Special Ho Nam from Altos Ventures — A Different Approach to VC

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal are joined by Ho Nam from Altos Ventures to discuss the intersection of value investing principles and early-stage technology companies. Drawing from their own experiences and the journey of Altos Ventures, they explore how to identify and nurture companies with the potential to grow exponentially over the long term. Ho shares insights on the importance of capital efficiency, the power of a strong founder-investor relationship, and the critical elements that make a company truly special, including profitability, defensible moats, and deep relationships. Additionally, Ho reflects on the significance of personal connections, such as his relationship with Larry Morris, who supported Altos Ventures during its precarious early days. The conversation also delves into Ho's recent engagement on Twitter, where he has found value in the platform as a space for insightful analysis and meaningful connections with individual investors.

• Acquired podcast discussed as a platform for deep dives into technology companies.
• Ben Gilbert introduced as co-founder and managing director of Pioneer Square Labs and PSL Ventures.
• David Rosenthal introduced as an angel investor based in San Francisco.
• The hosts express excitement about the guest, Ho Nam from Altos Ventures.
• The episode aims to explore value investing principles in early-stage tech companies.

"Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures." "And I'm David Rosenthal, and I am an angel investor based in San Francisco."

The quotes introduce the hosts and set the stage for the episode's focus on technology companies and value investing.

• Speaker A acknowledges the depth of the podcast's series on Berkshire Hathaway.
• The series is mentioned as a signature piece, with its extensive coverage and duration.

"I feel like I know you guys because I listen to you guys on your podcast, and it's really fascinating because I think the three-part series on Berkshire is kind of like is your signature piece."

This quote emphasizes the listener's familiarity with the hosts through the detailed series on Berkshire Hathaway, highlighting the podcast's thorough approach to topics.

• Pilot described as a comprehensive service provider for startups' financial needs.
• The company has grown to be the largest startup-focused accounting firm in the US.
• Pilot's services include accounting, tax, bookkeeping, and CFO services.
• The hosts underline the importance of outsourcing non-core business functions like accounting.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner pilot for startups and growth companies of all kinds. Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

The quote highlights Pilot's role as a sponsor and its extensive financial services for startups, emphasizing the significance of focusing on core business activities.

• An Acquired party is announced to mark the end of season eight.
• The event is scheduled to take place in Seattle at Gasworks Park.
• The hosts express their anticipation for the in-person event.

"As the world opens up, we are marking the occasion by having an acquired party as we wrap season eight."

This quote announces the Acquired party, suggesting a celebratory gathering for the podcast's community.

• Altos Ventures is introduced as a lesser-known but highly knowledgeable investment firm.
• The story of Altos' investment in Roblox is used to illustrate the firm's investment strategy.
• Ho Nam's role at Altos and the firm's significant stake in Roblox at the time of IPO are discussed.

"Ho. We are so excited to have you here. This is an episode we've been wanting to do for a long time...Altos isn't as well known, I have learned just as much from following you over the years, and I am so excited to share that now with everyone."

The quote conveys the hosts' respect for Ho Nam and Altos Ventures, setting the stage for the discussion on their investment philosophy and success with Roblox.

• Altos Ventures focuses on capital-efficient and scrappy entrepreneurs.
• The firm's investment in Roblox was driven by a thesis on the next Club Penguin and exponential engagement growth.
• Altos' partners have varying interests and investment theses, leading to robust internal debates.
• The firm's investment decisions are influenced by meeting founders with a strong vision and mission.

"We like these really bootstrapped, kind of scrappy, capital-efficient kind of entrepreneurs. We don't like burning a lot of money."

This quote explains Altos Ventures' preference for entrepreneurs who are resourceful and prudent with capital, which is a key aspect of their investment strategy.

• The Hedgehog Concept from Jim Collins' "Good to Great" is mentioned as a criterion for evaluating entrepreneurs.
• Hedgehogs are contrasted with foxes, highlighting their focus on one big idea and mission.
• The concept is used to identify entrepreneurs who are deeply passionate and committed to their work.

"These great CEOs, great companies are run by these hedgehogs that really have one big idea and they have one big mission in life."

The quote summarizes the Hedgehog Concept and its application in identifying driven and focused entrepreneurs, which is integral to Altos Ventures' investment philosophy.

• Altos Ventures' approach evolved to include significant secondary market investments.
• The firm made strategic decisions to buy more shares of Roblox over time.
• Altos became an RIA to engage in larger secondary transactions and support their investment in Roblox.

"So we only got a one and a half million dollar piece, and then about a year later, first round actually came in...Every chance we got, we kept investing more."

This quote illustrates Altos Ventures' commitment to Roblox by continuously increasing their investment, reflecting their confidence in the company's growth potential.

• Speaker A discusses a tender offer process during a funding round for a company valued at $2.5 billion.
• They chose not to participate in the company's tender offer but ran their own process for their limited partners (LPs).
• The process allowed LPs to either cash out or roll over their investment on a "no fee, no carry" basis.
• This decision was made because they already had a significant position in the company and were not looking to charge additional fees or carry.
• They also cashed out half of their carried interest and rolled over the remaining half.
• Speaker A then talks about subsequent investment rounds, including a pre-IPO round at $45 per share, valuing the company at $30 billion.

