Can Venture Capital Come in from the Cold?

Allegis Capital and a handful of boutique firms are eyeing new investments amid a crisis of confidence among Silicon Valley VCs

By Spencer E. Ante

These days, many venture capitalists resemble mice, afraid to invest in the rough economy. But a few firms remain upbeat and aggressive, ready to pounce like a tiger.

One is Allegis Capital, a 12-year-old Silicon Valley VC firm that's smelling opportunity amid a fearful market. Allegis doesn't have a marquee name, but it's put together one of the most impressive track records of any venture firm in recent memory.

Last July, Allegis sold Ribbit, a telecommunications provider it backed, to BT Group (BT) for $105 million. In 2007, it sold computer security company IronPort Systems to Cisco Systems (CSCO) for $830 million. Over the past four years, six companies in which Allegis has invested have sold for a total of $2.1 billion. "Venture capital is not broken," says Allegis Managing Director and co-founder Robert R. Ackerman Jr. "Innovation is alive and well."

Questioning the VC Playbook

That's not the conventional wisdom in venture investing. The market for taking startup companies public has ground to a halt. The value of startups has fallen. And avenues for selling companies to corporate acquirers have narrowed while fundraising is scarce. Some investors have asked whether the venture capital playbook of raising large sums of cash and betting on a few home-run deals is in need of revision.

Yet smaller funds such as First Round Capital, Maples Investments, and angel investor Ron Conway's Baseline Ventures continue to invest amid the economic downturn.

Allegis has pursued a strategy based on mergers and acquisitions, not initial public offerings, since the tech bust of 2001. The company eschews the traditional VC approach of storing lots of capital. Allegis invests out of a $110 million fund that closed in 2006. It typically invests a few million dollars in a startup and targets a 20% ownership stake in the company. The approach has proved prescient.

No Hail Mary Passes

Ackerman doesn't throw Hail Mary passes downfield as much as other Valley VCs, says Scott Weiss, the former CEO of IronPort and a Cisco vice-president. Instead, Ackerman practices a conservative running game, Weiss says. "Bob is not flamboyant. It's 10 yards up the middle. It's not a moon shot and goose egg" approach.

Ackerman, a big friendly bear of a man, co-founded Allegis in 1996 after founding a startup that eventually sold to Cisco for $300 million. Since Allegis' focus is on matchmaking young companies with potential suitors, he and his team spend days hunkered down in the labs of AT&T (T) and other companies trying to divine their needs. Allegis works closely with a group of 35 companies, including Boeing (BA), Fujitsu, and Société Générale Group to help select investments.