July Cover Story: Pop VC –

When Ray Lane left Oracle after an exasperating eight years of toiling in the shadow of Larry Ellison’s epic ego, Kleiner Perkins Caufield & Byers was waiting in the wings with open arms.

Lane had never worked at a venture firm, but he found it to be a natural fit. Prior to becoming a “corporate guy” at Oracle, he had spent a dozen years at Booz-Allen & Hamilton, so “coming back to a partnership was easy.” At Booz-Allen, “everything happened very slowly and everyone contributed their point of view; it was an ecology.” It was a world apart from Oracle, where “I couldn’t stop someone in the hall to offer my view on a subject because within five minutes my words would be on email and considered gospel.”

Lane-now in his fifth year as a general partner at Kleiner Perkins-is one of four very high-profile names the firm has plucked from the technology industry. Months before Lane signed on, KP found its first celebrity GP in Internet whiz kid Tom Jermoluk. This year it has added rock stars Bill Joy, long the chief scientist at Sun Microsystems, and Randy Komisar, co-founder of Claris and the “virtual CEO” of such companies as WebTV.

Why has one of Silicon Valley’s most august venture firms been bringing aboard people without traditional VC experience rather than grooming people internally? And why have so many other firms done the same, including Highland Venture Partners, Hummer Winblad Venture Partners, General Catalyst Partners, and Polaris Venture Partners? Most of the best venture capitalists have never headed a major public company. Their resumes, though impressive, are fairly boilerplate. Think engineering degree or MBA. Think marketing VP or head of biz dev. Think Jim Breyer or John Doerr.

Herewith, a closer look into the puzzling trend, as well as insights by those in the know concerning what a tech celebrity brings to the party-and the potential problems that can arise when a “star” is added to an existing general partnership.

Entrepreneurial Magnetism

Stars whose accomplishments have been widely heralded are undeniably powerful talent magnets. It’s a universal truth, but particularly in an industry where brand means everything, it’s more than reasonable to conclude that a celebrated executive will help attract celebrated entrepreneurs.

Consider the case of Kim Polese, who found herself in the spotlight after co-founding software tools developer Marimba. When Marimba was sold to BMC Software for $239 million in April 2004, Polese-who shouldered 80-hour weeks at Marimba and enjoyed a financial windfall from its sale-considered relaxing for a few to six months. She eased into her new, slower-paced life by acting as a consultant to entrepreneurial friends.

Then the phone rang. It was Lane, who had been on the board of Marimba starting in October 1997, when he was still at Oracle. “He’d been incubating this new company with [an entrepreneur in residence] since the spring of 2003, and he thought it was a great fit for me,” Polese says.

She met with the company, SpikeSource, and weighed the opportunity. It was a good fit, but her decision to say goodbye to the easy life and take over as CEO of another startup largely came down to Lane. “I have tremendous respect for Ray, and I know his filter is very high and that he has a lot of practical perspective on business models,” Polese says. “So something that he was not only backing but he had helped to create really caught my attention.”

General Catalyst Partners is hoping that George Bell will have the same impact as Lane in attracting top-notch entrepreneurs. Bell, former CEO of Excite, joined General Catalyst a couple of months ago as a venture partner to focus on new media. If an entrepreneur chooses to work with the firm on the strict condition that Bell joins his or her board, “that’s fine; that’s why he’s here,” says General Catalyst Managing Director David Orfao.

“Some areas I know; others are new to me. I’ve only been a CEO of things that I know about,” Bell offers frankly. He is optimistic that he’ll get the hang of things. He’s also honest about what has brought him to venture capital. “We all believe that digital media is a reasonably promising area of investment, and I’m coming in with a brand on my forehead.”

Automatic Door Opener

Tech rock stars also have star-studded Rolodexes, an asset that traditional VCs can’t consistently claim. When Hummer Winblad went looking for a new CEO last year to pilot portfolio company Bridgestream, it found one through General Partner Mitch Kertzman, former CEO of Sybase, who joined the San Francisco firm two years ago. Though Hummer Winblad considered a number of candidates for the job, the person it most wanted was former Sybase exec Mike Tice. He took the job because of his old boss, Kertzman. “I knew Mitch would make a huge difference and he has,” says Tice. “He knows how to set a tone and get out in front and lead, and he provides great coaching in that direction.”

