A Kleiner addendum: What actually matters in venture capital

By Sarah Lacy , written on December 12, 2013

From The News Desk

I just got in a Twitter debate with Ben Popper at the Verge about our Kleiner story yesterday and a (seemingly) contradictory report out of CB Insights today that shows that Kleiner has the most robust IPO pipeline of any venture firm going into 2014.

I figured it's worth a quick post-script to explain why these two reports actually aren't conflicting at all. I admit, it's not immediately obvious to those who don't cover the venture world day in and day out.

First off, the study shows that Kleiner has the most IPOs in the pipeline-- but that's all it shows. The key takeaway here is the number of IPOs. It's definitely impressive and certainly bolsters our own analysis that Kleiner isn't going away. Indeed many of the ones that CB mentions are the very ones we mentioned as bright spots in Kleiner's portfolio yesterday.

From our story:

Kleiner put some wins on the board in 2013, but none were of the headline-grabbing, firm-making variety. The year’s IPOs included Chegg, Foundation Medicine, Epizyme, Five Prime, Veracyte, and Silver Spring, while Edgespring, Waze, 41st Parameter, and OptiMedica were each acquired. The firm also sold its 14-year-old stake in Kleiner also has promising early stage investments in Flipboard (Series A), Mandiant (Series A), Nest (Series A), One Kings Lane (Series A), Coursera (Series A), as well as later stage bets in Square (Series C), Spotify (Series D), LendingClub (Series F).

To be clear: Kleiner is doing fine, particularly compared to most venture firms. It’s just not doingKleiner-good.

But when it comes to returns, two things matter with IPOs: The size of the IPO and when (and thus at what valuation) a firm invested. The number in the pipeline doesn't mean a firm will have the best returns. For example, there is a world of difference in returns between a Chegg, which is valued at well under $1 billion, and Twitter which is valued at more than to $20 billion. Even though Kleiner invested in late in Twitter, that investment almost returned the entire fund. Meanwhile, its stake in Chegg did not. That's the power of being in the elusive handful of homeruns that come out of the tech world every decade or so. They perform disproportionately better.

Likewise, there is a titanic difference in being in a company early versus late. Let's look at Kleiner's own track record again as evidence. Even though Zynga has fallen precipitously in the markets, because Kleiner invested early, its return from Zynga is still about 8x its investment if it were to cash out today. Compare that to the very late stage investment in Groupon that Kleiner, Andreessen Horowitz, Greylock, and others made, which most VCs have long since sold and were lucky to break even on. As a company, Groupon is worth about double Zynga at this point. But Kleiner has made far more money on Zynga than Groupon.

As for the Kleiner IPO prospects cited by Bloomberg, Kleiner didn't invest in Square until its Series C round, or Jawbone or LendingClub until their Series E rounds. The firm may still earn healthy returns on each of these deals, but they're not the type of "get 'em while they're young and build 'em big" bets that the Doerr himself admits the firm needs to build its brand around.

Finally, it takes the average company 10 years to get to an IPO these days, meaning that these are likely bets that Kleiner made between 2005 to 2010. This hardly reflects that the firm is dominant today or that it has the right partnership, insight, and access to identify and win to the best consumer Web deals today. A better question to ask may be, what does their IPO pipeline look like for 2018-2020. Sure no one knows the answer to this question today, but the prospect of a major dry spell is stronger than at any point in Kleiner's storied history.

We do not have access to Kleiner's IRRs. Sometimes in the vacuum of the real data, we try to substitute other data. But the data point of the number of potential IPOs just doesn't give us a realistic picture of where Kleiner's returns are. It's a data point, yes, but hardly the data point.

We should also point out that many of the companies on this list are ones that CB is predicting could go public next year, not companies that have actually filed.

The researchers at CB totally get this, by the way. As they said in this Bloomberg write up:

“The jury is still out on whether [Kleiner] got their mojo back, because they have mostly been investing at the mid to later stage.”
And later in the Bloomberg piece:
"Judged by their ability to get into future public companies early, Menlo Park, California-based Kleiner Perkins ranked 14th. First Round Capital was first, followed by Benchmark and Andreessen Horowitz."
Rather than contradicting our story, this report essentially confirms it. As we wrote, Kleiner isn't going under. In fact, I'd rank Kleiner far higher than 14th in terms of their Valley mojo. I think it's solidly in the top six. But Kleiner used to be the top of the top. It's that fall from the king-position that the firm is making aggressive moves to rectify.

At the end of the day, Kleiner knows more about its IPO pipeline than anyone else. And the firm wouldn't be changing the people who are investing its capital if it was up to Kleiner standards.

[Image via Basement Rejects]