Jim Breyer remembers it was a long train ride back from Princeton. In late 2004 the Silicon Valley venture capitalist had been summoned to the university to meet with its investment team. His firm, Accel Partners, was trying to close on a new fund, and fundraising had not come easy. Accel's last three funds were losing money and costing investors millions in management fees. Other venture firms in Princeton's portfolio with busted dot-com returns had been quick to cut fund sizes and pay back fees. Accel was slower to come around. The firm had also missed out on one of venture's all-time megadeals,
A rejected Breyer went back to New York's Penn Station and on to Palo Alto, Calif. It would not be hard to find new investors. Then Harvard dumped Accel. MIT followed. Losing three prestige endowments in succession usually signals a death spiral in the venture community. Making matters worse, one of Accel's promising young partners had just defected and Breyer was going through a divorce.
When I ask Breyer about those dark days, his blue eyes, which have a way of smiling throughout our conversation, soften. He will only offer this: "Investors, like our entrepreneurs, are our customers. I don't take it personally if someone decides not to invest."
The Ivies made a horrendous call. That $440 million fund Breyer was raising, called Accel IX, is on track to become the best-performing venture capital fund--ever. The irony is particularly cruel in Harvard's case. One of its own, a hoodie-clad dropout by the name of Mark Zuckerberg, is the reason the fund stands to perform so well. In 2005 Accel made a $12.7 million deposit at a $98 million valuation in a startup that had just dropped "the" from its name thefacebook.com. That startup now has 600 million users and is worth $50 billion. Accel has already more than repaid investors in its fund, merely by selling a sliver of Facebook last November. It still owns a 10% stake, second only to Zuckerberg's.
Accel is that rare case of a firm that was on the brink of disfavor but, through hard networking, discipline and luck, rebounded so successfully that it is now considered the top shop in the business by returns and status. Breyer's comeback is reflected on our revamped Midas List of technology's best investors (see The Midas List).
Breyer ranked No. 90 in 2008 and did not even make the cut in 2009. Today he is indisputably No. 1. Thanks to the $1 million of his own he put into Facebook back in 2005 he will likely join fellow VCs John Doerr, Michael Moritz and Vinod Khosla on our next Forbes 400 list. His 1% stake is worth $500 million and climbing.
When I meet Breyer he is too busy, or maybe too wise, to gloat. Accel's Palo Alto office, just down the street from Facebook's University Avenue headquarters, is abuzz with action. That morning news had leaked that Warner Bros. would stream its most profitable film, The Dark Knight, on Facebook. Behind the scenes, Accel was busy inking a $40 million investment in Thomas Tull's Legendary Pictures, which co-produced The Dark Knight and has a seven-year, 40-picture deal with Warner Bros. (The next time you pay to stream a Warner Bros. movie with Facebook credits, Accel will take a cut from both sides.) Members of the firm's China investment team were in town to talk strategy.
When Breyer arrives he needs coffee. As a board member at Facebook,
Breyer hardly looks fatigued. With thick black hair and barely a wrinkle on his face, Breyer, who turns 50 this year, looks almost boyish. We get to talking about his favorite wine ('61 Petrus) and music (Schubert, Mahler, the Strokes), and he shares a line he read over the weekend from a curator at the San Francisco Museum of Modern Art, where Breyer is also on the board: "'Of every ten artists I pick, nine of them will end up failing. But that one out of ten becomes the next Picasso.' That's the venture capital business! You're not going to get them all right. But if you stop taking chances, stop discovering, you're never going to figure out who the next Picasso or Gerhard Richter is."
Clearly the Picasso in this story is Zuckerberg, but Accel has had a string of hits apart from Facebook. It was early (relatively) into Groupon. Other successes: Admob was bought by
Accel is now the world's first truly global VC firm. Ten years ago it had nine partners in Palo Alto. Today it has seven in Palo Alto, seven in Beijing, four in India and five in London. Accel manages $6 billion worldwide. It paired up with the top venture firm in China, the International Data Group, and its Accel-IDG funds are outperforming almost all other U.S. funds in China. In Europe Accel is one of five pan-European VCs dominating the market. It closed its last Europe fund--$530 million--in the teeth of the recession. Breyer just closed two new funds in China and will close two more in the U.S. that will altogether come to $2 billion in fresh capital.
