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06/24/2005

Just How Much Did VCs Pocket On Google?

A reporter asked me the other day what impact Google would have on the two main VCs in the Google deal, Kleiner Perkins and Sequoia, and it got me to thinking:  just how much money did those funds really pull out of Google?    Filled with a wistful sense of VC envy, I wondered over to Edgar to try and piece together the details.  In doing so I made some pretty interesting discoveries which I don't think have been discussed to date.

How to Turn $12.5M into $4.3BN
As many may know, all the way back in 1999 Kleiner and Sequoia each invested $12.5M in Google for a 10% stake.  Fast forward to the Summer of 2004 and these stakes were worth $2.03BN at Google's IPO price of $85/share.   While they originally intended to sell about 10% of their stakes in the IPO, both Kleiner and Sequoia backed off from this plan when the IPO ran into some investor jitters over valuation (which in hindsight look somewhat misplaced).  Lucky for the VCs, Google's shares have basically been on a straight line to the moon since IPO and now trade at $290/share less than a year after the IPO, so being forced to hold on to their shares was a blessing in disguise.

As it currently stands, both Kleiner and Sequoia have already distributed the vast majority of their stakes to their LPs.  Thanks to the wonder of the SEC's Form 4, it's possible to go back and calculate exactly how much money the firms have made for their LPs to date.  It's also possible to see how much the individual VCs have received (John Doerr and Mike Moritz) and even to make a realtively precise guess at the specific carried interests that each VC has in their respective fund.

In the case of Kleiner, they made their first big distribution of shares to LPs on 11/17/04 when they distributed about 5.7M shares, about a quarter of their total stake, at $172.5 a share which equates to about $983M.  They made another distribution on 2/4 of 11.4M shares, about 54% of their stake, at $203.66 per share for a cool $2.3BN.  On 5/2/04, they made another distribution of 1.1M shares worth $247M.  In total, to date they have distributed shares worth $3.549BN.   They still have another 2.6M shares worth $752M as of yesterday's close, so the total value of their stake is $4.3BN which represents a 344X return on their investment of $12.5M ... not too shabby.

The Mystery of The Disappearing Shares
There is one significant mystery about Kleiner's stake.  In the initial drafts of Google's S1, Kleiner was represented to have 23.9 shares, a stake equal to Sequoia's.  However about a month before the IPO, sometime between July 12th and July 26th, about 2.85M of Kleiner's shares mysteriously disappeared from the cap table.  At the same time a new entity affiliated with Kleiner called "Vallejo Ventures Trust" appeared in the footnotes owning 1.8M shares.  I can't find any information on Vallejo Ventures (my thought is that it is a seperate private partnership 100% owned and funded by the Kleiner partners, but that's just a complete guess), but it would appear that Kleiner sold off the 2.85M shares, possibly to an entity that had some relationship to Vallejo, or possibly to a third party.

One theory would be that once it was apparent to Kleiner that it was not going to be able to sell secondary shares in the IPO that it struck a private deal with a third party to sell some shares in advance of the IPO.  Another would be that Morgan and Goldman simply got the share count wrong in the first few drafts.  I have a hard time believing that the share count was wrong because it has been widely reported that both firms invested the same amount of money and had the same ownerships stakes, so there's no good reason that Kleiner would own 2.85M less shares than Sequoia.

I am going to assume then that Kleiner did own those shares and that they sold them to a third party at the IPO price of $85/share (I will guess Morgan Stanley), so you can add another $242M to their take to bring the total to $4.5BN and maybe, just maybe, $5BN, if they figured out some way to move those shares offshore and still hold them without having to report them to the SEC (which seems unlikely and unecessary, but you never know) .  Anyway, if anyone has better information on what happened to these shares please post a comment.

Quite a Bit of Carry?
One other tibit of information that one can plausibly deduce from Kleiner's SEC filings on Google is just how large John Doerr's personal carried interest is in Kleiner's funds.  Carried interest is the % of the profits of the fund that an individual partner is entitled to receive.  The Kleiner funds that made the investment in Google are reported to give the Kleiner partners a 30% carried interest in the profits of the funds.   Because Kleiner distributed stock and because the SEC requires Doerr to disclose how much stock he directly received from such distributions, it's possible to make a reasonably well informed deduction about Doerr's personal carried interest in the Kleiner funds.  According to the SEC documents, to date Doerr has personally received 2.162M shares or 12% of the 18.2M shares distributed to date.  Assuming that Kleiner has a 30% carry on the fund, that means they were entitled to 5.46M shares of the 18.2M.  This means that Doerr has received 40% of Kleiner's total carry and also has a personal carried interest of 12% in the fund.  [See the UPDATE below as these #s are definitely wrong based on some discussions I've just had]  It also means that to date he has received $422M worth of Google shares and has another $90M worth of shares yet to be distributed.  God Bless America!

