This interview is with quite a legend in private equity, Alan Patricof. He got into private equity in the 1960’s which eventually turned into Apax Partners, one of the largest funds ever.
In 2006 Alan decided to switch gears when he started Greycroft Partners, and get back into focusing on early stage investing.
Alan has such a rich investment background we could spend hours talking.
Here are some other things we talk about:
-How did you get involved with private equity? What was one of your first investments?
-How do you decide to make an investment? What’s the process? How has this changed over the years?
-What’s a portfolio company you’re excited about now?
-How did you get the chance to invest in Apple early-on?
Dave Kruse: Hey everyone. Welcome to another episode of Flyover Labs and today we get to have a Private Equity Investor Legend with us, Alan Patricof, and he has quite a background. He has gotten into the Private Equity in the 1960’s started in Patricof & Co which later turned into Apax Partners, which ended up doing the largest funds ever, and in 2006 Alan decided to switch gears when he started Greycroft Partners to get into more early stage investing. So Alan has quite a rich background and we can spend hours talking, but we don’t have hours, so let’s get rolling. Alan, thanks for coming on the show today.
Alan Patricof: Thanks for having me.
Dave Kruse: Definitely. And so before you started Patricof & Company what were you up to, before you got into…
Alan Patricof: I had being in the investment businesses since 19 – when I came out of college in 1955, but then I was in the army, twice after that. I got called back in the reserves, and I also when to business school at Columbia. So I was in and out of the investment counseling world and then I ran a family, not my own, I ran them money as the number two person for about six or seven years and that’s where I got the idea of starting up venture capital, because I recognized that every family I knew that was very wealthy had people running their public portfolio, but every once in a while they would buy a private deal and they got no idea what they were doing because someone would just call him and just tell them to invest and it would go into a file draw, because people had file draws at that time, everything was filed up. And I said to myself, this is an opportunity to manage the private investments for any private family and with the central office and I have done myself several private investments for and behalf of the family I managed and so I understood the thinking and how they operate. So I set up my firm, Alan Patricof Associates in 1970s that was the focus was managing the private equity portfolios in private fields for high network families. So that’s how I got into the business.
Dave Kruse: Got you. And so what was one of the first deals you did? You were with Patricof & Company or even before that?
Alan Patricof: In fact it was called Alan Patricof Associates. The first deal I did believe it or not, I remember it was a different world then, venture capital that existed was in the secondary led smelting businesses and I invested in a company that was a small scrap operation in New Jersey and the only reason I tell you this story is over the years that company became the largest secondary smelter in the world. I had sold out by then with plants in six countries and was doing $2 billion or $3 billion dollars as a private company, and the internet went public and that went private. So you know from little acorns grow, it was a very small company and it was a very entrepreneurial guy. So I obviously picked the right guy at the back and I was with him for many years, but not till the end. I left long before that. And the second deal we did was an animal feed supplement company, which did not turn out so well. The third company was in the plated wire filed, which was a technology that was replaced by semiconductors and then we also invested in the predecessor of the internet in 1972 with a company called network analysis, which at that date when the internet was really based on technology that came out of DARPA and it was called package switching and we backed the first package switching company. So that’s how we started. I would say a conglomeration of companies from different areas, technology, nontechnology, wherever the opportunities developed.
Dave Kruse: Yeah, that’s really interesting. So after those first few investments, did you kind of like the variety or did you want to say, hey let’s have it a little more focused. I mean one of them is very asset heavy you know and then the other ones are a little less.
Alan Patricof: I don’t think the opportunity for us to be in focused came until the mid to late 70’s and we went into a whole bunch of different companies and I do know that in ‘79 we invested in Apple; in 1980 or 1981 we invested in America Online, the predecessor company which is called Quantum Computer and we had you know at that time we were getting more into more technology, went into rich companies and you know semiconductor packaging. We were married at different areas, but much more oriented to adapt technology and by that time I opened up an office in Palo Alto.
Dave Kruse: Okay. So how early did you get into Apple?
Alan Patricof: 1979, it was the second round.
