• Archive

Done Deals: Venture Capitalists Tell Their Story: Featured HBS John Doerr

As a young venture capitalist, John Doerr (HBS MBA '76) became one of the first flag bearers for the Internet generation at a time when most entrepreneurs were in their teens and twenties — younger than Doerr himself. Doerr joined Kleiner Perkins in 1980, at the beginning of a decade in which, he says, "we witnessed (and benefited from) the largest legal creation of wealth on the planet."
John Doerr

Excerpted from the book Done Deals, edited by Udayan Gupta, Harvard Business School Press

John Doerr began at Intel in 1975 as an engineer and for the next five years became versed in everything technological - from engineering to the marketing of technology. He couldn't have had a better company or a better mentor: Andrew Grove. When he left Intel to join Kleiner Perkins in 1980, he started at the beginning of a decade in which "we witnessed (and benefited from) the largest, legal creation of wealth on the planet," he says.

The value was in new ventures based on the microchip and personal computer. The then-new PC companies (the Compaqs, Suns, Microsofts, and Dells) grew from $0 to $100 billion in revenues and market capitalization.

As the 1980s ended, Doerr was looking at a new world of opportunities, a world that he has greatly helped shape. With investments in Netscape and Amazon.com, and the launching of the Java Fund, an Internet-only fund fully financed by Kleiner Perkins, he was helping create companies in what clearly has been the biggest industrial boom in modern history.

Doerr, the young venture capitalist, became one of the first flag bearers for the Internet generation, where most entrepreneurs were in their teens and twenties - younger than Doerr himself. He adopted a new mantra, declaring the Internet had been underhyped, that everywhere we turned, the Web was changing everything, and that the benefits, contributions, and value of the new Net companies would dwarf the $100 billion created in the first decade of new microchip and PC ventures. And do so faster!

Here Doerr talks about his path to venture capital and ten important ventures that Kleiner Perkins Caufield & Byers has backed. He looks forward to venture capital in the twenty-first century and in the new economy and shares his personal passion for education reform and the New Schools Venture Fund for education entrepreneurs.

Intel: 1974
Kleiner Perkins Caufield & Byers: 1980
Compaq: 1982
Sun, the Stanford University Network: 1982
GO, a Fiasco in Pen Computing: 1987
Intuit, a "Speedup": 1990
Netscape: 1994
@Home: August 1995
Amazon.com: 1996
Healtheon/WebMD: 1996
The Java Fund: 1996
Drugstore.com: June 1998
Kleiner Perkins Caufield & Byers: 2000
K-12 Public Education
The New Economy
The System Is the Problem
The New Schools Venture Fund: 1998
The Net of It All

What led me into venture capital? Luck, a fascination with innovation and entrepreneurs, plus the ambition - inspired by Lou Doerr, my dad and hero - to one day start a venture with friends.

In 1974 I moved to Silicon Valley after finishing my first year of business school. Venture capital, I'd heard, had something to do with building new companies. So I cold-called Silicon Valley's venture groups, hoping to apprentice myself to one. But the timing was terrible. In 1974 there were only two new ventures funded with more than $1 million - Playboy Enterprises and KP's Tandem Computers. Venture groups were not making new investments; instead, they were struggling to keep existing ventures funded and afloat.

Somehow, several venture capitalists found time to offer advice, including Brook Byers,1 who was then working with Pitch Johnson,2 Bill Draper,3 Burt McMurtry,4 and Dick Kramlich,5 then working with Arthur Rock.6 Their advice was to forget about venture capital and to go out and get a real job working with a good company. A few suggested a small new chipmaker called Intel.

Luckily, Bill Davidow,7 then VP/General Manager of Intel's microcomputer division, agreed to meet me. I interviewed and landed a summer job.


Intel: 1974

The summer of 1974 was pivotal in my career. Intel was a promising, well-managed, $130 million revenue company with 3,000 employees. They had just introduced the 8080 chip, the first 8-bit microprocessor.

That summer Andy Grove taught new employees the first course on "Intel's Organization Philosophy and Economics" (iOPEC). Andy's management genius and personal commitment to education were evident even then. By summer's end Andy and I had trained Intel's sales' force in the U.S. and Europe. Our benchmarks showed the superiority of Intel's 8080 processor versus Motorola's 6800. And even more fun, we won major design contracts selling major customers like Siemens and ICL. I promptly forgot about venture capital and decided to build a career at Intel.

I returned to grad school to finish a degree in business and continued working twenty hours a week for Intel as the field engineer assigned to DEC. We dragged DEC kicking and screaming into the brave new world of microprocessors. DEC's engineers were skeptical of computers on a chip, but that's another story.

After business school my next job was at Intel's factory "headquarters," working first with engineering and then product marketing. However, my friend and marketing manager, Jim Lally, advised me that if I someday wanted to be a successful marketing or general manager, I'd better learn how to sell and how to motivate a field sales force. He told me to "get out into the field, and carry a bag!"

