Downsizing Hits Kleiner Perkins …

For more on the Kleiner decision — and LP pressure on firms like Accel, Redpoint and Benchmark — check out Monday’s print edition of Private Equity Week.

In a move certain to reverberate through the VC industry, Kleiner Perkins Caufield & Byers has informed its limited partners that it will likely call down 20%-25% less cash for its 10th fund.

Partner Kevin Compton told Private Equity Week (PEW) that the firm had sent letters to LPs and had conversations with some of them regarding the move. ?We?re telling our limiteds that we?re probably not going to call it all, but we won?t know officially for about 12 months,? Compton says.

If the firm does in fact call down less money, the final size of Kleiner Perkins Caufield & Byers X (KPCB X) could shrink from $627.5 million to approximately $471 million. If the fund is smaller than originally planned, the management fees that the firm collects will be commensurate with that reduced amount.

Additionally, Kleiner Perkins told its LPs that it plans for KPCB X to co-invest in new deals alongside its ninth fund, a $500 million vehicle raised in 1999.

According to a document sent to LPs, KPCB X is broken into two funds, one for institutional investors and one for wealthy individuals (aka friends of the firm). It is unclear if the Kleiner partners themselves particpated in either group, or if they invested in a third tranche.

Compton declined to say why the firm will likely call down less capital, except to say, ?We want to do some things that are going in the right direction for the industry.?

Institutional investors say the potential move to call down less capital indicates that there is just too much money chasing too few deals. ?This is the blue chip of the industry acknowledging some excess and the fact that the industry has changed,? says an executive at a large institutional investor with knowledge of the Kleiner Perkins? letter.

The executive went on to say that there has been growing concern among LPs over the past 12 months regarding $1 billion funds. ?A number of people collected large pools of money and couldn?t deploy it in a timely fashion, but they?ve been collecting management fees on it,? he says.

A Silicon Valley venture capitalist who asked not to be named says that the move by Kleiner Perkins is certain to be followed by others as Kleiner Perkins? actions carry significant weight.

?It?s very obvious to everyone that the number of attractive deals out there have been few, and Kleiner gets to see the cream of the crop,? says another industry source. ?So what they?re doing is significant because it says they don?t believe there?s enough opportunities or enough exit horizon.? Asked if he agreed with that assessment, Compton replied: ?It?s not accurate.?

Stellar Returns

Because of its stellar track record, Kleiner has almost always had to turn away potential LPs from its funds, because they were oversubscribed.

One manager of a large pension fund says he was ?psyched? about the returns his fund received for Kleiner Perkins? sixth and seventh funds. He reports that Fund VI, a $173 million vehicle raised in 1992, has returned $878 million to date, with most of that already distributed to LPs. KPC&B VII, a $255 million fund raised in 1994, has ballooned to a value of $2.2 billion, he adds. An alternate source confirms the figure for Fund VII, but believes returns from Fund VI may have actually been a bit lower.

Banking on such high returns, the pension fund manager tried to get into the eighth fund, but it was so oversubscribed that Kleiner Perkins? was limiting some LPs? participation to about $2 million to $3 million ? a non-meaningful amount for large institutions. The fund manager couldn?t get into the ninth fund, because, he says, he was told that the firm wasn?t likely going to take outside money.

He speculated that the firm is making the move to reduce the size of its 10th fund because of concerns about LPs later invoking a claw back provision ? which would mean that Kleiner Perkins? partners would have to return any profits if the overall fund loses money.

Another institutional LP who is actually in Fund X, sayes the move was first discussed in February, and was not spurred by LP pressure. “It was voluntary,” he says.

KPCB X has made at least two investments, according to VentureXpert, a database operated by VE. It invested $14 million in Tellme Networks Inc. of Mountain View, Calif., in September 2000, and it put $1 million into Epoch Partners of San Francisco in February 2001.

Contact Lawrence Aragon or Dan Primack
Additional reporting by Carolina Braunschweig.

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