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Why Zazzle Dazzles John Doerr

John Doerr, general partner at venture capital firm Kleiner Perkins Caufield & Byers, is one of the most successful VCs practicing today. His $12.5 million bet on Google (GOOG) in 1999 has since ballooned into a $3.4 billion fortune, returning 344 times the investment. And that's only his most recent blockbuster. His track record includes such names as Amazon (AMZN), Netscape Communications, Intuit (INTU), Palm (PALM), and Sun Microsystems (SUNW).

Even his failures have been larger than life, including doomed pen-computer maker Go Corp., which was described in the 1994 book Startup by Jerry Kaplan. (Doerr once remarked that the book "should have been called Screwup.")

Doerr's latest investment is Zazzle, a six-year-old outfit that lets consumers make, sell, and buy customized goods such as T-shirts and stamps on the Internet. Ram Shriram of Sherpalo Ventures, an early backer of Google, has joined with Doerr and Kleiner Perkins in investing $16 million in Zazzle.

The company fits Doerr's thesis that the next wave of the Internet will be about consumers expressing themselves. To learn more about that idea -- and Kleiner Perkins' new investor and advisor, General Colin Powell -- BusinessWeek Silicon Valley correspondent Justin Hibbard spoke with Doerr. Edited excerpts of their conversation follow:

Q: How did you discover Zazzle?

A: [Kleiner Perkins general partner] Brook Byers knew the entrepreneurs. [Zazzle co-founder] Matt Wilsey in particular was a friend of his. Brook has kids who go to the same school. Brook said, "There's this really interesting new Internet commerce opportunity, kind of a new cut on it, so let's check it out."

Q: Zazzle was founded in 1999. What have they been doing for six years?

A: They were founded to develop custom and proprietary inks, and particularly inks that would bond under a process to apparel. They did that R&D for quite some time and then bootstrapped their way into a Web site.

Through the experience of being in this business, they came to the opinion that this is quite a large opportunity, and we agree with them. There's this large trend -- I think the next trend in the Web, sort of Web 2.0 -- which is to have users really express, offer, and market their own content, their own persona, their identity. I don't mean identity as in credit cards. I mean like apparel is a way we express our identity, how we dress, the music we listen to.

Zazzle is a way to take all those unique, individual, and custom expressions of self and realize them in expressions generally of things, be they apparel, or posters, or stamps.

One of the remarkable things is to see some of the stuff that soldiers in Iraq are creating. They're there, they're online, they're making stuff, and they're sending it back home.

Q: What are some other examples of your theory about self-expression on the Web?

A: The next wave of the Web is going to be user-generated content. We all know about blogs and how big they are. Well, there are more writers of blogs right now than there are readers, so that's clearly a vanity phenomenon. And it's not clear to me how you make money on it, except perhaps by monetizing it through Google AdSense or AdWords.

But it shows some of the hunger there is for user expression and interest in the most popular of the blogs, in sharing and reading.

Another great example that has just broke on the scene in the last six months are podcasts (see BW, 6/6/05, "The Lowdown on Podcasting"). From my estimate, there are between two and four million listeners every week to podcasts who listen for 65 minutes a week. In this case, it's not so much a vanity phenomenon, I think. There are about 8,000 podcasters out there.

Q: CafPress has offered custom goods online since 1999. How is Zazzle different?

A: Caf? Press doesn't offer custom postage, just for starters. There are just not many people approved by the U.S. Postal Service to make custom postage. I don't think Caf? Press has the same collection, the same range of library tools. I've looked at the user interfaces, and I think Zazzle is way more convenient, way more easy to use.

Q: How does Zazzle make money?

A: They sell things for more than they cost to produce them. And for people who make their own market on the site by putting up their own things, they charge them a fee to sell them. They make a marketplace, like eBay (EBAY) does. It's really straightforward. It's not some ad-based model.

