Bill Elkus conceived the Clearstone Venture Partners (then known as Idealab
Capital Partners) concept in 1997 and has been a managing member of its
general partnership since its inception. He sits on the board of four firms,
including GoTo.com, RealNames Corp., HealthAllies and Cooking.com.
Bill began his career at the Boston Group in 1977 with five years as
a strategic planning consultant in a wide variety of industries, including
semiconductors, magnetic recording media, and publication databases. In
1982, Bill founded Nathan Todd & Co., an investment advisory firm
specializing in providing wealth management services and representing
private family fortunes. During the period of his full-time involvement
at Nathan Todd (1982-1993), he was active in several aspects of venture
capital, including investments in traditional funds, co-investments with
those funds, and direct venture investments. He also co-founded five independently
managed investment partnerships in the areas of securities trading, real
estate and merchant banking.
Last week, Idealab Capital Partners (ICP) changed its name to Clearstone
Venture Partners and moved its operations out of idealabs offices.
Why are you trying to so strongly disassociate your firm from its former
The move that we made wasnt to disassociate ourselves from idealab!
the incubator, but rather to make it clear in the minds of the media and
entrepreneurs and other venture capitalists that were separate entities.
Weve had a lot of issues of brand confusion for the three years
weve been in business. People sometimes think that we are a creator
of companies, and people sometimes think idealab the incubator is a VC.
Weve had investments attributed to us in the press as recently as
[Tuesday] that weve never made. The best way to make it clear to
people that we have a different portfolio and different investors was
to simply take a different name. As far as the offices are concerned,
that was just a personal preference. The idealab! office in Pasadena is
over 30 miles from my house and the houses of each of my full-time partners.
Were also space constrained inside of the incubator, and I know
theyd love to have the extra space for themselves, so it all just
worked itself out.
When you went out to raise your first fund in 1998, the idealab brand
name was obviously a strong incentive for investors to take a look at
you. When you went out late last year to launch Fund III, was the idealab!
moniker viewed as a drawback due to its recent layoffs and pulled IPO?
Our investors are overwhelmingly sophisticated investors, such as CalPERS,
The State of Michigan, Goldman Sachs and Merrill Lynch. These people have
dozens and dozens of venture funds, have done extensive due diligence
on us and are not at all confused between idealab! and Clearstone. Whatever
is going on at idealab itself as a brand I dont think has a positive
or negative impact on our ability to raise a third fund.
On a separate issue, idealab! has provided dealflow for us but, over
time, the dealflow that they provided for us became a smaller and smaller
part of the total dealflow available. It was a tremendous advantage for
us in the beginning, but since then weve added partners, gained
what I think is a good reputation and have more experience in the marketplace.
All of these have greatly added to our non-indealab! dealflow, which is
now much larger than our idealab! dealflow.
You ended up pulling that fund off the market after approximately
four months of fund-raising. Why?
When we go out into the marketplace we, like most venture capitalists,
look at our existing portfolio companies and estimate how many of them
will present attractive [follow-on] investment opportunities. And that
changes every month: Sometimes it goes up, sometimes it goes down.
The second thing we look at is the rate in which were investing
in new deals, and the third thing is how much we invest in each new deal.
So that gives you a sense of your cash forecast and when you need to raise
your new fund. When we first went out to market we were in a different
market environment than we are right now and our forecasts were that around
now we should have a new fund under management.
In all three of those cases weve seen fairly significant changes.
Our existing portfolio companies are, to use someone elses words,
hoarding cash. They are retrofitting their business models to use the
cash they have as frugally as possible. Theyre seeing a financial
environment where the private equity markets are not very friendly, where
the public markets dont exist as a practical matter and, more importantly,
where their competition isnt growing as quickly and, in some cases,
is dead. So many of our existing companies have said they dont need
to raise money right now under these circumstances.
On the new deal side, I think everyone is finding that their investment
pace has slowed. Part of it is because fewer companies meet our criteria
and part is because we can now conduct longer due diligence
losing deals because were taking a long time.
When we do make an investment, companies dont need as much money
in the early stage and were early-stage investors -- as they
did a year ago. The 1997 to 1999 imperative to get big fast before even
proving your business model has been lost. So we looked at out portfolio
and said we have a lot of runway left in Fund II, and we should not be
closing Fund III yet because its not appropriate.