Dave Kruse: Wow! Wow! Okay and…
Alan Patricof: I no longer – I can assure you, it went public in the early ‘80s and we were out, sold it out a year or two later.
Dave Kruse: Okay, well that was probably good, because they didn’t do too well in the 90’s eventually, but now they are doing okay. So at that point did you get more into technology or were you still. I thought that’s fairly venture capital, were you still doing more traditional private equity larger deals at that point too?
Alan Patricof: No, we hadn’t started doing private equity until our fund was getting bigger and bigger in the last 80’s and in the 90’s is we got much bigger and we gradually grew the AI, by that time opened up in Europe with offices in London, Paris, Munich, Madrid and there that pull of the European markets was more and more towards later stage investing and so that’s the story, that – and by the mid-90s we were almost entirely focused on big deals and had left the venture business.
Dave Kruse: Got you, okay and why is that? At that point why did you leave the venture business at that point?
Alan Patricof: Because – well, because our funds were so big we were running $30 billion, you can’t do $2 million investments.
Dave Kruse: Got you, okay. And when did Apax, when did that kind of come out of this. What year was that?
Alan Patricof: Apax is Alan Patricof Associates International and that was a name change in – we changed in Europe like ‘89 and we changed in the early ‘90s in the United States.
Dave Kruse: Okay, and how was the transition going from venture, more like true venture to private equity. I mean one is a lot of more – it seems like its a little more gut driven. The other one is a little more cash flow driven, strategy driven.
Alan Patricof: Exactly.
Dave Kruse: And so how was that? How was that transition, and did one help with the other? Like starting out venture did it help kind of private equity later?
Alan Patricof: Yeah, well I mean. Yeah, I mean some of the same skills, but you know it was different kind of valuation, you are dealing much more with cash flow and financial structure than you are – we are dealing with new concepts and you know that has to do with what the potential is in the future, not necessarily was there today.
Dave Kruse: Got you, yep, yep and what is one of those larger deals that went either well or didn’t go quite well. I’m curious to see or hear more details.
Alan Patricof: In which, in private equity or venture?
Dave Kruse: In private equity.
Alan Patricof: We had plenty of failures.
Dave Kruse: Let’s go private equity, do you have anything?
Alan Patricof: You know I really can’t sight any. Nothing we didn’t have, but you know in the private equity business you can’t afford too many big losses. We had – I think we had a company called Hit Entertainment that we lost money on, that just comes to mind. We had an educational company, I don’t remember the name of, but our – the last deals that I was involved with while I was still there was we bought Calvin Klein for on behalf of Phillips Van Heusen and merged into there and then we invested through Phillips Van Heusen which was public and then we invested in – that was back with Calvin Klein. Then we separately invested in Tommy Hilfiger right at the very end. So you know that’s what I remember.
Dave Kruse: Got you okay, all right. And you know can you walk us through one of those acquisitions. I’m curious to see how you were thinking at that time and now with private equity. Then we’ll get into venture capital here after this. But when you are looking at one of those deals, you know whether its Calvin Klein of a different one, you know you are looking at the cash flow, you are looking at the team, you know how do you put it all – How do you commit?
Alan Patricof: A 100%. When you are looking at cash flow, you are looking at management, I mean it’s much more of you know – I mean you are investing in an advanced business. In the case of Tommy Hilfiger they have had problems in the United States, but were very successful in Europe. So it was a question of restructuring and figure out how to make this into a more viable company as a private company and by the way it worked out very, very well.
Dave Kruse: Interesting. All right, so yeah I remember when Tommy Hilfiger kind of came in strong back in the day, interesting.
Alan Patricof: And it’s very successful now.
Dave Kruse: Yeah, yeah interesting, okay. All right, well let’s talk a little bit about – okay so was it 2006 is when you Founded Greycroft.
Alan Patricof: Yeah, I would say between 2002 and 2006, I worked a lot in the international world helping out the World Bank with some of their issues in small and medium enterprises and trying to develop some entrepreneurial strategies, particularly for Africa and Asia and in 2006 I got board of doing that and I wasn’t go out to pastures, so I got the idea of why don’t I start again a venture group, but designed from the first day to only do forever as long as I’m evolved only venture details and that’s what I did and it’s been 11 years now. It seems like yesterday and we are still just doing only venture details, which is eliminating the size. It effects our whole thinking as to how we, you know how we invest, how we – pricing and everything else.
