Tag Archives: Venture Capital

When Kleiner Perkins and Sequoia co-invest(ed).

I end 2012 with two posts related to my beloved Silicon Valley. This one is about the two great Venture Capital firms Sequoia Capital and Kleiner, Perkins, Caufield and Byers. The next one will be about Palo Alto-based author of thrillers, Keith Raffel.

I have already said a lot about these two firms. You can for example read again the following on KP:
About KP first fund (3 posts)
Tom Perkins, a Silicon Valley venture capitalist
Robert Swanson, 1947-1999
and about Sequoia:
When Valentine was talking (2 posts)

The recent IPO of Jive is the motivation for this new post because Jive has both funds as co-investors. I am obviously providing my now-usual cap. table and what you can discover here is the huge amounts of money both funds have poured in the start-up ($57M for Sequoia and $40M for KP) … is this still venture capital? I am not sure.


Click on picture to enlarge

I am not writing an article on Jive here but let me add that we have again here two founders who had each 50% of the start-up at creation and end up with 8%, the investors have 30%. What is really unusual is that the company raised money in 2007, six years after inception. A sign of a new trend in high-tech?

Now back to Sequoia and KP. When they co-invested in Google in 1999, I thought it had been a very unusual event. David Vise in his Google Story (pages 66-68; I also have mine!) explains how the start-up founders desired to have both funds to “divide and conquer”, hoping no single fund would control them. When I met Pierre Lamond, then at Sequoia, in 2006, I was surprised to learn from him that in fact the two funds has regularly co-invested together. As often in Silicon Valley, it is about co-opetition, not just competition.

So I did my short analysis. A first Internet search got me the following:
– The question on Quora “How unusual is it for both Kleiner Perkins and Sequoia to co-invest in a company?” (August 2010) gives 11 recent investments, including Jive and Google.
– Russ Garland in the Wall Street Journal adresses the topic in “Kleiner Perkins, Sequoia Combo Has Solid Track Record” (July 2010). He says: “But the two Menlo Park, Calif.-based firms have done plenty of other deals together – at least 53, according to VentureWire records. It’s been a fruitful relationship: 29 of them have gone public. They include Cypress Semiconductor Corp., Electronic Arts Inc., Flextronics International and Symantec Corp. That track record lends credibility to the excitement generated by the Jive investment. But most of those 53 deals were done prior to 2000; the two firms have been less collaborative since then. Of the handful of companies that both Kleiner Perkins and Sequoia have backed since 2000, at least one is out of business. That would be Abeona Networks, a developer of technology for Internet-based services.”
– Now in my own Equity List, I have 4 (Tandem, Cypress, EA, google) plus Jive.

So I did a more systematic analysis and found 55 companies. More than the WSJ! I will not put the full list here, but let me give more data: Kleiner has invested a total of $267M whereas Sequoia put $268M [this is strangely similar!], i.e. about $5M per start-up. On average, KP invested in round #2.07 and Sequoia in round #2.63, so a little later. Time to exit from foundation is 6.5 years. I found 27 IPOs (I miss two compared to the WSJ)

Is Garland right when he claims “But most of those 53 deals were done prior to 2000; the two firms have been less collaborative since then”? Here is my analysis:


Number of co-investments related to the start-up foundation year

If I look at the decades, it gives,
70s: 6,
80s: 30,
90s: 11,
00s: 7.
Clearly KP and Sequoia co-invested a lot in the 80s, much less in the 90s and 00s. Whereas the fields are

So what? I am not sure 🙂 . KP and Sequoia are clearly two impressive funds and as a conclusion, I’d like to thank Fredrik who pointed me to Business Week’s The Venture Capital Winners of 2011.

Sequoia and KP may not be #1 and #2, but their track record remains more than impressive. Here is a bad picture taken on an iPad!

A history of venture capital

I am surprised not to have published this before. It was one of my first work before I even wrote my book. It became its chapter 4. Venture capital is about 50 years old and it has changed a lot in parallel to innovation and high-tech. I hope you will enjoy these very visual slides!

Mind the Gap: the seed funding of university innovation

I recently read Mind the Gap: The University Gap Funding Report published by innovosource.

