UPDATE: After Private Equity Week went to press, we got a call from Bill Burnham, who said that he had made a mistake in drawing conclusions about carried interest figures for John Doerr and Mike Moritz.
?One of the things I definitely did forget, and which I’m wrong on, is if anyone had made a personal investment in the [venture] fund,? Burnham said. ?If you were a partner and you had invested some of your personal money then you would be both a partner and limited partner, and your distribution would include both the personal investment you made as well as any carried interest you had. So, that’s definitely a mistake on my part. … It’s hard to figure out the carried interest unless you know what the person has invested in the fund, and I don’t know what either John Doerr or Mike Moritz invested in their funds.?
You can read Burnham’s extended explanation on his blog at http://www.billburnham.blogs.com
It’s no secret that famed venture capitalist John Doerr made a killing last year in the $1.7 billion IPO of Google, but documents filed with the Securities and Exchange Commission (SEC) show that his cut from the deal was considerably larger than those of his partners at Kleiner Perkins Caufield & Byers.
Doerr’s “carry” was brought into the spotlight by no less than another venture capitalist, Bill Burnham, who writes a popular blog called “Burnham’s Beat” at http://www.billburnham.blogs.com. Burnham, who is in the midst of raising a new venture fund called Celsius Capital, says that his curiosity was piqued when a reporter asked him how Kleiner and Sequoia Capital fared in Google’s IPO. He says he dug through SEC filings and “made some pretty interesting discoveries.”
“Interesting” is an understatement. One of the findings Burnham writes about in his blog:
“According to the SEC documents, to date Doerr has personally received 2.161 million shares, or 12%, of the 18.2 million shares distributed to date. Assuming that Kleiner has a 30% carry on the fund, that means they were entitled to 5.46 million shares of the 18.2 million. This means that Doerr has received 40% of Kleiner’s total carry and also has a personal carried interest of 12% in the fund. It also means that to date he has received $422 million worth of Google shares and has another $90 million worth of shares yet to be distributed. God Bless America!”
The blog continues: “Now don’t get me wrong, John Doerr deserves every penny of his carry. His personal track record is absolutely fantastic. However, I was amazed to figure that he is entitled to 40% of the profits at Kleiner. After all, Vinod Khosla is no slouch himself and he was in the same fund. If they both receive 40% of the profits, that would leave just 20% for all the other partners. I had heard that Kleiner’s economics were heavily skewed to the big two,’ but that is a bit more skewed that I had thought. Perhaps the answer is that Kleiner’s carried interest is actually 35% or 40%, which would reduce Doerr’s share down to a still very high, but less onerous, 35%-30%. Either way, it’s clear that Doerr has a very large share of the economics at Kleiner.”
What did Doerr think about Burnham’s post? The official comment from John Denniston, Kleiner’s chief operating officer: “The numbers in there are way wrong.” Denniston declined to elaborate.
We went back to Burnham. “The numbers are what the numbers are,” he said. “They’re in public filings. Anybody with a calculator and half a brain can add them up.” He noted, however, that a few scenarios could make it wrong to conclude that Doerr gets 40% of Kleiner’s profits:
* Kleiner’s carry may be more than 30%, a figure that has been widely reported over the years. If, say, it commands a 40% carry, then it would have received 7.28 million of the 18.2 million Google shares that were distributed. And that would mean that the shares distributed to Doerr account for 30%, not 40%, of the firm’s total.
* Certain Kleiner partners may get a “deal-by-deal carry,” so they get a bigger cut of the profits on the deals they are personally involved with. For example, Doerr may have received a 40% carry on the Google deal, but he may not receive that percentage for all deals in the fund. Deal-by-deal carry is not a common practice.
* Finally, it’s possible that Kleiner makes distributions unequally to its partners at various times, but then splits up the profits equally at the end of a fund’s life. That is also an uncommon practice.
Burnham’s blogging may have gotten under the skin of the GPs over at Kleiner because of the observation he made about how much Doerr earned in contrast to Mike Moritz of Sequoia:
“… Applying the same deductive logic to [Moritz’s] personal distributions as we did to John Doerr’s we see that he received 394,000 of the first 7 million shares distributed, which was about 5.6% of the total. Assuming the same 30% carry for Sequoia’s fund, that means that he has received about 19% of the partnership profits, although his actual share is probably closer to 21.5%, given that the first distribution was no doubt depressed by the return of capital.
“Now 21.5% is a highly respectable share of the fund profits, but it is somewhat ironic to note that Moritz made the same investment as Doerr, presumably did the same work, but is going to get paid about $306 million, which is about $200 million (40%) less than Doerr, despite returning $200 million more to his LPs. Go figure!”
Those sorts of comments can only serve to fan the flames of the rumored rivalry between Kleiner Perkins and Sequoia. But Burnham insists he’s not out to stir up trouble.
“These guys are rock stars,” he says. “[Doerr] deserves every penny that he made. I just thought it would be interesting to run the numbers.”