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Kleiner Perkins bets the farm (July 21, 2008)Kleiner Perkins bets the farm (July 21, 2008)
THE KING AND HIS COURT: John Doerr (third from left) and partners (from left) Chi-Hua Chien, Aileen Lee, Ajit Nazre, and Ray Lane; on far right: Bloom Energy's K.R. Sridhar.Photo by Robyn Twomey

In the past decade Kleiner Perkins Caufield & Byers has doled out $10 billion to its major investors, all of which are university endowments, philanthropic foundations, or public pension funds. Silicon Valley’s top venture capital firms never divulge their actual performance. Yet this tidbit comes directly from John Doerr, Kleiner’s preeminent partner, who is so intent on ensuring that I’m correctly processing the significance of that figure that he helps me with the math. “That’s $1 billion a year on average,” he says. “Those are great gains. That’s not a couple university chairs, and it’s not a building or two. That’s whole quadrants of a campus.”

Point well taken, John Kleiner Perkins has long defined the gold standard for venture capital; one institutional investor estimates that the money it had with Kleiner grew tenfold over the period Doerr is talking about. The Kleiner hit parade stretches back 36 years and includes early bets on industry icons Genentech, Compaq, Sun, Netscape, Amazon, and Google. Of its hundreds of competitors, only Sequoia Capital, an equally storied firm with a similarly successful star investor, Michael Moritz, comes close to matching that track record.

Yet Doerr sounds a tad defensive when I visit him at Kleiner’s offices on a hazy day in late June, the normally pristine skies above Menlo Park, Calif., turned gray by the wildfires menacing the region. Kleiner Perkins, you see, is at a crossroads, and Doerr knows it. About three years ago he began steering his partners toward an emphasis on alternative-energy projects, or “green tech” in Kleiner parlance. The new eco-focus has attracted plenty of hoopla, most notably late last year when Doerr hired his pal Al Gore as a Kleiner partner.

Yet the firm’s shift toward energy investing is only part of the story. As important is Kleiner’s steady drift away from the industry that made the firm what it is today: the Internet. Kleiner’s investments defined the Internet’s first generation. Without Kleiner there was no Netscape, and without Netscape there was no cash-gushing dot-com boom. Yet Doerr and his partners have been absent not only from the biggest deals to date among the next generation of Internet companies—MySpace, YouTube, and Facebook—but also from the buzziest prospects for big paydays down the road—LinkedIn, Yelp, Twitter, and a host of similar Web 2.0 startups whose common thread is an interactive, or “social,” relationship with users.

Doerr, who is 56, only grudgingly accepts the premise that Kleiner has turned its back on the consumer Internet. “We made a very deliberate and strategic decision,” he says with the baritone of a deejay, which he was in college. “We could’ve doubled down on Web 2.0, whatever that is. We didn’t.” Instead, the firm has been diversifying. First, in 2006, it created a $200 million fund focused exclusively on preventing infectious-disease pandemics. Then, last year, it raised $360 million to invest in China—Kleiner’s first foray outside the United States and a project that already is off to a rocky start because one of its two key recruits quit within months. The newest addition is the $500 million Green Growth Fund, launched in May.

But the green fund represents more than just an expanded product line for Kleiner—it’s an attempt to stretch the definition of venture capital. Ever since the industry got its start 40 years ago, VC firms have always been small partnerships investing relatively small amounts of money, hoping for a few giant payouts to outshine the inevitable flubs. But together Kleiner’s three most recent funds—including its latest, $700 million venture fund raised this spring—amount to nearly $1.6 billion, a paltry sum compared with the giants of private equity but a massive amount for the venture business. And unlike the usual startup-centric VC approach, Kleiner’s strategy focuses on existing alternative-energy companies that are well beyond the launch phase.

LIFERS: On far left, Mark Forchette of Optimedica, a Kleiner portfolio company; after him, from left, Kleiner's life sciences specialists: Jessica Owens, Brook Byers, and Beth Seidenberg.
LIFERS: On far left, Mark Forchette of Optimedica, a Kleiner portfolio company; after him, from left, Kleiner’s life sciences specialists: Jessica Owens, Brook Byers, and Beth Seidenberg.Photo: Robyn Twomey
Photo by Robyn Twomey

In essence, like some of the biggest private equity shops, Kleiner is becoming more of an asset gatherer, as opposed to a builder as it was in the early days of Amazon and Google. Then again, Kleiner needs more money than ever before because energy projects require billions of dollars in investments, not the millions required to jump-start a Web idea. (A supply of Red Bull, beanbag chairs, and a few powerful PCs are a lot cheaper than factories, transmission lines, and regulatory-compliance departments.)

