Gaule: Give us a brief description of your fund when it was formed, size, funds deployed and business focus areas.
Ackerman: We launched Allegis Capital in 1996 with an investment focus on seed and early-stage investments in the IT sector. When we started the firm, we had a number of guiding principles which continue to be core to who we are as a firm today, including an entrepreneur-centric culture, a predisposition to work with strategic corporate investors on a proactive basis, and to be a hands-on and true valued-added investor.
These principles are a reflection of my own experience as an entrepreneur and start-up chief executive (CEO) and founder. Ours is a business where experience matters.
Our team averages 15 years of venture investment experience in addition to our operating backgrounds. It is tough to walk an entrepreneur through the start-up minefield if you have not been there yourself.
In guiding our companies, we really depend on intuition honed by our own direct experience. Our work with corporations is probably one of the most distinctive aspects of Allegis Capital.
Over the years, we have had 35 multinational corporations as investors – limited partners – in our funds. We work closely on a regular basis with another 20 or so.
I developed a deep appreciation for the power and potential in collaborative partnerships between strategic partners and young companies when I was running my first company as a CEO.
We built a great software company with a global market presence and no outside capital, and we did it through close collaboration with three strategic partners – AT&T, Motorola and Apple Computer.
Today, we workwith our corporate partners to identify opportunities and needs for innovation, collaborate through due diligence in specific companies, and form strategic partnerships postinvestment. For us, this is really about proactively managing the risk associated with early-stage investing – we call it "active corporate partnering".
Gaule: What has been your most interesting recent deal with a corporate?
Ackerman: As you would expect, most of our portfolio companies have a number of strategic partnerships – its just part of our DNA. A good example might be Apprion, a company providing wireless infrastructure and application platforms for industrial automation customers – a fair number of Fortune 50 global players.
While we have the benefit of working with a highly experienced founder (our third time together) our serial corporate partners, Chevron and Motorola, have brought tremendous value to the table.
Chevron’s extensive domain knowledge and credibility have opened doors. They are also a great reference customer. Motorola has worked closely with the Apprion team on technology integration and sales. Both Motorola and Chevron are investors with us as well.
Gaule: What is your current view on the venture capital (VC) markets and opportunities for investments and exits?
Ackerman: The venture industry is going through a period of much-needed consolidation – a return to its roots. From my perspective, this is a natural by-product of the excesses from the dot.com boom, when we saw too much money managed by venture capitalists with too little experience.
The industry has rediscovered that experience matters, that there is a necessary balance between available capital and quality opportunities, and that it is difficult to generate VC rates of return with overly large pools of capital. At the same time, innovation is alive and well.
In fact, historically, down economies have produced some of the most interesting and significant start-up opportunities. Perhaps only the best and brightest decide to strike out on their own in choppy seas.
When we look back on this period from now, I think we are going to see a significant wave of innovation that belies the current rhetoric and turmoil. Merger and acquisiton (M&A) exits will play a greater role in the path to liquidity for venture-backed companies.
This is a natural by-product of corporations significantly reducing and refocusing their own reasearch and development (R&D) investments over the past 30 years and turning to select acquisitions to enhance their competitive posture.
Frankly, I think we have seen a permanent shift in the innovation matrix, where small, agile start-ups will play an increasingly larger role in the creative disruption that large brands can leverage into their customers’ bases. In an increasingly competitive global marketplace, the necessary focus is on efficiency.
And start-ups tend to be very efficient – in their success and in their failure. While some will argue that venture returns are tied to the initial public offering (IPO) cycle, our firm has demonstrated that we can generate a traditional venture rate of return in an M&A exit environment.
Over the past 14 years, 98% of our returns have been through M&A exits. The keys to the success here are to invest in companies solving real problems so that you can attract multiple trade buyers, paying careful attention to your cost basis – advantage early-stage investors – and building companies with a preoccupation with capital efficiency.
Gaule: What have you seen as the most challenging issues when managing the relationship with strategic investors?
Ackerman: There is a natural impedance mismatch between start-ups and large corporations. With all the best intentions, it takes tremendous commitment on the part of both parties to develop and maintain a truly successful strategic partnership.
The turnover in personnel and strategic drift on the part of a strategic investor can be a tremendous resource drain for a young company. A large corporation can easily overwhelm the resources of a start-up with requests. "Fast" has a different meaning to a strategic investor than it does to the young company.
While necessary, lawyers are probably one of the largest obstacles in documenting a strategic partnership. These are not relationships between equals in some ways – size, resources, business sophistication – and lawyers are often tempted to press their size advantages. Its takes strong business sponsor leadership to keep the lawyers in check and to focus on the fact that only a win-win relationship will be sustainable.
Gaule: What do you do to relax when you are not building ventures?
Ackerman: Who said I relax? Frankly, I love what I do. It is tough to beat the adrenalin rush associated with working with very bright and passionate entrepreneurs who want to change the world. That said, I find balance is important to maintaining perspective.
My wife and I are both active in the non-profit world with a focus on education and the arts. We own a small winery in the Napa Valley (www.ackermanfamilyvineyards.com) where we use the proceeds to support our non-profit priorities. When I really want to kick back, its fly fishing with my sons.
Bob Ackerman is also chairman of the IBF Corporate Venturing & Innovation Partnering Conference, with Global Corporate Venturing as a media partner. The next conference will have an H-I programme of innovation visits and conference from February 14.
To contact Andrew Gaule and for future interview ideas email andrew.gaule@h-i.com and jmawson@globalcorporateventuring.com