The dearth of venture-backed IPOs may be keeping some venture capitalists up at night, but Bob Ackerman has been sleeping like a baby.
“It used to be a VC premise that one or two portfolio companies would make the portfolio work through an IPO, but we don’ t accept that,” says Ackerman, co-founder and managing director of Allegis Capital. “We start with the premise that we’re investing to generate venture-level returns in an M&A environment.”
Thanks to that focus, Allegis—which is in the market to raise a sixth fund of $150 million to $200 million—has produced more liquidity events than many other firms.
Ackerman declined to comment on fund-raising due to regulatory restrictions, but he shared some thoughts about his firm’s investment philosophy and outlook for the market in an email and follow-up phone interview with VCJ. “Our approach isn’t particularly sexy,” he says. “It’s not about how big we can be. It’s about consistently generating returns.”
Ackerman doesn’t pull any punches when talking about the venture industry and its current difficulties. “All too often you’ll hear venture firms that have a good fund take credit for market insight and great execution,” he says. “But when they have a poor-performing fund, they lay it off on the market. If any of our CEOs did that, we’d fire them.”
Despite the current recession, Ackerman has a bullish outlook. “Our own investment history has demonstrated that great companies get built in challenging economic times,” he says. “If we look back to the last market downturn in 2001-2003, we funded IronPort Systems as a startup company.”
IronPort, which provides email and Web security, produced a healthy return for Allegis and its eight other venture backers, including Menlo Ventures, New Enterprise Associates and Starter Fluid. The VCs put $94 million into the company before it was bought by Cisco for $830 million in January 2007, according to Thomson Reuters (publisher of VCJ).
Ackerman says Allegis was the second largest shareholder behind Menlo Ventures and made about 10x on the deal. “We did really well,” he says. “We took out over $80 million at end of day.”
All too often you’ll hear venture firms that have a good fund take credit for market insight and great execution. But when they have a poor-performing fund, they lay it off on the market. If any of our CEOs did that, we’d fire them.”
While most VCs bemoan the lack of a market for new public offerings, Ackerman says IPOs “are by no means the only viable and profitable path to liquidity for venture companies. At Allegis Capital, our own net returns over the past 12 years have been top quartile on a relative basis and in line with historical venture norms—largely from M&A exits—on an absolute basis.”
By Ackerman’s calculations, Allegis portfolio companies that have been acquired have produced a total of $2.2 billion for their investors over the past three and a half years.
Besides IronPort, other Allegis portfolio companies acquired during that time include LGC Wireless, which offers broadband wireless solutions, Rent.com, a real estate website, and Ribbit, a telephone software company:
• LGC raised $77.5 million between 1996 and 2006 from a dozen VCs before selling out to ADC Telecommunications for $169 million in October 2007.
• Rent.com raised about $30 million over two rounds in 2000 from Allegis and four other venture firms before being bought by eBay for $415 million in January 2005.
Besides Ackerman, Allegis has four other managing directors: Peter Bodine, Jon Funk, Spencer Tall and Barry Weinman, who co-founded Allegis with Ackerman in 1995. The team also includes two general partners: Lara Druyan and Jean-Louis Gassée.
“Our team is twice as large as firms managing similar fund sizes,” Ackerman says. “People say, ‘Doesn’t it mean that your salaries are lower?’ Yes it does, but that’s the way you successfully generate returns from seed and early stage businesses. It’s a hands-on business.”
With regard to cleantech, I think you can argue that there are select opportunities, but there is substantially more capital than there is opportunity and that will have a negative impact on returns.”
As it has done with its prior funds, Allegis will seek commitments for its sixth fund from a sovereign wealth fund that is an existing LP, pension funds, corporate investors and family offices, according to a source familiar with the fund-raising effort.
Allegis will also continue its focus on what it calls “digital economy” companies, which build enabling technology for commerce, content, communications and the enterprise. It has no plans to invest in cleantech or other “hot” sectors.
“With regard to cleantech, I think you can argue that there are select opportunities, but there is substantially more capital than there is opportunity and that will have a negative impact on returns,” Ackerman says. “We’d be more interested in things that are a little more off to the left or the right from where the herd is investing.” —Lawrence AragonDEALWATCH: Five recent investments by Allegis Capital
Apprion Inc._Wireless products for industrial plants
Attune Systems Inc._Switches for network-attached storage
Inertia Beverage Group_Sales and marketing platform for wineries
PureWave Networks Inc._WiMAX base-stations and subscriber stations
Staccato Communications Inc._Wireless USB components
Note: Investments made between June 26 and Dec. 4, 2008 Sources: Thomson Reuters