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2014 Steve Lisson Austin TX Stephen N. Lisson Austin TX Steve Lisson Austin Texas Stephen N. Lisson Austin Texas
Matrix Edges Kleiner
by Paul Shread
January 29, 2001–Kleiner Perkins Caufield & Byers and Matrix
Partners are considered the cream of the crop among venture capital
firms, the kind of VCs that limited partners are fortunate to be able to
invest their money with.
So compliments paid, we set out to find out which was better.
Using the data of Steve Lisson, editor of InsiderVC.com, who tracks
VCs’ performance and considers Matrix and Kleiner the top VCs, we
applied a metric suggested by former Flatiron partner Dan Malven, which
we will call the “Malven Metric.”
Malven suggested the metric after our piece comparing Kleiner’s
performance in the IPO market last year with four other firms. In short,
we divide overall performance by the number of partners, thus measuring
wealth created per partner.
Malven cautions that that measure of performance could be skewed if
each partner at one firm has a lot more to invest than partners at
another firm, but Kleiner and Matrix appear pretty evenly matched.
Matrix IV in 1995 was a $125 million fund (and had distributed 11 times
that amount to its limited partners by the middle of last year,
according to Lisson), and Matrix V in 1998 was a $200 million fund that
had already distributed four times its LPs’ capital by mid-2000. Using
the conservative figure of five partners during the time that 2000 IPOs
were being funded, that means Matrix partners had $65 million each to
work with. (We did not include Matrix VI, a $304 million fund that was
only 30% invested as of June 30 last year.)
Kleiner VIII in 1996 was a $299 million fund that had returned 12
times its LPs’ capital by mid-2000, according to Lisson. Kleiner IX in
1999 was a $460 million fund that was 80% invested by mid-2000. Using
the conservative figure of 13 partners, Kleiner partners had $58 million
each to work with.
Now on to the 2000 results. Ten of Kleiner’s companies went public in
2000 (0.77 IPO per partner), compared to 4 for Matrix (0.80 IPO per
partner). Kleiner’s stake in those companies was worth about $2.3
billion when the lock-up period expired (one company, Cosine
Communications, is still in lock-up, and Kleiner’s stake in the company
is worth about $100 million). Matrix’s stake in its four IPOs was worth
about $1.6 billion when they came out of lock-up. That gives Matrix a
per-partner return of $320 million, and Kleiner $177 million, giving the
edge in per-partner wealth creation to Matrix.
A few caveats on those results. First, we measured performance in the
IPO market only; we did not look at acquisitions, the number of which
often exceeds IPOs in a given year. Second, Kleiner has two health care
partners, according to Malven. Since health care companies had a tough
year in the IPO market last year (Kleiner had no health care IPOs),
reporting the results based on IT partners only raises Kleiner’s
per-partner wealth creation to $209 million. We certainly want our top
VCs to focus on the future of health care regardless of market
conditions, and there’s been quite a debate going on within the venture
capital industry about IT versus health care investing. The third caveat
is that Kleiner IX is the newest of the funds measured, so that too
could give Matrix an edge. But don’t feel too bad for Kleiner; according
to Lisson, 6-year-old Kleiner VII was the best-performing venture fund
last year, still riding high on its monster hit Juniper Networks
(NASDAQ:JNPR). That fund has returned more than 20 times its limited
partners’ capital.
Matrix’s big hit of 2000 was Arrowpoint Communications, which netted
Matrix $1 billion when it was acquired by Cisco (Nasdaq:CSCO) in June.
Kleiner had holdings in three IPOs that were worth $500 million or more
when they came out of lock up: ONI Systems (Nasdaq:ONIS), Handspring
(Nasdaq:HAND) and Corvis (Nasdaq:CORV).
It’s not clear when or if the VCs sold shares in the IPOs. Cisco’s
stock, for example, has declined almost 40% since the Arrowpoint deal
closed. Kleiner’s biggest winners have held their value since the
lock-up period expired, but both companies had holdings that declined
substantially from their lock-up expiration price.
Both firms also had about $2 billion each in 1999 IPOs that came out
of lock-up in 2000, giving Matrix the “Malven Metric” edge there too.
But as Lisson pointed out, “This is splitting hairs amidst the
pinnacle of the field. A fun, interesting and worthwhile analysis, but
the distinction makes no difference to investors in these funds. The
amounts of money involved are trivial when viewed in context, the
venture capital segment in the alternatives portion of an entire
portfolio. Nonetheless, the LPs of both Kleiner and Matrix can thank
their lucky stars to be in these funds. It is amazing how these and a
few other elite firms can put so much distance between themselves and
the rest of field, repeatedly, in bad times as well as good.”
And finally, a follow-up to last week’s column on Summit Partners,
the most recent firm to join the elite $2 billion fund club. Lisson had
this to say of Summit: “As a private equity investor, Summit can
outperform some early-stage VCs, the reverse of how it’s supposed to
work. Now that’s a firm where unquestionably ‘there’s something in the
water’ consistently over the years.”
