Venture Capital, " Rightsized"

The old guard of venture capital is changing. The reason? Older partners downshifting as new money starts to flow in.

In a business often accused of herdlike behavior, Kleiner Perkins Caufield & Byers is the alpha bull. The venture-capital firm's 32-year parade of investments--from Sun Microsystems to AOL to Amazon.com--has made it the pacesetter among its Silicon Valley peers.

That's why heads turned at word that four longtime Kleiner partners, including superstar Vinod Khosla, would go part-time once the firm raised its latest fund. The news confirmed what many industry insiders already knew: A changing of the guard is under way in venture capital, leaving a new generation to shape the next wave of entrepreneurship.

Driving the troop rotation is an industrywide wave of fund-raising, a ritual that recurs about every five years. Since partners commit to managing a fund for a decade, those who have made their fortunes or are approaching retirement often bow out before the start of a new fund. In the fourth quarter of 2003, venture firms raised $5.2 billion, up 149% from 2002, according to Thomson Venture Economics and the National Venture Capital Association--a pace that's expected to continue through 2004.

The new efforts are modest compared with those of the late 1990s. Kleiner Perkins's latest fund weighs in at $400 million, about two-thirds the size of its previous fund, which it closed in 2000. "It's not a downsizing as much as it is a rightsizing," says Ray Lane, a general partner at the firm. "You needed more capital to deploy in the nineties than you do today."

Smaller funds require fewer managers and offer lower compensation for partners. But smaller paychecks per se don't fully explain the exodus at Kleiner Perkins and other firms. "Each of those guys has already made a ton of dough," says George Zachary, a partner at Charles River Ventures, referring to the Kleiner partners. "The real issue is there are probably fewer exciting opportunities." Indeed, venture-backed companies raised only $2 billion in initial public offerings last year, according to Thomson Financial. That's a 20% drop from 2002 and the third consecutive year of declines.

Kleiner Perkins says the downshifting partners, all in their forties or early fifties, plan "more time with family and on personal causes," while helping part-time with the firm's new technology fund. None responded to interview requests, but Khosla has said he will research microfinance schemes in his native India. It's a classic episode in capitalism, a little wave of creative destruction all the more poignant because these partners were among those who brought us the dotcom bubble. They're exiting even as new money flows in--leaving us to wonder: Are they getting out at the right time or missing the boat?

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