Disclaimer: I usually do not mention my activities at EPFL on this blog and this report deals exactly with the type of funds I manage there: the Innogrants. I was indeed interviewed for this report as one of the active members of the Gap Funding community and the Innogrants are one of the examples mentioned.

Mind The Gap is a great report because it describes a concept which was born a little before 2005, the seed funding, I should even say the pre-seed funding, by universities of their innovations, including start-ups. The next figure illustrates not only gap funding but all the existing tools enabling academic innovation.

Let me just briefly quote it (but you should know the report is not free, so I cannot summarize it in too much detail. The author allowed me however to give you a 25% discount code: USHAPE). In any case, it is extremely rich in data and information.

“This “gap” extends from where the government funding of basic research ends to where existing companies or investors are willing to accept the risk to commercialize the technology.” [page 9]. The author reminds us that “Failure is commonplace in these sorts of pursuits, but ask where you would find yourself (or where you are going) without GPS and the internet, and most recently a little iPhone “assistant” named Siri that originated from the DARPA funded CALO (Cognitive Agent that Learns and Organizes) program through a university consortium.” [page 20]

As a side element, there are also the emerging accelerators, “Popularized in recent years with the likes of Y Combinator and TechStars, accelerators combine access to talent and support services with “stage-appropriate” capital in return for a stake in the company or other repayment structures.” [page 22] but this is another subject!

There are already some “famous” gap funding tools: “another study by the Kauffman Foundation [1] investigated two well-known proof of concept centers at MIT (Desphande Center) and UC-San Diego (von Lebig Center) and reported general process and impacts.” [page 26]

[1] C. and Audretsch, D. Gulbranson, “Proof of Concept Centers: Accelerating the Commercialization of Univeristy Innovation,” Kauffman Foundation, 2008.

I do not want to quote much more this 100-page deep and very interesting analysis. My final comment is that a critical element is the leverage gap funding enables. You will find a full analysis on pages 88-90. In his Report Summary, the author depicts the value of gap funding through:

High commercialization rates
– 76-81% of funded projects commercialized on average
Attraction of early stage capital
– $2.8B leveraged from public and private investment sources
Business formation and job creation
– 395 new start-up companies
– 188 technology licenses to existing companies
– 7,761 new jobs, at cost of $13,600 gap fund dollars per job
Building a community of innovation
– Thousands of faculty and students engaged in the process
– Incorporate networks of technical and business professionals in the evaluation, mentorships, and leadership of these technologies
Organizational returns
– $75M returned to the organizations through repayments, royalties, and equity sales
– Maximize resource allocation and downstream savings, by permitting early failures through exploratory and evaluation tactics
– Empower universities to continue to take risks that support the type of breakthroughs that define our present, and the type of innovation that will carry us into the future

Let me finish with what I contributed to the report, i.e. a short description the EPFL innogrants:

When I met Jochen Mundinger in October 2006 it did not take me much time to make up my mind. I had previously seen many startup ideas and Jochenʼs Internet project looked to me original and powerful. Prior to any due diligence, I told him that if my analysis was positive, he would get a 12-month grant to work on his start-up. Because of this program, I am lucky enough to be able to make fast decisions and by January 2007, Jochen was working on his project. He did not wait until the end of his grant to found routeRank and by October 2007, with the support of business angels. Today, the service has grown and been recognized by the famous MIT TR35 award in 2010.

And then there was Andre Mercanzini, a Canadian citizen, who certainly has the drive and enthusiasm of many North-Americans. Andre obtained his PhD at EPFL following a few start-up experiences in the US. Andre has developed electrodes for Deep Brain Stimulation. The path was not as fast and easy as for Jochen. Though Aleva Neurotherapeutics was founded in mid-2008, Andreʼs prototypes needed further validation to attract venture capital (a major use of the grants). The Swiss ecosystem is rich with mentors and support so that Andre developed further his project to the point of raising $10M in his series A round in August 2011.