Having said all that, we are talking about Kleiner Perkins here, not some untested investment group, and already there are hints that the Kleiner mystique will light up new fields of dreams. As we’ll see, there’s a top-secret gem hidden in the firm’s portfolio that could validate the whole risky wager on the energy business. Yet it’s this move into green that competitors and admirers alike consider Kleiner’s riskiest decision ever. “I hope to God they’re right,” says a Valley mover and shaker who invests in Kleiner’s funds. “But if they’re wrong it’ll be the end of Kleiner Perkins.”

It’s late May, and I’m enjoying an outdoor dinner at the luxurious Four Seasons Aviara in Carlsbad, Calif. I’m here for AllThingsD, a tech-industry confab. The gang’s all here, from industry heavyweights Bill Gates and Barry Diller to “it” entrepreneurs Mark Zuckerberg of Facebook and Max Levchin of Slide, and naturally venture capitalists are on the prowl for startup ideas. That night and for the rest of the conference I ask some of the smartest people in the tech biz about Kleiner Perkins, and the responses, all off-the-record for fear of offending a powerful firm, are nearly identical: “What the hell happened to them?”

Several Valley investors who monitor startups tell me they don’t bother sending Web-oriented entrepreneurs to pitch Kleiner anymore; they say the firm just doesn’t seem interested. As if to prove the point, not one Kleiner partner attends the 600-person event.

Kleiner insists it is still keen on the Internet. For example, it has invested in a company called Aggregate Knowledge, an online advertising business, and CoolIris, a photo and video site that has a clever way to match content with ads. By and large, though, Kleiner thinks the Web, at least on PCs, is an idea that’s had its day. Web surfing on cell phones—now, that’s different. That’s why Kleiner recently created a $100 million “iFund” for backing startups building products for Apple’s iPhone and other mobile devices.

“Mobile is an enormously important new opportunity,” says Doerr. “We think it’s the next computing platform and will rival the personal computer.” (Actually, calling the iFund a “fund” is probably too strong. It’s really just a repurposed chunk of existing capital. This is classic Kleiner: Take money already in pocket, relabel, issue press release. Voilà—an investing meme! Silicon Valley cynics call this tactic “venture marketing.”)

As for the road not taken, Kleiner partners stick to the party line: We haven’t missed that much. During the two weeks of interviews with 15 partners, I repeatedly hear the opinion that having sat out Web 2.0 just hasn’t been a big deal. “Take YouTube out,” says Randy Komisar, a seasoned technology executive who joined Kleiner three years ago. “What’s done well?” He’s right, to a point. Sequoia scored when Google bought YouTube in 2006 for $1.65 billion. But in general there have been few “exits,” VC-speak for IPOs or company acquisitions. In the second quarter 0f 2008 there wasn’t a single IPO of a VC-backed technology company, a dry spell that hadn’t happened in 30 years.

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The outcome of Kleiner’s wager will be known only when the crop of companies on which it passed either start selling out at fire-sale prices or go public at register-ringing valuations. Its stance makes for a stark bifurcation in the Valley: those who have thrown their lot in with Web 2.0 and those who are betting on the hot new thing. “Are you saying the entire reincarnation of the Internet won’t present any great returns? Come on!” snorts a top executive with a leading online company when I repeat Kleiner’s thesis. Adds David Sze, a partner with Greylock Partners: “I think there are going to be plenty of exits and that we’re going to make money.” Sze has a lot riding on his assertion. Almost all his investments are in Web 2.0 companies like Facebook, LinkedIn, and Digg.

One top-tier firm that hasn’t taken a religious position on green vs. web is Sequoia Capital. In addition to backing YouTube and LinkedIn (which recently attracted new investors at a billion-dollar valuation), Sequoia has also made 14 investments in alternative-energy companies. One is a battery company called A123 Systems. Sequoia’s Moritz recently told a group of entrepreneurs that his firm has made these investments “quietly”—he didn’t add “unlike Kleiner,” but he didn’t need to. Asked if Sequoia considers such factors as social responsibility in its investments, Moritz noted that the firm’s only real job is making money for its investors, many of whom are in the philanthropy or nonprofit business themselves, and therefore better positioned to spend on saving the world.