That he has done so while the rest of the venture capital business is on the precipice makes his rally that much more compelling. The venture industry is littered with corpses of firms that could not make the transition from the last up cycle to this one: Merrill Pickard, Anderson & Eyre, TVI. Sigma Partners, once a brand name, recently announced it is splitting up. Mayfield and Mohr Davidow, two top-tier firms, are stuck in a dry spell. Even the mighty Kleiner Perkins Caufield & Byers had started to look more like an eco-lobbying outfit before plunging back into hot Web companies late in the game. As an asset class, you would have had the same middling result by blindly throwing your money at the Nasdaq over the last ten years.
This may just be a bad trough. The venture business has a pattern of roughly eight years of growth followed by six years of retrenchment. It's called the "Patterson cycle," after Arthur Patterson, Breyer's mentor and Accel's 67- year-old cofounder. How you navigate the roller coaster--developing new strategies over multiple funds and multiple generations--spells the difference between an Accel and a TVI.
Jim Breyer knows both sides of the cycle well. The first few years of his life were spent living in a funeral home in New Haven, Conn. It was the cheapest place his parents could afford. They had arrived in the U.S. with five dollars, having fled Hungary during the 1956 revolution and settling in Vienna for a year before his father earned a scholarship to Yale. His parents eventually moved to Boston with jobs at
In 1979 Jim left to study computer science and economics at Stanford. In his sophomore year, determined to get his feet wet in Silicon Valley, he sent out 50 résumés and received only one offer, from
That next year Breyer saw Steve Jobs on the cover of Time. Figuring he had nothing to lose, he sent Jobs a letter asking for work. Jobs passed his letter along, and Breyer spent the summer of 1982 working in Apple's PC group. By the end of the summer Apple's stock had jumped from $11 to $60. It was Breyer's first taste of Valley euphoria, not to be seen again until the 1990s dot-com bubble.
After graduation he put in two years at McKinsey & Co. in New York. One night before a big presentation, Breyer's boss told him to hand deliver copies of the presentation slides to the homes of ten clients. Breyer crisscrossed the tristate area ringing doorbells late into the night only to get doors slammed in his face and have executives complain the next morning about that "Breyer kid." Management consulting was out as a career choice.
So Breyer left for Harvard Business School. One-third of his graduating class (1987) went to Wall Street to chase a late-inning bull market. Breyer was determined to get back to the Valley. He got turned down by Kleiner and Sequoia. He interviewed with Larry Ellison and Tom Siebel at Oracle. Ellison asked him what other jobs he was considering. Breyer said he was seriously thinking about venture capital. Ellison said, "Jim, you come work for me and Oracle for ten years and you'll be your own venture capitalist."
Instead Breyer went to Accel, a two-man venture shop comprised of Citicorp alums Arthur Patterson and Jim Swartz. One month later Wall Street imploded, and venture suddenly seemed idyllic. Firms were dying off at a rate of 20% per year. That meant less competition and more time to poke into deals. "We did not make a new investment in those three or four years where we didn't do three to four months of due diligence," says Breyer.
Over the next several years he learned Accel's investing strategy, which requires keeping a "prepared mind." It's a new-age maxim Breyer repeats five times over the course of our conversation. It boils down to defining who you are and who you're not and investing accordingly. The partners spend most of their time educating themselves about a few sectors so that when the right deal comes along, they close. Once a quarter Accel hosts an offsite for wining, dining and redefining its investment thesis. (Such a meeting in 2005 kept the firm out of clean tech and reaffirmed its belief in social media.)
"A lot of people in the business get caught up in momentum investing. That's a good way to get killed," says Accel's cofounder Jim Swartz. "If you don't have a really good thesis, you're better off not doing it."
