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Why would Kleiner refer this deal?
A deal from Kleiner
Altos was just getting started, and the partners sat in Kleiner's impressive office in big leather chairs around a large conference table, feeling like little kids. Kleiner described a deal they should look at. Altos did the due diligence, traveled to Dallas to meet one of the company's big customers, JCPenney, and went over it in partners meetings.
The question that stuck
The question that kept coming up was why Kleiner would send this deal to a group of nobodies. Kleiner could snap its fingers, call anyone, and get a deal funded, so something had to be wrong with it.
Building their own deals
Altos passed. The partners wanted to work with Kleiner, John Doerr, and the other famous venture capitalists, but they concluded that following them into their deals would not work because they wouldn't hand over their best ones. So Altos decided to develop early-stage companies of its own and present them to the firms it wanted to work with. Kleiner and others did end up following Altos into a bunch of deals.
Why does a referred deal raise suspicion?
Economist George Akerlof's 1970 paper The Market for Lemons showed that when sellers know more than buyers, buyers assume the worst and discount what is on offer. A deal passed along by a firm that could fund it alone fits that logic: the firm knows more than the recipient and may be keeping its best ones. Venture firms trade deals with trusted partners, and a referral can be either a gift or a discard. Akerlof shared the 2001 Nobel Prize in economics for this work.
How does syndication work in venture capital?
In a venture syndicate, one lead investor sets the price and terms and invites other firms to fill the round. Sharing a deal spreads risk and brings in firms with different expertise and contacts. Firms tend to bring each other their best opportunities only when they trust the partner to return the favor. Younger firms usually earn a seat in these syndicates by bringing deals that others want to join.
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