Tice points to his earliest days on the job to underscore his point. “Because of Mitch’s own experience [as a CEO] he was able to give me highly useful management advice about how to handle my first month at Bridgestream,” Tice says. “We talked about the importance of having one-on-one meetings with all the staff to connect with them. He also suggested having an all-hands meeting as soon as possible, having an open-door policy, and meeting with my staff for coffee when possible. It went a long way in helping me to set an optimistic but realistic tone.”

A fat Rolodex isn’t just helpful in recruiting talent for portfolio companies. It can also open doors for those companies. Just ask Jasvir Gill, CEO of Virsa Systems, a Kleiner Perkins portfolio company that makes security and compliance software for SAP’s enterprise software. Gill has seen Virsa board member Ray Lane work magic with a single phone call.

When Lane approached Gill last year with the idea of changing Virsa’s business model to grow from a base of about 50 customers to thousands in just a couple of years, Gill asked, “Are you crazy?” Listen, replied Lane, “What if we call SAP and cut an exclusive deal for them to offer your compliance product, and we split the revenue?”

Lane knew just the person to call: Leo Apotheker, president of global field operations at SAP. He’s known him for 15 years and once hired him as a consultant at Oracle. “Leo’s immediate reaction was No, we don’t do that. We aren’t going to resell someone else’s product and retain its branding,” according to Lane. Lane pressed ahead anyway, saying: “If you develop it yourself it will take one to two years and you’ll lose revenue. Do the deal with us.” Six weeks later SAP inked a deal with Virsa to create a product called SAP Compliance Calibrator by Virsa Systems. Virsa’s customer base tripled.

Celebrity doesn’t necessarily have to come from the technology industry to give a person pull. Consider James D. “Jim” Robinson III, CEO of American Express for 16 years before co-founding RRE Ventures in New York. He is credited with marrying electronic payment giant First Data Corp. with Bitpass, a startup that enables “micro” payments over the Internet. Robinson sits on the boards of both companies. Fellow Bitpass board member John Ball, a managing director at Disney’s Steamboat Ventures, says Robinson not only brought in First Data as a Bitpass investor, but also convinced First Data to encourage its customers to use Bitpass. “Your run-of-the-mill VC couldn’t do that,” Ball says. “Jim’s contacts are fairly unique.”

Operating Room

Celebrities from the corporate world may bring a spate of other enviable assets, including extensive operational experience that often includes decades of managing technology-oriented companies, and precious leadership lessons.

“Statesman” is the word Ball uses to describe Robinson. “Some of these boards are chaotic,” he says. “Folks get a little overanxious about certain issues and don’t realize that they have to build a consensus. Jim knows how to do that because of his wide range of experiences.” Wide indeed. Robinson is not only a director at Bitpass and First Data, but he also sits on the boards of QPass and two other startups and is a member of the boards of Coca Cola, Novell and Bristol-Myers (where he was recently named chairman).

“Jim brings a top-down perspective that reminds us of what the two or three important things are around an issue, rather than the 15 things we’re grappling with,” says Chase Franklin, CEO of QPass, which helps carriers bill for mobile data services.

Bob Davis, former CEO of Lycos and now a GP at Highland Capital Partners, also gets high marks for his board presence. Davis “zeros in on issues very quickly,” says Jeff Anderson, CEO of Turbine, a startup that makes massively multiplayer online games. “I’ve met with a lot of different VCs and business leaders and entrepreneurs, and I find that most people are effective in one area, maybe two. Bob knows how to operate on different levels, though. As a former CEO, especially as the former CEO of an Internet startup that went hugely public, he contributes in lots of different ways, not the least of which includes talking about our company when he’s on CNBC,” Anderson adds with a wink.

The Vision Thing

Many corporate stars have earned that status because they are “visionaries.” It stands to reason that a couple of firms have hired them with the hope that they’ll recognize their brethren at startups.

