"Let's
mingle
And make it well.
Come together now,
Yeah let's gel. " -Collective Soul - Gel
What if your future as a technology company was
pre-determined as a raging success? Or should I say
"pre-ordained"? What if you could take your
idea and your nascent management team and guarantee that
you would have connections right to the top of the
premier organizations that would be your partners, your
customers, or even your buyer? What if the top
financiers and investment banks would be constantly
calling to take you public in a moonshot IPO? What if
you would be featured on covers of top magazines and
achieve celebrity status amongst your peers? Is there
such a guarantee in life? Well, no, not really- but it
doesn't come any closer than being an investee of Kleiner,
Perkins, Caufield and Byers of Menlo Park,
California.
KPCB was one of the original VC firms in the Silicon
Valley, starting up in 1972. As such, they have a long
track record and today stand without peer as the most
successful and well known VC firms in the world. They
soared to stardom on the back of the very first "moonshot"
IPO in technology history, Genentech in 1979. Here is a
short list of their investee companies...you may have
heard of one or two of these:
Lotus, Sun Microsystems, Electronic Arts, Symantec,
Netscape, Ascend, AOL, Macromedia, Compaq, Pivotal
Software, Sybase, Marimba
Healtheon, OnSale, Drugstore.com, Preview Travel,
Excite, Rhythms NetConnections, Amazon.com,
HomeGrocer.com, Realtor.com, CBS Sportsline, @home,
NextCard
Imagine, for a minute, that you had invested a few
million dollars in each of these companies at about $2 a
share, on average. You can see why the rest of us VCs
get googly-eyed when we talk of KPCB. The principals are
not named Kleiner or Perkins any more. Those guys have
retired. John Doerr runs the show, but some of his
partners are household names as well. Vinod Khosla
(co-founder of Sun Microsystems), Ted Schlein (Java
Fund), Will Hearst (yes, that Hearst) and Roger McNamee
(through the Integral Capital subsidiary) are all top
names to have on your board.
John Doerr is a power broker of unmatched proportions
in the Valley. He has made no bones about his political
aspirations to the point where they are already printing
bumper stickers: "Gore and Doerr in 2004!"
Nice ring to it. He is small in stature but has
incredible energy and, quite simply, the most valuable
Palm Pilot database in the industrial world. I have said
many times before that the most valuable part of any VC
is the extent and quality of their network of people.
That is the single most critical piece of "value
add" that a VC brings to the table. If John is at
your table, you are as connected as anyone.
KPCB talk extensively about "keiretsu", the
Japanese term for a team of disparate companies loosely,
but tangibly connected as one. Their philosophy is to
amass a valuable network of sister companies that can
cross-pollinate one another. This philosophy has landed
Mr. Doerr and his group in some hot water over the
years, as they have been labeled
"anti-Microsoft" (ouch!) and had allegations
of conflict-of-interest levelled against them. The most
recent example of this was the merger of Excite and
@home. John was on one board, Vinod on the other. The
company's offices were adjacent to one another. Is it
possible that Vinod and John had discussed the
possibility in private before hand? Is the Pope
Catholic?
Another dicey area of concern over KPCB's keiretsu is
the idea of investing in companies that are in the same
industry niche. It is a kind of hedge, but with the
influence that VC's have on the board of early stage
companies, some see this is as a confidentiality breach
waiting to happen. John Doerr's famous reply to the
allegations of conflict-of-interest is now an industry
quip, "No conflict, no interest." It seems
that the concerns have not altered their philosophy at
all. In fact, they are developing a new strategy that
might be even scarier to some. I call it "retail
world domination".
Scroll back up to that list of companies. Look at the
second group. See a pattern emerging? Yes, they are all
Internet plays of one type or another. But there is much
more to it. Quick, start to tick off the largest
existing markets for e-tailing over the Net: books,
travel, CDs, software, consumer electronics. Okay, now
the top web based services: stock trading, health
information, banking, real estate. How about the new
web-enabled business models: auctions and portals.
Finally, high bandwidth access: cable modems and the new
DSL. Do I have your attention now? Is it just smart
investing by KPCB? Yes, but it's much more.
There are groups of pundits, financiers and analysts
that think that all of the good e-tail opportunities are
now done, so there is no point in creating or investing
in new ones. That's like saying that just because there
was McDonald's in the beginning, there was no point in
any other fast food restaurants. While it is true that
current cost estimates for starting up and properly
branding an e-tailing opportunity are at $50 to $100
million, the field is still wide open for new entrants.
At the recent Young President's Organization meeting,
none other than John Doerr told the crowd that today, we
are a few milliseconds after the Big Bang, when it comes
to opportunities in the New Economy, created by the
Internet. If we really are at the universe forming stage
of this new evolution, then wouldn't you want to try and
grab as much of the small, but rapidly expanding, real
estate as you could? If you owned a lot of this new
economy and controlled key access points to it, you
might become a monopolist that would make Bill Gates and
John D. Rockefeller look like small town corner grocers.
