The power of Money

On Sand Hill Road in Menlo Park, Calif., if you throw a rock - or, more appropriately, a start-up business plan - chances are you'll hit a venture capitalist.

Cutting through the middle of Silicon Valley, just a few minutes from Stanford University, Sand Hill Road is legendary as the venture capital center of the United States. And the companies inhabiting its unobtrusive office buildings collectively have provided the fuel that has propelled the high-tech revolution of the past few decades.

These days, business is better than ever, thanks to a record amount of investment money available and a dizzying number of start-up companies with grand visions to become the next Microsoft Corp., Cisco Systems, Inc. or Netscape Communications Corp.

A quarterly survey conducted by Price Waterhouse shows that $3.5 billion in venture money was invested in the third quarter of 1997, surpassing the previous all-time high of $3.18 billion set in the second quarter.

Another quarterly venture survey, the "Coopers & Lybrand Money Tree Report," shows more than $8.6 billion in venture funding was invested through the first three quarters, putting 1997 on track to smash last year's record of $10.1 billion.

Both surveys show that about one of every three venture dollars invested goes to a Silicon Valley company, and more than half of all venture funding goes toward companies in the software and communications sectors.

Companies in the Route 128 area west of Boston attract the next-highest amount of venture funding, though the area is a distant second to Silicon Valley. After that it's a free-for-all for third place, with hotbeds of venture activity in Seattle; San Diego; Dallas; Austin, Texas; New York and Washington, D.C.

There are anywhere from 600 to 700 venture funds in the U.S. and, depending on who's estimating, between 1,500 and 3,000 venture capitalists.

The vast majority of venture capitalists have Harvard or Stanford MBAs, solid hands-on experience running successful high-tech firms, or both. Together they controlled a staggering $40 billion in venture funds last year.

Despite the huge amounts of money available to invest, venture capitalists usually fund only a small percentage - usually less than 10% - of start-ups seeking cash. The amount of time and energy they must devote to helping start-ups by serving on corporate boards and attracting executive talent restricts the number of companies venture capitalists can manage in a portfolio.

And while they all have different criteria for investing, venture capitalists invariably look for a good idea, a strong business plan and management experience in launching a successful start-up.

So who are the top power players in the world of venture capital? Interviews with venture capitalists and observers of the scene indicate that there are as many as two dozen first-tier venture capital companies in the United States. Network World selected a handful to highlight. Kleiner Perkins Caufield & Byers

If venture capital were college football, Kleiner Perkins Caufield & Byers (KPCB) would be the consensus No. 1 pick.

"Kleiner is kind of at the top, and then you've got a whole group right behind them," says Larry Buchsbaum, editor of the "Money Tree Report." "KPCB is the opinion leader in the industry."

Founded in 1972, KPCB counts among its investments Sun Microsystems, Inc., Netscape, America Online, Inc. and Amazon.com, Inc.

The company positioned itself as a champion of Java technology by starting the $100 million Java Fund in 1996, which financed a dozen Java- related start-ups in the course of the next year.

KPCB has developed an investment strategy based on the Japanese business principle of "keiretsu," the linking of companies in order to share knowledge and information. (Sure, other venture firms also encourage their portfolio companies to work together, but KPCB deserves credit for devising a clever name for the practice.)

KPCB's star is John Doerr, who joined the firm in 1980 after a short career at Intel Corp. But Buchs-baum says KPCB's strength goes beyond its most visible partner.

"KPCB's got a whole slew of brilliant general partners," he says. "It's in a category all by itself."

Brilliant, but not perfect. One of KPCB's recent Internet investments, OnLive Technologies, Inc., reportedly faces serious financial and management problems.

Oh yes, KPCB is located on Sand Hill Road.

Hummer Winblad Venture Partners

Located just north of Silicon Valley in San Francisco, Hummer Winblad Venture Partners has turned a focus on software start-ups into a $200 million venture fund since the company was founded in 1989.

Cofounder Ann Winblad is the firm's most prominent partner. A 20-year veteran of the software industry, Winblad also is a close friend and confidante of Bill Gates. Among the company's investments are Envive Corp., PowerSoft Corp., Netopia, Inc. and Net-Perceptions, Inc.

Bill Gurley, the firm's newest partner, says Hummer Winblad's decision to stick with software gives it an edge in a complex technology market.

"Some of the [venture capitalists] who invest in semiconductor equipment, then follow that with a networking play and then get into software, will be stretched too thin," he says. "We like the economics of software - the low start-up costs. You invest in a semiconductor com-pany and there's a problem where they have to do another run at the plant, you're talking another round of investment."

Accel Partners

Since its founding 20 years ago, Accel Partners' "core strategy has remained very consistent," says Jim Breyer, managing general partner. "We invest in early stage companies that we believe can be part of the next generation of Fortune 1000 leaders."

Some of the companies Accel has bet on include network equipment vendors Foundry Networks, Inc., Starlight Networks, Inc. and Internet services vendor UUNET Technologies, Inc.

