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Matrix Edges Kleiner
by Paul Shread
January 29, 2001--Kleiner Perkins Caufield & Byers and
Matrix Partners are considered the cream of the crop among venture capital firms, the kind
of VCs that limited partners are fortunate to be able to invest their money with.by Paul Shread
So compliments paid, we set out to find out which was better.
Using the data of Steve Lisson, editor of InsiderVC.com, who tracks VCs' performance and considers Matrix and Kleiner the top VCs, we applied a metric suggested by former Flatiron partner Dan Malven, which we will call the "Malven Metric."
Malven suggested the metric after our piece comparing Kleiner's performance in the IPO market last year with four other firms. In short, we divide overall performance by the number of partners, thus measuring wealth created per partner.
Malven cautions that that measure of performance could be skewed if each partner at one firm has a lot more to invest than partners at another firm, but Kleiner and Matrix appear pretty evenly matched. Matrix IV in 1995 was a $125 million fund (and had distributed 11 times that amount to its limited partners by the middle of last year, according to Lisson), and Matrix V in 1998 was a $200 million fund that had already distributed four times its LPs' capital by mid-2000. Using the conservative figure of five partners during the time that 2000 IPOs were being funded, that means Matrix partners had $65 million each to work with. (We did not include Matrix VI, a $304 million fund that was only 30% invested as of June 30 last year.)
Kleiner VIII in 1996 was a $299 million fund that had returned 12 times its LPs' capital by mid-2000, according to Lisson. Kleiner IX in 1999 was a $460 million fund that was 80% invested by mid-2000. Using the conservative figure of 13 partners, Kleiner partners had $58 million each to work with.
Now on to the 2000 results. Ten of Kleiner's companies went public in 2000 (0.77 IPO per partner), compared to 4 for Matrix (0.80 IPO per partner). Kleiner's stake in those companies was worth about $2.3 billion when the lock-up period expired (one company, Cosine Communications, is still in lock-up, and Kleiner's stake in the company is worth about $100 million). Matrix's stake in its four IPOs was worth about $1.6 billion when they came out of lock-up. That gives Matrix a per-partner return of $320 million, and Kleiner $177 million, giving the edge in per-partner wealth creation to Matrix.
A few caveats on those results. First, we measured performance in the IPO market only; we did not look at acquisitions, the number of which often exceeds IPOs in a given year. Second, Kleiner has two health care partners, according to Malven. Since health care companies had a tough year in the IPO market last year (Kleiner had no health care IPOs), reporting the results based on IT partners only raises Kleiner's per-partner wealth creation to $209 million. We certainly want our top VCs to focus on the future of health care regardless of market conditions, and there's been quite a debate going on within the venture capital industry about IT versus health care investing. The third caveat is that Kleiner IX is the newest of the funds measured, so that too could give Matrix an edge. But don't feel too bad for Kleiner; according to Lisson, 6-year-old Kleiner VII was the best-performing venture fund last year, still riding high on its monster hit Juniper Networks (NASDAQ:JNPR). That fund has returned more than 20 times its limited partners' capital.
Matrix's big hit of 2000 was Arrowpoint Communications, which netted Matrix $1 billion when it was acquired by Cisco (Nasdaq:CSCO) in June. Kleiner had holdings in three IPOs that were worth $500 million or more when they came out of lock up: ONI Systems (Nasdaq:ONIS), Handspring (Nasdaq:HAND) and Corvis (Nasdaq:CORV).
It's not clear when or if the VCs sold shares in the IPOs. Cisco's stock, for example, has declined almost 40% since the Arrowpoint deal closed. Kleiner's biggest winners have held their value since the lock-up period expired, but both companies had holdings that declined substantially from their lock-up expiration price.
Both firms also had about $2 billion each in 1999 IPOs that came out of lock-up in 2000, giving Matrix the "Malven Metric" edge there too.
But as Lisson pointed out, "This is splitting hairs amidst the pinnacle of the field. A fun, interesting and worthwhile analysis, but the distinction makes no difference to investors in these funds. The amounts of money involved are trivial when viewed in context, the venture capital segment in the alternatives portion of an entire portfolio. Nonetheless, the LPs of both Kleiner and Matrix can thank their lucky stars to be in these funds. It is amazing how these and a few other elite firms can put so much distance between themselves and the rest of field, repeatedly, in bad times as well as good."
And finally, a follow-up to last week's column on Summit Partners, the most recent firm to join the elite $2 billion fund club. Lisson had this to say of Summit: "As a private equity investor, Summit can outperform some early-stage VCs, the reverse of how it's supposed to work. Now that's a firm where unquestionably 'there's something in the water' consistently over the years."
Corey Ostman of Alert-IPO and Mary Evelyn Arnold of VC Buzz provided research for this article.
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