Dave Kruse: And so why did you go back to the venture world? Did you miss it? Did you enjoy that part more?
Alan Patricof: Yeah.
Dave Kruse: Got you. And what did you enjoy more about it compared to the traditional private equity?
Alan Patricof: Well, you get much more involved with the companies, the entrepreneurs. You take much more greater sense in the dedication. You could see how easily I remember our investment in Apple Computer, our investment in Office Depo, our investment in AOL, our investment in a whole bunch of sunglasses. You know those things I was very intimately involved with and when you are doing later stage deals you are really – its financial manipulation.
Dave Kruse: Interesting, okay and with some of those earlier companies, how did you get involved with like Apple, AOL. Was it more of you on the board or at least a board observer and just being a part of that…
Alan Patricof: No, I was, I was not on the Board or an observer in Apple. I was someone from the firm was in Office Depo I was personally in AOL, just to see who was covering it.
Dave Kruse: Got you, okay and that’s how you get – yeah, it’s much more of a personal kind of connection or relationship you have with the team, probably.
Alan Patricof: Yeah, yeah, much more and it was a – it’s a very- venture business is a very exciting business.
Dave Kruse: It is and…
Alan Patricof: Everyday you come to work. I mean today I had – I ran this sports lunch, we had 20 early stage companies in the sport world, the sports technology and everyone is more exciting than the other.
Dave Kruse: Well, that’s a whole podcast right there to see what those companies are doing. That would be interesting. And all right, so you start out in the venture business, went to private equity, went back to venture. Like how – going back to venture were you a lot smarter after being in private equity? Did that help at all saying like oh, these are the types of – you know these are how larger firms operate, this is how they plan strategy, acquire firms? Did that help at all?
Alan Patricof: Well, I would say I learnt more from what mistakes I made in the venture business and I learnt certain things that I through were – would set us in a more, you know not to be like everybody else. I mean we have a certain strategy which we implement a 100% which is, we never make an investment without a partner; we don’t care about being board seats; we give up boards for anyone, any co venture with us, but we also have an observer seat; we have no minimum dollar investment, no minimum percentage ownership and those things resonate very much with other venture firms, as partners and with entrepreneurs. They love it because we are the only people they have met who doesn’t want to put a minimum of so much money in and own 20% of the company. We are the only one who doesn’t want one or two board seats and they are – it works very well in terms of setting, you know the very much – you know it builds our relationship with both sides.
Dave Kruse: You start up friendly in some ways, yeah. And so you mentioned that you know you made some of the mistakes in the past. Are there any other mistakes that you do not repeat now that you had made in your past that you can remember off the top of your head?
Alan Patricof: No, there are not. I can’t you know remember. I mean a mistake in the past, you know when you meet new entrepreneurs you want to pick people perhaps better from what you’ve learnt as a work. You want to find people who know how to tell their stories and segway. You want to have people – we find a great predictor of successes, companies that have, CEO’s that have done it before, start a new business in a related area and attract other people from their previous activity, that’s a good predictor. We want people to understand the economics in our business and what it takes to make a profit and not just – and know what their addressed market size is. Its commonly referred to as TAM, the Total Adjust Market size.
Dave Kruse: And you know you mentioned the team. So I mean, how soon do you usually get a sense that this team has what it takes. Is it a gut feeling when they start talking and within 15 minutes or is it lot of due diligence?
Alan Patricof: No, it only has to do with due diligence.
Dave Kruse: It only has to do with due diligence, okay.
Alan Patricof: We don’t just, you know. Very, very rarely – I can think of one time when I made a gut reaction and then made the due diligence after the fact. I am very focused on doing due diligence.
Dave Kruse: Okay.
Alan Patricof: I believe very strongly in doing your homework.
Dave Kruse: And can you describe some of that homework. I’m kind of curious what your investment process is you know before you actually make an investment.