Menlo Park is where deals get done in Silicon Valley, but Sunnyvale is the kind of town where the companies actually get built. The temperature nears 100 degrees outside as I drive there to meet K.R. Sridhar, CEO of Bloom Energy, Kleiner’s first renewable-fuels investment and its favored showpiece to explain to the rest of the world what it is doing. Sridhar, a 47-year-old engineer who worked on one of NASA’s Mars lander programs before founding Bloom in 2001, explains to me how the company is developing a fuel-cell system that will power single-family homes or entire office complexes. As he speaks, though, my eye is drawn to the photographs of the public-policy big shots who have toured Bloom’s facility with Sridhar: Al Gore, Colin Powell, Arnold Schwarzenegger, Michael Bloomberg, Bill Clinton, and the celebrity journalist Tom Friedman, among others.

This collection of luminaries is telling. For one thing, Bloom isn’t ready to share many of the basic details of its business: who its customers are, what specifically it will sell, when it plans to bring its products to market, and so on. In other words, it has plenty of secrets to keep, yet it’s a fixture on the green-is-good political tour of corporate America. What’s also telling is the star power of Kleiner Perkins. Gore, as noted, is a Kleiner partner. Powell is a “strategic limited partner,” whatever that is, as Doerr might say. Friedman is a cross-country-skiing buddy of Doerr, who likes to pepper his commentary about global investing with reminders that we live in a “flat world.”

OH YEAH, THE INTERNET: From left, Soujanya Bhumkar of Cooliris, a web startup, and Kleiner partners Randy Komisar and Trae Vassallo.
Photo by Robyn Twomey

Investors, including Kleiner, have pumped more than $200 million into Bloom, yet it is at least a year from being ready even to make its product at commercial scale, much less make money selling. It’s an audacious risk that is being played out repeatedly in Kleiner’s portfolio. Ray Lane, the former president of Oracle who joined Kleiner in 2000, says one of his portfolio companies, GreatPoint Energy, won’t have its first commercial plant for turning coal into natural gas in operation until 2012, which would be seven years after Kleiner first invested. Another Kleiner investment, solar-panel maker Miasole, has missed several major product milestones and replaced its CEO. Yet Miasole is trying to raise $200 million from hedge funds and other investors at a valuation of around $1 billion.

There is one company that could be Kleiner’s first energy-sector grand slam—and there’s nothing green about it. The secretive, seven-year-old company, called Terralliance Technologies, has developed software that purports to make it easier and cheaper to find and extract oil and natural gas. Rather than license its software to petroleum giants, Terralliance decided to become a wildcatter itself. According to Kleiner partner Joe Lacob, Terralliance has already dug 100 wells around the world and is in the process of raising additional capital. Sources peg the new financing at more than $1 billion and a valuation of around $4 billion. In addition to Kleiner, Terralliance investors include Goldman Sachs and San Francisco hedge fund Passport Capital.

Terralliance, founded by software entrepreneur Erlend Olson, is so stealthy that it has no phone listing in Newport Beach, Calif., where it’s based. Its corporate website consists of one page that shows a map with three locations in North America, one in Europe, and one in Southeast Asia. A three-sentence description of the company says, “Terralliance has already achieved exploration success rates dramatically above the industry norm.” The company may be quiet, but it is well connected. Several years ago it retained Richard Richards, a former Reagan aide and chairman of the Republican National Committee, to make introductions to foreign governments in order to obtain commercial visas. “They’re very secretive because they’ve got some technology they don’t want the big guys to steal,” says Richards. He says Terralliance hasn’t called in a couple of years because it now has a far better-connected advisor helping it with foreign governments: former Secretary of State Colin Powell.

If Terralliance’s technology works nearly as well as its website says it does, the company could be ready to make a big splash. It recently hired a chief financial officer, Stephen Buscher, a former investment banker with Lazard Frères and Merrill Lynch who previously was CFO of Russian oil company Urals Energy, which is listed on the AIM stock exchange in London. Reached at his office in Newport Beach, Buscher said, “We’re not prepared to make any comments.”

It would be ironic, to say the least, if Kleiner’s first “green” jackpot turns out to be a company that actually drills for oil. Doerr, who has made the reduction of fossil-fuel use a personal crusade, refused to comment on Terralliance.