"We ran our own little tender process. We said, you know something, we will do this SPB and we'll participate in the round and then we will run a tender process amongst our lps and say, hey, look, if anybody really wants a chance at liquidity, here it is."

This quote explains the alternative tender process they conducted for their LPs, offering them liquidity options without additional costs.

• The company considered going public with an IPO but decided against it due to the high valuations in the private market.
• Speaker A expresses concern about the volatility of IPO pricing and the potential for early shareholders to sell at an artificially low price.
• The company sought to find the right price for its shares, which they believed to be much higher than the initial IPO valuation.
• They found investors to support a $30 billion market cap, validating their belief in the company's higher value.

"Those pops were just kind of insane, and we kind of felt helpless to control it because if you do a traditional IPO, you have such a limited supply."

This quote reflects the challenges of controlling the share price in a traditional IPO due to limited supply and high demand, which can lead to inflated prices.

• Speaker A recounts the journey with Wua Brothers, an early winner for their firm.
• The founder of Wua Brothers was a non-consensus choice, not coming from a top college in Korea.
• Despite early challenges, the founder demonstrated strong growth and leadership, eventually becoming a successful CEO.
• The company's growth trajectory prompted strategic investment decisions, including the choice not to sell shares too early.
• The experience with Wua Brothers influenced their decision to become a Registered Investment Advisor (RIA) to facilitate a secondary sale.

"Wua brothers was the main reason that we registered to be an RIA to do the first SPV."

This quote highlights the significant impact that the experience with Wua Brothers had on their decision to change their regulatory status, which allowed for more flexible investment strategies.

• Speaker A discusses the practice of cross-fund investing, which is generally frowned upon by limited partners (LPs).
• They explain how they convinced their LPs to allow cross-fund investments based on their track record and the potential of companies like Wua Brothers.
• The firm raised a Korea-specific fund to focus on opportunities in the Korean market, which some LPs were hesitant about due to geopolitical risks.

"We were investing fund after fund after fund into Wua Brothers and canonical."

This quote indicates their commitment to a company they believed in, even when it meant challenging traditional investment norms and LP preferences.

• Speaker A reflects on the firm's history, including missed opportunities and the decision not to become an RIA for a previous investment in a company called Coupang.
• They detail the firm's small size and the decision-making process that led to registering as an RIA for the Wua Brothers deal.
• The discussion touches on the firm's philosophy of seeking out founders who are deeply committed to their life's work, rather than serial entrepreneurs looking for quick successes.

"We keep making all these huge billion dollar mistakes, and it's know, at some point, we should stop making these big."

This self-reflective quote acknowledges past investment mistakes but also implies a learning process that has shaped their current approach.

• Speaker A discusses the emotional aspect of realizing they might be good at venture capital when seeing significant returns on investments.
• They emphasize the importance of supporting entrepreneurs who are deeply connected to their mission, leading to more meaningful and potentially profitable ventures.
• The firm looks for what they call "hedgehog" entrepreneurs, who are focused on one big idea or mission, rather than "foxes" who pursue multiple opportunities.

"So you could be a serial entrepreneur, have a bunch of fantastic hits, but then you will find something that says, oh, my God, this is it. I found what my life's purpose is."

This quote captures the firm's investment philosophy of finding and supporting entrepreneurs who have discovered their true calling and are committed to a singular, impactful vision.

• Rapid expansion can lead to a company's foundation becoming unstable.
• Achieving $100 million in revenue is a significant milestone that often tests a company's robustness.
• Turnarounds are more challenging than building a company correctly from the start.
• Early-stage startups generally have strong cultures due to necessity and visibility of individual contributions.
• As companies grow, maintaining the initial strong culture becomes increasingly difficult and requires careful attention.
• The ideal scenario is for a company to accelerate growth even after reaching $100 million in revenue.

"When you really step on the gas, and we've done it before, we've had companies go to 100 million in revenues, and then the wheels start falling apart and it takes so much time, so much work to get a company to 100. It's like the most heartbreaking thing in the world to have this thing that you worked so hard on start to fall apart on you, and it's really hard to turn it around."

This quote explains the difficulty and emotional toll that comes with a rapidly growing company beginning to falter after reaching a significant revenue milestone.

• Hiring the right people and nurturing the right culture is crucial for sustained growth.
• As a company grows, it gains access to increasingly higher caliber talent.
• It's essential to upgrade talent while also developing existing employees.
• A mix of new hires and employees who have grown with the company can provide stability.
• Recognizing and nurturing talent within the company can lead to a strong, multi-layered team.

"Yeah. Well, a big thing is people and culture. It's so easy to just get people with fancy resumes. They'll take you there super fast, and you just have to be careful."

This quote emphasizes the importance of being cautious when hiring based on resumes alone, highlighting the need to consider how new hires will fit into and contribute to the company culture.