The prepared mind approach worked terrifically in the 1990s. Accel's 1996 fund returned investors nearly 20 times their money (after fees). It funded Redback Networks, which sold to
Accel began rolling through funds at a rapid clip. It closed Accel VII, a $480 million fund, in 1999. This time the firm upped its share of profits from 25% to 30%, arguing it needed extra cash to hire and retain its talent. At a 30% carry, Accel would join a select group of firms charging top billing, including Kleiner and Bain Capital.
At the bubble's peak in 2000, Accel closed its biggest fund yet: Accel VIII, a $1.2 billion fund with the same high fees in place. When the bubble burst, so did the fund. By 2001 Accel's investors-- Princeton, MIT, Harvard, Stanford--had grown tired of paying millions in fees on a billion-dollar fund that was losing their money.
Accel was not an isolated case. Other venture firms, losing investors' cash, worked fast to cut fund sizes and repay fees. Accel was less obliging. It told investors it would split Accel VIII in half, with one caveat: It would call the other half Accel IX and consider them committed to the new fund--with the same 2.5%/30% fee structure. Investors weren't having it. Accel was forced to simply reduce the fund to $680 million and would have to beg its investors to reinvest in Accel IX. Believing Breyer had become the poster boy for a firm that had gone too far, Princeton, Harvard and MIT decided to part ways. Stanford expressed its grievances but ultimately stuck with him.
"I give Stanford University great credit. They stayed in. Many of the endowments dropped out," says Breyer. "Once you get turned down by Harvard and Princeton, there was a tidal effect-- that January 2005 closing and investment was very challenging. The only other fundraising that was as difficult was hitting our target in the fourth quarter of 2008, when the world,
Accel was also visibly absent from the one megadeal of the mid-2000s, Google, which Kleiner and Sequoia backed. Adding salt to wounds: One of Accel's promising young partners, Jim Goetz, had just defected to Sequoia. The firm's other heir apparent, Peter Fenton (No. 4 on the Midas List), would soon jump ship to Benchmark.
But Accel IX did close and soon after lucked into Facebook. It wasn't entirely luck. Most of the credit for bringing Facebook to Accel goes to Kevin Efrusy, a principal Accel had hired in 2003. (Some VCs who speak only off record gripe that Breyer has taken too much credit for Efrusy's Facebook deal and say he crossed a line when he personally invested a million of his own in Facebook.)
By that time Efrusy (No. 6 on the Midas List) had started one company that went public, run another and spent a year at Kleiner. Breyer tasked him with finding Accel's next big social networking play. By late 2004 Efrusy had yet to source a major deal and was anxious to prove himself.
Chi-Hua Chien, a Stanford grad student working part-time for Accel (now a partner at Kleiner), showed Efrusy thefacebook.com. Efrusy spent the next three months polling coeds on the site and aggressively pursuing a meeting with Zuckerberg, Sean Parker and Matt Cohler (now a VC at Benchmark). By all accounts, Facebook was not interested. Zuckerberg was putting the final touches on a deal with Don Graham at the
Over beers Efrusy urged Parker to bring Zuckerberg to one of Accel's Monday morning partner meetings. During the demo Breyer took a look at the home page: "At the bottom, I saw the line 'A Mark Zuckerberg Production.'" Until that point it was still unclear who was calling the shots. "That jumped out at me. I knew then it was all about Mark Zuckerberg." His first impression? "Everything about my gut said, 'This is someone we need to back.'"
Recalls Arthur Patterson: "The statistics were so spectacular, you didn't need to be a genius to know it was a great project. In a short period of time they had done what had taken ESPN several more years to achieve-- in terms of hours per day spent on the site and high penetration rates in a critical demographic."
Breyer called Don Graham at the Post to get into the deal. "I said, 'If it's a done deal, I'd like to find a way to do it together. And if it's not, we'd like to find a way to do it together.' Don said, 'Thank you for calling.'" (Breyer and Graham are now Facebook friends.)