So I transferred to Intel's Chicago sales office and had a blast, calling on small accounts in farming and industrial communities. It was the one of the best and most educational of jobs: solve a problem, get an order. Then I was called back to Intel's factory to be a marketing manager, still working with microprocessors, software, and people.

Kleiner Perkins Caufield & Byers: 1980

In 1980 a friend introduced me to Kleiner Perkins. They wanted a gofer to help check out new business plans. I was still interested in someday starting a venture, but I wasn't so sure about venture capital. During my interview, the KP partners - Eugene, Tom, Frank, and Brook - promised that if I worked for them, they would someday back me in starting a new venture. They pointed to their success backing Bob Swanson, an associate who incubated Genentech, and Jim Treybig, who incubated Tandem Computers.

Kleiner Perkins offered me a job and within the first year I was fortunate to meet two professors at the 1981 Cal Tech VLSI Conference: Carver Mead from Cal Tech, and Jim Clark from Stanford. Carver and Jim would later play key roles in ventures that KP backed.

Carver Mead told us about his research into new tools for chip design. He called it "silicon compilation." True to their word, the KP partners backed Carver and me in co-founding a new venture, Silicon Compilers. After eighteen months we recruited a more qualified CEO from Intel, Phil Kaufman. Later, Silicon Compilers merged with Silicon Design Labs, and in 1991 Mentor Graphics acquired Silicon Compilers for $142 million.

Meanwhile, Jim Clark was developing his geometry engine, which led to Silicon Graphics. Jim later worked with KP in building great companies like Netscape, Healtheon, and currently myCFO.

Throughout the 1980s, the microprocessor was the common denominator - the base technology - for successful KP ventures, from Compaq to Lotus, and from Sun Microsystems to AOL. None of these new digital, personal computing, information, or network products would have been possible without the microchip.

Compaq: 1982

The first business plan from Compaq founders Rod Canion, Jim Harris, and Bill Murto outlined their intention to market hard disk drives for the original IBM desktop PC, which desperately needed more storage. Ben Rosen and L. J. Sevin (the lead investors) and the KP partners didn't think that was a durable business, so we passed on the hard disk idea. But the founders had already resigned from Texas Instruments; so although they were devastated, they didn't give up. Instead they "worked the problem" - which is a Compaq attitude and slogan. They sketched out a new plan at a fabled meeting at the House of Pies in Houston.

Their new vision was to build the first transportable PC - similar to a computer that Regis McKenna and I had advocated unsuccessfully at Intel a few years earlier. The first Compaq was sewing-machine sized, with a nine-inch diagonal green screen, two floppy disk drives, and a handle. It was 100 percent IBM compatible. Thirty-five pounds. Portable-or at least luggable. I fell in love with their idea and advocated we invest and help build the team.

Their timing was terrific. IBM was unable to supply all the demand for PCs, and the Compaq was in many ways better. Further, the genius of Compaq's marketing was positioning Compaq as complementary to IBM, not competitive. Compaq did neither intellectual, emotional, nor economic violence to the commitments and success of the IBM dealer chain.

To sign up and serve the dealers, we recruited Sparky Sparks, one of the original "Dirty Dozen" founders on IBM's Boca Raton PC team. Sparky had set up the IBM dealer network, making numerous dealers millionaires by awarding them the IBM franchise. So when Sparky phoned to sell Compaq's high-quality, IBM-compatible product, the dealers took his word. They signed on and promoted the Compaq, and delighted their customers. Compaq's dealer network, including Sears, Computerland, and Businessland, remained one of its strengths for many years.

Revenues skyrocketed. Compaq sold $110 million of portable PCs its first year. Over the years it became the fastest new venture ever to achieve $1 billion in revenue and the fastest to enter the Fortune 500.

Sun, the Stanford University Network: 1982

While I was at Intel in 1980, Stanford professor Forrest Baskett visited and described the "Sun: Stanford University Network" research project led by Andy Bechtolsheim. They were building an affordable version of the much-admired and envied Xerox "Alto" workstation. After I moved to KP, I followed Sun's progress by hanging around the second floor of Margaret Jacks Hall, the mother lode for computer science innovation at Stanford.

The four co-founders of Sun were twenty-seven-year-old entrepreneurs - backed by a couple of thirty-year-old venture capitalists. Fortunately, none of us really knew what we were doing, or what we were up against. If we had, we might not have violated the then-conventional wisdom about computing.

Sun adopted and promoted "open systems": standard networking, commodity microprocessors, and Berkeley's UNIX operating system. In comparison, rival Apollo Computer in Boston had far more experienced, respected management and proprietary systems. Although starting later, Sun's founders - Vinod Khosla, Scott McNealy, Andy Bechtolsheim, and Bill Joy - and their team decisively beat Apollo. Vinod, Scott, Andy, and Bill remain lifelong friends, and Vinod is one of my most talented partners.

