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Q&A with Kleiner Perkins Caufield & Byers

Here is the full version of the Q&A published in Sunday's San Jose Mercury News. It is part of a package of stories pegged to the quarterly MoneyTree Survey about venture capital published by the Merc.

John Doerr, Brook Byers and Ray Lane are partners at Kleiner Perkins Caufield & Byers, one of Silicon Valley's most prestigious venture capital firms. They recently talked with Staff Writer Matt Marshall at their offices in Menlo Park. Here is an edited transcript.

Q: Was Googleās auction IPO an unmitigated success? Bill Hambrecht, one of the underwriters, said there may have been too much control of the process by the two lead underwriters, Morgan Stanley and Credit Suisse First Boston?

john_doerr.gifDoerr (pictured at left): We don't have any reservations about the role of Morgan Stanley or Credit Suisse. I think that by any measure, this would be among the most successful technology IPOs ever. On behalf of the company and its before-IPO shareholders, it raised more money at a higher valuation than any technology IPO ever before. And on behalf of democracy: Investors who wanted to invest, whether they were individuals or big institutions, got allocated shares if they put in a bid for $85 or higher. And at $85 the new public investors have done well, indeed.

Q: The venture capital survey shows a decline in VC investing (in the third quarter), but some suggest one reason may be artificial: Start-ups are trying to stay under the radar longer and not announcing their VC funding.

Doerr: The entrepreneurs want it that way. Ten years ago, as soon as a venture was funded by a reputable venture capitalist, within six months, two or three clone ventures would be launched like heat-seeking missiles right up their tailpipe. People got wise to that. Why should we say anything about what we're doing until we have happy customers, and we're ready to try to expand and grow our market? You see many more entrepreneurs wanting to remain in stealth mode for a long, long time. The smart ones, anyway.

Lane: It's worse than that. By talking too early, they produce weak competitors. The worst thing you can have is weak competitors. A strong competitor is actually good for you in an early market, because it helps build the market. A weak competitor, it turns off a client. The client says, ""I don't get it,'' because they're not able to put it across. It's not good for that original idea.

Q: Wouldn't announcing to the world draw good employees?

Doerr: They can do that while being in stealth. People like joining stealth projects.

Byers: Most companies come out of stealth with around 100 employees. And for the first 100, companies know who they want. That's pretty targeted.

Lane: They give up a little, short- term. If you can say Kleiner or Sequoia funded me, hey, that's a statement to the world, but this rarely offsets the advantage of remaining stealth.

Q: But what has changed, compared to say five years ago? Is it because thereās too much venture capital flowing in Silicon Valley ö which means there are too many start-ups competing, and so companies stay in stealth?

Doerr: A year ago I said there was too much venture capital, an overhang from the Boom that will take some time to work off. So there's plenty of technology, market opportunity, and venture capital, but too few great entrepreneurs and teams. I'm not sure we can connect too much venture capital with entrepreneurs preferring to be stealth.

Q: Is there anything else you're doing differently?

raylane2.jpgLane (pictured at left): One of the things we decided to do is invest even more time with research universities. So whether it's my involvement with Carnegie Mellon, or Brooks' with UCSF or John's with Stanford...

Byers: Right after this meeting I'm going up to UCSF and visiting labs, prowling labs, that's the best part of this job.

Doerr: You're a lab rat...

Q: Doing what exactly?

Byers: Going to visit principal investigators in different labs. I've been doing this for more than 20 years. So I know a lot of them.

Q: Looks like Silicon Valley VCs have started a race to invest in China. Yet Kleiner Perkins is standing on the starting line. Are you comfortable staying local?

Doerr: We might open an office on Mars. (Amazon Chief Executive Jeff) Bezos will fund it.

Q: Seriously.

Doerr: We don't have any Asia or India initiatives, but I'd say all the partners go both places often... because the region is important for the ventures we help.

Lane: If one of us were in India or China all the time, we would know more about India and China, no question about it. But we would give up a lot that we get by living in the same office.

bbyers.gif Byers (pictured at left): Matt, Kleiner Perkins is basically a service business. The question is: How do we add real service to entrepreneurs, how do we stay up with them, how do we follow what they need? That changes over time, and then we have to adapt and change. All the venture firms on Sand Hill Road are different, and that's good for the entrepreneurs because they have a variety of different styles to choose from.

Lane: We've been well-served by staying in the same place.

Byers: It gets back to this culture thing. We like collaboration. We spend every Monday, and many Tuesday mornings together, in this building, sharing ideas, about what we've learned in the prior week, and how we can help. We meet with entrepreneurs. We form subgroups of partners to work with ventures, right away. That would be really hard to then spread around. Um, I can't see doing it.

Q: How will Silicon Valley manage China's emergence into an economic powerhouse?

Doerr: We can have an hour-long conversation about the quality of our education system.

Byers: We can talk about policies that would hurt. Stock options.

Doerr: If the Financial Accounting Standards Board is allowed to mandate expensing of broad-based stock options, they're going to basically go away for 14 million Americans who use them...whose companies use them as a way to create a powerful ownership incentive.

