NewNet Investor Profile: Bob Ackerman, Allegis Capital

19 November 2009

Bob Ackerman

Bob Ackerman, founder of Silicon Valley venture capital firm Allegis Capital and board member of The Entrepreneur’s Foundation, on the hype surrounding cleantech, the potential bubble that is currently growing around the sector and the dangers of over-capitalisation.

What sectors are likely to take off going forward from here?

‘Clean technology and green technology have attracted enormous attention. While I agree that there is a need for significant innovation in these areas, the expectations and dollars being committed exceed reality. Consider the example of a colleague of mine who recently spoke at a major cleantech conference.  He asked the audience, ‘How many of you have been in technology for more than five years?’  No hands went up.  ‘How many of you have been investing for more than five years?’  No hands went up.  Then he said, ‘I rest my case.’ Cleantech is the latest shiny object.’

Are you seeing a bubble developing?

‘Yes.  The bubble is being led by overstated expectations and magnified by inexperienced people selling into a fantasy of hope.  That is not a good combination and it is not grounded.  That’s why I don’t believe in investing in clean technology even though there are real opportunities in the space. If you over-capitalise a sector, you destroy its economic vitality. Much more promising opportunities today exist in IT, healthcare and the life sciences. Healthcare, in particular, has done well recently.

Still, I question the underpinning of so-called healthcare reform in the United States today. It is not so much reform as it is federalisation of healthcare insurance. What long-term impact will that have on healthcare-related innovation? What happens to innovation if you begin capping fees and put downward pressure on pharmaceutical prices?  Some areas of innovation may no longer be economically viable and that is something to be concerned about.  We don’t see these same issues in information technology, where there is tremendous opportunity.  IT as it relates to healthcare is particularly interesting.  Heavy government involvement has a way of distorting the market’s natural forces – whether we are talking about cleantech or healthcare – and there are usually good reasons to avoid markets where the government is playing an exceptionally active role.

Venture has gotten a bad reputation for its inability to generate good returns over the last ten years. The reality, however, is that it is a tale of two markets. Large venture funds have had a very difficult time generating returns.  By contrast, smaller, very focused venture funds have actually done fine. The venture capital model is not broken. We just need to revert back to the original principles and business model of venture capital that made it successful in the first place – match capital availability to magnitude of quality opportunities, disciplined and experienced management, and differentiated investing and value creation.’

Are you expecting the cleantech bubble to burst?

‘Yes. It has to. When arrogance meets ignorance in a pool of capital, nothing good happens.   A bubble of hype has built up around clean technology. Capital flows are inflating that bubble, and there will be a lot of disappointment at the end of the day. Ironically, the cleantech movement is generating some really important technology-driven innovations. But the risk that these ideas will be over-capitalised is growing. Successful and profitable innovation depends upon a careful balance between available capital and quality ideas.  When that balance is disturbed, ideas that should not be funded do get funded. The background noise becomes too high and good ideas compete with undifferentiated competitors.  The problem is intensified when the capital is managed by people who don’t know the difference between a good idea and a bad idea.’

Do you feel that investors just want to be involved in the sector of the moment?

‘We’re seeing the greater fool theory at work. The belief is that someone else will pay more for the technology down the road. Too much money is being thrown at clean technology. There is no doubt that we are already in a cleantech bubble.’

Copyright © 2009 NewNet

Tags: venture capital

This story was published on Thursday, November 19th, 2009 at 11:40 am and is filed under investors, profiles. You can follow any responses to article entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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