Sun's original business plan, written by Vinod, was a model: just seven pages covering the mission, four months' objectives, a tentative two-year plan, the product, the market, their competitors, and their people. Brief business plans are best.

GO, a Fiasco in Pen Computing: 1987

GO's failure in pen computing is well-chronicled in Jerry Kaplan's Startup. It could have been titled Screwup. GO failed - but not for lack of vision or good corporate partners. IBM, AT&T, and KP backed some of America's smartest, most passionate entrepreneurs who were convinced that pen computers were the next big thing. But our implementation was just wrong. We misread the market and picked the wrong price point, and the handwriting recognition was too ambitious.

A few years later, Jeff Hawkins and Donna Dubinsky introduced the Palm Pilot hand-held computer. Jeff and Donna sold four million units in 1998 before leaving 3COM/Palm to start Handspring with KP backing.

Three important lessons stand out despite GO's failure. First, the importance of leadership and teams: Bill Campbell and GO's people were extraordinary. We've subsequently backed dozens of them in building other successful, important companies. GO alumni are now CEOs, founders, or VPs of ventures such as Netscape, Intuit, Sun, Verisign, Amazon.com, Handspring, OnSale, and others. Second, a terrific team is necessary but not enough. Don't confuse a great team with a great business. And third, the ethos of Silicon Valley: It's okay to try and fail, and try again - just don't make the same mistakes twice. We want to encourage risk taking. When important risks are removed, there can be great rewards.

Intuit, a "Speedup": 1990

Intuit was founded in 1983 when Signe Ostby, VP of Marketing for a large software company, complained to her spouse, Scott Cook, about the time and hassle required to balance a checkbook. Scott sought funding from over twenty-five Silicon Valley venture firms, all of whom passed on the investment. So Scott's savings account, his father, and his friends were Intuit's first-round investors. They struggled, missed payroll for four months, but by 1988 Intuit's Quicken was the leading personal finance software on DOS.

By 1990 Intuit had one million happy customers and revenues of $33 million. Then Scott decided it was time to take Intuit to the next level. The company had only inside members on its board of directors. Scott wanted the strongest possible outside board - one that would pay a lot of attention to Intuit, challenge it, and help grow it to $1 billion in revenue. He viewed Quicken's number-one personal finance software as just one leg of a stool. Scott wanted to add small business finance, and possibly taxes. He wanted to strengthen his team for impending competition with Microsoft Money for Windows.

KP invested $4.7 million for 12 percent of Intuit, promising to speed up - instead of start up - the business. We helped recruit management, get Quicken for Windows to market, launch the important Quickbooks business application, complete a public offering, merge with the leading tax provider (Chipsoft's TurboTax), recruit Bill Campbell as CEO, and attempt a merger with Microsoft. Intuit didn't need KP's money; in fact, our $4.7 million never went to the company's bank account, but purchased shares directly from founders.

After Microsoft withdrew its acquisition offer, Intuit rushed its products to the Web, forged alliances with Excite and AOL, and developed leading online sites for personal finance, tax, and small businesses. Under Bill Campbell's watch, Intuit grew from four million customers and $120 million revenue in 1994 to eighteen million customers and $1 billion in revenue in 1999. A whole book should be written on the leadership, integrity, character, and legacy of "Coach" Bill Campbell. The teams Bill assembled and coached at Apple, Claris, GO, and Intuit today lead many of Silicon Valley's best businesses.


Netscape: 1994

Alan Kay, a Xerox Palo Alto Research Center scientist, said, "The best way to predict the future is to invent it." Well, if you can't invent it, you can finance it. Or help piece it together.

Every year, usually in December, Bill Joy and I think ahead five to ten years and discuss the largest, most important new opportunities in science, communications, society, computing, and commerce. In 1991, Bill predicted that one day KP would back a nineteen-year-old kid who wrote software that would change the world.

On a Sunday afternoon in January 1994, at the MacWorld Expo, Bill Joy and I met with Will Hearst, Scott Cook, John Gage, and Chris Gulker in the San Francisco Examiner boardroom. John Gage demonstrated Mosaic, the first Web browser, and Bill Joy admonished us all to dive in. He declared that this was moving so fast, if we didn't get going, we'd be behind forever. Sure enough, Netscape redefined time. It created Web time, characterized by rapid change, growth, time compression, and shifting strategies.

In early 1994, Jim Clark was thinking of leaving Silicon Graphics. Jim was being "classic Jim": frustrated, restless, imagining the huge potential for multimedia over networks, possibly the Nintendo 64 game platform. Jim has always had an incredible sense of taste for technology, teams, and market opportunity. Bill Foss suggested Jim meet Marc Andreessen. Shortly after their meeting, Jim offered to fund the start of Mosaic Communications if Marc and he could hire the University of Illinois team that developed the prototype Mosaic browser. They flew to Champaign-Urbana, interviewed the programmers at the University Inn, faxed offer letters to the front desk, and signed all five engineers. Mosaic Communications was born.

