One of the big developments in Silicon Valley in recent years has been a quiet passing of a torch from the venture capital firms that dominated the tech-investing world in the 1990s to a new group that is eating the old group’s lunch.
The disruptors, in other words, are getting disrupted.
First and foremost of the firms that have lost a step in recent years is the legendary Kleiner Perkins.
Founded in 1972, Kleiner grew over two decades into one of the world’s largest, most powerful, and most successful venture capital firms. In the 1990s, under the direction of partner John Doerr, Kleiner was an early investor in almost all of the huge Internet success stories, including Netscape, AOL, Amazon, and Google. By the end of the decade, the firm’s reputation had become so gold-plated that an investment from Kleiner was worth vastly more than the actual money the firm put up: It was a sign that a company was one of the select few Silicon Valley startups that was marked for future world domination.
In the early 2000s, however, Kleiner lost its edge.
The firm missed its chance to invest early in many companies that went on to drive the next wave of Internet development, including Facebook, Twitter, Zynga, LinkedIn, and Groupon. It was also eclipsed by a new breed of more aggressive, creative, and focused investors like Marc Andreessen and Ben Horowitz of Andreessen Horowitz, Peter Thiel’s Founders Fund, Union Square Ventures, Accel Partners, Russian investor DST, and other firms. Punctuating the firm’s troubles, Kleiner has also recently become involved in something previously unheard-of in the VC world–a sexual harassment scandal in which one of its senior female partners, Ellen Pao, sued the firm for discrimination.
Last year, in an attempt to cash in on the late-stage “private IPO” investing frenzy, Kleiner startled the Valley by launching a $1 billion late-stage “Digital Growth Fund.” Many saw this fund as Kleiner’s attempt to play catch-up and associate the firm’s name with hot companies it had missed. Some also saw the fund as a sign that Kleiner had lost not just its edge but its valuation discipline and predicted that the firm might get clobbered on some of its late-stage investments.
These concerns were well-founded.
Armed with a boatload of new cash, Kleiner rushed out and made late-stage investments in, among other companies, Facebook, Groupon, Zynga, and Twitter. In most of these investments, moreover, Kleiner did not buy stock from the company–thus providing additional growth capital for the company–but, instead, bought stock from existing investors, helping them cash out with huge gains.
Kleiner’s investment in Twitter may yet pay off, but it has been far from a home run.
The firm’s late-stage investments in Facebook, Groupon, and Zynga, meanwhile, have been disasters.
Kleiner bought into Facebook at a $52 billion valuation, for example, more than any other institutional investor paid for the stock. In doing so, it helped existing Facebook investors unload $38 million-worth of their own stock. Facebook’s stock roared higher through 2011 and early 2012, leaving Kleiner temporarily in the money. But the stock has collapsed since its May IPO, and Kleiner’s investment is now in the red.
In February, 2011, Kleiner doubled-down on an early-stage investment in Zynga by helping insiders unload $25 million of stock at $14 a share. Kleiner’s earlier investment in Zynga, which was made at $0.42 per share, is still doing fine, but this late-stage bet has been obliterated. Zynga’s now trading at $3.Around the same time, Kleiner also dumped $45 million into Groupon at a $4.5 billion valuation, helping Groupon’s early investors cash out in a massive pre-IPO round. For a while, this aggressive bet did fine, with Groupon going public at a $16 billion valuation in late 2011. But now Groupon’s stock has collapsed to $4.75 a share, and Kleiner’s $45 million investment, made at $7.90 per share, is deeply underwater.
Adding insult to injury, Kleiner is one of firms that invested in that late Groupon round that has held on through the entire stock collapse. Andreessen Horowitz, meanwhile, one of the the firms that has usurped Kleiner’s leadership mantle in the Valley in recent years, dumped its own late-stage Groupon investment in June with a modest gain.
Losing money on late-stage “growth investments is not like losing money on early-stage venture bets, which are far more speculative. Late-stage investments are made in companies that are supposed to be much less risky than early venture investments. Offsetting this lower risk are generally lower returns, so valuation discipline is especially important in late-stage investments. And now, like many public-market investors who bought into this latest wave of Internet IPOs, Kleiner is now suffering for buying into late-stage hype and paying prices that were much too high.
Kleiner Perkins’s once-pristine reputation has taken a big hit in this latest wave of Internet development. The firm is still run by extraordinarily talented and successful investors, including John Doerr and Ted Schlein, but they are now looking like spectacular athletes who stayed in the game too long and retired long past their primes.
It will be interesting to see if Doerr and Schlein, et al, now rededicate themselves to restoring Kleiner, so they can go out on top. Or whether they will now follow in the footsteps of other Kleiner partners from its “Dream Team” era, such as Vinod Khosla, and quietly move on.