These are just two examples of EPFL innogrants. Initially backed by Swiss bank Lombard Odier, it has since received support from KPMG and Helbling, an engineering firm. The fact that similar initiatives were launched in Switzerland is another illustration that gap funding attracts and seduces. The Innogrants are a bet on young people. Since 2005, 48 projects have been funded out of more than 300 ideas and 24 companies created. We admit at EPFL that failure is part of the process and even if no start-up is ever launched, the grant is a learning experience. We also have the vision that Innogrants become role models and hope that more and more students will be less shy about expressing their dreams.

The Missed Deals of Venture Capitalists

Venture Capitalists are always proud to mention which companies they successfully backed. It is because of their success stories that Sequoia and Kleiner Perkins are so famous in this industry. But the deals the VCs decline are much less famous. In my book, I had mentioned some examples by some pioneers of venture capital:

Investor Missed deal
Arthur Rock Rolm then Compaq
Bill Draper Apple
Burt McMurtry Tandem
Tom Perkins Apple
Don Valentine Sun Microsystems
This is coming from the “Pioneers Lecture” 2002, Computer History Museum – archive.computerhistory.org.

A few VCs use the humour to tell their biggest mistakes. A colleague of mine (thanks Amin 🙂 ) recently mentioned to me that Bessemer has a full list on their anti-portfolio: A123, Apollo, Apple, Check Point, eBay, Federal Express, Google, Ikanos, Intel, Intuit, Lotus and Compaq,
PayPal, Stratacom.

The most striking miss is probably Google: “[One of Bessemer’s partner] Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?

But then what about OVP’s ironic style in their Missed Deals including

Starbucks.

“A guy walks into your office in the late 1980’s and says he wants to open a chain of retail shops selling a commodity product you can get anywhere for 25 cents, but he will charge 2 dollars. Of course, you listen politely, and then fall off your chair laughing when he leaves. Howard Shultz didn’t see this as humorous. And we didn’t make 500 times our money.

To get even (wasn’t our not making money enough?) years later, Howard opened his own venture capital firm right down the street. “

Amazon.

“The Internet boom was just beginning. Amazon had sales of $4M a year. We had a handshake on a term sheet with the CEO to put $2M into Amazon for 20% of the company (a $10M post money value). At the eleventh hour, some guy named John Doerr flew up and offered $8M going in for 20% of the company (a $40M post money value). Handshake? What handshake?

To get even, we buy all our books at Barnes & Noble. We don’t think Amazon has noticed.”

Just a few lessons about the difficulty in reading the future. If you have other links, please comment.

The Monk and the Riddle: a great book

Do not ask me why this book is entitled The Monk and the Riddle as I will let you discover it if you decide to read this “old” book (a more than 10 year-old great piece of Silicon Valley description). Its subtitle is clear though: The Education of a Silicon Valley Entrepreneur.

Not all agree on the fact it is a great book as you may find at the end of this post, from the comment by the Red Herring in 2000. Still, I loved reading this book and let me explain why. Randy Komisar, today a partner at Kleiner Perkins and former enrtepreneur, has written a book about passion and inspiration. He does not tell you how to do your start-up (but he tells you how not to do it). He also explains also very well what Silicon Valley is, the locus of risk taking, where failure is tolerated, where a start-up is more a romantic act than a financial endeavour. “Business isn’t primarily a financial institution. It’s a creative institution. Like painting and sculpting.” [page 55] Here are a more few extracts I scanned from Google Books.

First Mr. Komisar explains that an entrepreneur is a flexible visionary and why the business plan does not have to be strictly followed (or should not always be) [page 37]:

Of course, venture capitalists look for such people [page 38]:

But there is a danger with VCs: the down round which is the consequence of failed momentum [page 52]:

Mr. Komisar gives much more than basic advice. Even if he admits he may not have followed these when he was younger, he understands now how important they are. His book his about the meaning of life where he defines the Deferred Life Plan (that should not be followed) [page 65]:

He therefore considers that personal risks are more important than business risks [page 154]:
Personal risks include:
– the risk of working with people you don’t respect,
– the risk of working for a company whose values are inconsistent with your own;
– the risk of compromising what’s important;
– the risk of doing something you don’t care about; and
– the risk of doing something that fails to express – or even contradicts –who you are.
And there is the most dangerous risk of all – the risk of spending your life not doing what you want on the bet you can buy yourself the freedom to do it later.

