May 3, 2004 9:47 AM PDT

How John Doerr, the old prospector, finally struck Google

As far as John Doerr is concerned, the Internet frenzy of the late 1990s was not a bubble. No, to Doerr, a prominent venture capitalist in Silicon Valley, it was the "Great American Boom."

"It was a good thing," he said in an interview last month. "It made the American economy bigger. It raised incomes for everybody. It made us more of a leader in the world in all respects."

Four years after the stock market plunged under the weight of lifeless dot-com stocks and other technology losers, Doerr is as upbeat about the potential of Internet start-ups as ever--and now his faith will be rewarded with billions from Google, the Web search company, when it goes public.

In 1999, Doerr, on behalf of his firm, Kleiner Perkins Caufield & Byers, invested $12.5 million for a stake in Google that will probably be worth at least $3 billion--perhaps more--after Google sells stock to public investors this year. That is a gain of 240 times the original investment in five years and provides plenty of spare profit to offset the losses from other bets investors made in the same round of venture capital fund-raising.

"John Doerr throws big darts at distant targets," said Jerry Kaplan, a Silicon Valley entrepreneur whose start-ups in the early 1990s, Go and Onsale.com, were flops backed by Kleiner through Doerr. "Most miss, but when they hit, it's spectacular."

For Doerr, Google's spectacular success is fresh vindication of his ability to pick big winners. Since the dot-com bust, critics have questioned Doerr's boosterism of the Internet, which he famously called "underhyped" in the 1990s boom.

More recently, he raised eyebrows with his wildly optimistic predictions about the potential value of Segway, the maker of "human transporters," which has yet to find more than a niche market for its gyroscope-guided scooters.

Such disappointments certainly have not changed his views.

"I think we still underappreciate the long-term potential" of the Internet, he said matter-of-factly over bottled water at the Hay-Adams Hotel in Washington, where he was lobbying members of Congress to abandon initiatives he contends would hurt technology start-ups.

Doerr remains a huge presence in Silicon Valley despite his Internet losses. Entrepreneurs will always dream about becoming the next Amazon.com, the next Netscape Communications, the next Compaq, the next Sun Microsystems--all of which received early backing from Kleiner. The firm, which is based in Palo Alto, Calif., anchors the West Coast venture capital industry.


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Kleiner's flops are overshadowed by its financial successes. Doerr made an $8 million investment in Amazon for the firm that turned into $60 million when the company went public in 1997. His $5 million investment in Netscape Communications reaped $400 million for Kleiner.

Entrepreneurs who have received money from Kleiner said that Doerr's name lent a level of seriousness to their companies, and his connections and strategic vision improved their prospects. But they also note that the other, not-so-high-profile, partners of the firm are just as important.

"John Doerr is well-known for his rigor on key results and defined objectives," said Bill Campbell, chairman of Intuit, which Kleiner first backed in 1990 with $5 million. "But it really is partnership-oriented and different partners have different insights."

Doerr is adamant that what counts is the combined expertise of the 17 partners, not his status as a celebrity venture capitalist.

"I'm part of a firm with lots of prominent partners," he said, adding that focusing on him would be misleading. "One of the things that happened in the boom," he said, "was too much attention was paid to venture capital and not enough to the entrepreneurs and innovators and scientists. And that is rightly where the action is."

In the last three years, Kleiner has added six partners, including Raymond J. Lane, the former president of Oracle; Juliet Flint from Ramsey Beirne Associates, an executive search firm; and John Denniston, a former managing director at Salomon Smith Barney.

While Google is Kleiner's most visible investment now, the firm's $400 million KPCB XI fund will focus on six areas of investment. "What we do at Kleiner Perkins," Doerr said, "is we look for a fundamental and important technology breakthrough that will address a large, unserved market need."

In earlier funds, Kleiner has placed stakes in companies that make software and services for handheld devices like PalmOne, the maker of Treo, and consumer-based enterprises like Blue Nile, an online diamond retailer, which may go public this year.

It also has invested $12 million in Linuxcare, a company that provides support to enterprises using Linux, the operating system that is distributed free.

"That's a freight train I wouldn't want to get in front of," said Doerr, explaining the importance to having a stake in a Linux-based venture. "Probably get run over."

