Venture pioneer Tom Perkins (RIP) unveils what made Kleiner Perkins the dominant VC of his time—circa 1993
At the tail end of his reign as one of Silicon Valley's most powerful VCs, Mr. Perkins told us if he were to start over again in 1993, he would be an entrepreneur focused on the China opportunity.
By Anthony B. Perkins
From the December 1993 issue of Red Herring
By the age of 40, Tom Perkins had already established a legacy of successfully working under his mentor, David Packard, and driving Hewlett-Packard into the computer business. Along the way, he took $10,000 of his personal savings and built a company around a low-cost easy-to-use laser he invented. His initial investment eventually turned into a couple of million dollars when he sold the company to Spectra-Physics. “I guess I was already a de facto venture capitalist before I even raised my first fund,” he told The Herring. When we interviewed Mr. Perkins in his glass-walled office on the thirty-fifth floor of a San Francisco high-rise, we experienced the keen intelligence and casual confidence of his lore. All one has to do to measure Mr. Perkins’ success as a venture capitalist is to count the hundreds of thousands of jobs and billions of dollars in wealth created by the companies his firm has started; many in its spare offices, including Tandem Computers and Genentech.
Over the last thirty years nothing has been more important to the transforming of the American economy than the unleashing of technology entrepreneurs who were spurred by venture capitalists. And just as the semiconductor and personal computer industries required a few brash, young, risk-takers to launch their enterprises, so did the venture capital industry. Read on and meet two gentlemen who pioneered venture capital.
Thomas J. Perkins
Kleiner, Perkins, Caufield & Byers
The Herring: You presumably had a terrific job at Hewlett-Packard before you started your first venture fund. What inspired you to leave H-P and become a venture capitalist?
Perkins: I did have a great job at H-P, and I had been there a long time. I think I was the first MBA they ever hired, and, believe it or not, H-P’s annual revenue rate at the time was only about $25 million. But during my tenure, I left H-P for awhile and went to a small enterprise that Dave Packard and Bill Hewlett had personally backed. And the company failed. So Dave Packard recruited me back to H-P to start its computer business. By the time he went back to Washington to serve as Deputy Director of Defense, my division, the computer business, represented the single largest chunk of the company’s revenues. Eventually, other managers took over the computer division, and Hewlett asked me to be his assistant. During this time, I started moonlighting, with Packard’s permission, and started a company to leverage a low-cost, easy-to-operate gas laser I invented — my one and only significant scientific achievement. (laughs) The company ended up being very successful, and we merged the company into Spectra-Physics, which was a public company. So you might say that my first venture deal was a big hit, which was fortunate, because I financed the company with the money that my wife and I were saving to buy a house.
The Herring: That was probably the biggest risk you ever took!
Perkins: Yes. (smiles) Anyway, when this was all happening, Dave Packard was just returning from Washington, creating sort of a natural break for me. So instead of staying with H-P and running another division, I decided to become a venture capitalist. About the same time I ran into Eugene Kleiner.
The Herring: Were there any role models in the venture capital business for you at the time?
Perkins: At the time, you could fit all the venture capitalists in the United States into this office. It was a very small community. There was Art Rock and Tommy Davis in San Francisco, Fred Adler in New York, and Pitch Johnson and Bill Draper down on the Peninsula. But I would characterize them all as being financial guys. Kleiner and I characterized ourselves as more technologists and entrepreneurs who could help start companies. We were really the first industry guys to go into venture capital.
The Herring: How did you get together with Eugene Kleiner?
Perkins: Both Kleiner and I had separately contacted Sandy Robertson [founder and chairman of Robertson, Stephens & Co.] about our interests. Sandy put us together because he felt that we were both speaking the same language and had a similar vision of what we wanted to accomplish. So Kleiner and I met for a couple of days and explored each other’s philosophy and background and decided that two heads would be better than one. [The one phone call Mr. Perkins took during the interview was from Sandy Robertson.]
The Herring: How big was your first fund?
Perkins: Believe it or not, our first fund was only $8 million, which, however, was the largest venture fund ever raised at that time. In the end, we never invested all the money, but we returned hundreds of millions of dollars back to the investors in that first fund.
The Herring: What were your biggest hits?
Perkins: We had two super deals in that fund and only two. They were Genentech and Tandem Computers. Both were incubated by our partnership. I think that we were the first venture firm to try to incubate a company right out of our own office. Jimmy Treybig [CEO of Tandem] and Bob Swanson [chairman of Genentech] were both partners in our fund. In both cases, we were the only venture investors.
