Kleiner's Laws
Eight of them, to be specific
Good things happen in eights. In 1957, Eugene Kleiner and seven other engineers quit their jobs at Shockley Semiconductor Laboratory. Kleiner, a Jewish émigré of Austrian extraction, secured a $1.5 million investment from Sherman Fairchild to found Fairchild Semiconductor, the first major computer chip manufacturer in Silicon Valley. In the subsequent decades, the “Traitorous 8” founded a host of spin-off companies so wildly successful that Fairchild and its offspring are today reputedly worth over $2 trillion.[1]
Kleiner pioneered the archetype of the Technologist-VC. Though he referred to himself as an engineer to the end of his days,[2] he occupied the various roles of Scientist, Entrepreneur, and Investor at different points in his life. In 1968, Kleiner made a major bet on Intel, a company founded by another two members of the Traitorous 8, and now the largest semiconductor manufacturer in the world. In 1972, Kleiner cofounded a venture capital firm called Kleiner, Perkins, Caufield & Byers. KPCB went on to become one of the most prolifically successful venture capital firms in history, with notable investments in Genentech, Sun Microsystems, Compaq, Amazon, Google, and over 350 other companies.
Kleiner was a calm man with a rich baritone, famous for his formulations of entrepreneurial and investing wisdom. Kleiner’s Laws — a collection of pragmatic and occasionally culinary aphorisms — have achieved the status of folklore in Silicon Valley. Though Kleiner passed away in 2003, his principles remain vital to running a successful start-up or venture capital fund. Here are a few of our favorites:[3]
1) Make sure the dog wants to eat the dog food.
The technology may be groundbreaking and the team may be world-class, but if people don’t want to buy the product the company will be a failure. Product-market fit is a fundamental element of any start-up’s success, and some venture capitalists regard it as the controlling variable.
2) Build one business at a time.
Entrepreneurial ambition often outstrips reality. Founders may devote their attention to developing a scattered array of bells and whistles rather than to the core product. The appropriate time for sideshow experiments is once a company has scaled to maturity; in the early years of a company’s life, sustained, precise focus on a singular business mission is vital.
3) The time to take the tarts is when they’re being passed.
Venture capital exhibits a cyclical, seasonal quality. The strategic founder should take advantage of funding when it is available, and not attempt to time funding according to the business’ stage of development.
4) It’s difficult to see the picture when you’re inside the frame.
Boards of Directors and Advisory Boards aren’t a formality, they are a vital source of perspective and feedback on the direction of a business. Kleiner famously quipped that “a good board will give you better advice than your mother.”
5) Even turkeys can fly in a high wind.
In a similar vein, investors should factor in macroeconomic indicators when assessing the value of a company. Tailwinds of irrational exuberance often drive company valuations into artificially high ranges. The intelligent investor understands that few companies can really survive in such thin air.
6) After learning some of the tricks of the trade, some people think they know the trade.
Though entrepreneurs commit this fallacy, venture capitalists are more likely to mistake superficial knowledge for robust understanding. Both founders and financiers should beware dilettantism and make sure they have a deep grasp of the industries they deal with.
7) Venture capitalists will stop at nothing to copy success.
Second-rate investors will often attempt to replicate the strategies of top investors with catastrophic consequences. The winner-take-all dynamics of modern technologies — especially but not exclusively software platforms — mean that it’s usually better to fund companies with first mover advantages.
8) Invest in people, not just products.
To make good dog food, you need a good team. Kleiner famously maintained very close relationships with the founders he invested in, and he was always a source of patient guidance on operational issues. A great company will combine an excellent team, product, and market.
Today, Kleiner’s Laws remain at the heart of what we do as technologists and investors. Kleiner operated from first principles as an entrepreneur and an investor, and his approach yielded enormous rewards. The best culture an investment firm can foster is to constantly invoke, reflect on, and argue from basic principles — and to help their founders do so as well. Only in this way can a firm remain methodologically sound, and make confident decisions. A founding father of Silicon Valley, Eugene Kleiner remains a perennial source of wisdom.
Thanks to Harry LeFrak for reminding me to write this piece.
[1] Morris, Rhett. “The First Trillion-Dollar Startup.” TechCrunch, Jul 26, 2014.
[2] Meyer, Peter. “Giants of Poly: Eugene Kleiner.” p. 22 http://web1.poly.edu/alumni/_docs/Giants-Kleiner.pdf