A Venture Capitalist Innovation Process, with Randy Komisar / KPCB (2007)

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So Randy, the first thought I want is, you're a big believer in big ideas. And we've heard the businesses you've been involved in. And I guess my first thought would be, do you still see big ideas coming? I've always thought that you could be pretty darn successful taking the next incremental step. But where do you get these ideas? And for this group of entrepreneurs, do you see that that still is the most logical path, or at least the one that attracts you? I think there are certainly many different paths to building successful start-up ventures. I think that the exciting one for me and for the firm I now work with, Kleiner Perkins, is to try and find those big ideas that can make big differences. And the way that we tend to do it is that it's a riff that we do with the information that we're always getting feedback on from projects and entrepreneurs that are coming in everyday to show us what they're working on. But unlike a lot of venture capitalists, we don't generally sort of take a look at what they've presented and give it a thumbs up or thumbs down. There's a real sense of applying that against a set of filters that we've already come up with on a rolling annual basis as a partnership, anticipating what we think can be the very significant innovative changes over the course of the next 5 to 10 years. And with that filter in mind, we tend to look at projects and then we tend to tweak them. We tend to work with the entrepreneurs and management to steer them to where we think the big ideas and the big impact is. So it's this process, this constant process of iteration and riffing with what's bubbling up organically and what we see as investors/entrepreneurs ourselves, in looking at the problems we want to solve. What are the big problems that are on the horizon, that innovation can make a difference with?

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You know, maybe you could give the example of TiVo, how that--which was not a Kleiner project, but it came to you in one form. Because--I think we talked about this a lot--an idea starts one place, but where you end up can often be very different. Well, TiVo, when TiVo came to me, it was two guys who had this interesting idea to create a better VCR. It was a very smart VCR box, and they wanted to sell it as a box in retail. And I met with the two entrepreneurs, and I didn't like the idea. I didn't like the notion of trying to build a piece of hardware, selling that on the shelf in the big box stores, Best Buy, Costco, etc. and then trying to build a long-term business just with the stand-alone box. And we ended up working a great deal with each other early on. The good news for these entrepreneurs --this is a real test for entrepreneurs for me--was, when I gave them the bad news that I thought their idea sucked, they came back. That's an important point, by the way. It's very important to be able to tell an entrepreneur exactly what you think is good or bad about their idea and then seeing what their response is. A lot of entrepreneurs are so wedded to their own ideas that they're unable to take constructive feedback. Those generally don't make great investments for us, in the way in which we work with our entrepreneurs. But in TiVo's case, the entrepreneurs came back, and we began to work out the notion of building a services business, a business where the value is really in the network, not in the box. And that's what we've been trying to do now for 8, 9 years. We've got 4 and a half million of those out in the market place. Our business model has been struggling along, but I think is more and more promising as we go forward. But most importantly, the value we've created is not in the weakest part of the plan, which was a piece of hardware that sits on a shelf and gets low margins. It's actually in a network which gets more and more valuable everyday.

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When I worked for George Lucas, he told me something I've never forgotten, which is, "To paint on a white canvas is really hard. But if you throw a half a dozen dots up there, just splatter your brush onto the white canvas, it's now much easier to approach that canvas. You're now working with something. You've got sort of a sense of interaction and engagement." And I see that in my business. I see that in the entrepreneurship business, which is the notion of innovating around concepts that may be inchoate, that may be in process, that may be sort of engaged with each other and that you then sort of come up with a unique, hopefully unique vision or perspective on. And that becomes the idea.

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The concept of deferred life, which is the notion of putting off today what you really want to do because you believe that what you need to do today is what's expected of you is not the notion of not paying your dues or not working hard to build a foundation for success. Those are two different ideas. It's important to understand that what's deferred is your sense of passion. What's deferred is your sense of excitement, your enthusiasm, the integration of what you're doing with what you believe, what you care about. I believe it is a deferred life plan to go off and sell a product you don't believe in or to study an area that is of no interest to you because you believe it's somehow going to prepare you for an opportunity yet to be determined. I think it is not a deferred life plan to work very very hard to get experience in an area that you care about or to work your way up through a business where there's a product or a principle or service that you truly believe in. So working hard is not inconsistent with deferred life plan. Paying dues is not inconsistent with the life plan, but simply failing to do what you believe in is the deferred life plan.