The Herring: Why were those deals so successful for you?
Perkins: Both were very high-risk deals. If we have any kind of investment formula, it’s that we try to isolate whatever the biggest risk is in a given deal and structure our initial investment so the money is used to eliminate that risk. In the case of Genentech, clearly the biggest risk was whether or not God was going to let us create a new form of life. (laughs) And in the case of Tandem, we had to prove that we could develop software that could work in a multiprocessing environment. The market opportunity was clear and exciting, but there was a big technical risk.
The Herring: These days, putting the technical risk behind you, at least in the computer business, is a much more expensive proposition.
Perkins: That’s right. But it was harder to start companies in those days because there weren’t as many entrepreneurs around, and the support structure in the investment community didn’t really exist. Today, it’s a lot easier to start companies, but, you’re right, it costs more money.
The Herring: What were some of your more memorable failures in the early days?
Perkins: We had some failures. I’d have to go back and look, you know; like other venture capitalists, we don’t like to talk about our failures. Our most famous one was a company that made a combination motorcycle/snowmobile. (laughs) It was a great product. I had a lot of fun with it up in the Sierras. Jimmy Treybig worked on that deal. Unfortunately, just when we launched the company, the oil embargo hit, when everybody had to wait in line for gas, and the deal never really had a chance to get off the ground.
The Herring: Is it harder to be successful in venture capital today than it was back in the early 1970s when you got started?
Perkins: I don’t think so. It’s probably harder to make the enormous returns some of the early funds did, because there’s so much money available and it’s a much more competitive business. But I think it’s easier to make more consistent returns. When Kleiner and I first got started, entrepreneurs were also more skeptical as to what, if any, contribution venture capitalists could make beyond signing a check.
The Herring: What is KPCB’s competitive advantage?
Perkins: Since the very beginning, I think that we had developed a way of doing business here in the partnership that is very powerful and has given us a natural momentum that you won’t find at other venture firms. Maybe that’s what I’m most proud of in my career. The way we structure the partnership, the way we raise money from our limited partners, the way we treat our limited partners, and the way we create general partners have ultimately been our greatest competitive advantages. To explain the specifics of each of these practices would take a long time.
The Herring: Let’s focus on creating general partners. What are the elements to success in this department?
Perkins: Kleiner and I tried to pick partners who thought and acted like we did. Frank Caufield, Brook Byers, John Doerr, Jim Lally, and Vinod Khosla are hands-on guys, with strong technical backgrounds and very competitive, impatient personalities. They’re all very ambitious about the companies we invest in — often more ambitious than the entrepreneurs running the companies. They all push hard, because they want to win.
The Herring: What drives that ambition?
Perkins: Well, I suppose you could say that we all want to make a lot of money. If you look back, I think that we have divided up some $30 billion dollars between our investors and management. But I think our motivation runs much deeper than that. The money we make is really the by-product, perhaps the scorecard, for our drive to build successful companies that are on the cutting edge, that are developing new and exciting technologies that will change the world. If we can, we like to create new industries rather than just companies, and we’ve been successful at that a number of times. Our investments gave birth to the biotechnology industry and the ASICs business, for example. I suppose that we’re also proud of the fact that the enterprises we’ve incubated and funded have created over 100,000 new jobs. But, again, that’s just another by-product of our drive to be successful, and, well…have fun!
The Herring: You’ve been credited with making KPCB the number-one brand name in the business. What was the science behind this effort?
Perkins: I think that we did a number of things, which, in retrospect, seem obvious. First of all, we’ve always recognized and appreciated that our limited partners were the sources of all our capital, so we set up some rules from the very beginning to protect their interests. For example, to this day, no general partner will have a personal investment in a company that the partnership might have an interest in, even if the partnership turns it down. This principle assures that there’s never a conflict between our personal interests, and the interests of the partnership. Even when we’re individually given cheap stock for sitting on a board or something, we’ll throw that stock into the partnership so the limited partners can benefit as well. Second, unlike other venture funds, we never reinvest profits. All profits are distributed back to our limited partners immediately, so there’s an end to all our funds. Our investors like that. Another principle is that new funds are not allowed to invest in deals our previous funds had invested in, so there’s never the perception that new money is going in after bad. And, of course, we have had great returns.
The Herring: Where does the entrepreneur’s interest fall into this money-making lovefest?
