jose suburb of Menlo Park. This neighborhood was ground zero for Silicon Valley venture capital.
By this time, Kleiner Perkins was considered the blue chip among its peers in the valley and John Doerr, the grandmaster of the game. The firm was reviewing 2,000 business plans every year, though it only funded 1 percent of them. The percentage of profits its general partners pulled from its funds, 30 percent, was the highest carry charge in the business. KPCB still had a reputation for being very selective of its clients, or limited partners, who were mostly large foundations and wealthy individuals. The firm could afford to be. KPCB invested $8 million in amazon.com in 1996; this stake was worth $60 million at the time of the company's 1997 initial public offering and peaked at $113 a share in 1999.
A number of outstanding optical networking deals were made in 1999, most backed by Vinod Khosla, the Indian-born co-founder and former CEO of Sun Microsystems Inc. who had joined Kleiner Perkins in 1986. Cisco Systems acquired Cerent Corporation for $7.3 billion in stock, the highest price ever fetched by a privately owned technology company. Redback Networks acquired Siara Systems for $4.3 billion in stock. Juniper Networks, a maker of routers for fiber optic networks, went public in June 1999; its shares rose 900 percent in the next six months.
After a couple of years of enormous, some would say irrational, valuations for Internet companies, the dot-com bubble burst in the spring of 2000. In June 2000, Webvan Group Inc. acquired KP company Homegrocer.com for $1.2 billion--all of it in soon-to-be worthless stock. There were also companies in the portfolio that, though their share prices crashed precipitously when the Internet bubble burst, were still profitable for KPCB due to the very low prices it was able to obtain by getting in during the very earliest stages. These included Handspring and WebMD.
Though it was becoming more difficult to lure top executive talent into start-ups, KPCL was able to attract Ray Lane, former president of software giant Oracle, who became a general partner at Kleiner Perkins in August 2000.
Venture Capital Journal reported that the number of U.S. venture-backed IPO's fell from 229 to 37 between 2000 and 2001. It was becoming more difficult for firms to find promising investments. In 2002, KPCB reduced the size of its tenth fund from $627.5 million to about $471 million. There was too much money chasing and not enough deals, reported industry journals.
KPCB appeared to be taking a beating in the communications sector. "Never before has the firm had such a spectacular string of flameouts," wrote Venture Capital Journal of KPCB's broadband investments in 2002. Excite@Home was one of KPCB's biggest flops. It was formed from two KPCB portfolio companies, the Internet portal Excite and broadband access provider @Home. Once valued in the billions, the company was bankrupt by 2002. Its chairman, Tom Jermoluk, had joined KPCB as a general partner in May 2000.
The start-up of a London office in 2000 was also something of a misadventure. Launched in conjunction with management consultants Bain & Co. and private equity firm Texas Pacific Partners, Evolution Global Partners was to develop e-commerce companies in partnership with multinational corporations; however, by November 2001 it had terminated most of its employees and relocated to Silicon Valley.
In 2002, Kleiner Perkins was named as a defendant in a class action lawsuit related to the Martha Stewart Living Omnimedia (MSLO)/ImClone affair. The suit alleged Kleiner Perkins and others dumped MSLO stock just before news broke of insider-trading allegations against Martha Stewart.
Principal Competitors
Accel Partners; Benchmark Capital; Hummer Winblad Venture Partners; Menlo Ventures; Redpoint Venture Parters; Sequoia Capital.
Further Reading
Akin, David, "The Shoguns Who Are Set to Shape the New Wired World: Enter the Keiretsu," National Post, January 12, 2000, p. C2.
Aragon, Lawrence, and Dan Primack, "Kleiner Perkins Joins Growing Movement to Trim Fund Size," Private Equity Week, March 25, 2002.
------, "Downsizing Hits Kleiner Perkins: Famed VC Tells LPs It Will Call Down 20% to 25% Less Cash in Latest Fund," Investment Dealers' Digest, March 25, 2002, pp. 10-11.
Bransten, Lisa, "Search for Talent Pits Recruiter Against a Venture-Capital Firm," Wall Street Journal, August 14, 2000, p. B8.
Calvey, Mark, and Jim Gardner, "Doerr's Venture Outlook," Business Journal-Portland, January 12, 2001, p. 7.
Campbell, Katherine, "Entry Is by Invitation Only: This Small and Tightly Knit Partnership Remains Committed to the Valley," Financial Times (London), September 13, 2000, p. 3.
Chinwala, Yasmine, "US Venture Capital Firm Named in Martha Stewart Suit," efinancialnews.com, August 22, 2002.
Chira, Susan, "Talking Business with Perkins of Kleiner Perkins," New York Times, August 28, 1984, p. D2.
Edwards, Owen, "ASAP Legends: Thomas Perkins," Forbes, ASAP Supp., August 26, 1996, p. 82.
Foremski, Tom, "Lane Joins Kleiner Perkins," Financial Times (London), Companies & Finance: The Americas, August 24, 2000, p. 15.
"The Godfather of Broadband," Fortune, January 24, 2000, p. 108.
Holson, Laura M., "A Capitalist Venturing in the World of Computers and Religion," New York Times, January 3, 2000, p. C1.
Moukhieber, Zina, "Kleiner's Web," Forbes, March 25, 1996, p. 40.
Peltz, Michael, "High Tech's Premier Venture Capitalist," Institutional Investor, June 1996, p. 89.
Pham, Alex, "Technology & Innovation from the Valley: They're Ahead of Their Time on Funding," Boston Globe, March 27, 2000, p. C2.
Primack, Dan, and Lawrence Aragon, "The Big Squeeze: After Expanding for Seven Years, the Venture Industry Had to Contract. But the Pain Is More Intense Than Even Veteran VCs Expected," Venture Capital Journal, May 1, 2002.
Privett, Cyndi, "Kleiner Raises $150 Million," The Business Journal, May 19, 1986, p. 6.
Rutter, Nancy, "Fastest VC in the West," Forbes, October 25, 1993, p. 105.
Schrage, Michael, "US Company Encourages Firm Relationships, Japanese-Style," Washington Post, March 9, 1990, p. G3.
Sinton, Peter, "Venture Capital Firms Hit Pay Dirt with Stock Offerings," San Francisco Chronicle, Bus. Sec., March 18, 1996, p. B3.
Stein, Tom, "Keiretsu Comedown: Kleiner Perkins Learns That Not Everything from Japan Works Right Out of the Box," Venture Capital Journal, April 1, 2002, pp. 32-7.
Taylor, Roger, "Silicon Valley's Idea Man," National Post, July 26, 1999, p. C12.
Tully, Shawn, "How to Make $400,000,000 in Just One Minute ..." Fortune, May 27, 1996, p. 84.
Veverka, Mark, "Pied Piper of the 'Net'," Barron's, June 10, 2002, pp. 19-22.
Wilson, Jack, The New Venturers: Inside the High-Stakes World of Venture Capital, Reading, Mass.: Addison Wesley, 1985.
— Frederick C. Ingram