In a story recounted well in David Kirkpatrick's book The Facebook Effect, Breyer invited Facebook's team to dinner that night. Breyer ordered a nice bottle of wine. Zuckerberg, still under 21, got a Sprite. (Breyer now buys birth-year wines for Zuckerberg and his girlfriend, who were both born in 1984. "It's a hard birth year for wine.") Zuckerberg knew Accel's money made more strategic sense than the Post's. The thought of slighting Graham made him break down crying in the men's room. But it was done. The next day Breyer and Zuckerberg shook hands on the deal that would propel Accel back to the top of the Valley's pecking order.
Facebook, says Breyer, was "one of the most controversial deals--if not the most controversial--that we ever did." It was a nearly $100 million valuation for a company that had ten employees, 700,000 registered users (all college students) and no business model. The social network Friendster had been valued at less than half that much and was heading off the cliff. Myspace, the leader at the time, was becoming a cesspool. "Investors thought we had grossly overpaid," says Breyer.
With Facebook in hand, Breyer began to rev up the firm's activity in Asia. The China partner that every elite Sand Hill Road firm wanted to work with was billionaire Patrick McGovern's International Data Group, or IDG, where Breyer's father used to work. IDG's lead managers, Hugo Shong and Quan Zhou, had used a $100 million fund raised in 1999 to back every single successful Chinese Internet company--Tencent, Baidu, Ctrip--with the exception of Alibaba. That success spurred competitors, and IDG knew it would need more capital to ante up on deals.
So in spring 2005 IDG ticked off its IPOs at a big dinner for American VCs at the China Club in Beijing. On hand were Redpoint, John Doerr from Kleiner, Douglas Leone and Michael Moritz from Sequoia, and Breyer. IDG whittled its decision down to Sequoia or Accel. "We ultimately went with Accel," says Shong. "The economics were better, and we had better chemistry with Jim."
Accel closed its first $300 million China fund with IDG that fall, 90% of which came from Accel. It raised another fund--$510 million--in 2007 and a $600 million fund in 2008.
Shong took Breyer to his alma mater, Hunan University, in 2006. He introduced him to the university president, and Breyer delivered an impromptu speech at Hunan's thousand- year-old Yuelu Academy about the difference in business culture between the U.S. and China. "They liked him so much they named him an honorary professor," Shong says.
This is the thing with Breyer. He glides easily within and between circles: Silicon Valley, China, Europe, and Hollywood. George Roberts, founder of buyout shop Kohlberg Kravis Roberts, has paired with Accel on a set of tech funds: "The egos out here aren't very small. There's a lot of people who have done well financially and believe they're infallible. I've never found that with Jim. He always has a kind word for a person regardless of their station."
Sheryl Sandberg offered this: "He's incredibly supportive in a productive way. I needed help closing on a job candidate. I called up Jim and asked him if he could reach out. He did it right away, got it done in an hour-- and I find out later he was in China."
China is clearly Accel's new center of gravity. The firm just closed two megafunds with IDG in China--one early stage, one late stage, $1.3 billion in total. That's roughly the size of the two new funds it's raising in the U.S. "It's not the U.S as the hub and China as the satellite anymore," Breyer says. "Perhaps China becomes the hub and we in the U.S. become the satellite."
Accel uses a different set of criteria to pick its Chinese startups. "If, within the first minute, a Chinese entrepreneur doesn't talk about the fact they want to get rich, our China team is unlikely to back them," says Breyer. "In Silicon Valley, if Mark Zuckerberg or other entrepreneurs talk within the first minute about wanting to get rich, it's meeting over."
The question now is where Accel plans to park its $2 billion in fresh capital. At press time Accel had just deposited $40 million in Legendary Pictures and another $20 million in Rovio, maker of the addictive mobile game Angry Birds. If those deals offer any clue, Accel is doubling down on its prize stake in social media by investing in the applications (movies, games) that will be built on top of social networks.
Some might call that building a house of bubbles. But Breyer has been here before, got burned and emerged the better for it. "There is always a bubble somewhere, whether it's in China or downtown Palo Alto. Navigating through bubbles is one of the big challenges of this business," he says. "I've learned that when the pessimism is high, dial up the investment pace. When the optimism is high, take a breather. I get a little better at that each year."