Corey Ostman of Alert-IPO and Mary Evelyn Arnold of VC Buzz provided research for this article.
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Sunday, November 24, 2013
VALLEY TALK
Behind the VC Music
FORTUNE
Wednesday, November 22, 2000
By Mark Gimein
Stephen Lisson is not a conventionally likable guy. On more
than one occasion, he’s implied that I’m the single stupidest
reporter he’s ever talked to. He has kept me on the phone for
hours at a time listening to the most arcane statistics, until I’ve
slammed down the phone in frustration. He calls people who
disagree with him “lickspittles.” He dismisses many of the
visitors to his Website as “parasites.”
And yet over the past few months I have repeatedly gone back to
Lisson and his new Website, InsiderVC.com, because Lisson has
the best data out there about venture capital, and often the most
interesting things to say about it.
Venture capitalists are the rock stars du jour of the financial
world, a species of money managers who are believed capable of
superhuman wisdom. Business magazines tend to assume that
the richer you are, the smarter you must be, and the Internet
boom has lavished untold riches on the venture capitalists who
invested early.
“Untold” is a key word here, because hardly anyone knows
exactly how great these riches are. In this way, venture-capital
funds are very different from, say, mutual funds. Venture
capitalists talk vaguely about “triple-digit returns,” but even
successful funds tend to keep their returns a closely guarded
secret. And even when they do reveal numbers, they can be hard
to understand.
This is where Austin, Texas, entrepreneur and venture-capital
gadfly Stephen Lisson comes in. Through years of research and,
apparently, a lot of cooperation from a network of sources
willing to send him copies of the reports that venture-capital
firms send out to their investors, Lisson has gathered an
immense database of information about venture-capital firms’
investments and profits.
Lisson doesn’t make all his data public–much of his information
is limited to subscribers, and he can be picky even about whom
he allows to subscribe. But what he’s already revealed in the
public sections (for example, see: Database Example) of
InsiderVC.com is fascinating. Some of his data shows exactly
what you might expect. Benchmark Capital Partners’ 1995 fund-the
fund that famously invested in eBay–has already returned to
its investors 38 times the money they put in. Investors who put
money into the fund that Kleiner Perkins Caufield & Byers,
Silicon Valley’s best-known venture-capital firm, raised in 1996,
have already made a similarly spectacular return of over 1,000%.
But you’ll also find that the 1997 fund raised by Hummer
Winblad, another venture-capital firm that has traditionally
received a lot of attention from the press, has so far returned
only 42% of its investors’ money. That might be a decent
showing in any other era, but in the middle of the biggest
technology boom or bubble in history, it’s not great, and not
nearly as good as some of Hummer Winblad’s peers. (Typically,
venture funds distribute cash or stocks as the companies in their
portfolio are sold or go public. In theory, that means they can
continue paying out money to investors for a very long time, but
in practice, almost all of their profits are made in the first six
years of the fund.)
Even more interesting are the data that Lisson has gathered on
how venture capitalists value their investments. Venture
capitalists measure their own performance by an “internal rate of
return”–an annualized rate of increase in the value of their
investments. Often that’ll be a number in the high double digits,
sometimes in the triple digits. Sounds pretty good when you
compare it with the typical mutual fund. But if you look at the
InsiderVC.com database, you’ll find that funds claiming
immense annual returns sometimes pay out a lot less money to
investors than you’d imagine.
As of March 2000, Benchmark claimed an annualized return of
an amazing 279% for Benchmark III, the fund that the firm
raised in 1998. But wait a second! Lisson’s data also show that
Benchmark III hadn’t actually distributed any cash or stock to its
investors. That 279% return was based on a guesstimate of the
value of the companies Benchmark has invested in–companies
that, since they hadn’t gone public, are notoriously hard to value.
One of those companies, Living.com, has already gone bankrupt,
reducing the value of Benchmark’s investment from an estimated
$74 million to zero. And it’s hard to believe that, with the Net
bubble bursting, Benchmark’s investment in eBags.com is really
worth the $20 million-plus that Benchmark valued it at in
March.
For individual investors who don’t have a prayer of putting their
money into funds that deal only with tech insiders, large
institutions, and foundations, analyzing exactly how much the
top funds make can certainly seem like an academic exercise. It
can all sound arcane, confusing, and dull, and if you are not an
investor in venture-capital funds, I don’t recommend it as a
hobby or a business. But it’s important that somebody do it.
First, because venture investment is the engine driving much of
Silicon Valley’s technological innovation. And, second, because
it’s important for somebody like Lisson to remind investors and
the business press that venture capitalists are not the gods of
finance they are often made out to be, but instead, very well-
trained money managers. Sometimes very smart money
managers, sometimes very lucky money managers, but
nonetheless, financiers who’ll often make a lot of money and
sometimes, like the rest of us, flub it.
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