Venture Capital Icon Kleiner Perkins To Split As Partners Disagree Over Strategy

Late stage vs early stage venture capital translates into a world view about money now or money later, which reflects the changing nature of technology, the dominance of the big internet firms and the future of entrepreneurship. JL


Tomio Geron reports in the Wall Street Journal:

The move is indicative of changing fortunes in venture capital, as funds ballooned to levels not seen since the dot-com boom and startups stayed private longer. Tensions brewed between the two sides of the firm over investing as the early-stage fund’s hits have been meager. Kleiner led the late-1990s dot-com frenzy with investments in Netscape, Amazon, Google and others, but missed out on early investments in  internet firms including Facebook and Twitter. The growth team has made lucrative bets on later-stage startups such as Uber, Spotify, Square, and Peloton.
Kleiner Perkins Caufield & Byers is splitting in two, a surprise rupture that reflects the storied venture-capital firm’s struggle to balance making smaller bets on young startups and jumbo investments in companies on the cusp of initial public offerings.
The Silicon Valley firm’s growth-investment team focused on later-stage funding is leaving the firm, spurred partly by internal differences over investing strategy and resulting in the departure of famed former Morgan Stanley analyst Mary Meeker. The split is the firm’s most striking move in its four decades, restoring it to its smaller, early-stage roots, best known for initial bets in Google and Amazon.com Inc

The move is indicative of the changing fortunes in venture capital, as funds over the years ballooned to levels not seen since the dot-com boom and startups stayed private longer with money that in past eras would have been raised in the public markets. Big firms such as Kleiner have sought to wrangle both ends of the startup market, adding growth funds to capture larger pre-IPO deals that traditional early-stage vehicles weren’t designed for.
At Kleiner, tensions brewed between the two sides of the firm over investing approaches, particularly as the flagship early-stage fund’s hits have been meager, relegating the firm’s once-stellar returns to a middling rank in the market, according to people familiar with the matter.
Ms. Meeker joined Kleiner’s growth team in 2010 and is known in part for her annual Internet Trends Report. She, along with growth-stage investors Mood Rowghani and Noah Knauf and talent partner Juliet de Baubigny, will form a new firm—whose name wasn’t announced—and will raise funds separately. The remaining core firm will focus on early-stage deals.
Kleiner led the late-1990s dot-com frenzy with investments in Netscape, Amazon, Google and others, but it bet big on clean technology years later with little reward, and missed out on early investments in some of the generation-defining internet firms including Facebook Inc. and Twitter Inc. Around 2010, it sought to boost its profile in internet investing, hiring Ms. Meeker and pushing money into more mature companies.
In recent years, the growth team has made lucrative bets on later-stage startups such as Uber Technologies Inc., music-streaming service Spotify AB, payments company Square Inc., and fitness-bike maker Peloton Interactive Inc. But its early-stage investment team hasn’t kept pace, and rival firms have outshined Kleiner with early bets on companies like Snap and Whatsapp.
Kleiner informed its limited partners about the split on Friday morning, catching some of the investors off guard, though not totally surprised given changes the firm has made in recent years, said one limited partner in the firm.
“We’re watching a dismantling and rebuilding of a storied firm,” said this person. “I feel for the first time in probably a decade they’re starting to have a direction.”
Over the past several years, Kleiner has undergone several changes while attempting to revamp its early-stage practice. Beth Seidenberg, a top Kleiner life-sciences investor, recently left to help found a new firm, Westlake Village BioPartners.
John Doerr, one of Silicon Valley’s top venture capitalists, in 2016 stepped back at the firm, taking a role of chairman, which cleared the way for new leadership, limited partners say. Most recently, Kleiner brought on two new partners with proven early-stage credentials—Mamoon Hamid, a co-founder of Social Capital, and Ilya Fushman, formerly of Index Ventures.
The venture-capital industry has gone through rapid changes in recent years with large firms such as the $92 billion SoftBank Vision Fund upending the late-stage investing landscape with frequent, massive funding deals. Meanwhile, nimble, early-stage seed investors that specialize in specific sectors have proliferated.
Fundraising rounds by the hottest startups are now intense competitions that often pit early-stage investors against those who focus on later-stage deals. Those investors’ differing strategies can spur conflicts, particularly when the investors belong to different practices of the same firm.
At Kleiner such tensions flared up in recent years, according to people familiar with its inner workings. It became a two-headed operation that would clash internally over whether the late-stage fund would invest in the early-stage fund’s portfolio companies and propel their growth, according to a person familiar with the fund.
Ms. Meeker and the growth team, though, preferred to find their own companies and investments, often meeting with early-stage companies and drawing the ire of the other side of Kleiner in the process, the person said. A spokesperson for the firm denied the two practices feuded.
“We believe specialization and focus is increasingly key,” Ms. Meeker said. “This is not a mass-production business. We want to stay small and lean and we want to be really focused.”
Ms. Meeker’s growth fund from the start had a fair amount of independence compared to other venture firms, and that independence continued over time, which set the stage for their current different approaches, according to another person familiar with the firm.
Although both teams will continue working together on existing portfolio companies, the new funds for each firm will be separate.
“The skills are quite divergent,” said Ted Schlein, one of Kleiner’s general partners, citing the different needs of early-stage and growth-stage startups.
“We believe two independent funds, each with a team focused on what they do best, makes for a greater whole to maximize value for the portfolio and LPs,” he said.
Kleiner Perkins previously has emphasized the synergies that link the firm’s early and late-stage practices. But today, Mr. Schlein said, the “synergies are less obvious.”