Amazon.com
is the cornerstone of the world domination plan. They
are quickly becoming the Wal-Mart of the web.
(Interestingly, Wal-Mart recently announced that they
want to be the Wal-Mart of the web. Should make for an
interesting battle.) Amazon.com has over $1.5 billion in
its war chest and has recently begun to spend it. They
are investing in other e-tailing opportunities, like
drugstore.com and homegrocer.com (both KPCB investments,
of course). Amazon.com is also rumoured to be ready to
launch their new toy category. Home appliances,
hunting/fishing gear and home and garden can't be far
behind.
Homegrocer.com
(run by 3 ex-Vancouverites) is an interesting investment
by KPCB. With Amazon.com gearing up to sell everything
in a department store on-line, the brains at KPCB had a
problem. Fed Ex and UPS run very profitable businesses
that are going to be much larger in the age of delivered
goods enabled by e-tailing. But it makes no sense for
them, economically, to deliver to the residential door.
So, how do you run a profitable business doing local
delivery, while establishing a brand for quality and
trust, so that everyone uses it. Enter Homegrocer.com.
Delivering groceries is just the beginning. They will
have a refrigerated lockbox on the side of your house
that will be where the groceries, booze, movie tickets,
dry cleaning and, yes, books, CDs and toys are
delivered. Anytime of the day or night, the trusted
Homegrocer.com delivery folks will serve you with a
personal touch. Now, do you think that the guys from
Barnes and Noble or Wal-Mart will have access to that
box? You can surely bet that anyone affiliated with KPCB
and Amazon.com surely will.
Let's review. KCPB is the common thread between a
series of new companies with huge promise for the
future. That thread includes the largest cable modem
service provider and one of the emerging DSL
competitors. It also includes the largest retailer on
the web and a whole lot of smaller, but significant
players. And the thread includes a local delivery model
to get all the stuff to and from you. Oh, and the main
guy wants to be Vice President of the United States.
Wow!
Clearly, KPCB is changing the definition of venture
capital. They are taking it to a new extreme level. I
can assure you that no other VCs have thought through
the current changes in the economy to this extent. This
is the highest level of strategy and planning, which
leads me to one final point about KPCB: They take the
time to meet with, talk to and debate technology and its
impact with many top thinkers. A typical weekday evening
at John Doerr's house might be titled "The Future
of Digital Images" and John, Rob Burgess of
Macromedia, a few top mathematicians and image
processing gurus would all have a few beers and talk
wild ideas into the night. I'm not sure that my house in
Tsawwassen has as many top level discussions, but I'm
working on it. I've got the beer...
I remain very interested in what they invest in next
and I am watching the positioning of their existing
companies with curious excitement. This story will only
get bigger. Meanwhile, I'm looking for some of that
expanding universe real estate myself.
Random Thoughts
- I went to the Washington Software Alliance Investor
Forum in Seattle last week to see 18 early stage IT
companies. First of all, I had my "geek"
celebrity moment as I met and chatted with Mark
Anderson, thinking the whole time, "I could kidnap
him at knifepoint here and then day trade with him as my
private stock picker from some bunker in Montana. I'd
make a fortune!." But, alas, we talked about fuel
cells and his newsletter. Anyway, the crop of companies
was impressive. There were definitely a few dogs and
some bad presentations (For the love of God, please
don't spend 10 minutes of a 20 minute presentation
telling a roomful of technology information junkies that
the business to business e-commerce market is $x
billion. WE KNOW!). Having been to many IT forums of
this type, I have to say that the Seattle area is
getting a very high quality of ideas and interesting
opportunities. One of these was Onvia,
formerly Mega Depot. Yes, this Canadian on-line
electronics and software e-tailer is now in Seattle
after the founders could get no money from investors up
here. They went after the more prestigious Silicon
Valley firms and came away with $11 million US from
Mohr, Davidow Partners, home of Geoffrey Moore, the
authour. The new business model is a small business
portal and fufillment operation. They want to be
"the right hand" of the entrepreneur by making
life simpler, aggregating content and needed product and
services in one site. Check 'em out. Another Vancouver
area group gets big money and great partners in the USA.
Funny. They didn't do a National Post and Globe and Mail
whine and gripe article about how they were leaving BC
because of the taxes.
- This little gem came forwarded to me. It's just
more grist for the mill on the publicly traded stocks:
Suppose you had $200 billion to spend buying companies.
For this amount, you could buy all the shares of three
of the most popular Internet stocks (as of April 23,
1999):
- AOL
- Yahoo
- eBay
or,
For the same $200 billion you could buy all the
shares of: Boeing, Eastman Kodak, Caterpillar, Nike,
Sears, Alcoa, Aetna, Marriott, American Airlines, Barnes
and Noble, and Kmart. In addition, you would still have
over $17 billion to put in the bank. With these
"traditional" companies, you have over 85
times as much revenue, and over 78 times as much net
income as the three Internet companies above.
