Even some of Dick Kramlich's friends worry he's headed for trouble. The 74-year-old co-founder of the venture capital firm New Enterprise Associates just raised a new fund so large that many in Silicon Valley think he'll never be able to keep up with the returns at other top firms. NEA's $2.48 billion fund is 20 times the size of the average venture fund raised last year and is the largest launched since the financial crisis. Bob Ackerman, the founder of Allegis Capital who made his first fortune with Kramlich, says NEA's task would be tough in the best of circumstances and looks near-impossible now because it's so hard for venture firms to sell their startups through initial public offerings. "Big funds need big IPOs to generate a return, and those have been in short supply for a very long time," says Ackerman.
Such skepticism is widespread as the Valley legend begins his last act. Kramlich says NEA's 13th fund will be his last as a full-time partner, capping a career in which he helped commercialize everything from balloon angioplasty to PowerPoint. When it's over, he says, he'll have the last laugh. "With me, you're dealing with a different kind of cat," he says. "I don't have an ego. I have quiet confidence."
Kramlich and NEA 13 are part of a broader debate about the best way to finance innovation. In the wake of the economic crisis and a sharp decline in startups going public, many experts believe the venture business has to get much smaller, shrinking individual funds and the total size of the $200 billion industry by as much as half. VCs like Ackerman, Greycroft Partners' Alan Patricof, and Netscape co-founder Marc Andreessen say the best approach is to put dabs of money into lots of tiny companies, quickly discarding ideas that flame out and feeding those that work. They may initially invest $1 million in the average startup, rather than the $20 million NEA typically has.
Kramlich and his backers counter that startups need serious money if they're going to tackle the kinds of issues that boost the economy and raise living standards. A new drug can cost hundreds of millions of dollars to develop. Tesla Motors has raised $223 million to build electric cars. "If you're going to climb Mount Everest, you can't do it with gym shorts and sneakers," says Alan E. Salzman, chief executive of Vantage Point Venture Partners, a Tesla investor.
NEA took a year longer than expected to raise its 13th fund, largely because of Lehman Brothers' collapse, says Suzanne King, the partner in charge of fund-raising. Kramlich and his partners ultimately got the money by convincing institutional investors of their approach: They plan to hedge their bets on newly formed companies by also backing more-mature startups that have perfected their technology and will use NEA's cash to grow. The fund will focus on health care, energy, and tech companies, while looking for opportune deals in other sectors. "We wanted a diversified fund with a flexible strategy, and that's what these guys do," says Vince Smith, chief investment officer of Kansas' Public Employees Retirement System, which put $10 million into the fund.
NEA 13 made 15 investments before the fund closed in early January. The biggest was in Boulder (Colo.)-based Clovis Oncology, which plans to buy cancer treatments from inventors who lack the money or management skills to get them to market, says CEO Patrick J. Mahaffy. Clovis will run clinical trials, work with regulators, and handle marketing, splitting rewards with inventors. The NEA fund put $20 million into Montclair (N.J.) e-tailer Diapers.com, largely for marketing. It's also invested in social-networking and energy startups.
The challenge for NEA is the math, say advocates for smaller venture funds, such as Ackerman. Historically, venture firms have had to triple their money over 10 years to give investors top-notch returns. In a stock market where it's difficult to take even small companies public, that looks highly unlikely, say the skeptics. "Turning $150 million into $450 million is a lot easier than turning $2.5 billion into $7.5 billion," says Ackerman. He figures NEA needs its portfolio companies to be worth a total of $50 billion. "In one fund, you need 50 $1 billion exits? Or 200 $250 million exits? Has that ever been done?"
Still, big venture funds have done better than most others in the past. Of the 11 funds of $1 billion or more raised through 2005, all of them outperformed the average fund raised the same year, according to researcher Cambridge Associates. NEA has raised three funds of $1 billion or more, and all three rank in the top 30% of funds raised the same year, Cambridge says.
In the last stretch of his career, Kramlich is giving more responsibility to younger NEA partners and laying plans to build a museum for digital and audio art. But before he goes part-time, he wants to show he can thrive during what may turn out to be the worst stretch for the venture business in decades. "This season...will validate we've built an organization equal to trying circumstances," he says. "The legacy I want is top-quality people and a top-quality institution that combines the venture art form with scale."