Interview with Ho Nam of Altos Ventures

Special Edition #6

Official bio:

Ho is a member of the Altos investment team. Before co-founding Altos in 1996, Ho worked in various sales and marketing roles at Silicon Graphics and Octel Communications.

He began his venture career at Trinity Ventures, an early investor in both enterprise and consumer companies, including Starbucks Coffee. He began his professional career at Bain & Company in San Francisco.

Ho received an MBA from Stanford University and a B.S. in Engineering with a minor in Philosophy, Politics and Economics from Harvey Mudd College. 

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A very special, er, 𝕊𝕡𝕖𝕔𝕚𝕒𝕝 treat for you today!

I’ve been enjoying Ho Nam’s contributions to fintwit and his great podcast interview with Ben and David of Acquired (the place to start before you read this Q&A), so much so that I reached out to him with some questions that he graciously answered.

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Liberty: Thank you very much for doing this, I truly appreciate it. I greatly enjoyed your conversation with Ben and David on the Acquired podcast. 

It made me want to learn more about what you’ve learned over the years and how you see things.

Over your career, investing in both private and public companies (even if just in your own account), have you noticed investing becoming harder over time?

I might be delusional but I think it has become easier. Why? Because I feel less pressure to do deals or to perform. So I am more patient. Don’t feel a need to act. If something is not obvious or compelling, then I do not need take action. If it’s obvious, then almost by definition it’s easy. 

That said, what I can never be sure about is the outcome. I may feel sure about my decision (with the info I have) but I have no idea what will be the outcome at the end. I am happy to accept what happens. And it’s more opportunity to learn if I get surprised. 

That said, I’ve also realized over time that investing is truly difficult (both public and private - there are pros and cons of each). So maybe it’s “easy” only after I have been humbled enough times to know that there are limits to what I can do. I am perfectly content with accepting whatever happens. All I can do is focus on what I can control - the decisions, not the outcomes. 

Liberty: I frequently think of Michael Mauboussin’s ‘Paradox of Skill’ idea, and how if there’s an increasing number of market participants that are getting more sophisticated, the skill floor is being raised, but the skill differential between participants narrows, creating the tendency for outcomes to depend more and more on luck rather than skill over time. 

When all participants operate at an extraordinary level, I have seen arguments for how much more of the outcomes are determined by luck. It’s an interesting argument and I bet people can come up with interesting data and math to support that argument (with something like luck playing a bigger factor in X% of cases?).

I personally don’t buy it. Who gives a damn what the math says about a million participants and some slight odds that one factor is more important than another? All I care about is what I do and what happens to me as a result of my specific actions. That’s all I can control and I will continue to work at it and accept the outcomes. Whether it’s determined by luck or not, I will continue to try my best.

Liberty: On the other hand, maybe the past seems easier than it actually was in hindsight, because we underestimate how non-obvious the things that the people at the time didn’t know were, and that it’s always subjectively about as hard, it just requires constant reinvention to find the new opportunities that pop up as old ones disappear.

Yes, I believe that the past seems easier. But was it? I’ve heard both Munger and Buffett say it so many times (that it’s so much harder now than when they got started).

They are being way too humble IMO. I don’t see many from their era that have had their track record. It was hard back then and it’s hard now, perhaps for different reasons.

I think the good news is that people can do extremely well today. I’m an optimist. Otherwise, what’s the point of even trying? As I said, I have no idea what will be the outcome but I certainly have belief that if I do my best I will like the result. Regardless of the outcome I will keep doing it as long as I continue to love the pursuit. It keeps me young. 

Liberty: I guess in short, I’m curious what you think of this idea generally, about investing becoming harder. Or is human nature such that there’s always going to be plenty of overlooked value, mispricing caused by cognitive biases, over-enthusiastic and depressive cycles, etc?

I believe that there will always be opportunities. Human nature has been around way longer than the stock market. The past few decades where the entire computing industry or investing world has transformed is a blink in the span of human history (which is itself a blink in evolutionary history of life, which is blink in…). 

When it comes to investing, at the end, it’s human nature and the colossal stupidity that can result that provide the greatest opportunities for patient value investors that have staying power. 

