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When we created Benchmark, we created a new kind of venture firm--one that's based on teamwork, superior service to entrepreneurs and an intense dedication to building technology companies of lasting value.
Venture capital firm Benchmark Capital stresses a team approach, and the team has shared in some spectacular results. Benchmark's 1997 investment of $6.7 million in online auctioneer eBay holds the record for best-performing Silicon Valley investment ever: by the spring of 1999, this stake was worth $5 billion. Benchmark's clients are managers of pension funds and college endowments, as well as wealthy individuals, and the firm prides itself on its service to the entrepreneurs behind its portfolio companies.
An Ambitious Start in 1995
Benchmark Capital was set up in 1995 by four ambitious young men. Robert C. Kagle was a consumer marketing expert who had spent the previous dozen years with Technology Venture Investors. A native of Flint, Michigan, Kagle had a keen interest in the Depression era and loved to regale his colleagues with tales of speculative pitfalls. Bruce Dunlevie also had prior venture capital experience, at Merrill Pickard Anderson & Eyre, and had worked earlier at Arthur Andersen and Goldman Sachs. A New York native who grew up in Dallas, Dunlevie was a former football player with a secret penchant for literature. Kevin Harvey, Benchmark's resident techie, had gone to Rice University like Dunlevie, and had invested in a database software company while still at Merrill Pickard. Andrew Rachleff, with a background in network equipment and telecommunications, rounded out the founding four.
Uniquely, profits would be distributed equally among the partners, a practice said to eliminate infighting. The partners were not tagged with ranks such as "senior" or "associate." The group set for itself the goal of becoming the number one venture capital firm within ten years, hence the ambitious Benchmark name. The group expressed a preference for high-tech ventures with the potential for creating or capturing huge consumer markets; Benchmark provided seed capital for entrepreneurs at the very earliest stages of a venture.
The group raised $85 million for its first fund, Benchmark I. They turned it into $7.8 billion, an extraordinary return of 92 times the original investment. Kagle believed the success of ventures depended mostly on finding and backing extraordinary people. Most of the entrepreneurs who obtained financing from Benchmark were referred by business colleagues.
Soon, the firm developed its own pipeline for finding the great commercial ideas of the near future. Benchmark named Keith Krach its first "entrepreneur-in-residence" (EIR) in 1996. Earlier in his career, Krach had run a robotics joint venture for GM; he became the carmaker's youngest vice-president at the age of 26. Krach then built up a mechanical engineering software company, Rasna, which he sold for $200 million, recorded Fortune. Krach teamed up with fellow Benchmark EIR Paul Hegarty to develop Ariba Technologies, which would supply a Java-based system for enabling employees of corporations to order office supplies online.
Within a couple of years, half of Benchmark's investments were in EIR-created companies. "There's much less risk," partner Andrew Rachleff told Fortune. In addition, Benchmark benefited by being able to invest in a company in the very earliest stages of financing, when shares were cheapest.
According to Silicon Valley business writer Randall Stross, venture capitalists like the partners at Benchmark saw themselves as company-builders, rather than mere investors. They were intimately involved with the companies they helped develop, serving on boards and consulting informally with their CEOs.
David Beirne became a partner in May 1997. Before joining Benchmark, he had established a successful executive recruiting firm, Ramsey Beirne.
Raising the Stakes in 1997
In 1997, Benchmark made what would be considered the best-performing venture investment of all time. It put $5 million from the Benchmark I fund into eBay Inc., the online auction service, obtaining a 22 percent share in the company. The 1998 IPO of eBay was extraordinarily successful; Benchmark's stake would be worth $2.5 billion by early 1999, according to Business Week--an unbelievable return of nearly 50,000 percent. After a secondary offering, eBay's valuation peaked at $26 billion.
In April 1999, Benchmark's share was worth more than $5 billion when it made a partial distribution in April 1999. Its $4 million investment in Ariba would be worth nearly $1 billion. This tale and others were chronicled in the book eBoys by Randell E. Stross, a Menlo Park native who had the very unique position of writer-in-residence at Benchmark from the fall of 1997 to the fall of 1999.
The group raised $125 million for its Benchmark II fund in 1997. Some of the companies in this portfolio were Scient, Critical Path, Red Hat, and Handspring, a PDA (personal digital assistant) maker formed by the founders of Palm, Inc. This fund was another winner, eventually worth $2.5 billion.
Benchmark also backed a few companies that did not perform, and when this happened, they tended to fail on a grand scale. TriStrata, developer of encryption software for corporate networks, was one such investment. David Beirne brought it to the attention of his group, which in July 1998 invested $6.5 million in it, suggesting a valuation of $97.4 million. TriStrata would not show any revenues at all for at least another two years. By this time its CEO Paul Wahl had resigned, as had its board of directors, who felt unable to work with founder John Atalla (pioneer of ATM PIN codes). Benchmark's investment was left in place, but the group suffered a significant drain on its resources and reputation--Beirne had spent considerable time persuading Wohl to leave his position as CEO of SAP America to head the venture.
Late 1990s E-tailers
The firm raised $175 million for its Benchmark III fund in 1998. This fund was heavy on e-tailers such as Living.com, a furniture site. The optimism surrounding e-commerce was beginning to wear off. 1-800-Flowers.com went public in August 1999 at $21 a share; by the end of the year, it had fallen to $13. Another Benchmark III company, web furniture store Living .com, would fold by the beginning of 2001.
Approximately $1 billion was raised for Benchmark IV. Given Benchmark's historical preference for working on relatively small deals of $5 million or less, this raised questions about the ability of the investing partners, which numbered seven in 2000, to efficiently invest larger amounts of money in each company. Benchmark IV included an $18 million investment in MVP.com, a celebrity-backed sporting goods site, and a $20 million stake in Juniper Financial Corp.
Benchmark investments Ashford.com (watch sales), Webvan (Internet-based groceries delivery), PlanetRx.com Inc., and E-Loan were all hit hard in the mass e-commerce sell-off of May 2000. The IPO market had shifted to optical networking, noted Business Week. Benchmark named Alex Balkanski, former C-Cube Microsystems Inc. CEO, a partner to boost its expertise in semiconductors and networking.
Venturing Abroad in 2000
Benchmark always thought big and in 2000, this meant thinking globally. The group established an office in London in 2000, led by partner George Coelho, who was eager to bankroll Europe's talented, underfunded entrepreneurs. In 2002, the $750 million Benchmark Europe I Fund was reduced to $500 million due to the perception that companies were requiring less financing to break even than in previous years. Benchmark also had a $220 million fund for investments in Israel.
Benchmark's interest in consumer-oriented start-ups was somewhat against the prevailing fashion among venture capitalists in 2002. One of Benchmark's biggest bets, so to speak, was the European person-to-person gambling site Flutter.com. Other investments included Keen.com, where users could purchase advice from experts in various fields, and Orchestria Corporation, a provider of Internet security software for the corporate market.
Webvan, the ambitious Internet grocer start-up, went bankrupt in the summer of 2001. It had been conceived by Louis Borders, founder of the bookstore chain, and had attracted premium management talent and investors. Though Benchmark was an early backer, the VC firm only lost its $3.5 million initial investment. The San Francisco Chronicle noted that the value of Benchmark's stake had peaked at $1.2 billion on Webvan's first day as a public company.
Principal Operating Units: Silicon Valley; Europe; Israel.
Principal Competitors: Hummer Winblad Venture Partners; Kleiner Perkins Caufield & Byers; Menlo Ventures; Sequoia Capital.