A few weeks later Jim Clark called and asked me to meet with Marc, who was then twenty-two - the almost nineteen-year-old genius prophesied by Bill Joy.

Netscape's team was nimble, bold, and frame-breaking. KP partners, particularly Kevin Compton and Doug Mackenzie, helped rapidly recruit world-class senior executives including four VPs (Jim Shaw, Mike Homer, Todd Rulon-Miller, and Rick Schell), numerous directors, and an awesome CEO, Jim Barksdale, in less than twelve weeks. I can't overstate the impact of Jim Barksdale on Netscape. He was tough, but revered. He's ruthlessly honest, selfless, and a tireless leader and team builder. He has extraordinary integrity and courage, a sense of humor and the power to bring out the best in others.

It's astounding to stop and realize that just a few hundred weeks ago there was no Web. The introduction of Netscape's Navigator created unprecedented and unanticipated opportunities. Navigator simplified the Web, making technology previously the domain of academics accessible and ubiquitous. Remember the contributions of Navigator 1.0? It supported forms and encryption, enabling e-commerce. All you had to do was point and click.

On August 9, 1995, Netscape went public. Their IPO raised $140 million, with their price per share zooming from $28 to $74.75, valuing Netscape at $2.2 billion. It was the first Internet IPO - the shot heard round the world. The IPO was the starting gun in the race to develop technology, attract talent, build brands, and offer all kinds of new Internet services.

On December 7, 1995, Microsoft gathered financial analysts and declared they were going after Netscape. Microsoft would offer browsers, which were $150 million of Netscape's revenue, for free (more or less). Analysts wrote Netscape's obituaries. But Netscape morphed from a browser company to a browser plus server company, then from a browser plus server company to a collaboration and open standards mail company, then to an e-commerce software company, and then to Netcenter, a growing portal with nine million members. If America Online was the "nighttime online channel" for consumers, then Netscape's Netcenter became the leading daytime channel for business and professional users.

In mid-November 1998, Netscape and America Online, with Sun Microsystems, announced that Netscape would be acquired by AOL. Over the next six months AOL's market value increased $120 billion. Sun's market cap increased $25 billion. Netscape's market cap leapt from $4 billion to over $17 billion.

@Home: August 1995

@Home was incubated in Kleiner's offices with KP partner Will Hearst as founding CEO. We dreamed up the idea, the co-branding, and even the name, thinking it would be really cool to have an e-mail address that reads janedoe@home.net.

Will says that at the heart of every great venture is a technical genius. @Home needed a networking genius. So we asked our friends, "Who is the very best Internet guru?" All of them pointed to the infamous and elusive Milo Medin, who at the time was running Mae West and the government's Internet at NASA Ames. We called Milo several times a day and sent him mail messages for over a month. He didn't respond. One day, by chance, Milo answered his phone. While we couldn't disclose that the cable companies were our partners, we got his attention with the prospect that he could deliver the Internet into millions of homes thousands of times faster than ever before.

Two days later, Milo met with Will Hearst and me at the Good Earth restaurant in Palo Alto. We sketched our idea, Compaq-style, on the back of a napkin. We explained to Milo that we would recruit a world-class Silicon Valley technology team that would build the biggest, fastest network ever. But the idea was more than a fat, dumb pipe. The vision for @Home was an extremely popular, co-branded, always on, high-speed Internet service. All the high-speed Internet you could eat - for $20 to $40 per month. Milo laughed and said, "Nice try, but it won't work."

We had hoped to simply put cable modems in homes and then stitch them through cable head ends directly to the Internet. Our fatal flaw was that the fastest Internet backbone at the time was only forty-five megabytes per second. To deliver a full-screen video clip, for example, could consume a megabyte and a half of bandwidth. In other words, if just thirty people hit the carriage return on a video clip of a shuttle launch, they could bring the Internet to its knees.

Milo insisted we couldn't just connect with the Internet. Instead he proposed a parallel managed Internet exploiting an important idea in computer science: caching. Milo put proxy servers to keep copies of the most popular pages in every cable system head end. Also, Milo didn't believe the first cable modems were manageable, or would scale. He helped redesign them with industry architects at Cable Lab. The second-generation modems offered security, encryption, and manageability. Milo insisted the cable modem networks be very high performance and reliable, up 99.99 percent of the time.

In 1999 Excite and @Home became Excite@Home, a merger valued at $7.2 billion. Excite@Home would have failed merely as the idea of venture capitalists. It needed the genius of Milo Medin and the leadership of Will Hearst, Tom Jermoluk, and George Bell, who Will hired to run the company. Ideas are easy, but execution is everything, and teams win.


Amazon.com: 1996

The best ventures are big and simple. They serve large markets with strategic focus and a simple, powerful value proposition. When Amazon.com opened its bookstore in July 1995, there were many other stores on the Web. But none had so thoughtfully and rigorously obsessed about creating a compelling customer experience. Amazon.com offered huge advantages. They weren't merely putting a catalog online. Nowhere else could you find two million books, books in print, books out of print, with low prices and next-day delivery from an authoritative, trusted source. Amazon.com built its brand with a voice - with a light, playful, but respectful attitude.

