Benchmark's Venture Capitalists Take The Valley By Storm

The young firm aims to out-venture Kleiner Perkins

Atop the desk of venture capitalist Robert C. Kagle sits a miniature plastic computer cracked in half. A cheap wooden plaque above it bears the inscription: The Broken Computer Award--Profits So Huge that they Broke the Computer. At first blush, you might dismiss the dubious honor bestowed on Kagle by colleagues at his Silicon Valley venture firm as little more than a gag.

No gag. In 1997, Kagle's firm, Benchmark Capital, bought 22% of Internet- auction highflier eBay Inc. for $5 million. Today, that stake is worth about $2.5 billion, a--gulp--49,900% return was too big for the firm's computer system to swallow. "Our computer only allows gains of up to $100 million," explains the 42-year-old Kagle, who, along with each of his four partners, can personally lay claim to some $120 million of the eBay gain. "We aim high."

Indeed, as it stands now, the firm's stake in eBay looks to be the best-performing venture investment of all time--better than Microsoft, Cisco Systems, or Compaq Computer. Not bad for a group of guys who in just four years have taken the clubby, elite world of venture capital by storm. "eBay really put them on the map," says rival venture capitalist C. Richard Kramlich of New Enterprise Associates. Adds Alfred Giuffrida, a managing director at Horsley Bridge Partners Inc., an institution with investments in 30 venture-capital firms, including Benchmark: "They've had an immediate impact in Silicon Valley and are already among the very top tier of groups."

This team of five alpha males, with an average age of 38 and an average height of 6 ft. 3 in., may not have the cachet of powerhouse Kleiner Perkins Caufield & Byers or the muscle of its superstar, L. John Doerr. But they plan to get them. Indeed, the firm's name screams it. "We want to set a new benchmark," says partner Andrew S. Rachleff. Predicts Keith J. Krach, CEO of Benchmark-backed Ariba Technologies: "They're going to be ruling Silicon Valley."

But first, Benchmark will have to prove that it's more than just a one-trick pony. Some Valley insiders suggest Benchmark's bravado may be premature, given its members' relative youth and brief track record. Benchmark has yet to return one dime to investors, since gains are still merely paper profits. And landing the hottest deals is increasingly difficult as competition stiffens. "You're only as good as your last fiasco," warns Doerr.

Not surprisingly, then, Benchmark has been in overdrive. Since opening its doors in 1995, it has invested nearly $250 million raised from institutions and marquee individuals like Bill Gates, Michael Dell, and Craig McCaw. The result is a portfolio chock-full of promising startups--from E-business consultant Scient Corp. to online mortgage broker E-LOAN Inc. to high-speed Internet-access provider NorthPoint Communications Inc.

BUZZMEISTERS. Of 52 investments--many focused on the explosive opportunities in E-commerce and the Internet--just two have turned out to be dogs. On paper, 11 would already return an average of almost $19 million. Then there's eBay. Says fund investor and Sun Microsystems Inc. CEO Scott G. McNealy: "They've done very well by me. Every time I see [Kagle], I start coughing `Distribute, distribute."'

So what makes this chest-thumping upstart the talk of Silicon Valley? And what makes it believe it will one day outshine the likes of Kleiner Perkins, a 27-year-old firm with a track record that includes home runs like Sun Microsystems, Netscape Communications, and Rivals, investors, and other execs suggest Benchmark has simply mastered the venture capital game: recruiting top management, forming key strategic relationships, creating the all-important market buzz.

More important, as the partners see it, is their unique teamwork, an unbending devotion to entrepreneurism, and genuine boyish camaraderie. Not a day goes by without footballs getting thrown around Benchmark's posh new offices on Sand Hill Road, venture capital's equivalent of Park Avenue. Partner retreats are more about fishing, bird hunting, or playing Hearts than about discussing serious strategic issues.

It was their ability to function as a team that attracted Louis H. Borders, the 50-year-old founder of bookseller Borders Group. Once he avidly opposed taking venture money, believing that VCs were too meddlesome. But Borders, now at work on a yet-to-be-launched online superstore, has changed his tune. He says all five partners at Benchmark have been vital to decisions affecting everything from product offerings to hiring. At other firms, he says, only one partner generally interacts with management. "Benchmark has been more supportive as a company," says Borders. "They'll do anything I ask of them."

That includes shuttling job candidates around the Valley or playing door-to-door salesman. Partner David M. Beirne got E*TRADE Group to chuck a deal it was on the verge of sealing to outsource its E-mail operations. Over dinner, Beirne talked CEO Christos M. Cotsakos into trying out Critical Path Inc., an upstart backed by Benchmark instead. "We bet our company on a whole new infrastructure with Critical Path," recalls Cotsakos. "There are very few people who could have convinced me to do this."

That kind of help is priceless. But entrepreneurs worry that some venture capitalists can take their roles too far. One company founder says he opted to take money from Benchmark instead of Kleiner for fear it would take over his outfit. "My hunch on Benchmark was that it would be much more constructive and cooperative in helping us build the company," this entrepreneur says. "The rap on Kleiner is that they pretty much do what they want to do."

"KILLER IDEA." Doerr bristles at the idea that his firm is too heavyhanded, saying Kleiner's dominance makes it an easy target. "We're an active, not passive, investor," says Doerr. "But I haven't heard complaints that we're too hands-on."

Even more distinctive is Benchmark's structure. "We wanted to architect the firm differently," says Bruce Dunlevie. Unlike most venture capitalists, Benchmark partners share equally in profits and failings regardless of who brings in or works on a deal. Many Silicon Valleyites say that all but eliminates internal politics and infighting between partners for hot deals and talent. Even the support staff shares in the goodies. "This is the new killer idea," says Novell Inc. CEO Eric E. Schmidt. Adds 34-year-old Kevin R. Harvey: "At a lot of other venture firms, everybody is jockeying for position." Although Benchmark says otherwise, it is not the first firm going this route. Such old-timers as Sequoia Capital, for example, also say they give partners equal slices of their venture pies.

Not everyone is convinced that such a structure is sustainable, particularly for a small newcomer like Benchmark that hopes to grow. With just five partners and a relatively small $125 million fund--Kleiner's latest fund raised $398 million--Benchmark could run into trouble as it expands. "It will be interesting to see over the next 10 years how they scale the business without having a hierarchy," says Jeffrey D. Brody, a partner at rival Brentwood Venture Capital.

Benchmark is indeed currently in the hunt for a sixth full-time team member. Last year, former Federal Communications Commissioner Reed Hundt joined as a part-time affiliate. But Benchmark says it needs more firepower--particularly if it wants to continue to break records, not to mention computers.

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