Liberty: You and your partners are obviously very long-term oriented. 

Have you ever been tempted to pull a Buffett and create a permanent-capital vehicle to do investing with no need to sell or send capital back to LPs? Maybe even through a publicly-traded vehicle?

Given our investing approach, I have been asked this question a lot over the years. I say no to permanent cap vehicle (what has been called evergreen fund structures) for two reasons. 

First, evergreen structures are a bad deal for LPs. Every time that carry gets reset between LP/GP, the GP effectively double dips on carry going forward (crystallizing carry and turning it into an ever growing LP interest).

Over time, it shifts ownership/wealth of the portfolio in a pretty big way from LP to GP. You can say that is all fair (Buffett did it in BPL rolling over his performance fee every year) because everyone is signing up for it and as long as the net returns are great and the LPs are sophisticated and going in with eyes wide open why not? All are fine arguments but it does not feel right. We make plenty of money doing what we do with our current fee structure (which many people may feel is too rich in the first place. Then they should not invest in our funds and I respect their decision). 

The second reason is that I like the pre-nup agreement inherent in the current fund structures. I like the defined end of life. Our funds are 12 years, rather than the typical 10 (with two more years that can be extended, which is common to all VC funds). That is plenty of time. We can parts ways as friends at the end. 

If there are a few assets that we may want to hold longer at the end, we will have plenty of time to figure it out. We can deal with it as we approach the deadline with a lot more info than we have now. 

Finally, I’ve thought a lot about “permanent” capital and have come to the conclusion that there is no such thing as permanent capital. As long as humans are running things, so much can change.

The most important things are reputation and track record (a demonstrated ability to create value/returns). With those two things, I believe you can always access capital. Without those two things, can you truly lock in capital or have access to more and more? I do not think so. 

People believe that Buffett is successful because he had access to permanent capital. But is his capital really permanent? He runs a public company. The cash that Berkshire has and generates does not belong to him. If he screws up, daggers will come out. Once he is gone, there will be pressures from shareholders about what should be done - dividends, spinouts or whatever. Just ask any public company CEO. The only reason Berkshire’s capital is permanent (for now) is due to his reputation and track record. 

Then people will ask me, what about if you had your own capital? Like a family office. Isn’t that permanent? I’ve known many family offices. The capital is permanent if the family can keep it together. Have seen patriarchs go and the next gen could be a mess. Never know what will happen. 

Even if it was all my own money, the capital is not permanent in the way I need it to be. Unless I want a huge cash drag, I will always need cash to make investments. If I am fully invested, I have no capital. I will have to sell something in order to buy. Or take on leverage and there are downsides. So having huge amounts of your own money/assets is not permanent capital in the way that I need it to be in order to be the type of investor I would like to be - a super patient one that can make big moves on short notice. 

Liberty: I guess this also raises the question, why do you think the Berkshire model is so rare even among very long-term investors?

Great question. Buffett and Munger have been asked it way more often than I have. They do not have a good answer other than it seems people are not satisfied with getting rich slowly. So many people are in a hurry. 

I tell young people in the money management business that you can get rich without charging fees. Buffett made 99%+ of his money on a no fee no carry basis. They look at me with a funny look. They cannot imagine not charging fees. It would take way too long. That’s fine. But my point is that you can do pretty well being a good investor. You can also do well by raising large funds and living off fees (and carry).

It’s not black and white but most fund managers get focused on building the fund management business. To get super rich, if the business is successful, they can monetize the founder equity in the business by taking it public or selling a piece (or all) of their management company at the end. It’s just a different mindset from making money as an investor.

Liberty: You seem to get quite close with the management of your investments.

I'm curious about how this can be a double-edged sword.

I've heard many investors talk about how they don't want to talk to management because they are often very charismatic, very good salespeople, and very good at convincing others (the famous Steve Jobs reality-distortion field).

I know Buffett has said it. But in reality, Buffett does care about management. He gains more conviction when he gets to know them. Not only that he learned from the best and became friends with some. Tom Murphy of Cap Cities is an example. How fun is it to not only make a lot of money together but to build lifelong friendships? It’s just a better approach. More fun. 