[… page 156…]
If your life were to end suddenly and unexpectedly tomorrow, would you be able to say you’ve been doing what you truly care about today?

He also explains why Hard Work is a critical and necessary value of Silicon Valley [page 125]:

But People and Culture remain the most important elements [page 128]:

Another interesting concept is the fact that start-ups need 3 CEOS [page 128]:

But nothing replaces Vision [page 144]:

When I wrote above that Silicon Valley is about tolerance to failure [page 150]:

Obviously it means even success should be mitigated [page 151]:

I really advise you to read this great book, not only for the Riddle but also for the nice, funny and sad story of Lenny and Allison. Enjoy!

Here is what the Red Herring published. The analysis is not wrong, but even 10 years later, I am not sure Silicon Valley is so well understood as the RH thought…

Atlantic Drift – Venture capital performance in the UK and the US

A new report on venture capital brings interesting conclusions and updates. Here is the summary that you can also fidn on the Nesta web site:

1. The returns performance of UK and US VC funds in recent years has been very similar. UK funds have historically underperformed US funds, but this gap has significantly narrowed. The gap in fund returns (net IRR) between the average US and UK fund has fallen from over 20 percentage points before the dotcom bubble (funds raised in 1990-1997) to one percentage point afterwards (funds raised in 1998-2005). However, this convergence has been driven by declining returns in the US after the burst of the dotcom bubble, rather than by increasing returns in the UK. Average returns for funds raised after the bubble in both the UK and the US have been relatively poor, but VC performance is likely to move upwards as VC funds start to cash out their investments in social networks (particularly in the US).

2. The wider environment in which UK funds and the companies they finance operate was a major contributor to the historical gap in VC returns. While there are some large differences in the observable characteristics of VC funds between both countries, they cannot account for the historical returns gap.

3. Average returns obscure the large variability in returns within countries. The dispersion in returns across funds was highest during the pre-bubble years, and has fallen significantly since then. But in both periods the gap in returns between good and bad performing funds within a country was much larger than the gap in the average returns across countries. Thirteen per cent of UK funds established since 1990, would have got into the top quartile of US funds by returns (this has increased to 22 per cent for funds established in the post bubble period), while 45 per cent of UK funds outperformed the median US fund. Selecting the right fund manager is thus more important than choosing a particular country.

4. The strongest quantifiable predictors of VC returns performance are

(a) whether the fund managers’ prior funds outperform the market benchmark;

(b) whether the fund invests in early rounds;

(c) whether the fund managers have prior experience; and

(d) whether the fund is optimally sized (neither too big nor too small).

Moreover, historical performance has been higher for funds located in one of the four largest investor hubs (Silicon Valley, New York, Massachusetts and London) and for investments in information and communication technology.

5. UK government-backed funds have historically underperformed their private counterparts, but the gap between public and private returns has narrowed in recent periods. This suggests that in later years governments have become savvier when designing new VC schemes.

Most US funds have traditionally only invested locally, with less than a third of US funds raised between 1990 and 2005 having invested in one or more companies outside the US. In contrast, the majority of European funds have invested outside of their home market.

The situation has changed somewhat in recent times. A higher proportion of European funds raised in 2006-2009 have chosen to invest locally while US-based funds are becoming more global. As a result, the proportion of European VC capital being invested in the US has halved, falling to 10 per cent, and a slightly larger share of US VC capital is coming to Europe.

Overall, this analysis suggests that Europe does not offer an attractive proposition to US VC funds. Europe has a less developed VC market than the US, so attracting US funds (their money but also, crucially, their expertise) ought to benefit European economies. Instead, the opposite is happening. A much larger share of European VC funds invest in the US than the other way around. While Europe is likely to benefit from its funds investing in the US (for the returns it provides, the network it builds and the experience it generates), the small flow in the opposite direction is a cause for concern.