The Chinese five-year development plan says that all their growth companies are going to have broad-based stock options. By administrative fiat. And they're also not expensed. I'll tell you what. I've got a great national strategy for United States competitiveness. Let's make it difficult for the smart people in the world to get into our great universities. And once they're admitted and get degrees, let's not allow them to stay here. OK, then let's have all our entrepreneurs, those who do manage to stay here from foreign countries, not be able to be competitive on a worldwide basis because they can't offer ownership incentives. This is nuts.

Lane: It's France.

Q: Can I ask about IonAmerica?

Doerr: Thatās a stealth company

Q: Can I ask about your energy companies?

Lane: All of them are stealth.

Doerr: There's a large unmet need for clean distributed affordable energy. All the studies say, over the next 20 to 40 years, six 6 billion people are going to moving from rural settings to urban settings. It's likely the setting will be in Asia.

Q: We noticed the word keiretsu (a Japanese term for companies organized around a single bank for mutual benefit) has disappeared from your Web site's home page. How come?

Doerr: We could put it back up. It starts with a ""k.'' We coined it in the early '80s to describe a particularly entrepreneurial, western, and independent version of the Japanese keiretsu -- without a centrally controlling bank.

Byers: I think it was a catchy phrase. Network was a thing of the 1990s. I don't know what it is now.

Doerr: It's the blog.

Byers: Now we call it the Rolodex. Ray (Lane)'s the walking Rolodex.

Doerr: There's another very visible thing that we do to help network companies together. We invested in a networking company called Visible Path. It helps our ventures connect with Kleiner's (network) of executives so that we can open doors for them in a targeted way, more rapidly. Ray's on the board of that company. And it's a kind of social networking. They probably hate that term as everybody does.

Byers: It's not keiretsu, it's relationship capital.

Lane: Whether you call it a network, a Rolodex, keiretsu, or whatever, it is something that entrepreneurs crave, because they're looking for help. As Brook said, money is not a differentiator in our business, but they're looking for help. Either you have knowledge in their domain, and you can help them get from start-up to a company that actually gets something in the market, or you help them scale through relationships. In this world, at least in the enterprise world, it helps to know somebody.

Q: Wasn't there supposed to be something more to the keiretsu, though? Kleiner invested in Google, which has a social-networking company called Orkut. Kleiner also invested in Friendster, a social-networking company. John is on the board of Amazon.com, which has a search engine, A9. Then there's Visible Path. Are these multiple links so that you can access, say, what Friendster's doing, so you can help Google's Orkut?

Byers: We actually try to avoid overlap.

Doerr: Stand back. We don't control any of the companies we invest in. Friendster is a very good customer of Google's. Amazon's also a very good friend of Google's. As technology is increasingly pervasive, firms cooperate, and they compete. But we try to back innovators who are going to be first or second in their market, and help them in any way we can.

Q: Do you really think the Internet is underappreciated?

Lane: We believe we're now in the era of the Internet. Whether you think there are two or three phases, I think we're kind of in the third phase, and this is the phase where money will be made.

Doerr: Just so that we're provocative, I'd say we're in the early adolescence of the best of the Internet. Sure, there are some big proven adult business models. But the future's unevenly distributed, with best still to come.

END



Comments

I strongly disagree with Mr. Doerr,

Is the "catalog trade" just *implemented* in a form of a web-site something 'adult' (Amazon)? In my humble opinion it's just a form of what Qelle was doing for almost half of a century... It's not 'adult' it's indeed 'aged' business-model.

Is the Google business-model of making money on advertizements while having a *different* main product (search result) 'adult'? NO IT IS NOT ! Because it contradicts the very essence and nature of the main product! In fact Google right now *has no economic interest* to find exactly what the client is looking for! Otherwise who would be clicking the sponsored links? In fact Google has refuted itself by doing that instead of developing advanced search capabilities, making it state of the art and offering *this* (the main product) at a price... Otherwise, what's the point of improvements, Mr. Doerr?

Regards

Alex Fedotov on November 13, 2004 2:08 PM
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P.S. It's exactly like if one would say:"we know how to dig coal and oil, they can be burned and we'll get some heat, which means that we have an 'adult' business-model". What about "gasoline" and internal combustion engines? Don't you anticipate that somebody will be *refining* oil and shall come up with a cars and airplanes soon? ... what'll happen with 'adult' steam-engines then? :)

Alex Fedotov on November 13, 2004 2:18 PM
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P.P.S. The last thing. As to business-networking, the venture industry would better keep an eye on the things like this linkedin.com Max Levchin is nursing with... In my opinion - THAT is the next stage of business-networking, particularly usefull for 'stealth' companies, you won't even *know about their existence* soon.

Alex Fedotov on November 13, 2004 2:42 PM
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When the conversation turns to government policies that squelch innovation, I am amazed how VCs talk about options rather than our shambles of a patent system. The patent system as currently constituted allows large companies with deep pockets to prevent small competitors (who may well have better products) from entering their business. The VCs know perfectly well that the IP system favors lawyers and decreases competition. Why do they remain silent on this issue? The patent system may well allow Microsoft to crush the Open Source movement, which would stifle software innovation for another generation. This development would be strongly counter to the VCs' interests. Presumably they fear Microsoft, like almost everyone else.

Alison Chaiken on November 14, 2004 11:09 AM
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