Imagine deciding to sit out on an investment that ended up yielding 100,000% returns.
Those five zeros are not typos, and that scenario is no hypothetical: just ask John Doerr, the chairman of the venture capital firm Kleiner Perkins.
Doerr has made many strong investments in his career, including Alphabet GOOG GOOGL, Amazon.com, Inc. AMZN, Square Inc SQ and Twitter Inc TWTR.
One of his famous misses came in the mid-2000s, when a young South African on a bold mission gave him a clear proposition to invest in a new kind of technology.
The South African was Elon Musk, and his new kind of technology was a little something known these days as Tesla Inc TSLA.
Tesla’s Competing Series C Offers
Musk’s most famous encounter with encounter with Doerr and Kleiner Perkins occurred during his company’s push for a Series C investment.
Kleiner came in with $50 million; competitor Vantage Point offered $70 million.
Despite Vantage Point’s 40% higher valuation, Musk explained in a 2012 interview with Sarah Lacy of PandoDaily that he originally leaned toward Kleiner.
Musk's personal philosophy is that working with the right people means more than a higher valuation, he said.
“If you have a choice of a lower valuation with someone you really like or a higher valuation with someone you have a question mark about, take the lower valuation,” the Tesla CEO said.
“It’s better to have a higher quality venture capitalist who you think would be great to work than to get a higher valuation with someone where there’s even a question mark, really.”
Doerr’s Decision To Sit Out
Musk required a crucial caveat to work with Kleiner: Doerr needed to join the board for the investment.
Vantage Point offered more monetarily, but Doerr offered the kind of mind and personality that Musk sought from an investor.
In the end, Doerr decided to sit out on the opportunity and watch from the sidelines.
“John felt that he had too many obligations and that there was another partner at Kleiner who really wanted the deal, so he could not supplant that person ... I mean, that’s a 40% difference [in valuation]. I thought if John would be willing to join the board then we could do that, but not if it was somebody else.”
This decision turned out to be a costly one for the entire Kleiner brand, which decided to overlook Tesla in favor of Fisker Automotive, another luxury, energy-saving car company.
Since then, Tesla has soared to a $46 billion market cap valuation.
With a little math, we can see that Doerr’s decision to forgo the board seat cost him a 100,000% return on investment.
Fisker, on the other hand, declared bankruptcy in late 2013 due to a lack of demand and efficiency.
“That was their mistake,” Musk said to a chuckling crowd while discussing the series of events in the same interview with Lacy.
“In the case of Fisker, it was headed by Henrik Fisker, and he’s the designer," he said. "But he thinks it’s all about styling, and it’s not ... the reason we don’t have electric cars is not for a lack of styling."
The Fall Of Kleiner
The Tesla miss turned out to be one of many in a difficult decade for Kleiner Perkins, which also sat on its hands when approached with early opportunities to invest with Facebook, Inc. FB, Slack Technologies Inc WORK and Robinhood.
It was an even more peculiar misstep for Doerr, who was able to foresee the rise of tech after joining Kleiner in 1980. His plethora of successful ventures sparked Kleiner’s run to becoming the most recognizable venture capital firm in the U.S. by the mid 2000s.
A plausible explanation for this could have been Doerr’s dedication to clean energy initiatives. Kleiner invested over $500 million on over 50 clean tech companies in the mid-2000s, most of which did not come to fruition.
Although Doerr’s foresight on the need for clean energy companies was not unmerited, it came too early to cash out and may have blinded Kleiner from juicy opportunities.
These events, combined with some leadership issues, caused Kleiner, the once gold standard among venture capital firms, to flounder.
Despite strong positions in up-and-coming brands like Spotify Technology SA SPOT, Peloton and Intuit Inc. INTU, one can only wonder where Kleiner Perkins and Doerr would be sitting today had they chosen to move forward with that young and bold South African.
To see Musk’s full comments with Lacy, skip to the 24-minute mark of the video below.
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