1Mby1M Virtual Accelerator Investor Forum: With Stewart Alsop of Alsop Louie Partners (Part 3)

Sramana Mitra: Talk to me a little bit about what you see as the early stage investment game. It has become very tricky. How does a small fund or even angel investors compete with the mega funds that put in $100 million in Series D with 3x liquidation preference. How do you prevent being washed out?

Stewart Alsop: It is a tricky business. It requires understanding of how to run a venture fund. You have to be very careful that you don’t get ahead of yourself in terms of investing. We can look at a company and go, “That’s cool.” That business is going to take $50 million to $100 million to really build out and we won’t really know until the later stages of that $50 million to $100 million whether this team will turn it into a successful company.

We have to find companies that require relatively less capital and you have to be very careful about that and not fool yourself along the way. You got to stick with things that you can do. The irony is Alsop Partners started the same year as Andreessen Horowitz. We’ve raised three funds which total about $300 million. Current fund is about $140 million.

Andreessen has raised five funds for $6 billion. They’re better at raising money for sure. They had a whole concept of how to build a first-class top-tier firm. Everything that Andreessen did, they did intentionally. By definition, Andreessen, NEA, Sequoia really can’t play in the really hard stuff.

We’re building a reputation over time of having carefully curated companies that have tremendous potential. In our relationships with the entrepreneur and the terms that we deploy, we are able to get our round and make sure that we don’t get stuck by one of the elephants.

Sramana Mitra: Do you talk to entrepreneurs about the philosophy of how they want to build companies? There’s clearly two different kinds of entrepreneurs playing in the market today. The one who really believe in raising loads of money and there are entrepreneurs who want to do it for a reasonable amount of money and make sure that they have a better shot at making money.

If you have a Facebook in your hand, it doesn’t matter but if you’re operating in the higher probability realms of venture capital, you have to do things in a more capital-efficient way. That’s where the bulk of the entrepreneurs have to navigate so they can create wealth for investors as well as for themselves. Do you sort through these two different mental models?

Stewart Alsop: You were making a false distinction there that being reasonable is a good way to be an entrepreneur. We are looking for unreasonable entrepreneurs. You were distinguishing between a lot of money and big outcomes and a little bit of money and reasonable outcomes. We’re very interested in unreasonable outcomes if we can accomplish that without raising hundreds of millions of dollars.

I totally agree with you. We have a similar point of view which is raising money is not the point. I have talked to entrepreneurs who are well-covered in the press. They’re raising money just because they can. I don’t understand the investing. I don’t understand the entrepreneur. If you don’t need money, why would you raise money? The kind of entrepreneurs that I get along with are the ones who have strong points of view.

I have the privilege, not as an investor, but as an independent director to work with John McFarland at Sonos for eight years. John doesn’t raise money if he doesn’t need to raise. He’s totally in control of his cap table, of the culture of his company, what the objective of the company was. He takes is very personally. I had a blast working with John at Sonos and learned so much from him. That’s a massively successful company. That’s the kind of entrepreneur I like.

I don’t understand entrepreneurs who raise money just because they can. This is the thing. I feel like I’m an old guy. Part of my problem in the current environment is that maybe the principles that I grew up with are no longer valid. Maybe I’m just a grumpy old man complaining at how these young kids are doing it these days.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Stewart Alsop of Alsop Louie Partners
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