Today was probably a good day for Robert Ackerman, managing director and co-founder of Allegis Capital. Less than a year after Allegis led the $10 million second venture round for Ribbit, “Silicon Valley’s first phone company,” BT announced that it has acquired Ribbit for $105 million. That’s supposedly a return of more than 500 percent for Allegis.
I spoke to Ackerman this afternoon, and he described the sale as another validation of Allegis’ investment strategy. That strategy emphasizes mergers and acquisitions (which make up 98 percent of Allegis’ exits) and a diverse portfolio, paying off in $2.2 billion in exits over the last three years.
VB: Congratulations! Were you surprised by the news? I mean, presumably you heard about this a lot sooner than we did, but still …
RA: [laughs] I think our initial reaction was one of pleasant surprise. This is a company that we liked a lot. Certainly, at the time we weren’t investing for a quick exit, we were investing for the long term — that’s the business that we’re in. The offer that was made by BT certainly generated a great return for us, and it was a tremendous validation of the team’s vision.
VB: Can you confirm that this was a 5x return on your investment?
RA: Well, I can’t say specifically, but the IRR [internal rate of return] was in the excess of 500 percent. We’re not complaining.
VB: And that’s particularly impressive in light of how bad the exit market is right now.
RA: Here’s the thing, right, in venture capital everybody talks about the cyclical nature of venture capital returns and that it’s tied to the cycles of the public markets. Our belief is — and I wish I woke up one morning with this brilliant insight, but as with most insights it comes from a fair amount of scar tissue — what we realized in 2000, 2001 was that we can’t predict public markets. What we began thinking about was, “We can’t predict the market, so how can we adjust?” Number one, there’s always a market for trade sales. Let’s assume we’re building a company with trade sale markets in mind. If there’s a robust IPO market, great, but let’s plan for the more conservative case. Let’s plan to build a venture portfolio for that more conservative case.
In that more conservative case, what you want is to build a thing where you can identify the value you’re creating. So, for example, you’ll see us not wanting to make a lot of “me, too” investments. We’ve built a portfolio of companies that are perhaps more differentiated from each other than most. If you’re in a trade sale environment, that also tends to mean you really have to watch cash basis and capital efficiency.
VB: How did Ribbit fit into that strategy?
RA: All venture capitalists talk about disruptive. The question is, what do you mean by disruptive? We like platform plays, quite frankly. When you’re able to bring others onto your platform, you’re able to leverage their creative and their financial resources. Now Ribbit, case in point, was a disruptive idea where you build a platform without having to build all the underlying infrastructure. When you open the platform, you harness the creativity and financial resources of all the brightest minds in business.
VB: And what are some areas you’re looking at for future investment?
RA: You’ll see a number of platform plays in our portfolio, where you can leverage the economics of other market participants. We continue to see a phenomenal amount of opportunity in the communications sector. Everyone talks about Web 1.0, 2.0 and 3.0. Well, let’s call this “Communication 2.0.” [laughs] The communication and data worlds are merging around IP networks. That’s going to be transformational, and Ribbit was the beginning of that. The further you go up the stack, the more value is being created.
And enterprise, good grief, coming out of the dark ages of 2001 and 2002, everyone was saying, “Enterprise is dead.” But [software-as-a-service]-based computing models integrate rather well with how corporations do business. Third, security continues and will continue to be a rich vein of ore for many years to come. There’s no such thing as too much security, when everything about you is available online.
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