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An Investor Like no Other
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
June 14, 1999


By Brent Holliday
Greenstone Venture Partners

"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.

 

What Do You Think? Talk Back To Brent Holliday

 



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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