Five Questions with Bob Ackerman of Allegis Capital

Allegis Capital is one of those venture firms that you don’t hear much about. It just quietly goes about the business of making money. It’s had some big exits in the past few years, including the sale of IronPort to Cisco for $830 million in 2007. In fact, Allegis has made it a point to focus less on taking portfolio companies public and more on positioning them for sales—which makes it well positioned in the current environment.

The seed stage investor is sure to play up its M&A success now that it’s out pitching its sixth fund, which has a target of $150 million to $200 million. (Private Equity Week broke the news on Monday.) I recently spoke to Bob Ackerman, who co-founded Allegis back in 1995. He couldn’t confirm or talk about fund-raising due to SEC restrictions, but he had some interesting things to say nonetheless, particularly about venture firms that are crying in their beer about the lack of an IPO market.

Q: Any concerns about the IPO window being closed for so long?

A: Our premise is that we’re are building a portfolio and need to generate returns in an M&A environment. As a seed and early stage investor, we’re looking at a five- to seven-year development cycle. I don’t know what the IPO market is going to look like in five to seven years. I have no control or visibility over that.

Q: How does focusing on M&A as your primary exit strategy affect how you operate?

A: It does three things. It means you have to be capital efficient, disciplined on valuations and you need a larger percentage of your portfolio contributing to the returns of the fund.

Q: I noticed that you don’t focus on cleantech. Why is that?

A: In general, what we look for is a good match between opportunity and available capital. All too often in private equity, investors will overcapitalize a sector. We try to invest away from the herd, because the herd has a negative impact on returns.

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.

Q: How will the economic downturn impact the venture business?

A: This environment will force a lot of people to go back and reevaluate past decisions and their investment criteria. That applies to LPs as well. What has worked and what hasn’t worked? Sometimes you need that body blow to the system to look in mirror and say: What are we doing right and what are we doing wrong?

Q: Any other thoughts about VC in general?

A: Our job is not to make investments. It’s to make money. 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.