VC Firm or Johnny-Come-Lately? Kleiner Blurs the Line

Kleiner Perkins' late-stage investment in FreeMarkets may enable it to piggyback off FreeMarkets' proprietary technology.
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Sometimes you can get an inkling as to how hot an initial public offering is going to be simply by watching which investors jump aboard at the last minute. In the case of

FreeMarkets

, the business-to-business industrial auction site based in Pittsburgh, one of its Johnny-come-lately investors,

Kleiner Perkins Caufield & Byers

, seems to be signaling a whole new direction with its investment.

You won't find a press release from FreeMarkets or Kleiner on the matter, however. That's one of the perverse effects of the

Securities and Exchange Commission's

desire to clamp down on preoffering hype: The SEC presumably thinks less widely disseminated information is better for investors.

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Instead, you

will

find word of the investment by Kleiner as well as

Dell

(DELL) - Get Report

and existing investor -- and large customer --

United Technologies

in the latest FreeMarkets amendment to its IPO documents filed Monday with the SEC. According to a nugget in the filing, FreeMarkets has allocated to Kleiner and Dell 350,000 shares each in the 4 million-share IPO. United Technologies, which already owns 1.7 million shares, or about 5% of the company, may buy up to another 400,000 shares. At an expected offering range of 14 to 16 per share, according to the filing, the Kleiner and Dell investments should amount to more than $5 million each.

There are all sorts of interesting things about this investment. For starters, it's part of an emerging trend of would-be public companies continuing to raise funds up until the very last moment before their IPOs. The companies aren't necessarily adding the funding because they want more cash -- public investors would be just as willing as Kleiner Perkins to buy the extra shares. For FreeMarkets, signing up Kleiner and Dell adds considerable prestige to the company and the offering. It isn't too shabby having famed Kleiner investor

John Doerr

on the board of directors, either. He joined the board in October, according to the filing.

Dell's move isn't difficult to decipher, either. The direct-selling PC king formed its

Dell Ventures

unit in April, and already it has lent its imprimatur (yes, and its money) to hot issues, including Linux software maker

Red Hat

(RHAT)

, B2B investor

Internet Capital Group

(ICGE)

and Web-management software company

NaviSite

(NAVI) - Get Report

. A Dell spokeswoman noted that the venture unit -- whose size and exact number of investments Dell doesn't disclose -- invests with three objectives: financial return, access to new technologies and services, and the ability to get in front of new potential customers.

The move is perhaps most interesting from the perspective of Kleiner Perkins. Supposedly, KP is a venture capital firm, and some of the companies it has staked have gone on to make tech-stock history, including

Sun Microsystems

(SUNW) - Get Report

,

Netscape Communications

and

Excite@Home

(ATHM) - Get Report

(both parts). Another early-stage Kleiner investment that will make history without ever going public is

Cerent

, which sold itself to

Cisco Systems

(CSCO) - Get Report

for $7.3 billion (the deal closed Tuesday) instead of completing its own IPO.

But the investment in FreeMarkets also represents a new stage for Kleiner, what one competitor calls its "barbell" strategy -- either making very early stage or very late-stage investments. Investing just before the IPO is not "venture" capital. This is Kleiner's second prominent late-stage investment, but its first in technology. The previous nearly IPO'd company to win Kleiner's backing was

Martha Stewart Living

(MSO)

, on whose board Doerr also sits.

Doerr wasn't available Tuesday to discuss Kleiner's strategy. But people close to Kleiner -- many claim to be -- say the reasons for the late-stage investments are twofold. First, when you raise as much

money as Kleiner and other big VC firms like

Benchmark Capital

are raising, it's simply difficult to make sizable investments. "Raising funds of up to $1 billion forces people to find new ways to put a lot of money to work," says one KP watcher.

Second is that Kleiner may be interested in starting other businesses that can use the FreeMarkets proprietary BidWare technology that runs real-time auctions for disparate clients.

An official with FreeMarkets, by the way, cited the brouhaha over

Webvan

in declining to comment on the Kleiner-Dell investment -- or on anything else, for that matter. One got the feeling that FreeMarkets wouldn't confirm the sky's blueness. (As

reported,

Goldman Sachs

expects to price the stalled Webvan IPO tonight, with trading scheduled to begin Thursday. Investment banking sources agree that having had to wait three weeks from the time it

refiled its IPO documents constitutes no more than a wrist-slapping. The SEC threw cold water on Webvan's IPO amid publicity over its roadshow presentation, including in this column.)

By the way again, besides United Technologies, the other major investor in FreeMarkets is Goldman Sachs, which bought about 1.4 million shares in FreeMarkets in April at $4.77 per share. Goldman, together with

Morgan Stanley Dean Witter

, is a lead underwriter of the IPO. It'll be curious to see how enthusiastically Goldman's research team supports a stock in which its parent firm so clearly has a vested interest.

Finally, the (sad) kicker

The Wall Street Journal

ran a tiny item Monday about television maker

Zenith Electronics

(ZETHQ)

having received an extension on its credit line from a group of banks led by a unit of

Citigroup

(C) - Get Report

.

The sad part was the way the paper identified Zenith, once one of the proudest U.S. companies in terms of technical and marketing sophistication. The company's also from my hometown of Chicago, and I covered it not so very long ago. "Zenith, which trades on the over-the-counter Bulletin Board," the report explains, "is a consumer electronics company."

Ouch.

Sic transit gloria

.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.

Edie Yates assisted with the reporting of this column.