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My first "failure" - commercial failure, significant commercial failure, was a company called GO Corporation, which was the precursor to pen computing in the United States. It was ahead of the Palm Pilot and what we then saw, Palm and Handspring were also good friends of mine, Don and Jeff. But we went in a different direction. We were earlier, and we were trying to build a very robust, Windows-killing operating system that was going to be pen initiated and pen navigated. It was very ambitious. It was a Kleiner Perkins investment way before I was a partner at Kleiner Perkins. I was a CFO of this company and the COO of this company. And it was some of the best and brightest in Silicon Valley. We got a tremendous amount of press, a lot of capital for those days. And we went out, and in four short years, failed. The company was sold sideways to AT&T. Nobody made any money. The product never really came to market. And eventually, Palm got it right. What's interesting about that "failure" is, I've never felt the slightest remorse or disappointment about it. That management team of that company turned out to be the pioneers of the Internet. It was an incredible group of people. The esprit de corps and the teamwork and the excellence with which we executed against the bad plan and bad technology was really admirable. We learned a ton. And people like Bill Campbell went off to run Intuit, later to become a very important part of the resurrection of Apple, with Steve Jobs at the board level, and an important factor in the creation of Google. Mike Homer went off to found Netscape. Stratton Sclavos went off to do VeriSign. Robert Carr went off to do Autodesk. Jerry Kaplan, one of the founders, went off to do Onsale, which was a precursor to eBay. I went off to do LucasArts Entertainment, WebTV and TiVo. If you look at what came from the seeds of that failure, it was success after success. And not only that, it would create a new industry. Now let me tell you about another failure, one where the investor made money. This was a company called Crystal Dynamics. I'd come out of LucasArts Entertainment prematurely, in large part because George had decided we were so successful that he wasn't going to spin us out. And I was very unhappy with that decision. I loved my company. I loved our products. We were on a great roll, and I felt like this would be a wonderful standalone public company. We had big plans, and George pulled us back so he could make the next set movies, use it as a financial vehicle for the next set of movies, the prequels. When he did that, I left. And I left to join a Kleiner Perkins start-up called Crystal Dynamics which was in the game space, very similar, in the face of it, to what I'd been doing at LucasArts Entertainment. Within a year, I had lost all of my passion for what I was doing. The company was struggling to get right sized and to set the priorities it needed to for the limited resources and the slow trajectory of the marketplace. And I had no stomach for it. I didn't care about the products we were creating. They were very different from the LucasArts products, when you finally dug into them. They were toys versus story telling. It was a very different set of ambitions. It was about building things for the game consoles versus starting to try to build things for interactive media. It was a very different sensibility. And by the end of it, I had no muse. I couldn't get myself up in the morning to make the hard decisions, because I had no passion for what I was doing. That company was sold, people made money. I left within one year to become what became called the virtual CEO. I sort of invented that on the fly. I did not know what I was going to do. I just knew I wasn't going to do that. That was a true failure.

