How the Kleiner Perkins Empire Fell(fortune.com)
fortune.com
How the Kleiner Perkins Empire Fell
http://fortune.com/longform/kleiner-perkins-vc-fall/
58 comments
This is a great point - to some degree this explains the power law in VC - founders hustle hard to get in front of Sequoia / A16Z / Benchmark etc, whereas you can stumble on other VC sites and see a bunch of logos but nothing impressive.
I've been in SF for 3 years now and haven't really heard anything that impressive about Kleiner, but looking at Crunchbase, they've led the A for Rippling, the C for Plaid, the D round for Intercom, the B round for Figma, the E round for Peleton. They have a bunch of other impressive logos that they've also managed to lock in.
To your point about the web - they clearly still have it. Yes, they're out of the loop and aren't getting the early stage deal flow that they used to (to the benefit of many others), but they clearly have a deep moat still and can get an ok return from that.
I've been in SF for 3 years now and haven't really heard anything that impressive about Kleiner, but looking at Crunchbase, they've led the A for Rippling, the C for Plaid, the D round for Intercom, the B round for Figma, the E round for Peleton. They have a bunch of other impressive logos that they've also managed to lock in.
To your point about the web - they clearly still have it. Yes, they're out of the loop and aren't getting the early stage deal flow that they used to (to the benefit of many others), but they clearly have a deep moat still and can get an ok return from that.
I learned from the article that KP's problem was that their firm bifurcated. They had a growth fund led by Mary Meeker which was likely responsible for a number of those impressive logos you listed.
Meeker's success with the growth fund happened as KP's early stage venture fund went into decline even though it was the original and the stalwart for decades.
The article mentioned that Meeker left last year with her entire team to start her own fund and one of KP's biggest problems has been the inability to keep its own talent. So "they clearly still have it" is likely in reference to people who have left with their 'web' and KP may not have anything.
Meeker's success with the growth fund happened as KP's early stage venture fund went into decline even though it was the original and the stalwart for decades.
The article mentioned that Meeker left last year with her entire team to start her own fund and one of KP's biggest problems has been the inability to keep its own talent. So "they clearly still have it" is likely in reference to people who have left with their 'web' and KP may not have anything.
Extremely good point
The point of the article is they’re returning 2X on their recent funds. Their competitors who got in earlier are returning 25X.
Which is great from an ego point of view, but also not that important necessarily - I think Matt Levine's point about hedge fund is largely true for VC - the point of being successful at running a hedge fund is keeping your job for a long time, rather than being exceptional.
It's a problem from an LP's POV. There is no reason to invest in a VC fund that returns 2x when you can invest in a Vanguard index fund that returns 2x. You're supposed to get compensated with higher returns for the risk you take investing in VC; if you don't, the managers of that fund are failing at their jobs.
> There is no reason to invest in a VC fund that returns 2x when you can invest in a Vanguard index fund that returns 2x.
That's not how it works. LPs create a portfolio mix across asset classes and each LP has generally different mixes based on their risk profile. If you're an LP and can't get into a Sequioa/Benchmark/etc fund but still want to diversify asset classes into VC then a "2x fund" might still be attractive to be able to diversify into. There's so much to unwind here, but long story - it's not that simple at all. I agree with the OP's assertion about Matt Levine's view.
Example: https://twitter.com/ZacharyDeWitt/status/1112554272929910785
Edit: Another point worth noting - hedge funds as an asset class are notoriously not outpacing index funds (and in many cases actually losing value), yet they still get funded: https://www.nytimes.com/2018/07/12/business/hedge-funds.html
That's not how it works. LPs create a portfolio mix across asset classes and each LP has generally different mixes based on their risk profile. If you're an LP and can't get into a Sequioa/Benchmark/etc fund but still want to diversify asset classes into VC then a "2x fund" might still be attractive to be able to diversify into. There's so much to unwind here, but long story - it's not that simple at all. I agree with the OP's assertion about Matt Levine's view.
Example: https://twitter.com/ZacharyDeWitt/status/1112554272929910785
Edit: Another point worth noting - hedge funds as an asset class are notoriously not outpacing index funds (and in many cases actually losing value), yet they still get funded: https://www.nytimes.com/2018/07/12/business/hedge-funds.html
I agree in theory but not in reality. But it's the same situation where the the incentives of an LP and a VC are different (not really that different compared to a PE or Hedge Fund). Just like the incentives of a founder and a VC are aligned, until they aren't anymore. There's a reason LPs with squillions to invest carve off a tiny smidge to VCs, and it's not just returns - it's also downside protection. What's true for you and me for our personal finance is not necessarily true for the Harvard endowment.
I thought it's because VC only had a smidge of capacity to absorb capital. You can't fit everyone's $10-$100B funds into VC projects.
