Legendary venture capitalist John Doerr is said to have once described his investment philosophy as “no conflict, no interest.”In other words, when Doerr and venture capital firm Kleiner Perkins aren’t privileged enough to enjoy a potential conflict of interest with respect to a potential investment, they have no interest in making the investment.
In the public markets, some investors might describe this as having “an edge.” Others might describe it as investing with the benefit of influence and information that other investors don’t have. Others might say, at least in some cases, that it might be investing with inside information–a.k.a., insider trading.
But in private markets there are no clear rules about inside influence and information. At least not yet.
Whether John Doerr actually ever said “no conflict, no interest,” is unclear: A brief Google search, for example, turns up no evidence that he actually said it (just references to other people saying he said it).
But everyone thinks John Doerr said it. And many people believe John Doerr acts like he believes it. And some tech-industry veterans think that Doerr is now taking this attitude way too far, especially in an era where secondary markets now allow private investors to trade private stock the way public-market investors trade public stocks.
John Doerr’s recent participation in a Twitter board meeting despite having been prevented from joining Twitter’s board, for example, has raised eyebrows and questions.
And so has talk that Kleiner Perkins is already selling of some of the stake it bought in Twitter last December, following a doubling of Twitter’s value in secondary private markets.
Last December, John Doerr’s Kleiner Perkins invested $150 million in Twitter.
This investment by itself turned heads, for two reasons.
First, it was an unusually late-stage investment for Kleiner Perkins, which is known for making investments in legendary Silicon Valley companies at a very early stage but, in recent years, has missed the early financing rounds of Facebook, Twitter, Groupon, Foursquare, and many other emerging monster companies. Kleiner has since made several such late-stage investments.
Second, John Doerr is on the board of Google, which one inside source says made a “soft bid” for Twitter last year.
Google is the biggest alpha dog in the tech industry, and it frequently has acquisition and partnership discussions with other emerging digital powerhouses like Twitter and Groupon. Details of major acquisition discussions bubble up to board meetings, because Google needs the board’s permission to make such significant offers. Google board members like John Doerr are therefore given an inside peek at the performance, operations, and ambitions–not to mention the investment merits–of such companies. And the connection between Kleiner’s recent investments and Google’s recent acquisition interests has some tech veterans shaking their heads.
A month after its Twitter investment, for example, Kleiner went on to invest in Groupon, another company Google recently made an offer to buy. A month after that, in February, Kleiner invested in Facebook, which is emerging as Google’s arch-nemesis.
Now, Kleiner is making these investments out of a new $750 million “digital growth fund,” which was presumably created for the express purpose of making later-stage investments like these. And with a fund that size, the firm needs to invest in big fast-growing companies. And it’s no secret that Twitter, Groupon, and Facebook have been growing like weeds.
But not all investors who might like to invest in companies like Twitter and Groupon are privy to their confidential results and projections, the way Google board members would have been.
In any event, in December, Kleiner made a $150 million investment in Twitter.
JOHN DOERR ATTENDS TWITTER’S JANUARY BOARD MEETING
According to one insider, when Kleiner invested in Twitter, John Doerr understandably wanted to take a seat on Twitter’s board. But a legal review of the situation determined that this would be a conflict of interest, because Doerr was a Google board member and Google and Twitter were, at least at some level, competitive.
Having another Kleiner partner take the board seat would have created a similar conflict of interest.
So Kleiner and Twitter agreed that Twitter would appoint an independent board member that was mutually acceptable to both of them.
This board member, insiders say, is Mike McCue–the founder and CEO of another of Silicon Valley’s hottest companies, FlipBoard, which is also backed by Kleiner Perkins.(Conspiracy theorists will note that McCue’s prior company, TellMe, was also backed by Kleiner Perkins. Not that Mike McCue isn’t a great person for Twitter to have on its board. It’s no surprise he was considered mutually acceptable).
In any event, in January, the Twitter board meeting came around.
According to a source familiar with the events, John Doerr was not supposed to be there.
But there he was.
And there he stayed.
Sources offer different accounts of John Doerr’s presence at the January board meeting.
One person familiar with the situation says Doerr was only at the meeting as a “board observer.” And given that Kleiner has $150 million invested in Twitter, the source adds, it was perfectly reasonable for him to be there. This source further adds that, as at many board meetings, the Twitter board meeting went into “executive sessions” to discuss information that might create a conflict for mere board observers. This source says Doerr was not included in these executive sessions.
Another person familiar with the situation, however, says the whole “board observer” concept is a distinction without a difference. John Doerr was present for discussions that constituted a clear conflict of interest with Doerr’s role as a Google board member, this person says. The person believes that John Doerr has clearly crossed a line in some of his dealings with Twitter.
John Doerr’s attitude toward conflicts, this person says, is that John Doerr does whatever John Doerr wants to do. The person adds that many high-level Valley veterans are startled and annoyed by Doerr’s behaviour.
KLEINER PERKINS SELLS TWITTER STOCK
According to a person with second-hand knowledge of the situation, Kleiner Perkins has already sold some of the Twitter stock it acquired last December via sales on secondary private markets. (We have not yet confirmed this. John Doerr has not responded to emails seeking comment on this or the board meeting.)
