Student of History

Steve Lebow recently finished reading a biography of Franklin Delano Roosevelt, and it seems to have had a notable impact on his outlook.

A managing director at Los Angeles-based GRP Partners, Lebow predicts that the financial crisis will bring an end to the days of debt-fueled purchases by the American consumer, and a return to the “old-fashioned” virtues of thrift and saving.

“This is a time for steady hands and not for kids,” he says. “I’m 54-years-old, and I’ve never seen anything like this, and I’ve read economic history going back 150 years.”

For an investor who has dedicated most of his career to the retail industry, a recession fueled by declining consumer spending would seem like alarming news. But GRP, formerly known as Global Retail Partners, has done pretty well lately.

In October, the firm had its most lucrative exit following the sale of portfolio company Bill Me Later to eBay for $945 million. Lebow, who sits on the board of Bill Me Later, led GRP’s investment in 2003 at a reported $67 million valuation. In exchange, GRP received what he calls “a nice stake” in the Timonium, Md.-based payment technology provider.

The Bill Me Later acquisition was the largest of three portfolio company exits Lebow has presided over during the past two years. Ulta Salon, Cosmetics & Fragrance Inc., a salon and cosmetics retail chain, went public in October 2007. The company, which raised $200 million in venture funding prior to its IPO, currently has a market capitalization around $540 million, having shed more than two-thirds of its value in the past year amid the broader market carnage.

Another portfolio company, software developer Aventail, sold to Internet security service provider SonicWALL in June 2007 for $25 million. Aventail was a losing proposition for VCs, having previously raised a total of $121 million in venture financing, according to Thomson Reuters (publisher of VCJ).

Without a doubt, GRP is playing up the success of Bill Me Later as it approaches potential limited partners for a third fund. It has already raised $136 million of a planned $300 million, according to a regulatory filing.

Lebow says he is not at liberty to discuss fund-raising, but he has plenty to say about the economy and the impact it will have not just on consumers, but also on venture capitalists.

Q: You’ve spent decades tracking the spending habits of American consumers. What does the current downturn portend?A: What I believe is that we’re going from a consuming economy to a saving economy. I think we’re going back as a culture to the 1950s, back to good old-fashioned values. People must save for 12 years to buy a house. Kids are going to have to pay off their student loans or move back with mom and dad.

I think we’re going back as a culture to the 1950s, back to good old-fashioned values. People must save for 12 years to buy a house. Kids are going to have to pay off their student loans or move back with mom and dad.”

Consumers will cut back spending. They aren’t going to buy $4 Starbucks coffees when they can buy one for $2 at Dunkin’ Donuts. And they’re not going to buy the fancy Lancome cosmetics when they can go buy Oil of Olay. Malls will also suffer greatly and transform, and all of that is going to create a huge ripple through the consumer landscape.

Q: How long do you expect the downturn to last?A: Three months ago, conventional wisdom was a recession would last six months to a year-and-a-half. Now, the general impression is it’s going to be longer. It’s probably going to last for as long as two to three years. Financially, I think this will be a lost decade. Everyone’s 401(k) will be close to where it was 10 years ago.

Q: What does this mean for the venture business?A: For the quick flips, it’s all over. It’s going to be about solving problems and creating value.

The consumer’s looking at a 50% loss in their 401(k), and job losses are starting to pick up. Unemployment could go up to 10%. What it means is you don’t invest in frivolous things. You invest in things where you see a need. It can’t be a good-to-have product. It’s got to be a must-have.

But I don’t want to sound like a pessimist, and I don’t think anyone should lose their cool. It’s going be an exciting time to be in the venture business. Some of the best companies have come out of recessions, such as Costco, Federal Express and Southwest.

Q: You invested in Bill Me Later during a big down cycle in the venture industry. What drew you to the deal?A: Having done this for 30 years, I knew the company represented an important moment in the intersection of credit and data mining. When Dell Venture Capital and Mike Kwatinetz [a general partner at Azure Capital Partners] brought the deal to me, I had been waiting for it. I was also able to introduce them to a lot of retailers who had been limited partners in our fund.

Q: Didn’t you have any concerns about the investment?A: I knew it was going to be a high burn. That’s why the big reserves were so important. We knew it was going to be a good idea, but we had to fund it very cleverly. It was a question of how long would it take to create the tools to sell to a retailers like Costco or Petsmart. They’re very difficult, these retailers. They work on margins of pennies.

Q: What sector is a good investment now?A: We have always looked to consumer financial services and Internet services. But in today’s climate, the company better be unique in what it’s doing and be run by people who know the industry cold.

Q: Are you investing while you’re raising the new fund?A: We’re fully invested from fund I and fund II. So, we’re looking at investments, but aren’t making any now. As for fund-raising, legally, I can’t talk about that.

Q: You were a supporter of Barack Obama. Any thoughts on the President-Elect?A: Well, I’m very happy. The most important thing about Obama is that he’s an optimist and he gives people hope. That’s something that’s needed in times like these.

It’s going be an exciting time to be in the venture business. Some of the best companies have come out of recessions, such as Costco, Federal Express and Southwest.”

Clearly taxes are going up. But I would say that if John McCain was elected. The problem is that tax revenue is still going to be going down.

BIO: STEVE LEBOW

Managing Partner and Co-Founder

GRP PartnersLocation: Los Angeles

Age: 54

Education: Bachelor’s degree in political science and economics from UCLA and an MBA from the Wharton School of Business at the University of Pennsylvania.

Work history: Spent 21 years at Donaldson Lufkin & Jenrette, most recently as chairman of Global Retail Partners, and before that was managing director of the retail group within the investment banking division. Opened DLJ’s investment banking office in Los Angeles in 1986.

Focus: Consumer financial services, retail and e-commerce. Sits on the boards of EnvestNet Asset Management and Ulta Salon, Cosmetics & Fragrance (Nasdaq: ULTA).

Recently read: “The Defining Moment: FDR’s Hundred Days and the Triumph of Hope.”

Source: VCJ reporting