Less then 1% of Facebook's value is VC funding.
Less then 1% of Facebook's value is VC funding.
That was a different era. Look at the latest crop of unicorns.
Not so much downside protection or even absolute return, but rather uncorrelated returns.
Do VC firms take 2-and-20 fees?
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This is an interesting point. One question. How does one distinguish between the institution and the people that make up that institution?
> For most of its life, KPCB had a web around the firm. [... Then they didn't.]
Was this an organic thing of their own doing, or was this due to disruptors, like A16Z?
Was this an organic thing of their own doing, or was this due to disruptors, like A16Z?
The other thing that gets left out: lots of them are lottery winners who think they're Ed Thorp.
Kleiner is a great example of this.
Kleiner is a great example of this.
There is an interview with Andy Rachleff (former VC at Benchmark and CEO of Wealthfront), where he notes that the problem with Kleiner is that the old partners never retired. They just stayed on and did very little actual work but since they owned huge stakes in the partnership they collected much of the carry. Over time new firms (like Benchmark) formed that basically pushed out partners who started coasting. If you are an ambitious young VC which kind of firm would you work for?
A top heavy old partner institutional firm is not a bad thing. The they're usually hands off once you invest and take their money. The problem is they're too conservative with their capital, and only invest in trends that have passed by decades ago to pursue the next big thing. As an entrepeneur in the dining and technology space knows how and where I want to grow my company, I'd rather see my angel investment funders come from the old cohort than the younger firms seeking radical changes.
In the case of Kleiner, the article puns it on a wrong bet (green energy) rather than being too conservative.
[reposting earlier comment reply as a top level comment + edited]
Disclaimer: my whole career is on the consumer software side, so I can only speak to that. I have zero insight on Kleiner as it relates to enterprise.
My first time inside KP was in 2003, working out of their office for a few months during a coding internship at Digital Chocolate. Great snacks and drinks freely available made quite impression on me as a college student.
Second time was in 2011 when I came in to pitch my first startup with Aileen Lee. It was a pre-revenue consumer play, not particularly in her wheelhouse of e-commerce, so nothing came of it. She was pleasant and professional. My only complaint was that she/Kleiner didn't seem particularly "hip". Not that VCs are particularly known for their cool factor, but for some reason I had expected something a little less square based on Kleiner's reputation.
I think this otherwise excellent article does a disservice by not mentioning Ilya Fushman joining on their timeline of key events. (It does mention him later, mostly in passing). I've never worked with him, but we have mutual acquaintances and have probably been to a few of the same parties. From my perspective as a not-total-outsider, Fushman brings some fresh thinking to a firm that is badly in need of relevancy/culture refresh. If they'd had someone like him there in 2011, for example, that would have made for a much more interesting meeting for me and other other consumer-facing entrepreneurs.
Not sure if and when they'll ever regain the kind of dominance they had at their heyday, but I do think being hipster credibility matters for consumer plays, and with Fushman on board Kleiner now has a solid chance to play in this space again.
Disclaimer: my whole career is on the consumer software side, so I can only speak to that. I have zero insight on Kleiner as it relates to enterprise.
My first time inside KP was in 2003, working out of their office for a few months during a coding internship at Digital Chocolate. Great snacks and drinks freely available made quite impression on me as a college student.
Second time was in 2011 when I came in to pitch my first startup with Aileen Lee. It was a pre-revenue consumer play, not particularly in her wheelhouse of e-commerce, so nothing came of it. She was pleasant and professional. My only complaint was that she/Kleiner didn't seem particularly "hip". Not that VCs are particularly known for their cool factor, but for some reason I had expected something a little less square based on Kleiner's reputation.
I think this otherwise excellent article does a disservice by not mentioning Ilya Fushman joining on their timeline of key events. (It does mention him later, mostly in passing). I've never worked with him, but we have mutual acquaintances and have probably been to a few of the same parties. From my perspective as a not-total-outsider, Fushman brings some fresh thinking to a firm that is badly in need of relevancy/culture refresh. If they'd had someone like him there in 2011, for example, that would have made for a much more interesting meeting for me and other other consumer-facing entrepreneurs.
Not sure if and when they'll ever regain the kind of dominance they had at their heyday, but I do think being hipster credibility matters for consumer plays, and with Fushman on board Kleiner now has a solid chance to play in this space again.
> pre-revenue consumer play
So, translating that into English, you were losing money giving something to individual people, but hoped you could do... what? Start charging money? Harvest data? Get bought before you ran out of VC money? This sort of "founder" bafflegab is annoying.
So, translating that into English, you were losing money giving something to individual people, but hoped you could do... what? Start charging money? Harvest data? Get bought before you ran out of VC money? This sort of "founder" bafflegab is annoying.