Now don't get me wrong, John Doerr deserves every penny of his carry.  His personal track record is absolutely fantastic.  However I was amazed to figure that he is entitled to 40% of the profits at Kleiner.  Afterall, Vinod Khosla is no slouch himself and he was in the same fund.  If they both receive 40% of the profits that would leave just 20% for all the other partners.  I had heard that Kleiner's economics were heavily skewed to the "big two", but that is a bit more skewed that I had thought.  Perhaps the answer is that the Kleiner's carried interest is actually 35% or 40% which would reduce Doerr's share down to a still very high, but less onerous, 35-30%.  [UPDATE:  As I say below I forgot to include the proceeds from any personal investments, so basically there's no way to really figure out what the real carried interest is but it's definitely lower than the 40% that I calculated and probably lower than the 30-35%.]

Last But Not Least
Sequoia's total take to date is a bit more difficult to figure thanks to their relatively tardy filing of Form 4, but we know that they had 23.9M shares to start worth $2.03BN at the IPO price of $85.  Unlike Kleiner, there are no missing shares here.  Sequoia clearly held on to all 23.9M of their shares pre and post IPO.  They made their first distributions of 7M shares in late November/early December 04.  It's interesting to note that unlike Kleiner which just distributed its shares in one big block on a single day, Sequoia doled its shares out over three weeks, presumeably in an effort to mitigate the impact of its distributions on the market.

According to the latest proxy statement, Sequoia has subseqently distributed another 13M shares but because they haven't yet filed a Form 4, it's impossible to determine exactly when they distributed them and at what price.  However making an educated guess they have returned about $3.8BN to date and have stock worth another $940M left to distribute for a total return of close to $4.7BN which is about $200M higher than Kleiner's $4.5BN (with the mystery shares).  Based on their $200M more in proceeds for the same stake and their careful doling out of shares to protect the market, Sequoia wins the award for best distrubution process.

As for Mike Moritz, who now has two of the Internet era's biggest VC Grand Slams under his belt in Yahoo and Google (although I personally admire his X.com/PayPal exit the most), applying the same deductive logic to his personal distributions as we did to John Doerr's we see that he received 394K of the first 7M shares distributed which was about 5.6% of the total.  Assuming the same 30% carry for Sequoia's fund, that means that he has received about 19% of the partnership profits, although his actual share is probably closer to 21.5% given that the first distribution was no doubt depressed by the return of capital. [UPDATE: See below, but basically the 21.5% doesn't account for any personal investments in the fund which means that the personal carried interest of Moritz is likely lower than the 21.5%.]

Now 21.5% is a highly respectable share of the profits fund, but it is somewhat ironic to note that Moritz made the same investment as Doerr, presumeably did the same work (although one could even argue that Moritz's connections at Yahoo were the key to Google's success), but is going to get paid about $306M which is about $200M (40%) less than Doerr, despite returning $200M more to his LPs.   Go figure!  [UPDATE:  See, below but one of the main reasons for the difference in personal income between Moritz and Doerr is likely that Doerr invested a lot of personal money in Kleiner's fund and thus got more because he risked more, which is what investing is all about!]

UPDATE:
I recently talked with some folks who definitely know many of the actual numbers involved and they pointed out to me what in hindsight is a rather embarassingly obvious fact: that the distributions received by individual partners include both carried interest as well as the proceeds from any personal investments made by the partners themselves into their fund, something which I had, quite stupidly, not figured into my deductions.  In many venture funds, these investments are usally quite small, somewhere between 1-2%, however in some funds partners make very significant personal investments and it's likely that both of the partners involved in Google had substantial personal investments in their own funds.

Based on this, I have no doubt now that the 40% share of profits that I deduced for John Doerr at Kleiner is wrong and that the 21.5% share I deduced for Mike Moritz is probably wrong as well.  Both of their carried interest shares are lower and in the case of Doerr, significantly lower than the 40% number I deduced.

While the absolute # of shares that have been distributed to them is still correct, there's no way to figure out what portion of those shares were for their carried interest in the fund and what portion were for their own personal investments in the fund without more infomation, so it's impossible to estimate their specific carried interests without that information and it is therefore in many ways irresponsible of me to even hazzard a guess.

As I said in my original post, both VCs deserved every penny they earned and now that it's clear a fair number of those pennies came from the partner's personal money they put at risk and invested into the fund I have to say that I think they deserved their rewards even more that I though at first.

June 24, 2005 in Internet, Stocks, Venture Capital | Permalink

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