The company fanatically focused on scale, on having happy customers, and on building a community of book lovers. Every ninety days was a Web year. But for the first twenty-four months - think of it as eight Web years! - the look of Amazon.com's Web site barely changed. All its effort went to recruiting the team, building the brand, and making sure the site would scale. Business was growing at 6 percent a week, faster than anything we'd witnessed.

Jeff Bezos and our partners immediately had a mind meld. The number one goal was GBF - get big fast. Inspired by Microsoft, we hired only incredibly smart people to lead this brave new world of e-commerce. We didn't hire senior management from the book industry. KP's Doug Mackenzie helped recruit a world-class CFO, Joy Covey, who is an incredible athlete and a great leader and competitor. She became not only CFO, but also one of Amazon.com's chief hiring officers. We hired not one, but two VPs of development: Dave Risher to run the front end of the store, and Rick Dalzell to run the back-end IT and logistics.

Under the covers, Amazon.com is a software company. Today, over 600 out of 3,000 people work on software. Jeff deserves enormous credit for insisting that Amazon.com execs hire better people at every level. That way, the quality of the organization is raised with each person hired.

How do you sustain an ultra-high growth user web? You keep hiring great people. Jeff Bezos says that KP's important contribution to Amazon.com wasn't the biggest check we'd ever written - $8 million for 15 percent. Instead, we helped hire more great people faster.8

So value-added venture capital is not about the money. Because of Amazon.com's positive cash cycle (customer pays in two days, vendors are paid in fifty days) the company barely used the $8 million we invested.

Less than a year ago, Amazon.com was only a bookstore. Today it is the leading book, music, and video store. In 1999, it launched stores for toys, consumer electronics, auctions, electronic greetings, games, software, Z-stores, home improvement, wish lists, and a Sony store-within-a-store. Further, Amazon.com has been savvy and aggressive by investing in strategic affiliates. Amazon.com's mission is to be the best place to find, discover, and buy anything online.

Amazon.com does regular, ruthless triage on a list of insurmountable opportunities. These are projects that ought to be pursued, projects that compete every day for finite resources. Jeff is an extraordinary founder and entrepreneur. And together, Jeff Bezos and Joe Galli are exceptional leaders and executives. They communicate clearly and effectively throughout the organization, by word of mouth, and through the press about Amazon.com's mission.

We're witnessing at Amazon.com the creation of a gigantic, extraordinary service for discovery and commerce. In less than a decade, Amazon.com should be recognized like Wal-Mart, GE, or Microsoft for its contributions: pioneering e-commerce, lowering prices, building communities of happy customers, and delivering products and services that are really wanted. Amazon.com is shifting power back to the consumer.

Healtheon/WebMD: 1996

Just as Amazon.com puts the consumer in charge of their purchases, Healtheon puts the patient and doctor in charge of the health care system. Healtheon's premise is that the Internet will be the standard communications platform for health care. In my opinion our health care system is the second most screwed-up segment of the American economy. Americans simply want the best health care that other people's money will buy.

Until Healtheon, health care information systems were incompatible islands of minicomputer automation. These legacy systems mostly manage claims and adjustments ricocheting back and forth between payors and providers. The health care industry has historically invested a miserably low percentage of revenues on information technology. Medical records are not online, and they are incomplete or lost; lab data results are unavailable or delayed; and specialists incorrectly diagnose the needs of patients. Health care is more than the second largest segment of the economy; it is also a matter of life and death.

Jim Clark, Pavan Nigam, and KP's associate partner, David Schnell, founded Healtheon in January 1996. The first business plan was to use the Web for medical plan eligibility and enrollment. As with Netscape, we immediately began a search for a world-class CEO. And like Netscape, the business changed many times, responding to and ultimately transforming the market.

After many many months of recruiting, Mike Long, a world-class executive from Austin, Texas, agreed to become Healtheon's CEO. At the first board meeting Mike declared, "John, I'm in a hurry." Mike swiftly redefined the business to serve the information needs of a dozen large market segments, from diagnostic test results to doctors and providers. He scaled the business and team, completed an IPO in 1999, and closed dozens of joint ventures. In May 1999, Healtheon rocked the health care community by announcing a fifty-fifty merger with Jeff Arnold's WebMD, valued at $9.8 billion.

Healtheon/WebMD helps health care providers create their own portals for consumers. It helps consumers (patients) assess their health risks and take charge of their own medical care. Health care is, in the end, an information business. With data, you make better-informed decisions for yourself and your family.

So, Healtheon/WebMD meets KP's prescription for a great venture. It uses new technology to serve an important market with large, unmet needs. Although health care institutions are slow to change, the Web lowers costs, can profoundly improve outcomes, and most of all, puts power in the hands of users. That's the dynamic of the Internet.

