A group of 40 investors, executives, and entrepreneurs gathered at the Carneros Inn resort in Napa Valley, Calif., in June for a two-day conference on initial public offerings. LinkedIn (LNKD) Chief Executive Officer Jeff Weiner, Workday (WDAY) Co-CEO Aneel Bhusri, and EBay (EBAY) CEO John Donahoe spoke. Ousted Groupon (GRPN) CEO Andrew Mason said his online couponer went public too early. Yahoo! (YHOO) CEO Marissa Mayer recounted her first encounters with Wall Street, according to several participants who attended the off-the-record meeting.
The conference was hosted by Greylock Partners, a venture capital firm that once would have been unknown to many in the Silicon Valley elite. Founded in Cambridge, Mass., Greylock opened its first Valley office in 1999, after missing the first dot-com boom, and it did little in its early years on the West Coast to distinguish itself. Yet in the past five years, as most venture firms have performed poorly, Greylock’s bets have yielded some of the best results in VC history. It invested early in LinkedIn, Facebook (FB), Pandora Media (P), business-management software company Workday, and firewall maker Palo Alto Networks (PANW). Partners, including David Sze and LinkedIn co-founder Reid Hoffman, are now spoken of in the same breath as legendary investors John Doerr of Kleiner Perkins Caufield & Byers and Michael Moritz of Sequoia Capital.
In a meeting with its investor group in early July, Greylock announced plans to raise $1 billion for a new investment fund, the 14th in its 48-year history, according to four people who declined to be named because they weren’t authorized to discuss the matter. There’s little question that the firm’s small circle of regular investors, which includes universities and family endowments like the Hewlett Foundation, will pony up quickly. “These guys have been doing pretty much everything right for a long period of time,” says Yale Chief Investment Officer David Swensen, a Greylock investor credited with pushing university endowments into alternative investments like hedge funds.
Greylock declined to disclose its returns. Based on the performance of companies that have gone public from its 2001 and 2005 funds, however, the firm has far more than doubled its money, regulatory filings show. At the end of last year, VC firms had returned an average of 7.4 percent a year over the previous decade, trailing every major U.S. stock index, according to investment adviser Cambridge Associates. The National Venture Capital Association says that since 2002, the number of VC firms has dropped 23 percent to 841. “There are too many firms chasing too few large-venture exits,” says Anand Sanwal, CEO of researcher CB Insights, adding that he thinks the market is still too big.
In the last few years, firms including Crosspoint Venture Partners and Highland Capital Partners faded after handing control to younger partners. Others, such as Charles River Ventures, have stumbled trying to move to Silicon Valley from the East Coast. Greylock managed to do both almost simultaneously.
Founded in 1965, Greylock thrived for three decades by backing companies like skin-care giant Neutrogena (JNJ). It hired graduates out of Harvard Business School and boasted that they never left. The firm paid a price for its narrow view during the Internet boom, missing bubble gems like Netscape (AOL) and heavyweights like Google (GOOG). Stung, Greylock hired Bhusri from human resources software maker PeopleSoft (ORCL) to open a Silicon Valley office.
It was Bhusri’s first investing job, and he estimates he lost $70 million within 18 months on dot-com duds like CameraWorld.com, Guru.com, and an online rewards network called HelloAsia. (The office joke: “HelloAsia, goodbye $15 million.”) Bhusri hired Sze, a Stanford business school classmate who’d helped run early Web portal Excite, and who also had a poor start at Greylock. Far from the heart of the Valley in their San Mateo office, they struggled to gain credibility with local startups. Some of Greylock’s East Coast partners were also skeptical, but most decided the firm’s future was out west. “We couldn’t be perceived as a venture firm in Silicon Valley where every decision had to run through the East Coast,” says partner Bill Helman. “That was death.” As the firm refocused west, half of its 12 Cambridge-based partners left, replaced by Web veterans like Hoffman.
By that point, in the mid-2000s, Bhusri and Sze had found their groove, backing social networks and business software makers and relocating to Menlo Park’s prime VC address: Sand Hill Road. In early 2006, Sze invested in Facebook when it was a student-only social network valued at $500 million. He also led a $35 million investment in Pandora in July 2009, a week after the online radio startup resolved a two-year dispute over how much it owed in royalties. (By then, Bhusri had become co-CEO of Workday.)
Greylock has made its share of mistakes. The firm bet on Groupon 10 months before its disastrous IPO, and led financing rounds for faded online-recommendation network Digg. Greylock also passed on Twitter because Sze thought it was valued too high, and turned down juggernaut Chinese search engine Baidu (BIDU) three times. “These are hard decisions to make, even if now in retrospect they are completely obvious,” Sze says.
Nirav Tolia, CEO of the neighborhood social network Nextdoor, says he doesn’t worry about Greylock’s past missteps. “Those guys have been in literally hundreds of LinkedIn and Facebook board meetings,” says Tolia, whose company raised $21.6 million in a Greylock-led financing round in February. “I don’t know anyone else who has been at the ground level of this social revolution.”