An Interview With Alan Patricof

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A.P.: Yes, in this field, the returns are all over the place, depending on the cycle you’re in and your timing. And I’m always very conservative and realistic about expectations in this business. In the venture capital business, if you can consistently produce north of 20 percent, you’re doing terrifically. If you happen to be very lucky and find a period where it’s 30 or 40 percent, I think you consider it an anomaly; it’s not the norm. But I think, particularly today, the opportunities for taking companies public are much, much more limited than they were. So with most companies that you invest in, you have to realistically look at your exit—the possible sale of the company as opposed to having an I.P.O. The number of I.P.O.’s  is very limited today.

L.G.: Like Colin Powell, you always have to have an exit strategy?

A.P.: Well, that’s probably a good way to look at it. I think in the old days, you always looked at having multiple exit strategies. Today. one of the difficulties in this business is, it’s hard to find multiple exits. The minimum size for a public offering today is probably a company with a value of $250 million. You sell 20 percent of it, that’s $50 million to get any underwriter even talking to you. And to build up the company to the value of $250 million, you have to have a pretty sizable company, and it has to have earning power. Maybe that’ll change in the next 10 years. We may have another cycle of euphoria. But in today’s environment, and certainly since the post-bubble of 2001, 2002, we haven’t seen anything like that, and I.P.O.’s at young companies today are few and far between.

L.G.: What percentage of dogs can you tolerate?

A.P.: That’s the question everybody is always trying to get the answer to. I think there is no real answer. I mean, you can have one winner that can take care of so many losers that you can afford to have a lot of losers. But you’re going to have an awful lot of companies that we call the “living dead.” You hold them for a long time, and you just get your money back. So it tends to skew from having some big hits if you’re lucky, some moderate hits, a lot of them that just get your money back, and as few as possible where you have a wipeout. The objectives are, frankly, to not drown in feeding money into losing propositions and to cut your losses early, and try to recover something if possible.

L.G.: So you and your people are watching every company pretty carefully?

A.P.: We all operate on the basis of keeping our investments realistic. The more early-stage they are, the more limited we’re going to put our money in. And we’ll feed it in over time as certain accomplishments are achieved. And the later the investment, the more confidence we have in the establishment of a viable business model, the more likely we are to put heavier investments. And of course, the more you have those characteristics, the higher the valuations. So it’s a tradeoff.

L.G.: Ideally, you put your money into a startup and it’s hugely successful, and you take it out after how many months, years?

A.P.: I wish it were that simple. Usually, if you put your money into a startup, there’s a second round and potentially a third round, and you feed additional capital in. I think we used to say that the time frame for investment was three to five years. I’d say today, you have to be realistic about the holding periods being longer, and five to seven is a more realistic time frame. Today you don’t have the ability that you did 10 years ago to take a startup that may be a year or two old, losing money, and go public with it and be able to get liquidity. That doesn’t exist today.

L.G.: Are there any of these 18 companies in your portfolio that you’re particularly fond of, other than the Huffington Post?

A.P.: It’s like asking which one of your three children you’re fonder of. I have equal fondness for all of them. That’s the truth. And initially, I have similarly great expectations for all of them. As you live with them longer, you find out their frailties, and we’re still, fortunately, at the early stages of our investments in a lot of these companies, so they all look great to us at this point. And we think we have a very interesting, balanced portfolio in music and games, almost all internet-related content. We’ve also made a couple of investments in the online-advertising-network field. We also have a couple of investments in the communications field—wireless and voice-over-IP.

L.G.: What persuaded you that you should invest in the Huffington Post? I read it was a $5 million investment. I don’t know if it all came from Greycroft.

A.P.: The principal investor is Softbank Capital, and our strategy is to do most of our investments with somebody else. So Softbank was the lead investor. I was intrigued with what the Huffington Post was trying to accomplish, which is, in effect, to be the newspaper of the future—to have the same characteristics that you would find in the newspaper in the new world of online-media distribution. And I think we’re well along to achieving that.

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