In conclusion

– The global venture capital industry is concentrated in very few hubs (and does not exist in a vacuum)

– The convergence in returns is not the result of changes in the characteristics of UK funds

– Small funds underperform medium sized funds, but larger is not always better

– More experienced fund managers achieved higher returns

– Past performance predicts future performance

– Funds in investor hubs had better returns

Investing in earlier rounds leads to better performance

– But much of the variability in returns is not explained by these factors

Finally some advice on Policy:

Remember venture capital activity does not exist in a vacuum.

Resist the temptation to overengineer public support schemes

Avoid initiatives that are too small.

I also found interesting two figures:

Super angels: recycling of old stuff?

In my current reading of old Red Herring and Upside magazines (see for example Google in 2000 and Funny Data in the Internet Bubble), I just discovered an interesting ar4ticle about how angels may replace venture capitalists (Upside 1999).

They take a one example sendmail which did not go with Kleiner Perkins, Accel or IVP but closed a $6M round with business angels at a $20M valuation. The article also mentions the Band of Angels, agroup of then 120 investors having invested a total of $44M with an average investment of $600k and the Angel’s Forum with 20 investors putting up to $500k per start-up.

Sendmail raised $35M in 2000 (series D), $14M in 2002, as well as debt financing (at least $7M) as recently as 2009. Sendmail is still private so difficult to say if it is/will be a success or not.

I had doubts in a recent post on Super Angels being new stuff, this shows it is clearly not that new…

The Startup Game by Bill Draper

As I wrote in my previous post on a few Indian tech start-ups, I just read The Startup Game by Bill Draper. In general, that kind of books is of average quality, this one is much above the average, though this is just my personal feeling. I like what is written and here my summary.

Bill Draper is one of the fathers of venture capital and belongs to a interesting genealogy. His father was a grandfather of VC and his son is currenlty an active investor

More in the chapters of my book about venture capital!

Draper’s book begins with Buck’s, one of the famous meeting places of Silicon Valley (SV). SV is known as an open environment, where people meet easily, and public places such as bars and restaurants have become famous for this. There was the Wagon Wheel Bar, there is Buck’s or Il Fornaio and a few more.

He also mentions -page 5- another famous component of the SV legend, the Garage. He explains how he missed Yahoo even if he visited their famous trailer donated by Stanford when “Yahoo was space-intensive”, a place “legendarily littered with overheating terminals, pizza boxes, dirty clothing and golf clubs”.


Clockwise: HP, Yahoo, Google and Apple garages.

Of course, if his book was about anecdotes only, Draper would be of small interest. He gives also many lessons. For example:

– Hire managers “ambitious enough to help…. Adventurous enough to take a flyer on an almost untested vision of the future.” – Page 8.

– “Don’t invest money you can’t afford to lose.” An important lesson about venture capital (Page 12)

– Again on what is venture capital, when he planned an investment in real estate in Hawai, a Rockefeller partner had him fly in NY: “We don’t need you to put our money in real estate and then collect a fee and a carry, to add insult to injury. We became a partner in DGA because you told us you were going to invest in technology and honest-to-god entrepreneurs. It would have been far and away the best investment DGA could have made… although I cannot disagree with his main point that we should have focused on opportunities in our own neighborhood.” (Page 27)

– On what is a good venture capitalist (page 30):

  1. Good judgement
  2. Record of success in another form of business
  3. Warm and friendly personality
  4. Intuitive sense of where the world is going

– On the venture capital model (page 41), when he asked about his son’s first six investments: “dead, dying, bankrupt, probably won’t make it, and not so good”
Uh-oh I said to myself. And what about the sixth investment, Tim?” I asked, trying to sound upbeat.
He looked up and paused. “Home run!”.

And he adds later, “a young man can succeed in venture capital with a small amount of money, a willingness to sift through a lot of chaff to get to the wheat, a tolerance for risk, and a reasonably good calibration of the potential of various entrepreneurs. It is also evident that luck plays a part, but the old adage comes to mind: the harder one works, the luckier one gets.”

– On the entrepreneurs (page 54): “[Arthur] Rock feels that the most important ingredient in any company is the brains, guts and vision of the leader. If the product turns out to be wrong, the visionary leader will come up with a new one. If the market shrinks, the leader will stir the whole team toward another one.”