Kleiner Perkins clearly anticipates Joy’s legendary vision will translate into success for its portfolio. Joy created what became a popular variant of the Unix operating system, then led the development of Sun’s Solaris operating system and its UltraSparc processor. He’s not an operating guy who spent the last 10 years mired in managing day-to-day operations. And that’s just the idea.

Whether or not Kleiner is right remains to be seen-Joy, who is focusing largely on energy investments, hasn’t announced any deals yet-but it isn’t the first to test the premise. Bob Metcalfe, inventor of Ethernet and founder of 3Com, joined Polaris Venture Partners in Boston as a general partner in 2001. He has led eight investments for Polaris, with just one exit so far: Avaki, an enterprise information software startup, was acquired by Sybase in May 2005 for an undisclosed amount after raising $26 million. But Metcalfe has already demonstrated that his “vision” can be applied to investing. He invested as an individual in Grand Junction Networks, which was later sold to Cisco Systems for $348 million in stock.

Short Attention Span

Of course, there are plenty of downsides to celebrity, beginning with that most obvious of evils: ego. High-profile executives are often people who want to be in control and who aren’t afraid to dramatically shift gears to get what they want. That’s saying nothing of the possibility that someone who has already been successful in one career may not have the patience to stick it out in VC if the going gets tough. Money can be an awkward issue, too. Because many corporate rock stars have bank accounts to rival that of Paris Hilton, they can walk away if it suits them without worrying that their families will go wanting.

Lots of celebrity execs have dabbled in venture capital without immediate success only to try something else. The most prominent is Tom Jermoluk (known affectionately as “TJ”), the onetime president of Silicon Graphics, CEO of @Home Network and chairman of Excite@Home. Even though some of Jermoluk’s peers say he added a lot of value (Nancy Schoendorf, of Mohr, Davidow Ventures, says he asks “penetrating questions” as a director for Shutterfly), we’ll never know whether he would have been a good VC because he didn’t hang around long enough.

Jermoluk touched down with much fanfare at Kleiner Perkins in May 2000. “This is AWESOME,” John Doerr crowed in a rare press release at the time. “The KP team is thrilled that Tom is joining us. TJ will be invaluable to KP ventures. Tom’s management experience, technical expertise, raw smarts, good will and proven leadership will help us help entrepreneurs.”

The “invaluable” Jermoluk quietly left Kleiner Perkins in 2003 to run Hyperion, a Miami real estate development company, with pal Jim Clark, co-founder of Netscape.

A venture capitalist who worked with Jermoluk and asked not to be identified, chills at the mere mention of his name. “TJ is incredibly arrogant; he embodied everything that was wrong with the late 90s.” The VC chaffed at Jermoluk’s “obnoxious sense of entitlement” and that “he would do deals and then not return other VCs’ calls. He thought that he was a master of the universe before paying his dues.”

Jermoluk and Doerr did not return messages seeking comment.

Who’s Da Boss?

Not all former company chieftains are cut out for life in the relatively anonymous business of venture capital. And that can be tough for some personalities. “When you come from the cockiness of a CEO, who says, I know companies; I acquire companies,’ you quickly discover that VC is a fundamentally different game,” says Davis of Highland.

Steamboat’s Ball notes that VC is “an apprentice business, with no room for strong egos. What needs to be examined is whether this particular person is willing to be humble and to learn from the ground up. Can someone whose judgment was once accepted without question retool himself or herself? It’s not fair to paint celebrity VCs with the same broad brush.”

It’s a concern for Dick Kramlich, co-founder of New Enterprise Associates. He says NEA has no plans to add a flashy name to replace Stewart Alsop, the tech pundit who joined NEA in 1996 but left last year. The firm would rather groom stars than hire them. “What you really need to watch for is how consumed a person is by ego,” Kramlich says, speaking generally. “If it drives them, then they aren’t going to be team players, and the power of our business is the team. You can’t scale without it.”

Robinson agrees. “You can monitor and encourage and challenge, but you can’t drive changes,” he says. “You can’t put your hands on the steering wheel.” He learned to check his ego after leaving his role as a general partner at investment bank White Weld & Co. to join American Express.