The Java Fund: 1996

There have been just a few big ideas in computer science - one is the idea of caching, which was a pillar concept of @Home. A second important idea is Java. Java lets you write a safe, secure program, based on objects, that is small and can run anywhere. That the program is safe and secure and, in fact, provably correct, is incredibly powerful. It is as important an idea for software as the integrated circuit was for designers of electronic systems.

Bill Joy, James Gosling, Arthur van Hoff, Jonathan Payne, and Patrick Naughton created Java, building on decades of first-rate research in computer science. They said it was too hard to make computer systems work reliably - especially distributed systems, which are most of the really interesting systems. So they invented a new, needed language. Kim Polese9 brought marketing savvy to the team. And Eric Schmidt, Bill Joy, and Mike Clary broadly licensed Java technology to gain worldwide adoption. They got Netscape to include it in Navigator 2.0. That was the slingshot that spread Java to millions around the world and motivated Microsoft to license it.

KP formed a Java Fund, inviting its partners to invest. The fund, led by partner Ted Schlein, focused on ventures creating new distributed applications. It looked very, very risky at the time. However, the fund returns have been spectacular. And Java has been broadly accepted as a key technology. KP has pioneered whole new industries before, succeeding with Genentech - recombinant DNA - and failing with GO - pen computing. With the Java Fund, we again tried to help create a new industry. This time it worked.


Drugstore.com: June 1998

Four years after the founding of Netscape, and three years after Amazon.com, drugstore.com illustrates well the new high standards for second generation Internet start-ups.

Peter Neupert signed on in July 1998 as CEO of a three-month-old organization with one employee. Drugstore.com made its debut on February 24, 1999.

In just thirty-two weeks, Peter accomplished the following: He concluded a strategic alliance with Amazon.com. He assembled a team of 250 exceptionally smart, aggressive people. They created from scratch an authoritative, scalable e-commerce service. They photographed and entered the instructions and warnings for 15,000 pharmaceutical, health, beauty, and personal care products-twice! They created order-processing, merchandising, inventory, purchasing, vendor integration, credit card, and fulfillment systems. They established certified pharmacies able to ship to customers in all fifty states. They staffed and offered 24/7 advice so you can "ask your pharmacist" online, anytime. They focused, correctly, on commerce instead of content. And they raised $121 million in four private venture rounds.

In July 1999, just fifty weeks after Peter joined, drugstore.com filed for its IPO. After the filing, they forged a strategic relationship with Rite-Aid/PCS/GNC which ensured that all pharmaceutical purchases at drugstore.com could be reimbursed by health plans. They revised the prospectus to disclose the Rite-Aid alliance, and raised another $90 million in the IPO.

At year-end 1999, drugstore.com was clearly the leading online drugstore, with over 700,000 customers and four times the revenue of its nearest competitor. It is setting the pace in a $71 billion industry, with analyst forecasts for revenues of $1.1 billion in 2003.

The drugstore.com story shows the whole KP team serving great entrepreneurs. Associate partner Dave Whorton incubated the idea. Russ Siegelman suggested and helped recruit Peter Neupert as CEO. Brook Byers brought key insights into the pharmaceutical industry. He and I helped work out the Amazon.com relationship. None of this would have been possible without the team led by Peter Neupert, Kal Ramon, Susan Delbene, and partners at Amazon.com and Rite-Aid.


Kleiner Perkins Caufield & Byers: 2000

What's the outlook for venture capital and KP in the twenty-first century? How will venture capital change in the next two decades? Those are great questions that challenge us at our off-site strategy sessions. Venture capital, like every industry, is changing rapidly. And the change is accelerating because of the Internet and globalization. Venture capital remains first and foremost a service business. Advice, help, judgment, recruiting, and networking matter more than money.

Over $11 billion of venture capital was invested in Silicon Valley in 1999, up from $3.5 billion in 1997. An estimated 300 ventures in Silicon Valley are currently recruiting CEOs. Entrepreneurs, technology, market opportunity, and venture capital are in abundance. What's in short supply, what's dear, are great teams. Again, it's teams that win, because it takes teams to build a great business.

Great entrepreneurs and great CEOs are team builders. And good venture capitalists must help build and grow teams. We believe venture capitalists should have significant venture operating experience. The right to advise great entrepreneurs and to serve on their boards is earned, not purchased. And each partner and associate at KP is better because we're part of the KP team and network.

There's no reason a venture group need be more than an episodic collection of talented individuals. But since its founding in 1972 by Eugene Kleiner and Tom Perkins, KP has been committed to the training, development, and transition of generations of partners. We want to build and honor a long-lasting network of relationships with the best entrepreneurs and executives. And develop our own strong team with several generations of venture capitalists.