(UPDATE on 3/15: Mike Arrington of TechCrunch confirms that KP has sold some of the stock it bought, but he says the transaction he describes was a sale of $20 million to another Twitter investor, Insight, in conjunction with the closing of the December financing round, at the same price at which KP acquired the stock. There’s nothing noteworthy about that particular sale, and if it is the only Twitter stock KP has sold, then the concern about KP selling stock on the secondary markets is unfounded. John Doerr has still not responded to a direct question about this.)
From a pure valuation perspective, such sales are not surprising.
Photo: Screenshot of Mobile World Congress
Three months ago, Kleiner invested in Twitter at a $3.7 billion valuation. Recently, Twitter’s stock has been trading on secondary markets at more than $7 billion.Now that venture capital firms have access to the same sort of liquidity in private companies as investors in public companies do, it’s hard to blame Kleiner for taking some quick cash off the table. (Who wouldn’t want to book some gains after doubling their money in three months?)
From a broader perspective, however, the development of liquid secondary markets takes “no conflict, no interest” to a whole new level. And it also raises serious questions about the trading of private-company stocks through companies like SecondMarket and SharesPost.
According to several high-level Valley executives, the rise of secondary markets for hot private stocks is a disaster in the making. Right now, with the stocks of companies like Facebook and Twitter going nowhere but up, everyone wants in on the action. And a host of stock promoters that Valley veterans describe as new-age “boiler rooms” have begun pumping these stocks to individual investors.
To say that the information in such secondary markets is often “asymmetric” would be an understatement.
On the one hand, you might have a well-off but unsophisticated investor (a dentist, say), who is buying up shares of the red-hot private companies like Twitter because he’s hearing about them on CNBC and because he’s getting emails from brokers who are telling him they can get him in on the next hot thing.
This dentist may be buying the stock even though he’s so wildly unsophisticated (or careless) that he doesn’t even know how many shares Twitter has outstanding, let alone what the company’s real financial performance looks like.
(Don’t snicker: According to insiders familiar with the situation, these are exactly the sorts of folks who are being pitched Twitter stock these days.)
And, on the other hand, you have the seller–Kleiner Perkins partner John Doerr–who is on the board of Google and basically on the board of Twitter, who knows EXACTLY what he’s selling.
It’s this sort of asymmetric information that the Securities And Exchange Commission was created to address 80 years ago. And yet, 80 years later, here we go again.
NO CONFLICT, NO INTEREST
No one we have spoken with is suggesting that John Doerr and Kleiner Perkins have broken any laws.
But the sort of behaviour described above would almost certainly be a non-starter in the public markets.
For example, in the public markets, it is not illegal for major shareholders to buy and sell stock in companies they own–unless they have inside information. And a “board observer” like John Doerr would very likely have information that could be considered inside information.
If Twitter were a public company, moreover, a major shareholder and board observer like Kleiner Perkins would likely have to file “insider” trading disclosures with the SEC anytime it traded in the stock. Such disclosure requirements are designed to put other, less-well-informed traders on notice about what better-informed insiders are doing. The buyers of Twitter and other private-company stocks on private secondary markets get no such information.
In the public markets, moreover, board members are routinely forced to resign from companies in the face of perceived conflicts of interest. Google’s Eric Schmidt, for example, had to step down from Apple’s board, when Google began competing with Apple in smartphones. And John Doerr himself had to step down from Amazon’s board early last year, because of perceived conflicts with Google.
For obvious reasons, neither Schmidt nor Doerr enjoy “board observer” status at Apple or Amazon.
A person familiar with the Twitter situation, who is a major John-Doerr fan (as many people are), says that John Doerr knows exactly what he’s doing and what is and isn’t appropriate. At this stage of his legendary career, this person adds, John Doerr wouldn’t do anything to jeopardize his justifiably awesome reputation.
Another person familiar with the situation, however, has a distinctly different view. This person believes that Doerr’s “no conflict, no interest” attitude is at best unseemly and at worst crosses an ethical line.
A DISASTER IN THE MAKING
Regardless of John Doerr’s specific conduct, the growing prominence of secondary markets for private stocks is likely to generate increasing regulatory scrutiny. It’s also likely a legal disaster in the making.
Based on stories we’ve heard recently from senior technology executives, the information and behaviour in these markets is every bit as “asymmetrical” as the information and behaviour that that led to the SEC and modern securities laws being created after the crash of 1929.
For now, with hot private-market stocks going nowhere but up, everyone’s happy: Insiders and venture capitalists get some liquidity, and purportedly “accredited” investors (like rich dentists) get to cash in on the hot new things.
But when a red-hot private market stock like Twitter eventually crashes–which one inevitably will–woe to super-sophisticated insiders like Kleiner Perkins who have sold stock in these private markets. Because, just as inevitably, some of the stock that these insiders have dumped will have found its way into the retirement accounts of some dentists.
And those dentists will be just as aggressive about shouting that they got swindled as they were about buying hot private-market stocks. And they won’t lose their shirts without a fight.
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