Accel, which has offices in Palo Alto, Calif., and Princeton, N.J., looks for "markets that are changing dramatically; for the big, turbulent waves," Breyer says. "And right now the waves are adjacent to the Internet."

Once it finds a market, Accel, which manages a $500 million fund, seeks out a long-term proposition, he says.

"We're not interested in investing in a technology where the obvious exit strategy is acquisition by Cisco," Breyer says. "Our goal always is to build a major next-generation company."

While "five years ago most of our communications investing was focused on local infrastructure," he says, today Accel is exploring the market opened up by telephone company deregulation.

"We see the carrier segment as a core opportunity," Breyer says. "Growth is being driven by the rise of local competition, the outsourcing of wide-area networks and remote access, and the continued buildout of the Internet."

Sequoia Capital

Back on Sand Hill Road, Sequoia Capital has carved out a reputation as a major venture fund company by betting on big markets and avoiding fads.

"You don't find us investing in buzzwords like pen-based computing," says Don Valentine, who cofounded Sequoia in 1972. "We're not interested in developing a technology and then creating a market."

Valentine says the company, which manages seven separate $150 million venture funds, searches for markets "big enough where we can make 10 investments that don't compete with each other."

Some of the companies Sequoia has invested in include industry household names such as Cisco, 3Com Corp. and, more recently, Yahoo, Inc.

With a number of cyberspace bets, Valentine says the company "remains enthusiastic" about the Internet. He also sees real opportunity in network integration.

"A lot of the easy things have been done in networking," he says. "We're now at a phase where it's important to integrate the voice and video side of things. We're involved in an evolution away from networking being largely a data-only universe to a universe of video, voice and data."

Most of the energy and creativity in the market will come from "networking or data-oriented companies and not the big Bells," he says.

Brentwood Venture Capital

John Walecka, a partner at Brentwood Venture Capital, says his company "continues to think data has a bigger place in the enterprise and the WAN, so we've made some investments to facilitate the next generation of infrastructure products."

One such recent investment was in Avici Systems, Inc., which Walecka says is "building a true terabit router for IP core switching."

He also cited a "move in the industry toward supporting enhanced services higher up on the OSI stack, beyond just IP and TCP/IP traffic."

Brentwood, which started in Los Angeles 25 years ago, relocated its headquarters to Sand Hill Road 10 years ago. It manages a $160 million fund, Walecka says.

Sharing success and risk

Given the similar experiences and pedigrees of venture capitalists, not to mention their tendency to cluster in regions where high-tech entrepreneurs are plying their trade, frequent coinvestments in a start-up aren't surprising. "It's very much like a club," says technology industry analyst Judith Hurwitz, president of Hurwitz Group, Inc., in Framingham, Mass. "They have a herd mentality. Venture capitalists don't go in alone, they go in as groups." Indeed, it's rare to find a venture capital investment that doesn't include multiple partners. Boston-area companies such as Charles River Ventures and North Bridge Venture Partners, for example, routinely team to finance a promising start-up.

John Whaley, a founding partner of Norwest Venture Capital Management, in Minneapolis, says there are several pragmatic reasons why venture companies will collaborate. "Sometimes it makes sense to partner because of the size of the deal," he says. "It distributes the risk. Also, there's an added value to having other people provide knowledgeable perspectives."

Valentine acknowledges "a degree of competition with other venture firms, but it's not like Sun competing against Microsoft."

"We are in a business to optimize return on investment," he says. "Because the venture world is small in numbers of people, it tends to be very collaborative."

One type of investment many, if not most, venture capitalists tend to avoid are the "smaller" deals in which a company is seeking less than $2 million or so. To fill that void, a network of individual "angel investors" has emerged in recent years to finance such start-ups.

Touched by an angel

Angels tend to be people who have already made their money and want to invest it to help other entrepreneurs or simply to satisfy their appetite for action. They generally prefer working quietly behind the scenes, relying on personal networking to explore investment opportunities. One notable group is the Band of Angels, a loose confederation of about 75 executives in Silicon Valley. The Band of Angels began two years ago; money is invested individually, rather than as a group.

Angel investors are seen as particularly important in regions of the country that lack a strong venture capital presence. They also offer an alternative for start-ups leery of turning over too much control to venture capitalists.

"For a lot of companies, venture capital is the investment choice of last resort," Hurwitz says. "Some companies may give up 30% to 40% of their ownership to venture capitalists."

Angel investors are benefiting from the same prosperity as venture capitalists. Kirk Walden, Price Waterhouse's venture market survey director in Dallas, says he doesn't see an end to the good times in the near future.

"The pace shows absolutely no sign of letting up," Walden says.

Which could mean that some day soon the name Sand Hill Road may convey to the general public the same glitz and glamour as Hollywood Boulevard.

Valentine, for one, hopes that doesn't happen.

"Then we'll all have to start wearing bracelets," he says.