“I quickly learned that I had been in a role that made it easy to critique and opine and tell executives what they should be doing,” he says. “When I changed positions, it was like the channels changed. It was a lot different than passing judgment, and I never forgot it.”

Sometimes, the entrepreneurs are to blame for an overly zealous board member. Says one source who has worked on a board with Kleiner’s newest rock star, Randy Komisar, “The real challenge with Randy is that he’s so good with entrepreneurs that systematically, his voice ends up directing what gets done. Other board members are neutralized by him because everybody follows his advice.”

“I hope my enthusiasm doesn’t exclude others; that is certainly not my intent,” Komisar responds via email. “But I can understand if sometimes my passions fill the room. I think startups benefit from a multiplicity of perspectives and experiences, and I hope I can facilitate that whenever possible. What ultimately matters is that the entrepreneurs make the final decisions with the best advice they can muster. I won’t apologize for my zeal for entrepreneurs. It is a privilege to be able to help create impact with innovation. But I guess in the future I should excuse myself in advance.”

Jury Still Out

As hard as it is to resist, drawing honest conclusions about the likely success or failure of corporate stars who have become VCs isn’t feasible-yet. Too few have been at it long enough (see “Tech Celebrity Score Sheet,” pages 34-35). “I think it’s seven to nine years before you know if you’re going to be a great investor or not,” says Jim Goetz, a general partner at Sequoia Capital, echoing a common refrain. “Without some hyper-growth rates like we saw during the bubble, that’s how long it takes these companies” to make it or fail.

Lane, for example, has yet to see an exit from the six investments he’s made for Kleiner Perkins since late 2000. The same goes for Kertzman, who has led six deals for Hummer Winblad since 2003. Given the brief time frames, one can’t deduce much yet.

Even those VCs who have had some of their investments flame out could come out ahead in the long run. For example, two of the deals Jermoluk led for Kleiner Perkins have gone under, but he may yet find some measure of redemption in online photo publishing and sharing service Shutterfly, which some market watchers predict will go public this year.

Veteran VCs say it’s very hard to predict who will be a good investor. “You see people like Ray [Lane], very senior execs, who are very good,” Schoendorf says. “I also see people who come in with no operating experience who are very good. You have to look past what’s on the resume and for people who have the skills necessary to be good investors-and they do come from all walks of life.”

Even the big shots themselves aren’t certain that they’ll succeed. Take Metcalfe, who’s obviously no slouch. “I’m four years into what I think of as a seven-year apprenticeship in VC; this stuff is really complicated,” he says.

Metcalfe is only half-kidding when he knocks his own ability to be an innately brilliant VC. “I started thinking that-more than my VC partners, because I am such an entrepreneurial genius-I would spend my time more on helping investments than on choosing them.” What he’s learning is that “choosing is much more important if what you want to do is make money for your limited partners. In VC there seems to be much less than I thought of turning pigs ears into silk purses.”

Maybe the real question isn’t whether technology superstars make good investors but whether they have the single-mindedness to grind it out year after year. Consider Jim Barksdale. In 1999-a month after Netscape’s sale to America Online made him $700 million richer-he set up The Barksdale Group and went straight to work, making 21 investments in three years.

Only a few years have passed, but Barksdale’s track record isn’t looking half bad. Ten of his portfolio companies have been acquired and two have gone public. His biggest hit so far is VPN appliance maker Neoteris: It raised $37.6 million in venture funding before it was bought by Netscreen for $265 million in cash and stock. That’s a very respectable ROI of at least 7x. And if only his timing were better, the former Netscape CEO would have made a killing with HomeGrocer.com, which went public, got bought by WebVan for $1.2 billion and then, well, you know how that story ends. If the stars align, TellMe Networks, another of Barksdale’s bets, will go public this year, and he’ll cash in again.

Yes, Jim Barksdale has done quite well with his first venture fund, especially if you compare it to funds from the same vintage. He’s just the sort of emerging manager that LPs are looking for these days. It’s a shame that he shut down his firm in 2002, when it became clear that the bloom was off the VC business and the real work was just beginning. He could have been a good venture capitalist, maybe even a great one.