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In the early days of the Internet bubble, it was said, and this is, I know, an oversimplification, but it was said that all you needed was a few PowerPoint slides and a half-baked business plan, and you would get lots of money. Then came the crash, and now to move forward to 2007, the world is awash with liquidity, even more liquidity than at the time of the Internet bubble. So my question to you is: Have we learned? Have you guys learned? Do you still look, conceptually, at business plans? And is it possible to start raising money that way these days, in the real world? And then summing all of that up, what is the best way for an entrepreneur to really start looking for serious money in your view, at the conceptual level, after two years of sustainability and amount of experience? What is it? So let's break that. They're both really good questions. Really good questions. We're clearly seeing another bubble in certain sectors today. Here's the good news: it's only in certain sectors. In the late nineties, it was everywhere. The entire market was bubbling up and ready to explode in all sectors. And the Internet was leading that. And in the venture business, we saw it everywhere. We are definitely seeing it today. We're seeing it in what we call consumer Internet today. Consumer Internet today, somebody can walk in with a couple of PowerPoints and a me-too idea and there's plenty of money to fund them. What's interesting about that is, in the late nineties, it was understandable why that was happening. There was a rush towards liquidity in the public markets. People didn't have to take any risk in the development of these ideas or products or companies. And they could cash out within a year or two for huge returns. Today, that's not the case. These Web 2.0, as they've been referred to, consumer Internet companies have no liquidity, other than YouTube, which created a big splash when it got purchased. And I would argue, Google may at some point question whether that was a smart thing to do. But other than that, we haven't seen big numbers out of any of the Web 2.0 companies. What we see is a different phenomenon. And that phenomenon is, we're seeing a lot of liquidity in the $50 million range. Outside of the venture capital area, in the angel financing area, where for a few million dollars, you can test an idea and see if they will come. Forget the business plan. The business plan is irrelevant in Web 2.0. And the reason it's irrelevant is, you can monetize these companies by selling advertising on Google. So Google becomes the platform for Web 2.0 business models. And all you need to do is see if, if you put yourself out there, if people will come. And if enough people come, you can then monetize them on the prospects of advertising and continued growth. And those companies in each category end up getting bought in these food fights that are being between Google, Microsoft, Yahoo and others, who feel like they need to have one of everything in order to stay even with each other. The gap though, is that it's very hard now to put $5, $10 million with a venture capital work in the consumer Internet world and have any strong conviction that you're going to find liquidity of a site. So it's a strange bubble, but we're definitely seeing a bubble in it. At Kleiner Perkins, we've done very little investing in consumer Internet and Web 2.0, very little for that reason. But your insight is right. Our peers are doing it like crazy, and it is creating some tensions. We're not seeing that in all markets. We're not seeing that in energy, we're not seeing that in life sciences, we're not seeing that in health care. We're not seeing that in enterprise security and Internet security. So there are lots of areas that we are not seeing a bubble in. But if you're talking about Internet consumer, you are right. Your second question, though, had to deal with when to seek institutional financing or professional investors. My sense is, there are two ways to look at that. And one, I understand, was discussed a couple of days ago, and that is: who do you need to help build your business? Forget their money for a moment. The good news about a lot of professional investors, not most, but a lot, is: they bring very relevant experience, ecosystems and connections to help you build your business. You may very well want one of those people to be a partner in your business with you. That's one reason to bring in professional investors. The second is, you see an opportunity for acceleration of your idea ahead of your business model, ahead of your ability to bring in cash flow and that becomes an imperative for building your business in a competitive environment. Those two things, I would look to as being the primary indicators, to me, of whether or not I was going to seek a professional institutional investor.

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What makes you tick? What do you look forward to? Well, my career and my life makes a lot more sense in the rear-view mirror than it does in the windshield. I don't have any real strong sense of direction. [Laughs] I tend to get excited about things and do them. I tend to get excited about people and work with them. And what I have found ... and I thought about distilling this a little bit, because every year, at the end of my class, my students come to me and go, "Woe is me. What am I going to do with my life?" It's always that question, it's just year after year after year. And so each year, I try to distill it down more and more and more and more. And I think I got it to a point where I'm very comfortable with two simple principles. Which is, when looking at what you want to do with your life, find the way to optimize who it is, the quality of the people that you get to work with and the flow of opportunities that you're going to be in the middle of because great people support each other and build great networks that reinforce this recycling of opportunities. And the second is, great opportunities are essentially where you go next. And the notion of being in motion is probably an important aspect of who I am and why I've done what I've done. There's a real sense that there's always something else. There's always another chapter. There's always something important to be done, exciting to be done with really good people. And so I think that's at the root. If you look at the core, that's probably a better definition of why I've done what I've done than anything else that you could imagine from all of the other facts about my resume.

