John Doerr's oil patch lesson
Rock star VC's bet on oil exploration company Terralliance Technologies is no gusher.
(Fortune Magazine) -- "Borrow, buy, burn. Every part of that has got to stop" is a rallying cry for John Doerr. Sadly, Doerr's firm, Kleiner Perkins, did not consider these goals before making its investment in Terralliance Technologies. Terralliance is an oil-exploration company funded by Kleiner, Goldman Sachs (GS, Fortune 500), and others. It has burned through hundreds of millions of dollars, much of it borrowed, and now finds itself in serious trouble.
Only last summer, when Fortune featured Kleiner and its capital-intensive shift into energy, Terralliance, based in Newport Beach, Calif., was viewed as the great green hope. (See "Kleiner Bets the Farm.") At the time, Terralliance was weeks away from raising more than $1 billion at a valuation of $4.4 billion (including the new cash) from Temasek, the Singaporean sovereign wealth fund.
Kleiner's dirtying its hands in the oil patch was something of a head-scratcher. Back then the firm had recently hired Al Gore as a partner. But money is money, oil was trading for $140 a barrel, and Terralliance was said to have developed software that reduced the risk of drilling dry holes. It looked as if Terralliance could be a moneymaker for Kleiner, which had sunk a total of $65 million into the venture, an extraordinary sum for a VC firm - possibly its biggest single investment ever.
Not even a year later, Kleiner is learning the hard way how difficult it can be to enter new sectors. The Temasek deal never closed, and its collapse coincided with the removal of Terralliance founder and NASA alumnus Erlend Olson as CEO. As a Mr. Fix-It, Kleiner has installed Mike Long, a Doerr confidant who has previously overseen Kleiner turnarounds, including Move.com. Another investor, influential San Francisco hedge fund Passport Capital, lent Terralliance $150 million, a loan currently in technical default.
What went wrong at Terralliance is a common story line in Silicon Valley - rapid cash burn. Drilling an oil well on land (which is less costly than in the water) can cost as much as $25 million. The company has raised at least $500 million in debt and equity, most of which it has spent.
Kleiner, which recently took the unusual step of raising hundreds of millions of dollars to supplement its existing funds, declined to comment. So did Temasek, Goldman, and Olson. Oil prices at $50 a barrel can't be helping the VC firm's multiple eco-themed investments. Never truer are the immortal words of the great American philosopher Kermit the Frog: It's not easy being green.