Yesterday, we were the first to report that Alsop Louie Partners has held a final close on its second fund. It garnered $98.6 million in commitments after a two-year slog on the fund-raising trail.
Stewart Alsop, who co-founded the San Francisco-based firm five years ago, talked candidly with me about the process, and what’s changed from when it all started. Here’s our converation, edited and trimmed for length.
Q: What was the hardest part of raising this new fund?
A: The hardest part has been that institutional investors haven’t known what they want. They were all trying to figure out what their strategy was going forward, when all the rules changed [because of the financial crisis]. When they tell you, ‘We’re doing our asset allocation strategy,’ that’s code for: ‘We don’t know what the hell is going on and probably can’t invest right now.’
Also, you don’t know how to evaluate meetings. They tell you that, ‘We’re actively investing and love what you’re talking about,’ but afterward you have to assess whether they’re just gathering information. That’s changed, but in 2009, when people were still really shell-shocked, we had many long meetings, told people what we were doing and what the returns on our fund were, and we’d never hear from them again. It was later in the year that people started making up their minds about what to do.
Q: Was seed and early stage investing at all a tough sell, considering how crowded the space has become?
A: It’s not true that early stage is crowded. There are only 30 to 40 funds in the early stage space that are $50 million to $100 million in size. And the fact that bigger funds are [moving down market], trying to justify their funds — and that all these super angels have shown up — it’s all noise, mostly about Web-based consumer companies. And that’s clearly the end of the last cycle. It’s great that some companies are making great returns, but we’re looking at where the world will be three to four years from now. You want to be investing into the next tech cycle, not late into the last one.
Q: So what’s your point of view?
A: That there are two ways to raise a fund right now: One is to have incredible returns, like the Foundry Group, [whose first fund IRR is] in the 60s. Ours is good — we’ve made money for our investors — but not that good. So the other way you do it is to establish some level of credibility about how things will go in the future.
Q: What’s the pitch, exactly?
A: We call it the ‘Evernet.’ The Internet was designed to survive nuclear holocaust, and still have a network functioning. Generally, if the connection gets lost, both sides will keep working until the connection gets reestablished. But in the next generation, we’re going to solve the issue of real-time networks. Always on, pervasive, ubiquitous — all that stuff gets tossed around a lot, but it’s really going to happen. The question is how long will it take and how does it happen? And we have a proposition about how that will happen.
If you look at the 3Par deal, it was trading at $800 million when Dell offered to buy it for $1.3 billion, but [a bidding war between HP and Dell ensued and] HP eventually bought it for $2.1 billion. The value of the company tripled in a month’s time [because] its underlying technology is about highly distributed storage systems that are critical in a real-time highly connected network. Its value is precisely a reflection of these companies assembling a war chest for building the Evernet.
Q: What’s a concrete example of your new investing theme?
A: FrameHawk, a deal led by [new Alsop Louie Partner] Bill Coleman, who we call Mr. Cloud. FrameHawk is developing a Web-presence server. It’s early on in the sense that it’s only in pilots, but it’s working on associating resources and a network with a user, so that as the user moves around, it will deliver those resources — to their Android phone or their iPad or their TV or to a computer in a hotel room. A specific case would be if you’re doing a conference call in your office and you’re looking at shared documents. Well, if you stand up, the system detects that you’re starting to move and shifts the presentation to your cell phone. As you get into your car, it puts the call on your speakerphone. When you arrive home, it swaps the call to your home phone and puts the documents on your home computer.
Q: Does pursuing this “Evernet” idea buffer the firm from soaring valuations elsewhere in early stage deals? Or is it still hard to find a value right now?
A: We don’t compete for deals. There’s a game that goes on in this business where entrepreneurs and investors sit on opposite sides of the table, and sometimes entrepreneurs are running the deals and sometimes investors are, and we prefer not to participate in that game.
When we invest in a deal, we’re in control of it. We’re negotiating for the long term. The last thing we want is someone who thinks about where they can get slightly better terms. We’ve backed off of deals where there was another investor and it became competitive. We said, ‘Nah. We won’t do it.’