There’s one other complicating factor at Kleiner: its reliance on Doerr himself. Doerr and his partners tell outsiders—and themselves, apparently—that the firm is a true partnership and that Doerr is but an influential cog in the machine. It’s a useful notion that makes Kleiner’s institutional clients feel as if they’re entrusting their money to a team, not just one superstar. But John Doerr is the de facto managing partner. If he calls a meeting for a Sunday afternoon, the partners suit up and assemble. It was he who led the charge into alternative energy. He even leads when something isn’t his idea. Matt Murphy, who runs the iFund initiative, says Doerr “dragged his feet” about making a push in mobile-phone investments. But before long “John and Steve talked”—that would be Steve Jobs, naturally—and the result was Kleiner’s new zeal for iPhone-related companies. Says a Silicon Valley entrepreneur who has worked with the firm for well over a decade: “John has dominated Kleiner Perkins since the day I met him, and he has always denied it.”

THE GREEN GAMBLER: Doerr's investors are giving him the benefit of the doubt. That's no surprise. After all, he has made an awful lot of people rich.
THE GREEN GAMBLER: Doerr’s investors are giving him the benefit of the doubt. That’s no surprise. After all, he has made an awful lot of people rich.Photo: Robyn Twomey
Photo by Robyn Twomey

Doerr’s preeminence might rankle his colleagues—if it weren’t for all the money he makes them. Brook Byers, the name partner who hired Doerr in 1980, calls him “one of the legendary venture capital investors of all time.” But over the past few years three top Kleiner producers left the firm: Vinod Khosla, Kevin Compton, and Doug Mackenzie. Each made the usual noises about family and new pursuits—and each is working elsewhere as a full-time VC today. (Khosla caught the “green” bug first, and today his new firm, funded mostly by Khosla himself, is at least as important an alternative-energy investor as his old firm.)

Doerr can’t do everything, of course, and with 32 full-time investment professionals, Kleiner Perkins is bigger than it’s ever been. Byers runs a distinct biotech practice along with longtime partner Joe Lacob (who now spends half his time on energy) and two medical industry veterans, Beth Seidenberg and Dana Mead, hired in 2005 to eventually take over that business. But biotech never has produced the profits that Doerr’s side of the shop has. In tech (info and green), Ray Lane is highly valued for his operational chops but has yet to score big as a VC. Top partners Ted Schlein and Randy Komisar have broad experience but no massive payouts. Finally, there is Kleiner’s junior varsity, a team of accomplished brainiacs who include Trae Vassallo, Wen Hsieh, Chi-Hua Chien, Ellen Pao, Aileen Lee, and Ajit Nazre. These relative youngsters (most in their 30s) spend years serving apprenticeships to the older partners, and most are just beginning to lead their first investments, making it impossible to judge their company-building acumen.

Lately Kleiner Perkins has been stocking up on aging stalwarts of the technology industry. Bill Joy, 53, a former chief scientist at Sun, joined Kleiner three years ago. Bing Gordon, 58, a co-founder of Electronics Arts, signed on in May. John Gage, 65, another top scientist at Sun, joined in June—to work on alternative energy. None have any experience in venture capital and aren’t expected to lead the firm.

Who will lead Kleiner Perkins when Doerr hangs it up? Younger partners at other firms, like Roelof Botha at Sequoia and David Sze at Greylock, have begun making prominent names for themselves. It’s an issue Doerr thinks is overblown. He brings up an article in the defunct magazine Upside in 1989, when Tom Perkins retired, that asked if Doerr and Byers would drop the baton. They obviously didn’t. Of course, by 1989, Doerr had Compaq and Sun Microsystems under his belt. Byers had backed companies that revolutionized the detection of prostate cancer and the effectiveness of ultrasound scanning. Today’s crowd, bright and credentialed though it may be, doesn’t have any hits of that stature to its credit.

For now, investors have little choice but to give Kleiner Perkins the benefit of the doubt. More than one friend of the firm reminded me that it was derided for investing in Internet companies in the mid-1990s, when the idea seemed hokey and bound to fail. Plenty of other firms passed on the opportunity to invest in Google, which was just another search engine company in 1999. “In our business we don’t know if we’re right about anything for years,” says Byers. “It’s a humbling business.” If Kleiner is right, if alternative energy is a hit and if the IPO market returns, nothing else will matter. And John Doerr will be able to boast of whole university campuses being built with the dollars earned by Kleiner Perkins.

This story is from the July 21, 2008 issue of Fortune.