View from Elevation: Fred Anderson Discusses Palm

Elevation Partners was originally known for its high-profile partners, including Roger McNamee, Fred Anderson and Bono. But it quickly became better known as the firm that kept plugging money into Palm, the PDA maker whose popularity seemed to have peaked in around 2001. “As goes Palm as goes Elevation,” summed up an investor in the firm’s $1.8 billion debut fund.

Last week, HP completed its $1.2 billion acquisition of Palm, which gave around a 5% cash-on-cash return from its $460 million in total investments. Not very good, but better than Elevation would have faired in the Palm bankruptcy that some predicted.

To get a better sense of the Palm situation from Elevation’s point of view, I spent some time on the phone with Fred Anderson, the ex-Apple CFO who repped Elevation on the Palm board of directors. The conversation actually took place back when the deal was first announced in April, but Palm lawyers prevented me from publishing it until now. What follows are some of his comments from our conversation:

WHAT WAS THE ORIGINAL PALM INVESTMENT THESIS?

“The original investment thesis was that there was a huge global market called the handset market, but it was still in its early stages of development. Just 5% of the global market was using smartphones, and we believed there would be a huge substitution effect over the next five to ten years – that half of all internet activity would be mobile as opposed to fixed PC.”

“So a huge market opportunity at the early stages, and we were right about that. In fact, penetration levels are about 25% in the U.S. now.”

“We also felt it would be important to have a great mobile software platform in order to have long-term sustainable success. We still believe it.”

“Palm was going to bring to market under Jon Rubinstein a really great new mobile computing platform built from the ground up for mobile computing, unlike the iPhone or Windows Mobile which were derivatives of operating systems.”

“We also believed this wasn’t a winner take all market because we believed market would segment around various uses.”

“We also thought it was important to put in downside protection, even though we saw huge upside.”

WHAT SURPRISED YOU?

“I would say that clearly the iPhone was probably even more successful than we could have predicted in 2007. And the competitive advantage of its applications, with the iTunes store and things like that, were the ideal distribution method on their platform. When they released it, it just took off, and clearly had a competitive advantage in the exclusive arrangement with AT&T.”

“There also was the rapid adoption of Android by manufacturers… and pricing became very competitive.”

WHY BUY COMMON STOCK LAST YEAR?

“The risk had been reduced once you knew you had a great software platform, and that second tranche was done just before they announced the Pre/Web OS.”

WHY INVEST SO MUCH INTO A SINGLE COMPANY?

“Any time you have a really big upside you normally also have risk. We did a good job in structuring this deal to protect our downside. Some people might say in terms of concentration it’s not ideal to put 25% of your fund in one investment, but if there’s huge upside I think it makes sense. Again, the original investment was only around 17% of the fund.”