• Key decisions around the $10 to $30 million revenue range are critical for future growth.
• Companies must balance growth with capital efficiency.
• Strategic use of capital, such as investing heavily at the right time, can be crucial.
• Controlling costs and being creative within constraints can lead to more sustainable growth.
• Maintaining control of the company's destiny is vital to protect both founders and investors.

"But if you keep doing it right, if you're making the right kind of decisions at 10, 20, 30 million rather than at 100 million, then by the time you get to 100 million, you got some momentum building and you got some practice, and you got the right fundamentals going."

This quote discusses the importance of making the right decisions early on to set the company up for success when it reaches higher revenue milestones.

• Understanding the potential of a business is key to making informed investment decisions.
• Valuation should consider future monetization possibilities and not just current metrics.
• The distinction between value and growth investing is not clear-cut; growth is a component of value.
• Price per share appreciation is more important than valuation for assessing investment success.

"So we use these kind of rough metrics, whether it's five x or ten x, when we don't know the business. But once we know the business and we know what the potential is, then we kind of know, hey, we could be monetizing more, but we chose not to for a whole variety of reasons."

This quote highlights the use of general valuation multiples as initial benchmarks, which are then adjusted based on a deeper understanding of the business's potential.

• Long-term relationships with companies can lead to significant returns.
• Understanding the nuances of a company's operations and potential is crucial for long-term investment.
• Identifying special companies requires knowledge and patience.
• The value of a company is often realized through sustained growth over many years.

"The best ones will keep going longer. We always like to talk about GeICO. I love the GEICO story because that's a 70 year relationship between an investor and a company."

This quote illustrates the value of a long-term investment approach and the potential for a lasting and profitable relationship with a company.

• Market misunderstandings can create opportunities for investors who have in-depth knowledge of a company.
• Understanding a company's management and financial health is essential.
• Debt levels can present risks but also opportunities if the market overestimates the risk of bankruptcy.
• Long-term observation and understanding of a company can lead to informed investment decisions during market crises.

"If I think that the market's misunderstanding the company, then there's an opportunity for Alpha."

This quote suggests that discrepancies between an investor's understanding of a company and the market's perception can lead to investment opportunities.

• Debt providers can have different objectives; some may be more aggressive and look to take over a company.
• It is crucial to recognize who you're dealing with in financial arrangements.
• Most debt providers are reasonable as long as they are paid back.
• Speaker A mentions that their company has rarely defaulted on loans, indicating a strong track record.

"They're more like private equity guys, but they happen to be on the debt side and so they're looking for the first opportunity to take over."

This quote emphasizes the importance of being cautious with certain debt providers who may have intentions beyond simply lending money and could be looking for opportunities to control the company.

• A company's ability to generate cash and a path to profitability are fundamental.
• A strong business moat, such as network effects, patents, or unique know-how, is critical.
• The willingness of a company to keep its competitive advantage secret is a positive sign.
• Some companies have a moat so strong that they can be open about their strategies without fear of competition.

"So I wrote an interesting blog post last year kind of answering this question because people ask me this kind of a thing a lot, like what gives you conviction in a business at the end of the day to do these kind of crazy things where you're buying more instead of cashing out a little bit, you're buying more shares when you're up."

Speaker A explains the rationale behind their confidence in investing more into a business, which is rooted in the company's fundamentals and strategic advantages.

• Relationships are key in investment decisions, especially for concentrated positions.
• A strong relationship with a company provides proprietary knowledge and insight.
• Over time, as knowledge decays or relationships change, investment strategies may need to adjust.
• Personal attachment to businesses can influence investment decisions, similar to family businesses.

"The relationship is all about people. And again, we like to go big on companies where we feel like we have a great relationship."

Speaker A highlights the significance of having a deep, meaningful relationship with the companies they invest in, as it can provide a competitive edge and influence investment decisions.

• VCs often turn their earnings over to wealth managers, which Speaker A finds counterintuitive.
• Practicing public market investment can improve overall investment skills.
• Speaker A values the learnings from individual investors who focus on returns over institutional investors who may prioritize fund management.

"That's kind of what we wanted to be, right almost from day one. That's why the public part of it, even though it was tiny dollars."

Speaker A discusses the desire to be a well-rounded investor and the benefits of engaging in public market investments, even on a small scale, for the sake of practice and skill development.

• Twitter has become a valuable platform for real-time analysis and sentiment on investments.
• Speaker A re-engaged with Twitter to understand market sentiment around IPOs.
• The platform is used for conversations and sharing insights, rather than just broadcasting news.
• Twitter allows for connecting with thoughtful individuals and exchanging investment ideas.

"The reason I started to lurking on Twitter more recently was purely because we had some of these ipos coming up and I wanted to see what the sentiment was."

This quote illustrates Speaker A's strategic use of Twitter to gauge market sentiment and engage with insightful analysis surrounding recent IPOs.

• Investors make decisions based on personal beliefs and convictions.
• Track records are important, but they do not guarantee future investment from others.
• Finding people who believe in you and will support you regardless of past performance is crucial.

"So you just have to find your people, find the people who believe in you, who will back you no matter what."

Speaker A conveys the importance of building relationships with investors who have faith in your abilities and will support you based on personal conviction, not just past success.