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Yeah, you know, there is this machismo in the venture business, the entrepreneurship business about being able to take a company public and then growing into some huge public company ala Bill Gates. And those stories are wonderful stories when they happen. But the reality is that it takes different skills at different stages of a start-up to be successful. And individuals may have the skills to move from stage to stage, and they may not. And that's okay. I personally see the reinvestment of entrepreneurial skills back into start-ups as being much more valuable than seeing an entrepreneur has become a great manager in leading an operating business, because entrepreneurs are rare, and managers are trained at Harvard Business School. [Laughter] So the reality is that.. I think there are.. We all have our role, Randy. [Laughter] But I look at the stages in early stage companies. In the book, I used an example: three breeds of dogs. I looked at the notion of the early stage entrepreneur being a retriever. Somebody's got to go out and bring together all of the resources that are necessary to get that company off the ground, the people, the money, the partners, all the things that are necessary to try and get that idea going. If that's successful, if you end up with a good product or service, and it gets reinforced by the marketplace, you then have to become much more of a bloodhound. Now, you really have to find, you have to get the scent of the trail. You have to start building the plan, the execution plan that's going to drive that idea that you now have a demonstrable product or service into a real business against the market, with real customers. And then I looked at the notion of a husky, the idea that, "Now, okay, I've gone through those first two stages. I have a great product or service. I have demonstrated a real value proposition to the market, and I have ways to sell to customers and customers willing to buy my product or service. Now I need to grow the operation. I need somebody to pull the sled." And the notion here is that this husky is your operating leader, and somebody who can hopefully take that company to a public market liquidity, wherever the right destination is for it. And in the book, I allude to the fact that you hope you never really need a St. Bernard, somebody to come and save the company and bail it out from a tough situation. That's another sort of personality. And I didn't touch upon that as much.

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Based upon my own experiences as an entrepreneur--and I've worked with entrepreneurs now for 20 something years--I think that as entrepreneurs, as investors, as business leaders, we do ourself a discredit when we claim too much of the success is our own, when we don't give credit to market forces, to good fortune, to situations that create the opportunity for success. And what I'm indicating here is not the notion of blind, dumb luck as being the difference between great entrepreneurs and weaker entrepreneurs. That's not what I'm suggesting. What I'm suggesting is that hard-working, smart people fail many times for things outside their control. And they succeed many times because of opportunities that are created outside their control that they're able to take advantage of, the notion of the prepared mind, taking advantage of chance. And I think, to be a great entrepreneur, you have to be really smart. You have to work really hard. And then you have to take advantage of the opportunities as they are created, not necessarily by you, but by others and by the market around you.

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Well, the nature of ... and again, venture capital is practiced in many different ways. So I can only speak about it from the perspective of what we do at Kleiner Perkins. The nature of what we do is very hands-on in our companies. As I said, I meet with my companies every week, and help them to build their teams and to build their strategies and to build their networks and partnerships. And so the ecosystem which we work in, our own network is really important. And where our network is obviously strongest is right around us, within 60 miles of Silicon Valley. It's not a surprise that even a lot of the companies we backed coming out of Europe, coming out of Israel, coming out of, even today, coming out of countries like India end up with the management teams coming to Silicon Valley to build their businesses because that ecosystem is so reinforcing for them, and because we are then able to bring our core assets to bear in helping them. Now, we've expanded ourselves into areas, recently China, where we've been actually working a while, but we've now announced that we're working there. We've made investments in India for quite a while, much more capital investments rather than the sort of entrepreneurial investments that I'm talking about today. But you would think that the nature of our business is pretty fungible because capital is fungible. But the way that we practice venture capital at Kleiner Perkins, it's not that fungible, because it's very hands on. And so the idea of being able to back or support a company in South America, for instance, would be very very difficult for me, personally. That's not to say that there wouldn't be a partner who ultimately felt like living in South America was something they really wanted to do, and maybe they had a network because they grew up there. Then you could see that as being a possibility. But it would depend upon an individual deciding to do that and having that foundation versus an institution deciding that it's a place that they'd want to target.