KP's venture keiretsu has been widely misunderstood by the media. Unlike a leveraged buyout firm, or a true Japanese keiretsu, KP doesn't control any of the ventures we back. So the KP keiretsu is a particularly American, Western, and entrepreneurial version of the Japanese keiretsu. The difference is that there's no central controlling bank, no interlocking boards of directors. Instead, there are strong, independent ventures led by smart, aggressive entrepreneurs who are tops in their field. They know they can't do it all on their own. They seek alliances with other ventures. They see the advantage of accelerating growth and success by partnering with others. The keiretsu is a network and entrepreneurs want to be part of the network.

There are too many alliances, investments, and outright mergers between KP ventures to list completely. But there's no denying their impact on technology and the new economy. Consider:

  • Compaq and Microsoft's making the first 386 PC a year before IBM.

  • Netscape's decision to include Sun's Java in Navigator 2.0, and the AOL-Netscape-Sun alliance.

  • AOL's investments in Excite, Preview Travel, and HomeStore.com, and its acquisition of Netscape.

  • @Home's merger with Excite to accelerate broadband Internet.

  • Amazon.com's strategic investments in della.com, drugstore.com, homegrocer.com, and wineshopper.com, and its acquisition of accept.com.

  • Cisco's $7 billion acquisition of Cerent, their largest acquisition to date.

  • Broadband collaboration by Corvus, ONI, Juniper, Cerent, Siara, New Access, Qwest, and Rhythms to enable application service providers such as Asera, Broadband Office, Corio, and others.

  • Microsoft's catalytic role in Healtheon's $9.8 billion merger with WebMD.


K-12 Public Education

Question: If health care is the second most troubled sector of the American economy, what is the worst? Answer: K-12 public education.

Crisis is the right word to use in discussing the state of education. Among America's eight-year-olds, fully 40 percent are reading below grade level. When kids aren't getting it - when they're not learning or making progress - they turn off to education. They fall further and further behind. And then, all too often, we lose them forever.

Our K-12 public education system is, in the strictest sense, a state-run monopoly rife with social promotion. As long as you don't make too much trouble, you ride the conveyor belt from grade to grade regardless of how much you learn or whether you learn at all.

Outcomes don't matter until you get to college. Then, suddenly, outcomes matter - a lot. In California, for example, an astonishing 50 percent of incoming college freshmen are forced to take remedial English or algebra classes just to stay afloat.

Why does this matter? Because in the new knowledge-based economy, even the jobs on the factory floor require fairly sophisticated symbolic reasoning. You can't run a wafer stepper at Intel without being able to do statistical process control. And you can't do statistical process control without the ability to do algebra. You can't work for a dot-com Internet company without being able to read, write, and think critically.

By failing to teach more than half our kids the most elementary of skills, America's K-12 system leaves them ill-equipped to survive in this new economy. We're wasting whole generations of kids, especially in poor, urban school systems. The kids know when they're not getting it. They end up on the streets, in gangs, and then in prisons because they think they don't have options or opportunities. It's hard to imagine a more searing indictment - or one with more dangerous consequences for the new economy and for all of us.


The New Economy

Let's be clear. Americans will not achieve their dreams through welfare or by redistributing wealth. Instead, we must ensure that opportunity is fairly distributed and available to all. Education is the key. Every kid in this country ought to have a shot at a great education.

Education reform is deeply in our self-interest. Left alone, technology will widen the digital divide, the gap between the haves and the have-nots, the knows and the know-nots. Without education reform, the new economy will face huge obstacles.

By now, everybody has heard about the new economy. Its pillars are the microchip, the PC, the Internet, and genomics. Between 1980 and 1990, the new PC companies grew from $0 to $100 billion in revenues and market value. The industries emerging around the Net are expanding at least three times as fast. For Internet entrepreneurs, normal growth is 6 percent a month.

Such growth is unprecedented, and so are the broad economic benefits. In Silicon Valley unemployment is at 3 percent. Wages are at an all-time high. Upward mobility is not just for those on the upper rungs of the ladder. Almost everyone seems to be moving up. This isn't happening only in Santa Clara, California. It's also happening in Austin, Denver, Seattle, Boston, Raleigh-Durham, Pittsburgh, and South Dakota.

The new economy, we're discovering, isn't a strange phenomenon that flourishes exclusively in Silicon Valley. But if the benefits of the new economy are going to be felt everywhere, big changes in education are necessary. In the new economy, the scarcest and most precious commodities are intelligence, resourcefulness, and innovation. The new economy's ability to achieve its full potential will be retarded if it doesn't have a continuous and voluminous supply of strong minds.


The System Is the Problem

I can already hear the cynics sneering, "Yes, yes, okay, John. Everyone agrees that improving education would be a Good Thing. That's apple pie. But what do you 'techies' know about getting there? You haven't the foggiest clue about school boards and teachers' unions and education policy. Consider all this talk about wiring the classrooms. We don't need Cat 5 wiring. We need the roofs repaired. We need more money. And we need shorter school days for overworked teachers. Go back to your garage start-ups. Leave public education alone. You guys just don't get it."

