Reinventing Kleiner Perkins

This week, two widely read pieces have been published about the trials and tribulations of Kleiner Perkins, and how it plans to regain its spot at the top of the venture capital universe. But neither addresses the biggest issue confronting the 41-year-old firm — that it has raised more in the last nine years than it did in its prior 32, making the kind of returns it once enjoyed incredibly difficult to replicate.

According to data from Thomson Reuters (publisher of peHUB), from December 1971, when the firm raised its first, $8 million fund, through 2004, Kleiner raised roughly $2.4 billion from investors. But since 2004, Kleiner has raised north of $5 billion — most of which it has not returned to investors, according to the New York Times. Indeed, Kleiner investors interviewed by the Times say that the firm’s 1994, 1996, and 1999 funds returned 32 times, 17 times, and 6 times investors’ money, respectively, while its 2000 and 2004 funds remain unprofitable. Moreover, a $1 billion fund raised in 2008 and dedicated to clean tech investments is “also showing losses.”

According to Forbes, which published a profile of Kleiner’s John Doerr yesterday, Doerr admits the firm has made some missteps and he calls the past year “one of my more challenging” in the venture business. As evidence of Doerr’s contrition, he cites a January sit-down with entrepreneur Jack Dorsey, who told Kleiner’s partners that they need a “simpler interface.” Dorsey was referring to Kleiner’s staff of nearly 30 partners, a bench so sprawling that entrepreneurs sometimes find it confusing.

In response to Dorsey’s critique, Doerr made “structural changes to his pipeline process,” according to Forbes. One example was hiring former Google and Square product manager Megan Quinn to hit the streets of San Francisco’s South of Market district, where she has apparently succeeded in boosting the number of startups that Kleiner sees by 50 percent.

Similarly, the New York Times story notes that a “humbled” Kleiner Perkins is adjusting its strategy. As evidence, it mentions fee cuts; the firm’s elimination of “silos” that separated teams making investments in clean technology, health care and technology; and the “[addition of] more investing partners with digital expertise” like Quinn.

But a closer reading of these pieces begs the question of whether Kleiner Perkins really gets it.

First, Doerr doesn’t appear interested in scaling back Kleiner’s partnership. He also never actually admits that his firm has faltered. Pressed about its green tech investments, Doerr tells Forbes that Kleiner’s bets weren’t “too bold” but “too broad and too fast,” defensively adding that one has to “take a long-term view of venture capital,” a field in which “you can only lose one times your money, [but] you can make many, many times it when done right.”

More importantly, Kleiner has done little to explain how it is going to produce huge returns with so much capital under management. Way back in 1999, Kleiner and Sequoia Capital each invested $12.5 million in Google in 1999 for a 10 percent stake in the company, and they returned billions of dollars to their investors in the aftermath of Google’s 2004 IPO. At least one estimate claims that Kleiner returned $4.3 billion to its LPs from Google alone.

Deals like Google don’t come along often, though, and Kleiner’s huge fund sizes inevitably make it more difficult for the firm to return the multiples on invested capital that it has delivered in the past.

This isn’t to say it is impossible for a firm with a big fund to make money. For example, New Enterprise Associates has produced an IRR of 8.5% for its $2.5 billion 12th fund, which was raised in 2006, according to performance data from CalPERS, as of Sept. 30. (NEA also invested that fund in both late-stage and public companies, and collected a comparatively low 1.25 percent in management fees on the fund.)

Still, there’s little question that returning $5 billion, let alone numerous times that amount, will very much be an uphill battle. As Harvard professor Josh Lerner once told me: “Maybe it’s a totally new world and old rules don’t apply. But historically, as groups significantly increase their fund size, returns deteriorate. The tendencies are pretty clear in the data.”

Kleiner declined to comment for this story.

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