VC Downsizing Hits Kleiner Perkins

In a move certain to send shockwaves through the VC industry, Kleiner Perkins Caufield & Byers this week sent a letter to its limited partners saying that it plans to reduce the size of its 10th fund from $1 billion to $800 million, according to two industry sources.

As part of the arrangement, Kleiner will reduce its management fees for the fund, because it was drawing down fees at a rate commensurate with a $1 billion fund, the sources say. Additionally, the firm told its LPs that it plans for the 10th fund to co-invest in new deals alongside its ninth fund, a $500 million vehicle raised in 1999.

The 10th fund, Kleiner Perkins Caufield & Byers X (KPC&B X) closed on $1 billion worth of commitments in 2000. It would have been the firm’s first fund of that size. John Denniston, Kleiner Perkins’ chief operating officer, did not return phone messages. Two other firm partners were unavailable for comment.

“This is the blue chip of the industry acknowledging some excess and the fact that the industry has changed,” says an executive at a large institutional investor with knowledge of the Kleiner Perkins’ letter.

The executive went on to say that there has been growing concern among LPs over the past 12 months regarding $1 billion funds. “A number of people collected large pools of money and couldn’t deploy it in a timely fashion, but they’ve been collecting management fees on it,” he says.

A Silicon Valley venture capitalist who asked not to be named says the move by Kleiner Perkins is certain to be followed by others as Kleiner’s actions carry significant weight.

“It’s very obvious to everyone that the number of attractive deals out there have been few, and Kleiner gets to see the cream of the crop,” says another industry source. “So what they’re doing is significant because it says they don’t believe there’s enough opportunities or enough exit horizon.”

Stellar Returns

Because of its stellar track record, Kleiner has almost always had to turn away potential LPs from its funds, because they were oversubscribed.

One manager of a large pension fund says he was “psyched” about the returns his fund received for Kleiner Perkins’ sixth and seventh funds. Fund VI, a $173 million vehicle raised in 1992, has returned $878 million to date, with most of that already distributed to LPs, he says. KPC&B VII, a $280 million fund raised in 1994, has ballooned to a value of $2.2 billion, he adds.

He tried to get into the eighth fund, but it was so oversubscribed that Kleiner Perkins was limiting participation to about $2 million to $3 million per investor — a non-meaningful amount for large institutions.

The fund manager couldn’t get into the ninth fund, because, he says, he was told that the firm wasn’t likely going to take outside money.

He didn’t bother to try to get into the 10th fund, and now he’s happy he didn’t. “Kleiner’s getting slammed because they did 50 telecoms and 50 dot-coms and they’re all underwater and doing terribly,” he says.

He speculated that the firm is making the move to reduce the size of its 10th fund because of concerns about LPs later invoking a claw back provision, which would mean that Kleiner Perkins’ partners would have to return any profits if the overall fund loses money.

KPC&B X has made at least two investments, according to our VentureXpert database. It invested $14 million in Tellme Networks Inc. of Mountain View, Calif., in September 2000, and it put $1 million into Epoch Partners of San Francisco in February 2001.

As of press time, Venture Capital Journal was unable to confirm if a similar cutback has occurred with the firm’s $610 million Fund X-A annex fund. As of 5:30pm Pacific Time on Wednesday, no partners were still in the Menlo Park, Calif.-based office to return calls.

Lawrence Aragon can be contacted at: Lawrence.Aragon@tfn.com

Additional reporting by Carolina Braunschweig.