Alan Patricof: We do primarily reference checks and then – and also testing out what the economics are of the business. To satisfy something or the business has the potential to be profitable, because all our companies start out at a much earlier stage and you have to really see because this is a market size and they can put this team together and if they can – depending on how much capital they are going to need, we don’t like capital intact with businesses. Our focus is entirely on the internet and mobile delivery products and services, that’s all we do. We don’t do with health care, we don’t do biotech, medical devices, we don’t do chains of restaurants, but we would do a restaurant concept that is distributed through the internet.
Dave Kruse: Got you, okay, all right. Interesting and what’s – I know you’ve invested in a lot of companies at Greycroft. Can you tell me how many companies have you invested in now, do you know?
Alan Patricof: 140 companies.
Dave Kruse: Yeah, Wow! And so I was curious if there is one or two that you are especially interested in now. I mean I know they are all kind of your babies, but you know if there is one that you are especially keen on.
Alan Patricof: No, I personally, I mean forgetting my firm, which is being very involved in a lot of food distribution companies whether – most of them online food distribution company like drive markets and Box, which are new ways to selling foods economic, appropriate discounts and efficiently delivery, but I have done several media deals. I did a newsletter called The Skin, which is probably one of the hottest newsletters in the country today for millennial woman. I recently invested in an area out of Huffington’s new company Drive Global, which is about living well and before that we had been an investor in a company, the website Huffington Post and we are also now just made an investment in the three top people from political. We started a newsletter company with about six or seven newsletters called Axios. So that was the recent things I personally better on. I’m excited about all of them. I think the most exciting of all those is a little company in Africa which is dealing with payments between African companies, run by an American woman, young American woman who moved to Senegal to set up this payments company using bit coins and an intermediary. So you might say I had lots of abroad interest, but most of my interests are in the media area.
Dave Kruse: Got you. Yeah, those are some of your impressive investments that you made. And so how do you find new deals like that? Are you…
Alan Patricof: They come to us.
Dave Kruse: They come to you, okay.
Alan Patricof: They find us, but we also remember entrepreneurs sent it to us, our other venture firms send it to us. We get things from everybody.
Dave Kruse: Got you, okay. And we are getting pretty near to the end of this podcast unfortunately. Like I said, I could ask you lots of questions but one thing that – a couple more questions. One is, you know I am always curious how people – I mean you have done quite well in your career. You probably – not every day you probably haven’t felt like a rock start. I am always curious how have you kind of dealt with the ups and downs. You know if things didn’t work out, how did you get back on the saddle and just keep on ahead that you have done for many years.
Alan Patricof: You shouldn’t be in the venture businesses unless you have an optimistic point of view and have a point of view I should say, otherwise you can’t get up every day and come in. You know there is an excitement of this business that every day the elevator door is going to open and the next Steve Jobs is going to come out. It doesn’t happen, it doesn’t happen every day or ever month or every year, but you keep hoping it’s going to happen. And I get excited every day to see what’s going to happen the next day, like today.
Dave Kruse: I like it, it’s a good attitude, all right. And with Greycroft, where do you want to take it? Do you want to continue to invest in…
Alan Patricof: I want to keep it with the same strategy we’ve had.
Dave Kruse: Nice, okay. Sounds like it’s going well.
Alan Patricof: They are not going to change, not going to be here, but I keep our size limited. We are not going to become a private equity firm. We’ve made that decision.
Dave Kruse: Got you, and you guys do. You will do follow on rounds right up to…
Alan Patricof: Yes, we formed a growth fund just for that purpose.
Dave Kruse: Okay, all right. But that’s only in your existing portfolio of companies?
Alan Patricof: No, we do others to, but primarily about 60% come from our existing companies.
Dave Kruse: Okay, got you, got you, all right. All right, well Alan I definitely appreciate this and it’s been great chatting with your and you have a wealth of knowledge. So thanks for sharing some of it with us today.
Alan Patricof: Great. Thank you for inviting me.
Dave Kruse: Definitely. And thanks everyone for listening to another episode of Flyover Labs. As always, I greatly appreciate it. Thanks everyone. Thanks Alan.
Alan Patricof: Good bye.