Lol. By all means, make fun of this strategy now, I do it myself, but you have to understand what it was like in silicon valley back in those days, 2010-2011. Facebook was the game in town, and these were the days when for the true believers, myself included, it was going to deliver us from evil (yeah, I know). The “smart money” either were Facebook insiders or wished they were, ie everyone knew that to insist on meaningful revenue before writing a seed stage check meant missing out on the next Facebook.
I was a first time founder who started out as a build engineer, then engineer, tech lead, and PM. I’d been bootstrapping for two years and needed to raise. I didn’t know shit about business or venture capital other than that it’s apparently how dreams get made. So I figured out how to position the company to get funded, and got it done.
Did I have a proven revenue model? No, but I had a few plausible directions, and that was enough to get to the next phase, so I didn’t sweat it.
Would I pitch a pre-revenue startup on Sand Hill in 2019? Unlikely.
Maybe that’s obvious to everyone now. But it’s a lot easier to be on the outside making fun of failed projects than to actually forego the cushy salary and go for it as a founder.
I was a first time founder who started out as a build engineer, then engineer, tech lead, and PM. I’d been bootstrapping for two years and needed to raise. I didn’t know shit about business or venture capital other than that it’s apparently how dreams get made. So I figured out how to position the company to get funded, and got it done.
Did I have a proven revenue model? No, but I had a few plausible directions, and that was enough to get to the next phase, so I didn’t sweat it.
Would I pitch a pre-revenue startup on Sand Hill in 2019? Unlikely.
Maybe that’s obvious to everyone now. But it’s a lot easier to be on the outside making fun of failed projects than to actually forego the cushy salary and go for it as a founder.
I wasn't commenting on the strategy (which I agree is less than great) as much as the language. "Pre-revenue" as a euphemism for "we're losing money," "play" as one for "likely-to-fail business," etc. I could have called it "VC jargon," but "bafflegab" seemed appropriate, or maybe "Newspeak."
Still, thanks for the explanation. I'm just an outsider looking in.
Still, thanks for the explanation. I'm just an outsider looking in.
Pre-revenue is a widely accepted term to describe a company, and usually an accurate one.
He could have done any of those things, but it's not relevant to the story. In this case what 'pre-revenue consumer play' means they were a company focused on showing user growth before generating revenue, and the VC they pitched had more experience e-commerce companies (which usually have some revenue).
Maybe they should implement OKR’s over there and see how it goes for them??
I laughed.
I can go glass half-full or empty on OKR's. They obviously have value, but using OKR's at Google is one of the biggest selection biases possible. Google seems to have done so many things in its history that would be death for other org's.
The episode about firing all managers is a great in-depth story of stupidity. Yet Google succeeded because they had and have an absolute lock on the search market.
Dear Doerr, convince me about OKR's another way.
I would also love to see what OKR's looked like throughout some of the products at Google that they have sunset or flopped. G+, RSS, Wave, Hangouts, etc. - OKR's are a useful tool but they aren't what made Google a $750 billion company.
I can go glass half-full or empty on OKR's. They obviously have value, but using OKR's at Google is one of the biggest selection biases possible. Google seems to have done so many things in its history that would be death for other org's.
The episode about firing all managers is a great in-depth story of stupidity. Yet Google succeeded because they had and have an absolute lock on the search market.
Dear Doerr, convince me about OKR's another way.
I would also love to see what OKR's looked like throughout some of the products at Google that they have sunset or flopped. G+, RSS, Wave, Hangouts, etc. - OKR's are a useful tool but they aren't what made Google a $750 billion company.
I only jest because I did see John speak and give a presentation about his OKR system while I was working at Airware (now defunct).
I was just fresh from LinkedIn, where OKR’s had recently been implemented. I got to see how they systematically eliminated some of the best employees in favor of those who were willing to game the system and create fake goals for themselves.
As I sat in the audience, I thought to myself, “Finally I’m meeting the fabled creator of OKR’s.”
Airware went out of business a few years later.
I was just fresh from LinkedIn, where OKR’s had recently been implemented. I got to see how they systematically eliminated some of the best employees in favor of those who were willing to game the system and create fake goals for themselves.
As I sat in the audience, I thought to myself, “Finally I’m meeting the fabled creator of OKR’s.”
Airware went out of business a few years later.
I would have been mad. Heck, I'm mad just reading that. It's bad management. If you are going to use metrics you have to know that they are going to create perverse incentives.
It's management's job to be vigilant in seeing/hearing and looking for those perverse incentives and then determining if the trade off is acceptable.
It's management's job to be vigilant in seeing/hearing and looking for those perverse incentives and then determining if the trade off is acceptable.
I feel like most "X technique led us down a bad path" are actually "we had shit tier management and nobody could fix it" stories in disguise.
