Lifting the veil on VC returnsFebruary 16, 2004
February 16, 2004
by Matt Marshall, Mercury News
Silicon Valley’s elite venture capital firms, financiers of many of the nation’s technology start-ups, earned staggering amounts of money for their investors during the go-go days of the late 1990s, according to information revealed for the first time last week.
But the economic downturn is showing that those same venture firms are subject to gravity, as their most recent returns show anemic results.
Last week, the veil on this previously private world was lifted, when the University of Michigan released the performance results of the most respected, and secretive, of Sand Hill Road’s venture capital firms — warts and all. Among them are Kleiner Perkins Caufield & Byers, Sequoia Capital and Matrix Partners.
So what is underneath the veil? Well, spectacular performance during the mid-1990s, when firms like Kleiner Perkins returned to investors 13.5 times their money in less than ten years. After 1999, things look dismal — at least so far.
On the back of investments into successful companies like Amazon.com, Netscape and Juniper Networks, Kleiner saw internal rates of return, or IRRs, as high as 287 percent. That record return was on its 1996 fund, and it translates roughly into a return of 2.9 times the original money invested, each year, over the past eight years.
By contrast, the average venture capital firm with funds raised in 1996 produced an IRR of 37.7 percent, and even that was stellar compared with other investments, such as stocks or bonds.
Kleiner’s 1996 fund was the highest return produced by any of Michigan’s 62 fund investments, except for one: Matrix Partners’ 1997 fund, which produced a whopping 516 percent IRR.
Kleiner Perkins shows a -19 percent IRR for its 1999 fund. It’s still very early days for that fund, though, and Kleiner’s partners say they are determined to keep it from staying negative.
By comparison, the average 1999 venture capital fund is showing a -16.2 IRR, according to Venture Economics.
But Kleiner’s partners expect their negative 1999 fund will turn around: Their hope is hanging on Google, the well-known search engine that is planning to issue shares on the stock exchange over the next year or two. Kleiner invested millions of dollars into Google from this fund. Kleiner’s time and money spent on Google has caused a drag on its IRR because it hasn’t had anything to show for that investment.
When Google launches its first public stock offering — and founder Surgei Brinn recently said he thinks it can grow to a $100 billion company — the minus sign could quickly disappear.
One of Kleiner’s most costly investments, Broadband Office, failed spectacularly when the Internet bubble burst. It lost Kleiner tens of millions of dollars. However, that deal was made in Kleiner’s 1996 spectacular fund, underscoring how funds are made or broken by their jackpot companies, not their losers.
As for Kleiner’s 2000 fund, it’s much too early to tell. It is showing -15 percent, but that’s practically meaningless because it’s so early in the life cycle. From that fund, Kleiner has invested in a slew of start-ups, including ArcSight, FivePrime, MetaMatrix, Ophthonix and Adeosoft. Included also is Segway, the high-tech scooter invented by Dean Kamen, and backed by John Doerr. As a firm’s partners draw management fees early in a fund’s life, it is always negative.
The more recent funds of Sequoia and Matrix are also negative, as is every other Michigan fund that started investing in 1999 or later. Sequoia’s Franchise Fund, which sought in 1999 to invest in start-ups just before they went public, including dotcom flame-outs eToys, Scient and Webvan, will have a tougher time turning positive — mainly because Sequoia held on to most of these stocks as they dived. Its IRR stands at -11 percent.
Kleiner is the valley’s best-known and most successful firm, led by the energetic venture capitalist John Doerr, who seeded companies like Sun Microsystems and Compaq Computer. Matrix is a Waltham, Mass., firm, but has offices in Menlo Park, and invested in companies like Apple Computer, Veritas and Sycamore Networks.
Along with Matrix and Kleiner, only one other firm, Sequoia Capital, joined the ranks of firms that produced two funds boasting an IRR in excess of 100 percent. Among Sequoia’s investments are Apple, Cisco Systems and Yahoo.
The University of Michigan has access to these results because it is one of the large institutions that invests in venture captial firms. Michigan is unusual in that it is one of the few public pensions and university endowments that enjoy access to such esteemed firms.
Other large institutional investors have kept the results confidential. This is the first time they’ve been published, and comes in response to a request from the Mercury News. The University of California, the only other privileged public investor, has so far resisted a similar request.