It would take 24 years of 20% revenue growth for
Internet companies to catch up, if the
"traditional" companies do not grow at all. If
the "traditional" companies grow at just 6%
per year, it would take more than 36 years of 20% per
annum revenue growth for the Internet companies to catch
up with the traditional companies. By then the $17
Billion you put in the bank say at 5% will have grown to
over $98 billion, so the Internet stocks would still
have some catching up to do! Furthermore, in order for
the "catch up" to occur:
1. America Online, assuming current user fees, would
have to have some 8.4 billion subscribers (currently 100
million);
2. Yahoo would have to have $17 billion in advertising
revenue (up from their current $120 million); and
3. eBay would have to be generating $4 billion in
revenues instead of their current 47 million.
Remember that this growth is necessary for the Internet
companies to catch up to the level of business that the
traditional companies already have!
Response From Last Week's Column:
Hi, Brent,
As always, I enjoy reading your regular T-Net column and
the insights provided therein. You address issues of
importance to the local high tech community - you do it
well and with a good dose of humour along the way.
With respect to your May 31, 1999 column, the comments
of Pacific Insight's Brad Smithson, and your response to
his points, I agree with Mr. Smithson's view that a
small company that goes public to raise funds while
still young will face challenges in running not one but
two businesses - the core business and the public market
side.
However, as someone who works in the corporate finance
department for a regional investment dealer specializing
in small cap and emerging growth companies, I am also of
the view that the combination of the underlying business
and the public company side can successfully be meshed -
if the entrepreneur(s) have the skill and inclination to
do so. Also, they must fully expect to face this
challenge if the entrepreneur(s) choose(s) this route to
raise financing.
Your response to Mr. Smithson was that ". . . it's
the people that matter." I couldn't agree more.
Whether a young company seeks venture capital, angel
financing or a public offering, the quality, experience
and vision of the VC, angels or public company directors
and officers are key to the success of the company.
However, I disagree that one cannot find quality people
when going public on the VSE. True, perhaps in the past
a company going public on the VSE would have to have
lined up directors and officers beforehand, and then
hope for the best. Today, I believe things have changed
significantly on the VSE.
With the one year anniversary of the VSE's Venture
Capital Pool (or VCP) program recently behind us, there
are now at least 19 VCP companies or former VCP
companies trading on the VSE, with more in the
regulatory approval system. By vending one's technology
company into one of these VCPs, the entrepreneur is able
to access not only a source of IMMEDIATE funds, but a
vehicle for FUTURE financing. In addition, and this is
the critical point, VCPs may boast directors and
officers who have many years of business expertise,
financing skills, and public company experience. In
fact, the VSE has made it a cornerstone of the VCP
program by explicitly drawing attention to this area. In
its VCP policy, the VSE is clear that they want people
who fit your criteria of "superior, experienced,
connected set of board members and a pipeline to other
contacts . . ." Once the entrepreneur's technology
company is vended into the VCP company, the entrepreneur
who is content to focus on his or her technology
business is free to do so, while leaving the management
of the public company side to his new partners in
enterprise - the directors and officers of the former
VCP company. In many respects, these VCP principals act
like venture capitalists, albeit in a public arena. If
the entrepreneur selects a VCP company and group with
whom he or she can have a synergistic relationship, the
challenges mentioned by Mr. Smithson can be successfully
met to the mutual benefit of all parties - the
entrepreneur, the directors and officers of the VCP, and
the shareholders. Ultimately, this avenue for financing
should greatly benefit B.C.'s high tech industry.
Therefore, I would encourage your readers to click on
over to the column by your fellow T-Neter, Michael
Volker (and no, I don't get referral fees from Mike!),
which provides commentary on recent or upcoming VCPs of
note and also has a chart listing the existing VCP
companies and their directors and officers. As for the
high tech entrepreneur, I would definitely encourage him
or her to explore the VCP option. Even if, in the end,
the entrepreneur decides to go with VC or angel
financing, the VCP program is an excellent way to
provide these investors and other shareholders with an
exit strategy in the future.
Websites of note related to this are the following:
Michael
Volker's T-Net column
Michael
Volker's VCP chart
the
VSE's VCP policy (note: needs Adobe Acrobat to view)
Thanks for hearing me out, Brent. Keep up the good work
with the column and best wishes for Greenstone!
Kindest regards,
David Ing
- Thank you David for taking the
time and writing a great letter. I'm not going to debate
the theory behind the VCP or the standards set up to
ensure its reliability as a financing vehicle for early
stage opportunities. I just don't want to go there. In a
perfect world, an entrepreneur would fully understand
the implications, costs and benefits of every type of
financing available to him/her and then have the freedom
to choose which is best. In reality it comes down to who
gives the entrepreneur advice when they are running fast
and just know that they need money to make the idea
work. And the reality is that many of them get bad
advice. Simply put, the wrong type of investors will
kill you every time. Every situation is unique and I
would encourage people to learn as much as they can
about financing options.
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