The remarkable thing to me is they've established quite an unimaginable collection of great brands. Not just images, but brands. For example, Walt Disney (DIS) has 3,500 of its characters on the site so you can customize them, making gifts, or apparel, or stamps. You can get your kid's name on Mickey, Nemo, or a birthday message. And it's quite special.

They've found a way to privately, or within a small family group, share expressions, or other images, drawings, and then gain access to some of the world's great expressions and images and make them real, make them tangible.

Q: Can consumers alter brands any way they want?

A: With, for example, the Disney or Coca-Cola (KO) brands, the owners of those brands are not interested in seeing them defaced, abused, or used in an inappropriate way. So Zazzle has a two-step screening process to make sure that doesn't happen, and that gave the U.S. Postal Service, which has been around since the Continental Congress, the confidence with Pitney-Bowes (PBI), to partner.

Q: Is Zazzle profitable?

A: They were before we invested. We probably, with this launch [a redesigned Web site], have driven them into a brief spurt of unprofitability. But its plan certainly is to be profitable next quarter. It's a solid, ongoing business.

Q: Besides supplying money, how are you helping Zazzle?

A: The Web site [was] kind of crummy, so we needed to hire a bunch of engineers and management teams. It's actually not unlike Google at that stage of development. They had an up-and-running site. It wasn't losing very much money, it wasn't making very much money, but it was growing.

Importantly, Zazzle had a terrific set of very young founders: Matt Wilsey, Jeff Beaver, Bobby Beaver, and [the two sons'] dad, Robert Beaver. All of them are Stanford graduates. Then we proceeded to hire an incredibly talented young team of developers, a great marketer who built and ran Yahoo! Personals (YHOO), and a super-experienced vice-president of operations. So we're growing the team to meet the demand. The average age of the people working at Zazzle is certainly twentysomething.

Q: Does Zazzle offer assistance with marketing to people who want to sell custom goods online as a business?

A: Oh, yeah. They will post and feature sites and products that are available from sites and collections. Like eBay, there are going to be lots of micro-sites. Zazzle is certainly not a competitor with eBay. It's completely focused on individual expression, as opposed to existing goods. This is on-demand manufacturing.

Q: Does Zazzle do its own manufacturing, warehousing, and shipping?

A: Yes. They are the largest shipper right now through the Palo Alto, Calif. post office. They're really interested in next-day delivery.

Q: Doesn't that burn a lot of cash?

A: These businesses have a positive return cycle on their cash. If you place an order, you put up your credit card, so you pay immediately. Since they're on-demand, they're not stocking any inventory except some blank apparel and blank postage sheets, and you don't pay the post office for the postage until you've gotten paid. So it's not like you've got a big capital investment.

Q: Switching gears, let's talk about Colin Powell. What will his role be at Kleiner Perkins?

A: He's a strategic limited partner, and that means he's going to be available on demand to consult and advise Kleiner-backed entrepreneurs and prospective entrepreneurs, and the partnership itself on leadership, management development, globalization -- on the world as only such a distinguished leader can see it.

He'll look with us at new investment opportunities. When he sees investment opportunities, he'll refer them to us. I, for a long time, have really admired this man. He's an inspiration to me. I think he's an inspiration to all Americans.

Q: How did you meet him?

A: I've known him for some time. He and I have been e-mail pals. He originally started working with our partnership on America Online (TWX). He served on the board. So, when he stopped working at the State Dept., I picked up the phone and said, "Let's talk."

I was interested in talking first and foremost about some of the global causes and passions that he and I share, like debt relief and humanitarian aid for Africa and eliminating poverty through micro-lending. He's very interested in those things. After America's Promise, which is a project I worked on with him and his wife, Alma, I think he'll make a huge contribution on the worldwide scene. He remains on the board of America's Promise.

Q: Kleiner Perkins traditionally hasn't invested much outside the U.S. Are you hoping Powell might help you invest overseas?

A: Yes, and understand overseas markets, as well. If you took together all of Kleiner's businesses, over half the revenue would be outside the U.S. So, technology and innovation are truly global markets.

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