John Doerr: Investing in Stealth and Building a Portfolio Alumni Network

Today, More on John Doerr’s Investment Philosophy 1. The Best Phase for Venture Capital Is the “Stealth” Phase—Called “Sneaking” in the Source This means an industry and company are early in their development, but most people have not recognized them. Investing relatively early naturally carries high risk and considerable uncertainty. Someone will inevitably object. Opposition does not show that the venture is bad, only that some people see it clearly and others do not yet. Doerr invested in many such ventures, so his failure rate was higher. But if some can change the world, the return from one success can far outweigh the cost of many failures. When everyone agrees a venture is good, the best investment point has often passed. Today, many VC funds require every decision to go through an investment committee. That does not entirely fit the spirit of venture capital. In any era, only a few people see opportunities invisible to others. By the time most committee members understand and approve an investment, another fund may have invested in the previous round. Venture capital therefore requires insight and willingness to take risk, rather than democratic decision-making. At KPCB meetings, Doerr’s views often differed greatly from everyone else’s. This was not necessarily a question of who was right, wrong, or smarter. His perspective was often different. He examined overlooked areas more closely to discover companies in stealth, and likewise scrutinized overlooked risks to prevent problems. Once, while reviewing a KPCB portfolio company that was developing very well, people asked after the presentation whether he had any questions or concerns. His only concern was that its gross margin was too high. That seemed strange: higher gross margins usually mean greater added value. Why was he worried? Doerr said SGI—Silicon Graphics—had died that way. A graphics-workstation and server company contemporary with Sun, SGI made products considered the most technologically advanced and competitive of their time. Gross margins reached 70%. It grew so quickly that people thought it would replace Sun as the largest mainframe and server manufacturer. Google’s headquarters today was once SGI’s. But after the internet bubble burst in 2000, SGI rapidly headed toward bankruptcy. According to Doerr, SGI’s exceptionally high gross margin led it to avoid anything with a lower margin, even things it should have done. It missed many opportunities. When the economy weakened and demand in its original market changed, performance fell off a cliff. Accustomed to high profits, SGI did not know how to endure hardship and lacked even the capacity to fight. It went straight into bankruptcy. Many people may not learn Doerr’s judgments about industries and technology, or even consider them important. But his distinctive perspective can inspire VC professionals. Doerr believed venture capital did not require too much money. KPCB therefore usually limited each fundraising to $800 million–$1 billion, although it could easily have raised several times as much. One admirable aspect of his approach was making money-making a repeatable norm rather than the product of a few lucky geniuses. During the twenty years Doerr led KPCB, the fund invested in fewer than 300 companies and took nearly 100 public. By contrast, only about 1% of companies backed by Silicon Valley VC funds reached public markets. Each KPCB fund from the Doerr era ultimately returned roughly 40–50 times its investment. Sustaining that record takes more than stumbling upon a few Googles or Amazons. How did he do it? Besides repeatedly doubling down on excellent companies, as discussed earlier, he encouraged every portfolio company to help the others. Look at KPCB’s portfolio and its exits. Some companies went public, but more were acquired by other companies in its own portfolio. Doerr particularly emphasized those relationships. Accepting his money meant being prepared to help others he had backed. Think of it as a broad alumni relationship. He believed the people he invested in should help one another lead the future. He was therefore investing not in isolated companies but in a network of future leaders. His philosophy lacks the meticulous financial calculations associated with secondary-market investors in stocks and bonds. Instead, it focuses on future development and the impact ventures can have on the world. None of us is likely to become Doerr, or even easily meet his standards for outstanding entrepreneurs. But his views of people and promising ventures offer us valuable guidance. --- #得到 #吳軍矽谷來信 (Dedao; Wu Jun’s Letters from Silicon Valley)