OKRs are how MBAs force the company to pretend their business degree is adding value.
Google+ was famous for always having the bigliest OKRs while being an albatross of a product sucking the life and talent out of the company's products
Google+ was famous for always having the bigliest OKRs while being an albatross of a product sucking the life and talent out of the company's products
These are the stories I would love to hear/read about in detail.
Everyone company that has more than a certain number of people (maybe 20?) needs to make plans and communicate them to it's employees.
Google's OKRs are relatively lightweight way of doing that.
Google's OKRs are relatively lightweight way of doing that.
I remember about 7-8 years ago seeing John Doerr give a talk somewhere and he literally started desperately fighting back tears because he thought humanity was imminently going to go extinct because of climate change. I realized he'd lost his mind and figured KPCB was toast. Not sure if I'm supposed to feel good about some validation of that.
Spot-on.
I'm still under the impression that if you gave the same set of companies to every VC in the world and had each of them bet on the winners, that you wouldn't see that much of a difference in portfolio performance from the very worst to the very best VCs. There's no magic formula for choosing companies that firms like KP have--a lot of it is based on their reputation. Plus, the next Facebook is not going to look like Facebook or whatever that maxim was. The better companies tend to go to the VCs with the better reputation and the cycle continues.
> Plus, the next Facebook is not going to look like Facebook or whatever that maxim was.
Everyone fights the last war.
Everyone fights the last war.
Very interesting take on KP. Anyone from the inside (recent startup founders, ex-employees, etc.) want to chime in? Would love to hear.
I was an employee worked for KP invested Startup by 3 extremely smart MIT Phds. Smartest people I ever worked with - one of them can do Analog, FPGA, Linux kernel all the same time. We created a system with 10G interface (15 years ago) deployed in Comcast and generated 40+ million revenue with < 10 employees.
After that, KP installed their own CEO with old analog modem background, fired the extremely experience VP of engr, hire/fire 3 CTOs and hire 160 people to "scale" the company and burn all the cash without deliver one single product in the next 6 years. The CEO also manager to get rid of all 3 founders.
After that, KP installed their own CEO with old analog modem background, fired the extremely experience VP of engr, hire/fire 3 CTOs and hire 160 people to "scale" the company and burn all the cash without deliver one single product in the next 6 years. The CEO also manager to get rid of all 3 founders.
NOICE!
I'm a former early employee at a KP backed start up. Nothing but respect and good vibes from the folks I met with or presented to from KP.
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I've done some contract engineering work for them onsite. Super professional and talented engineers inside.
I’ve had very positive interactions with them. (Not an insider.) They we’re very professional and helpful.
My semi outsider observation is that it's a crap shoot which sector you place your bets on. Doerr lost his shirt on green tech when it went out of fashion. We are arguably now in another dotcom style investment bubble: KP lived through the earlier dot com boom and bust and was probably overly cautious in betting on which platform companies would be winner takes all post web 2.0 era. You can only have the midas touch for so long before age and experience gets in the way as much as it helps
My vague impression is they were conservative, didn't make the leap to Net valuations based on traffic and little revenues.
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As usual, the headline is rather sensational. Kleiner is like a Microsoft or Oracle of VC. They're not the latest or sexiest, but they've hardly "fallen" -- still one of the biggest funds out there in $ terms and will still be around for a long time to come.
Disclosure: previously worked at a Kleiner-backed startup, but have no stake in it anymore.
Disclosure: previously worked at a Kleiner-backed startup, but have no stake in it anymore.
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The article didn’t mention the spin out of G2VP which was surprising.
Is that the cleantech fund? How do you think they will do now?
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For most of its life, KPCB had a web around the firm. Great companies would come in and pitch themselves. So, for the most part, the job was to "only" pick whom to invest in (picking is just as hard!). As an extreme outsider, it seems that their operating rubric is so focused on this that they've lost the institutional capacity to spin new webs of their own. They are reliant on outsized personalities delivering the win rather than the institution itself pulling it in.
That's a tricky spot for the firm to be in. And it's a tricker spot to navigate out of. They'll have to rebuild institutional knowledge and prospect like other firms now; a mindset shift that could be hard for most veterans to get into as early on this would have been a negative signal in their careers and for their firm. Now, that it's a requirement; it has to be a tough sell to everyone involved (note: I don't know anyone at the firm. I have simply seen this pattern play out a few times).
They can hire fantastic new investors who know how to hunt, but will the firm be able to listen to them? This is a firm where getting rid of nametags was noteworthy enough to make it into Fortune; imagine how hard a sell getting down into the mud must be.
FWIW, such firms eventually recover. Eventually. They're just too big not to. But it is a painful road until that point. I wish the best of luck to them.