In public investing as well as private, you can learn a lot about the character of management by their actions, as well as their written words. So much can be found out about what they’ve said and done in this era of the Internet not just from SEC filings.

On top of all that info, if you can get access to the people I think it would help. Why worry that they are going to charm you?

Such charming people tend to turn me off and I think they would turn off Buffett also. As a result, maybe we miss some great investments. That is fine by me. There are plenty of people that I would genuinely enjoy getting to know better and win or lose, I will value certain relationships.

Liberty: Do you feel it’s a risk you have to take because with earlier stage companies, there's not much more than the people to bet on, so you have to get to know them really well to figure out if they have what it takes?

I wrote a blog post about this. At the early stage, there is not much to go on other than people and the idea.

But I have learned that true conviction at the later stages (after a lot of data), comes after we get convinced about the people (after seeing them evolve/develop or their true nature gets revealed over time through many ups and downs). This is the link:

Liberty: Have you ever been burned by this? Do you take any active measures to prevent losing too much objectivity because, for example, you really like someone personally and consider them a good friend, but the best decision for your fund may be not to invest, or cut your losses or get out..?

Yes, we have been burned by people mistakes. Some lessons are deep in our psyches. The loss of money is never the concern. The betrayals or disappointments in personal relationships are much more memorable than $. 

As far as money is concerned, we have learned to cut our losses. The harder thing is not cutting off the losers. It’s cutting off more investments in good companies - because they are not great. It took us a very long time to figure that out but now it’s quite instinctive and obvious after many years of experience. 

The bottom line is that if it’s not a great business, we do not invest more follow-on dollars.

We have some “good” companies where we have been working with founders for years without investing another dime. They are run by great people and we want to support them as best as we can. Some have become friends of ours. But if the company does not meet certain standards we will not invest. We’ve learned to be supportive without the money. Not all businesses should take more capital. In fact, the best companies do not need outside money but may still want us around.

Liberty: Something you wrote on Twitter really resonated with me:

“Having a blast is key. People thought I was having fun even when they thought we were struggling. Or perhaps failing. Of course it’s never that easy. But so important to enjoy the journey and surround yourself with good people. It’s still lonely quite often, but it does help.”

This made me think of Buffett’s famous tap-dancing to work, and how it’s a big competitive advantage. 

Not only does it probably means he’s putting more hours into his craft and will be thinking about it even on his “time off”, but because the benefits of compounding come at the 11th hour, anything that helped him stick with it longer than others no doubt helped make him stand out (on top of his other qualities).

I’m curious if you use this “having a blast” idea as a filter, not only for the managers/founders you invest in, but also maybe as a way to look at others (employees? customers?). Is it one of these things that doesn’t show up in the numbers, but can make or break a company?

It does show up in the financial results of companies eventually. At first you’ll see it in employee turnover rates. And maybe survey scores or eNPS. In the long run, productivity numbers show it and the overall rate of innovation, growth and profits. Having a blast is not a sure predictor of future success but it is a sign that even if things are going well today, it may not last. 

Liberty: Have you, or would you, invest in companies not led by founders? In your Acquired interview you talk a lot about your love for them and how you want to protect them and keep them in control. 

But have you found exceptions to this? If so, what are the signs that someone can be an exception to this? (ie. Satya Nadella types? How to identify them early?)

Yes, we have had success with professional management. But they have not been the the true outliers in our funds over the past 25 years. Maybe it’ll change on the next 25 years. You never know. 

Usually, we will exit the professionally run companies faster than founder led companies. No matter how great the professional CEOs, it’s not their life’s work at the end of the day and they will retire or transition out sooner than the best founders. That said, I’d love to work with someone like Satya Nadella or Tim Cook anyway. They are better and more mission driven than most founders.

Liberty: That was fantastic, thank you so much for doing this, I really appreciate you being so open sharing your hard-earned experience. I’m sure the wisdom here and in your other writings will help many people do better in life — great teachers are as valuable as they are rare!

For even more, I recommend checking out Altos Ventures’ blog. 

Here’s a few good places to start:

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