Another area of investment is next-generation semiconductor chips and technology. Alternative energy ventures are also of interest. "The biggest trend on the earth is urbanization," Doerr said. "We need clean water, clean distributed power and clean transportation." Kleiner has investments in this area but declined to name them.

Health care companies remain a priority. Doerr says that he is "very excited about the Internet," and added that "there's a revolution going on in health care." Kleiner has made several health investments, including information tech companies like Healtheon and ventures like Genomic Health, which Kleiner backed with $14 million in 2001.

"We're in early in all of those categories," said Brook Byers, the Kleiner partner who oversees many of the firm's health care investments. "We're the geeks in the suits."

Entrepreneurs have been eager to win the backing of Kleiner and Doerr because of his connections and ability to turn their ideas into solid businesses. Of course, Kleiner has financed its share of duds.

Doerr's less successful picks include a $13.8 million stake made in 1998 in Homestore.com, an online real estate company. Several executives of Homestore have pleaded guilty to securities fraud in connection with the company's accounting practices. Homestore's shares rose as high as $138 in January 2000, fell below $1 in January 2003 and are now trading around $5.

Drugstore.com was another Kleiner investment that did not fare well. Kleiner invested $3.9 million in that company in 1999 as part of the KPCB IX fund. After a $90 million initial public offering in July 1999, the company's share's fell, hitting about $1 a share in March 2001. It now trades around $5 a share.

Other prominent duds include a $2 million investment in Kibu, a teen-oriented content site that folded in 2000 and a $2.8 million investment in BroadBand Office, a real estate investment trust that bundled telecommunications services, which filed for bankruptcy protection in 2001 after two years in business.

Indeed, KPCB IX, the fund that backed Kibu and Drugstore.com, has trailed far behind previous funds like KPCB VIII, begun in 1996, which had an internal rate of return of 286.6 percent, according to the University of California, which invests in these two funds. As of March 2003, KPCB IX, begun in 1999, had an internal rate of return of negative 23 percent. Kleiner's venture partner in Google, Sequoia Capital, meanwhile, has had an internal rate of return of negative 6.1 percent on the Sequoia IX fund, the university said.

"They all failed for different reasons," said Doerr of the companies that faltered. "Most ventures fail, though I wouldn't say most Kleiner ventures fail."

Kleiner is taking a wager on "social networking" Internet sites. In February, Kleiner led a $3.7 million round in Visible Path, a company that offers a social-networking application for businesses, intended to capture the relationships between employees and a company's client base. And last July, Doerr led Kleiner's $5 million stake in Friendster.com. Other venture capital firms like Sequoia Capital and Mayfield are also investing in social networking companies.

Friendster offers personalized Web pages to members, who can link their pages to those of other members. The service is free. Doerr said the value of the company is in its customer base.

"All you have to do is look at the usage for a service like Friendster that connects people to people, and at the growth in the usage, and you know this is something that really matters, that people are going to use," he said. But critics say that social networking may never pan out as a viable business, and Doerr did not elaborate on how the company intends to make money.

But then, few thought stand-alone search engines could make money back in 1999 when Kleiner first invested in Google.

"It is the only company that prospered through the bust," said John Battelle, a Silicon Valley consultant who is writing a book on Internet search. Around the time Walt Disney was completing its acquisition of Infoseek, it acquired a minority stake in a deal valued at $420 million in a bid to create a comprehensive Web portal. The project was abandoned in 2001.

"Kleiner has strong visionary folks," said Kim Smith, an entrepreneur whose firm, NewSchools Venture Fund, invests in education-related ventures and has received financial backing from Doerr and Byers.

Other venture capitalists are less effusive about Google's prospects.

"Google is the current state of the art, but it could be replaced," said Timothy C. Draper, a partner at the Silicon Valley venture firm Draper Fisher Jurvetson. "I've got a new search in my office that will take on Google."

Doerr might not disagree. "We still underappreciate the long-term potential of this amazing and ever-improving two-way form of communication that may be evolutionary in its impact on business, but is likely to be revolutionary in its impact on society, governments, policies, political campaigns," he said. "We'll see. It's still early. I mean, it hasn't been all that long since you could point and click."

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