Perkins: With entrepreneurs, I hope that we have the reputation of not cutting the toughest, tightest deal. We try to make sure that the entrepreneurs make a lot of money, too. We like to tell the entrepreneurs that the only time we’re on the opposite side of the table is when we’re cutting the pie in the very first round. We also try not to fund competitors, because we want the entrepreneurs to feel that we’re solidly in their corner. This is getting harder because we now have 180 deals that are all going in different directions, but we try to stick to this principle. We also try to figure out how our companies can work together. This has been a very successful strategy. John Doerr would be better able to give you examples of the dozens of different relationships we have helped to create among the companies in our portfolio. I think that this gives a new entrepreneur a tremendous incentive to work with us.
The Herring: And join the Kleiner Perkins club.
Perkins: Right. Join the club. And it’s free!
The Herring: Do you ever take a risk with an entrepreneur who doesn’t necessarily have the “right” background?
Perkins: Oh, absolutely. Sometimes it works, sometimes it’s appalling. Every entrepreneur says, “If I’m ever not able to run this company, then I’ll be the first one to recognize it.” Of course, that’s absolute nonsense. But you take an entrepreneur like Sam Maslak, I don’t think he ever had even a secretary working for him before he started Acuson, and we took that risk, and he turned out to be one of our greatest CEOs. I have learned a lot from Sam.
The Herring: How would you summarize KPCB’s competitive advantage?
Perkins: Well, everyone says we’re arrogant. I hope that’s not our only differentiating factor. (laughs) I think that we’re proud, ambitious, and work very hard right alongside the entrepreneur. Once we sign the check, we’re on the team. We consider it our responsibility that the company never runs out of money, we help them hire the right people, and we help them identify the risks and put those risks behind them. If anything, we have been accused of being too involved.
The Herring: What’s the hardest part of building a successful company?
Perkins: The greatest problems in a start-up environment are people problems — the ability of entrepreneurs to recruit, retain, and motivate their people. I think we all could get our post doctorates in psychotherapy, because what we really do, for the most part, is help people work together for the common good of the company. All venture capitalists are accused of firing entrepreneurs, that’s why entrepreneurs are generically afraid of us. Actually, we do very little of that, but when it happens it’s excruciating.
The Herring: KPCB is known for swinging for the fence. Is that a gospel you preach?
Perkins: We try to avoid “me, too” deals. If we can, we try to be the first in new markets. And, yes, this is a higher-risk approach. But if we’re right, we win big and knock the ball over the fence.
The Herring: Where does KPCB find its deals?
Perkins: Our sales force is made up of the entrepreneurs we’ve backed in the past. Almost without exception, every deal we’ve ever done has come to us from an entrepreneur we had previously backed. I don’t think we have ever funded a deal that just arrived in the mail.
The Herring: Can you make more money as an entrepreneur, or as a venture capitalist?
Perkins: As an entrepreneur. I tell that to a lot of people who want to get into the venture capital business. You can make more money faster as an entrepreneur. And if you fail the first time, you can always make a come-back and get another turn at bat. This isn’t to say that young guys like Kevin Compton and Doug Mackenzie [KPCB’s newest general partners] won’t do extremely well if they hang in there through a couple of funds. It may take longer, but I’m certain they will do very well.
The Herring: You started reducing your participation with the firm a few years ago.
Perkins: Yes, I did. Six or seven years ago I was on seventeen boards of directors and chairman of sixteen. It was just too much. And nobody ever calls you with good news. I felt like I was in Sarajevo with mortars blowing up all around me. So I cut way back. I now sit on only four boards, Tandem, Genentech, Acuson, and Internet Systems, a private company in Chicago. But I felt that if partners aren’t willing to work twenty hours a day, they shouldn’t carry their interest forward in the partnership. So I set up a way for partners to scale back slowly. I’ve done that, and Frank Caufield has done that, and I think others will follow suit when the time is right for them. It makes it possible to bring on new partners and let them own a good chunk of the partnership.
The Herring: What is your advice to the new generation of venture capitalists?
Perkins: I’m not sure that I have any great advice. I suppose I would say that unless you have gained some operational experience within a growing enterprise, it’s going to be very difficult to take a hands-on approach to helping the companies you invest in.
The Herring: If you were dropped into the world today as a thirty-year-old, what would you do?
Perkins: I’m pretty sure I would be an entrepreneur rather than a venture capitalist. But the real question would be where in the world would I do this, and I’m not sure it would be in the United States. When I came to California in 1957, it wasn’t the same as it is now. Recently, I’ve been to Australia and China, and I was pretty impressed by the possibilities for business success in those two countries.
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