So we went back to our investors in the last few weeks and asked if they
wouldnt mind postponing the closing of the fund. We had never given
them documents or asked for a final answer. Most of them were still involved
in their own due diligence, and its been reported that a couple
of major institutional investors planned to invest more than they did
last time. We were going to have a dry closing anyway and thought, lets
just wait. We think we can go well into 2002 with what we have now and
probably do eight to 12 more new deals in our existing fund.
Since the conventional VC wisdom is to raise capital before you actually
need that capital, when would you expect to go out and raise Fund III?
Sometime in 2002. We basically look once a month [and project our cash
investment pace] and will raise it when we feel the circumstances are
Idealab! CEO Bill Gross was a co-founder in ICP, but is not listed
in the management section on the new Clearstone VP Web site. Is he still
an active member of the team?
Bills role hasnt changed. What we didnt want was an
entrepreneur who thought he might be getting Bill Grosss time --
which is very attractive to a lot of entrepreneurs -- by having him up
on the Web site as one of the active managers. Bill is a full-time executive
whos got a lot on his plate and has always given us part-time help
and part-time advice inside of ICP by design. Not including him on the
Web site was also another way to further separate the brands.
Idealab! itself was also involved in ICP by design in that it had
a significant financial stake in the two existing funds. Is idealab going
to maintain those positions?
Yes. We dont discuss, and have never publicly discussed, their
ownership in our firm so I wont give you any details, but idealab!
has a very strong incentive for both of our funds to be successful.
When you went out and started marketing Fund III, was idealab! going
to maintain its traditional role within the new fund?
We didnt disclose that to our investors. Like most venture funds,
the internal economics amongst the partners is not disclosed in the offering
Why did you pick the name Clearstone Venture Partners?
Picking a name was very difficult. We wanted a name sorry for
the pun that was clear, easy to spell, was memorable and that evoked
a sense of what we were trying to accomplish. So we looked at a lot of
names and came up with this one. The other thing you can do is name it
after people, but Elkus, [Managing Director Erik] Lassila and [Managing
Director William] Quigley are three very difficult names to spell. [Managing
director Jim] Armstrong is a lot easier, but with three out of four being
difficult we decided wed go with a more generic name.
Is there any difference in investment missions between ICP and Clearstone?
No. The difference might be apparent in the public mind only because
the public hasnt always focused on the fact that the ICP portfolio
is much more than eToys, NetZero, GoTo.com and MP3.com. Those are some
of the companies that got a lot of attention in 1998 and 1999 and were
big wins for us, but weve always had a significant technology portfolio.
Over the last year and a half, weve spent much more of our investment
dollars on [technology-centric] companies, and that hasnt been really
talked about much in the press. Companies that provide deeper technology
are a little more difficult to describe and are not as transparent to
the average newspaper reader. We recently announced an investment in Zyoptics,
which is an optical equipment manufacturer, and it just doesnt sound
like as much fun as an eToys, so people dont focus on it that much.
Our firm has been focusing for some time on software and communications.
We are a group of venture professionals who have significant experience
doing these kinds of transactions. Our experience and success in b-to-c
and Internet-related companies is significant, and were proud of
it, but it does not represent the bulk of our careers. For example, William
Quigley was at Mid-Atlantic Venture Partners before he joined us and did
eight communications deals there. Erik Lassila has been in business as
a VC for six years. Before that he was at Motorola and Texas Instruments
so he has a lot of experience with enterprise software.
On a broader level, should the VC community be concerned that the
recent spate of established firms pulling launched funds will cause institutional
investors to decrease their future allocations to the industry?
No, I think its very much the other way around. The institutions
make allocations to the space and then go find the best firms that they
can. I dont think theyll say, If we cant find
enough good firms to invest in we just wont invest.
There was a movement late last year to raise very large funds, and it
resulted in many institutions being overallocated to VC because they wanted
to keep their place in good funds. Also, a lot of the institutions weve
talked to dont have a full view of the losses theyve taken
in their portfolio due to the nature of venture reporting. It tends to
be very sticky on both the upside and the downside, and I think it will
be many months before they understand exactly what shape their portfolios
are in. They may have less invested in venture than they think.
Anything else youd like to add?
This is an exciting time for us because we are growing as a firm. We
expect to make additional announcements on personnel over the next few
months as well be making additions at all levels. Were establishing
two new offices and have $200 million to invest, and its a great
time to have cash to invest, so were looking forward to making some
great deals and building some really good companies.