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Altos survived on management fees
Surviving on fees
By 2001 the portfolio was struggling, and the September 11 attacks felt like being kicked in the gut while already down. Altos made it through on management fees, a recurring revenue model with guaranteed income, which paid the bills while a couple of funds were still under management.
Cold-calling for a new fund
The firm came up with a new thesis, and raising the fund took forever. Partners Anthony and Han cold-called, got rejected over and over, and flew in middle seats of coach to Europe and Asia. Anthony was the key driver of the effort and showed amazing resilience.
Who said yes
The investors who said yes were growth equity firms in the early days of growth equity, such as TA and Summit, who were looking for bootstrapped companies. They weren't chasing Kleiner or Sequoia deals and looked for diamonds in the rough. Altos pitched the same idea with smaller businesses, looking for $2 million or $3 million businesses instead of $10 million, $20 million, or $30 million ones. They had room in their portfolios for it and gave Altos a chance because it was different.
How do management fees keep a firm alive?
Venture and private equity funds commonly charge a yearly management fee of around 2 percent of committed capital. The fee is paid every year of the fund's life, usually about ten years, whatever the investments earn. The firm also takes a share of profits, typically 20 percent, known as carried interest. This arrangement is often called two and twenty.
How is growth equity different from venture capital?
Growth equity firms usually invest in companies that already have revenue and often profits, taking a minority stake to fund expansion. Venture firms back earlier companies that may have little or no revenue. TA Associates, founded in Boston in 1968, and Summit Partners, founded in 1984, are two of the best-known growth equity firms. Their investors tend to look for steadier outcomes than venture's big swings.
How did 9/11 affect US financial markets?
The New York Stock Exchange stayed closed for four trading days after the September 11 attacks, its longest shutdown since 1933. When it reopened on September 17, 2001, the Dow Jones Industrial Average fell about 684 points, its largest one-day point drop up to that time. The Dow lost more than 14 percent that week. The attacks came while the market was still in its slide from the 2000 peak.
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