To which I reply, "With all due respect, yeah right." For decades, public education has been the sole province of powerful, entrenched bureaucracies of self-styled experts who supposedly do "get it." Look at where they've gotten us. The problem isn't with teachers, many of whom are dedicated, caring, and energetic. The problem isn't with parents, who want nothing more than for their children to succeed and are willing to work to see that happen. And the problem certainly isn't with our kids, who desperately want to learn.

The problem is the system.

What are the solutions to reforming the system? The first thing to realize is that there is no silver bullet. There never is. Education is complicated, subtle, and demanding. But this isn't rocket science. All over the country, experiments have produced affordable, scalable programs with tangible results. We don't know everything, but we do know some things that get kids reading, writing, and learning math:

• smaller classes and smaller schools

  • teachers who have the time and the incentives to be better prepared

  • intense parental involvement

  • excellence and equity

  • charter schools

  • accountability - it's crucial to hold schools and teachers responsible for their students' performance and testing

  • choice and competition

  • leadership

Ultimately, the quest for education reform will fail if it's left to the politicians. They're necessary but not sufficient. This is a movement that needs to be driven from the outside by those who have the best understanding of the new economy and the greatest stake in it. It means encouraging and supporting a new breed of entrepreneu - education entrepreneurs.


The New Schools Venture Fund: 1998

The New Schools Venture Fund (NSVF) was founded to support education entrepreneurs.10 It helps with funding, recruiting, advising, and expertise. It helps scale really big ideas to improve public schools, whether for-profit or nonprofit, tackling system problems both inside and outside the public school system.

Charter public schools - Advantage Schools, Learn Now, and University Public Schools - are one such idea. Success for All, another powerful idea, is a research-based, structured program for whole school reform that gets all kids to read. Greatschools.net, an online Zagat's Guide to the actual performance and needs of schools, is a third big idea. Volunteer programs like NetDay are a fourth big idea. They have wired tens of thousands of schools, and are now designing new "NextDays" to wire classrooms, train teachers, and connect parents in impoverished communities.

Reed Hastings is both an education entrepreneur and NSVF investor. After selling Pure Software for $750 million in 1997, he began a new career in education reform. He went back to school at Stanford's School of Education. Reed embraced the idea of charter public schools. He is leading the charge on California's Proposition 26 to allow a simple majority to approve school construction bonds. Reed is a co-founder of nonprofit University Public Schools. He led a $4 million campaign to take the caps off charter schools in California, resulting in AB 544, which will fund 100 new charter schools every year for the next decade. The result of his efforts could be 1,000 new competitive public schools in California, changing the lives of perhaps 500,000 kids a year - public schools that can be innovative, and that are accountable for high performance, with as much as $4 billion in funding. That's a more valuable return than the venture investment in Amazon.com!


The Net of It All

We're still very early in the development of this new networked economy - just a few milliseconds after the Big Bang. This new world is expanding rapidly. Only a few laws and forces are clear. But this is a long boom. And faster than industry leaders can consolidate, new ventures are emerging - technology is creating more opportunity. The markets are larger, but less forgiving. The universe of possibilities is expanding. Competition is intense - for talent, for ideas, for customers, and for alliances. There's never been a better time than now to start a new venture, to get great venture capital assistance, or to better educate American children.

· · · ·


1. A partner at Kleiner Perkins, best known for his investments in biotechnology.

2. One of the early venture capitalists, a partner at Asset Management.

3. Another early Valley venture capitalist, a partner at Draper, Gaither & Anderson.

4. Venture capitalist at Technology Venture Investors.

5. A founding partner of New Enterprise Associates.

6. The lead investor in Intel and Apple.

7. Engineer at Intel, and later venture capitalist at Mohr, Davidow Ventures.

8. In just the last 120 days we helped Jeff recruit Joe Galli, a new president; Warren Jensen, a new CFO; Jeff Wilke, VP of Operations; Bill Price, VP of Customer Service; Daryl David, VP of HR; Mark Britto, VP of Development; and Jaheh Bisharat, VP of Marketing.

9. Kim Polese is a marketing executive at Sun.

10. Says Doerr: "Leading each of these great ventures are passionate, committed, even angry entrepreneurs: Don Shalvey, Bill Jackson, Julie Evans, John Gage, Michael Kaufman, Gene Wade, Jim Shelton, Nancy Madden, and Bob Slavin. The New Schools Venture Fund is a network of America's education entrepreneurs. Its president, Kim Smith, is herself an eduction entrepreneur and a co-founder of Teach for America.

"New Schools investors include Jim and Sally Barksdale, Ann Bowers, Brook and Shawn Byers, Scott Cook and Signe Ostby, John and Elaine Chambers, Steve Merrill, Halsey and Deb Minor, Ted Mitchell, and numerous others. NSVF is building the first network and community of education entrepreneurs."

[ Buy the book ]

Related stories on HBSWK:
Done Deals