Kleiner bets the farm
The legendary venture firm is going green - and leaving Internet deals to the competition.
(Fortune) -- In the past decade Kleiner Perkins Caufield & Byers has doled out $10 billion to its major investors, all of which are university endowments, philanthropic foundations, or public pension funds. Silicon Valley's top venture capital firms never divulge their actual performance. Yet this tidbit comes directly from John Doerr, Kleiner's preeminent partner, who is so intent on ensuring that I'm correctly processing the significance of that figure that he helps me with the math. "That's $1 billion a year on average," he says. "Those are great gains. That's not a couple university chairs, and it's not a building or two. That's whole quadrants of a campus."
Point well taken, John Kleiner Perkins has long defined the gold standard for venture capital; one institutional investor estimates that the money it had with Kleiner grew tenfold over the period Doerr is talking about. The Kleiner hit parade stretches back 36 years and includes early bets on industry icons Genentech (DNA), Compaq, Sun (JAVA, Fortune 500), Netscape, Amazon (AMZN, Fortune 500), and Google (GOOG, Fortune 500). Of its hundreds of competitors, only Sequoia Capital, an equally storied firm with a similarly successful star investor, Michael Moritz, comes close to matching that track record.
Yet Doerr sounds a tad defensive when I visit him at Kleiner's offices on a hazy day in late June, the normally pristine skies above Menlo Park, Calif., turned gray by the wildfires menacing the region. Kleiner Perkins, you see, is at a crossroads, and Doerr knows it. About three years ago he began steering his partners toward an emphasis on alternative-energy projects, or "green tech" in Kleiner parlance. The new eco-focus has attracted plenty of hoopla, most notably late last year when Doerr hired his pal Al Gore as a Kleiner partner.
Yet the firm's shift toward energy investing is only part of the story. As important is Kleiner's steady drift away from the industry that made the firm what it is today: the Internet. Kleiner's investments defined the Internet's first generation. Without Kleiner there was no Netscape, and without Netscape there was no cash-gushing dot-com boom. Yet Doerr and his partners have been absent not only from the biggest deals to date among the next generation of Internet companies - MySpace, YouTube, and Facebook - but also from the buzziest prospects for big paydays down the road - LinkedIn, Yelp, Twitter, and a host of similar Web 2.0 startups whose common thread is an interactive, or "social," relationship with users.
Doerr, who is 56, only grudgingly accepts the premise that Kleiner has turned its back on the consumer Internet. "We made a very deliberate and strategic decision," he says with the baritone of a deejay, which he was in college. "We could've doubled down on Web 2.0, whatever that is. We didn't." Instead, the firm has been diversifying. First, in 2006, it created a $200 million fund focused exclusively on preventing infectious-disease pandemics. Then, last year, it raised $360 million to invest in China - Kleiner's first foray outside the United States and a project that already is off to a rocky start because one of its two key recruits quit within months. The newest addition is the $500 million Green Growth Fund, launched in May.
But the green fund represents more than just an expanded product line for Kleiner - it's an attempt to stretch the definition of venture capital. Ever since the industry got its start 40 years ago, VC firms have always been small partnerships investing relatively small amounts of money, hoping for a few giant payouts to outshine the inevitable flubs. But together Kleiner's three most recent funds - including its latest, $700 million venture fund raised this spring - amount to nearly $1.6 billion, a paltry sum compared with the giants of private equity but a massive amount for the venture business. And unlike the usual startup-centric VC approach, Kleiner's strategy focuses on existing alternative-energy companies that are well beyond the launch phase.
In essence, like some of the biggest private equity shops, Kleiner is becoming more of an asset gatherer, as opposed to a builder as it was in the early days of Amazon and Google. Then again, Kleiner needs more money than ever before because energy projects require billions of dollars in investments, not the millions required to jump-start a Web idea. (A supply of Red Bull, beanbag chairs, and a few powerful PCs are a lot cheaper than factories, transmission lines, and regulatory-compliance departments.)
Having said all that, we are talking about Kleiner Perkins here, not some untested investment group, and already there are hints that the Kleiner mystique will light up new fields of dreams. As we'll see, there's a top-secret gem hidden in the firm's portfolio that could validate the whole risky wager on the energy business. Yet it's this move into green that competitors and admirers alike consider Kleiner's riskiest decision ever. "I hope to God they're right," says a Valley mover and shaker who invests in Kleiner's funds. "But if they're wrong it'll be the end of Kleiner Perkins."
It's late May, and I'm enjoying an outdoor dinner at the luxurious Four Seasons Aviara in Carlsbad, Calif. I'm here for AllThingsD, a tech-industry confab. The gang's all here, from industry heavyweights Bill Gates and Barry Diller to "it" entrepreneurs Mark Zuckerberg of Facebook and Max Levchin of Slide, and naturally venture capitalists are on the prowl for startup ideas. That night and for the rest of the conference I ask some of the smartest people in the tech biz about Kleiner Perkins, and the responses, all off-the-record for fear of offending a powerful firm, are nearly identical: "What the hell happened to them?"
Several Valley investors who monitor startups tell me they don't bother sending Web-oriented entrepreneurs to pitch Kleiner anymore; they say the firm just doesn't seem interested. As if to prove the point, not one Kleiner partner attends the 600-person event.
Kleiner insists it is still keen on the Internet. For example, it has invested in a company called Aggregate Knowledge, an online advertising business, and CoolIris, a photo and video site that has a clever way to match content with ads. By and large, though, Kleiner thinks the Web, at least on PCs, is an idea that's had its day. Web surfing on cell phones - now, that's different. That's why Kleiner recently created a $100 million "iFund" for backing startups building products for Apple's iPhone and other mobile devices.
"Mobile is an enormously important new opportunity," says Doerr. "We think it's the next computing platform and will rival the personal computer." (Actually, calling the iFund a "fund" is probably too strong. It's really just a repurposed chunk of existing capital. This is classic Kleiner: Take money already in pocket, relabel, issue press release. Voilà - an investing meme! Silicon Valley cynics call this tactic "venture marketing.")