• Don’t Mess with Musk

    Elon MuskYesterday, longtime Bay Area venture capitalist Stewart Alsop posted something fairly unexpected to Medium.

    In a letter to Tesla CEO Elon Musk titled “Banned by Tesla,” Alsop wrote of his surprise that Tesla would cancel the Model X he’d ordered and that Alsop has been eagerly awaiting. (Alsop says in the post it was to be red, with black leather seats and Tesla’s Ludicrous Speed option.)

    It was no clerical or accounting error. Alsop says that after complaining — also on Medium — about what he viewed as the Model X’s poorly orchestrated launch event back in September (Alsop titled that one, “@ElonMusk, You should be ashamed of yourself”), Musk personally got involved in his order.

    Specifically, says Alsop, he canceled it.

    We reached out to both Alsop and Tesla yesterday to find out more about the incident, which we gather is unprecedented, but have yet to hear back from either.

    What we do know, from Alsop’s post, is that the two talked on the phone at some point, at which point Musk told Alsop that he was not comfortable with him owning a Tesla after having been flamed by Alsop publicly.

    More here.

  • Planning for the End of a Bubble

    Bursting-BubbleWith so much talk lately of bubbles and burn rates, venture capitalists seem to be hoping for the best but planning for the worst. None will tell you with certainty that we’re at the top of the market, but they say they’re trying to be as prudent as ever — just in case.

    Investor Stewart Alsop, for example, whose firm is in the process of raising a third, $100 million, fund, says the way his firm is planning for the end of today’s go-go cycle is by “not investing in momentum businesses right now.”

    It’s not an entirely new trend for Alsop-Louie Partners, which has always stuck to atypical and very early-stage investments, and that’s largely because Alsop remembers the last bubble so well. “I was at [New Enterprise Associates] and we’d raised a new fund in 2000 and invested in telecom companies through that fall,” he recalls. “The idea was that these were real companies, buying real stuff.”

    When it became apparent that the telecoms’ endless growth possibilities weren’t so endless (they eventually built up an oversupply of capacity), they tanked, and NEA — along with many other firms — had to write off almost all of their investments. The lesson for Alsop: “That venture capital isn’t based on what happens in the next 12 months.”

    Venky Ganesan of Menlo Ventures says his firm is also being cautious. For one thing, Menlo is taking a good long look these days at whether the unit economics of the startups it meets with make sense. The firm is also focused on business models that aren’t dependent on the availability of cheap capital, and it’s “orienting toward more seed and Series A rounds so we don’t have a timing issue,” says Ganesan.

    Ganesan says he doesn’t believe we’re in a bubble, citing some of Menlo’s portfolio companies like Uber, which are “growing revenue at a pace we haven’t seen in our history.” Even still, he says, by funding companies that will “go to market in 18 to 24 months,” Menlo is essentially buying itself time to better understand “whether this is a bubble or a long-term secular trend,” he says.

    It’s an approach to which Greg Gretsch of Sigma West can relate. Gretsch says he doesn’t know whether or not we’re “in a bubble and headed for a crash” and that “anyone who says they know is a fool.” But he sees plenty of companies whose “business model is the ever-decreasing cost of capital that’s freely available” and says Sigma has been steering far clear of them.

    Like Alsop, Gretsch suggests that his firm is mostly sticking to its knitting, meaning “focusing on companies that have a fundamental business with real customers who are buying.” He adds that while most of Sigma’s portfolio companies are spending their revenue on growth at the moment, “a large percentage [of them] could cut back to profitability if they had to. We don’t have any [portfolio companies] that will hit the wall hard” if the winds change.

    That’s not to say that Sigma West is insulated from what’s happening around it. Says Gretsch: “The challenge in this market is that everything is expensive and you have to make sure you’re not making investments to keep up with the Joneses. We hear a lot of, ‘Our competitor has this great space and employee perks and they look better to [outsiders].’ And it’s like, yeah, those things would be optimal from a cultural standpoint, but those competitors are spending a ton.”

    Gretsch says he tries to be sympathetic to his startups, but he’s not taking anything for granted right now. He points to a Chicago-based portfolio company that’s doubling its workforce every year and recently asked his opinion about whether it should move into a big new building whose landlord wanted a 10-year-lease, or into several smaller satellite offices that required shorter commitments but could come at a cultural cost.

    He nudged the company toward the satellite offices.

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  • Stewart Alsop on His Firm’s “Kid VCs”

    Stewart AlsopLongtime VC Stewart Alsop believes “people in their 30s and 40s should work.” And by work, he means outside of venture capital. “You should be in a company,” Alsop, 61, explains over breakfast in San Franciso’s Hayes Valley neighborhood. “Your value comes from your work experience. If you sit around a board of directors’ table, and you don’t have experience and a network and a point of view and a domain that you know, you don’t bring any value.”

    The stance is somewhat ironic, given that Alsop and his partners at Alsop-Louie Partners have been introducing exceedingly young people into the world of VC since shortly after the firm’s 2006 founding. It was then that the firm begin working with college students, transforming them into part-time campus spies and calling them “associates.”

    “The [students] are all, generally speaking, 18 or older,” Alsop tells me, dipping into his eggs. “But they’re younger than the drinking age, so we consider them our kids, and we take care of them,” including “teaching them about employment and taxes and stuff like that.”

    Alsop-Louie is hardly alone in bringing college students into the fold. Though the firm is well known for tapping students to help them identify talent, a growing number of venture firms are finding creative ways to identify the next Mark Zuckerberg. Andreessen Horowitz employs an in-house “college talent manager.” Insight Venture Partners employs students as analysts on a full-time basis during the summer. Meanwhile, numerous firms, including Highland Capital Partner and Lerer Ventures, have student-focused summer programs. (Lerer Ventures even calls its program Summer School VC.)

    It’s become so competitive on college campuses that Alsop-Louie had to remove a Stanford student who was a finalist for their program after it learned the candidate was already involved in another venture firm’s student program. (“We wouldn’t want someone in our firm out talking with other people,” explains Alsop.)

    The question is what impact such programs are having on students involved in these programs. Alsop-Louie hires college students as sophomores, so they can spend three years playing VC. It’s enough time to figure out who’s who on campus, says Alsop. Yet it’s also enough time to begin envisioning a career in venture capital, an industry that’s shrinking, not growing. Is exposing them to a life that most can’t have fair?

    Alsop tells me about the numerous former associates – out of 13 to date – who remain close to the firm. Corey Reese, the firm’s first recruit at UC Berkeley, is today CEO of Ness Computing, a personalized search engine that was incubated at Alsop-Louie. It has since raised $20 million from an investor group including Singapore Telecom, American Express, and NTB Docomo. (Notably, Reese found five deals for Alsop-Louie’s first fund.)

    Another former campus associate, Eli Chait, is the cofounder and CEO of Copilot Labs in San Francisco. The company, which provides real-time marketing intelligence information to restaurants, raised $2 million last summer from undisclosed investors.

    Yet another recent UC graduate is working as an engineer at one of Alsop-Louie’s portfolio companies. And the list goes on.

    “They each have an innate interest in tech and in venture,” says Alsop.

    And yes, some of them hope to become venture capitalists out of college. “They do think that,” Alsop acknowledges. But he says that the firm quickly “beats it out of them” and pushes them to think instead about what else they really want to do.

    “We make it clear that this isn’t a job that teaches you anything,” he adds with a laugh.

    Photo courtesy of Joi Ito.

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