SM: You said that you like to get involved with companies early and help them solidify positioning; is that because you are good at it? Most VCs don’t do it, and even if they did they would not have a clue how to do it.
RK: It’s just what I do. I agree that most VCs do not know how to do it. The solution is simple; don’t go to most VCs.
SM: That’s easy to say, Randy, but how many people can realistically get to you?
RK: Very few.
SM: You are going to sell a lot of books, and they are going to show up trying to get meetings with you!
RK: I don’t disagree with you that you should try to resolve as many leap of faith questions as you can before reaching your VC. Web 2.0 apps are great because you can do them cheaply and easily in a garage with two to three people using standard tools. Why not? You don’t need a VC.
If you are going to experiment with a voice SMS system you are going to need the help and resources. If you are doing something in solar cells you need the help.
SM: The more capital-intensive your business idea gets, the more you cannot do it in a bootstrap model. There are businesses which can be bootstrapped and there are those which cannot.
RK: I would also say that it goes beyond financial capital. A strong network of portfolio companies is a powerful tool. Those networks can resolve certain leaps of faith early. We can get to GE, and they can tell us whether or not this particular energy monitoring product measures up. We can get to whoever we need to in the car business.
SM: I agree with you. Venture capital, when done well, is an incredibly powerful model. However, this makes me wonder why venture capitalists are behaving like bankers. What is the future of venture capital?
RK: That is a big, hairy question. The venture capital business has been challenged for the better part of this decade because of a lack of exits. There are lots of instances of rethinking, second-guessing, and new generations of entrance into the business.
SM: There is too much money chasing too few deals.
RK: Everybody thinks they are going to reinvent it. Fundamentally, this business works well when there are exits and right now there are not many.
SM: No amount of exists would be able to support the amount of money in the venture industry today.
RK: I don’t know if that is true or not. I am not even sure if that is the right place to focus. The real issue is understanding the role venture capital plays in the venture process. What sort of people could do that well? At Kleiner Perkins we look for people with operating experience. That has always been the case. You have to have empathy for what that process is like.
We approach deals with a hands-on approach. That can be a problem for some people, and it can be problematic for other types of people. Our goal is to make sure we partner with the right types of people.
The MBA investor approach to venture capital, which we see in the fast follower market and which represents the majority of the venture business, ebbs and flows like all private equity does. As the innovation industry garners more capital from pension funds, etc, you will see those ebbs. When we are in a downturn like we are now, it ebbs. It has a long latency because these funds are established for 10 years and the results are not really measurable until exits, etc.
SM: The level of accountability in the venture model is very low.
RK: It definitely is. The good news is that the process over time does tend to fix itself. It is just not highly responsive to immediate data. There has always been a small class of venture capitalists who have been responsible for most of the returns. You will find, in that class, a disproportionate number of venture capitalists who are more value-added in the process.
SM: I think that, based on where we are in the cycle, we need some big game-changing plays that open ecosystems the way Google and eBay did. We need industry-building types of ventures. From where you sit today, where will those ventures come from?
RK: I like the way you phrase that because that is what we are always looking for. One of the reasons we did not get excited about Web 2.0 investing is because we saw that as a derivative of the Google investment that we had already made. Google built the platform and everybody else plugged in and built little castles on top of it.
We keep looking for the next platform. That is what is interesting. It creates billions of dollars of value in a derivative way, in which others build on top of it. However, it is very hard. John Doerr is one of the most uncanny people at being able to do this. He did it in the PC, PC software, Internet, and he ended up doing it in things like Google. All of those were platform businesses. There are very few people who can do that.
At Kleiner Perkins, we continue to do a lot of life science investing. It is very exciting what is going on there with personalized medicine, and genetic and regenerative medicines. Our Pandemic Fund was way ahead of the market in investing in areas of the life science industry, like vaccines, which had not been really great returns with the slant that we would invest in things that accelerate those vaccines in response to pandemics. Those are very interesting, and we continue to invest heavily in those areas.
On the digital side, we did not do a lot of 2.0. We are looking for the next platform. We have a company called CoolIris which is looking at how you visualize the web. Will it be the next platform? I don’t know, but it offers the opportunity to change everything. If you begin to think about the web as something you can glide through visually, what does that mean?
At the same time we look for real sturdy businesses. I invested in RPX which creates defensive patent portfolios. They have remarkable numbers. We have LifeLock in the personal identity theft business doing quite well.