– Then page 55: “the entrepreneurs with the lowest risk of failure are those who know their field intimately.” Then senior managers of a successful company backed by the same VC are second in importamce, then again those with the ability to recognize their own limits and agree that they can be replaced.

– On entrepreneurs and investors (page 64) , he nearly copies Don Valentine (see below). “A fifty-fifty attitude: VCs put all the money, entrepreneurs all the blood, sweat and tears.”

– Another legend of SV (and I think it is true) “SV is the home of the handshake. Your word is your bond – or you’re in trouble.” (page 99).

– Could there be something changed in the SV culture? I mean too much finance people and financial engineering? Draper mentions investors should keep their shares in a company (chapter 7, page 173), at least if they believe in the future growth potential of the company value. But when in it comes to Skype acquisition by eBay (page 188), Draper sold his stock at $45.21 through some complex combination of puts and calls in less than a week after the closing of the deal. When Skype was bought, eBay’s share was $44.96… Six months later, eBay was trading at $33 a share.

Finally, the top 10 avoidable mistakes by entrepreneurs (page 75) :

  1. Creating overly optimistic projections
  2. Underestimating timelines.
  3. Trying to do everything yourself.
  4. Failing to master the elevator pitch.
  5. Not downsizing when necessary.
  6. Being inflexible.
  7. Not developing a clear marketing plan.
  8. Building a board that consists only of friends.
  9. Not taking action in a recession.
  10. Not knowing the right was to approach venture capitalists.

He concludes with his vision of opportunities for the future (page 224):
– The quantum computer
– Synthetic life form
– Decode and reprogram information systems of biology
– Life science in general (diagnostics, therapeutics, medical devices, healthcare IT)
– Voice and storage will be free
– Small nuclear power plants (sic)
– Changes in transportation

In a simple conclusion; a good book where you will learn some good lessons from Silicon Valley and elsewhere (i did not mention Draper spent 10 years with the UN and then created the first VC firm in India, through Draper International).

Note: Don Valentine said about entrepreneurs and investors: “When people come as a team (usually it is three or four people and typically heavyweight on engineering), it is a complex process. But I think all of us have seen it in the earlier days, times when I can remember saying, “Well, look, we’ll put up all the money, you put up all the blood, sweat and tears and we’ll split the company”, this with the founders. Then if we have to hire more people, we’ll all come down evenly, it will be kind of a 50/50 arrangement. Well, as this bubble got bigger and bigger, you know, they were coming and saying, “Well, you know, we’ll give you, for all the money, 5 percent, 10 percent of the deal.” And, you know, that it’s a supply and demand thing. It’s gone back the other way now. But, in starting with a team, it’s a typical thing to say, well, somewhere 40 to 60 percent, to divide it now. If they’ve got the best thing since sliced bread and you think they have it and they think they have it, you know, then you’ll probably lose the deal because one of these guys will grab it.” Transcript of oral panel – the Pioneers of Venture Capital – September 2002

Venture Capital according to WEF

The WEF report I mentioned last week for its interesting entrepreneurs interviews includes also an analysis of venture capital which I found of similar interest. (There are tons of study on venture capital and they are all quite consistent). Here are a couple of figures from the WEF report:

– Exibit 6-1 shows that there is money worldwide even in Europe (between $30B and $50B globally and about $5-10B invested per year in Europe.) However India and China remain relatively small, which was a surprise for me (there is indeed a mistake in the bars where India and China are inverted!).

– Secondly , it is amazing to notice that SV still represents 40% of the total of the hotbeds areas. In Europe, not surprisingly UK is 1st and France 2nd. However I found more surprising to have Switerland 3rd and even Germany 4th, only.

– The other major difference between the US and Europe is at which stage we invest in Europe. Whereas 60% of the funded companies are pre-revenue, it is only 40% for Europe.

What’s wrong with European venture capital?

It’s the title of a contribution in the Telegraph by Richard Titus. You can read the full article in Start-Up 100: What’s wrong with European venture capital?

I do not agree with 100% of the arguments, but probably 90%, which is good enough. Feel free to react by commenting! (And by the way, there is a French translation in the other side of the blog).