Seed Capital From Angel Investors: Ho Nam, General Partner, Altos Ventures (Part 2)

By guest authors Irina Patterson and Candice Arnold

Irina: What is your current source of deal flow?

Ho: Most deals we get come from our network. We have several thousand people working across our different portfolio companies, so the network has grown over time; entrepreneurs we’ve worked with in the past or people who have heard about us through our network.

We also get deals from other investors who know we’re looking to invest smaller dollar amounts, maybe at earlier stages than some of the larger funds. Then there’s also the network of bankers and lawyers and other service providers – typical network in Silicon Valley.

What’s interesting is a lot of bankers, such as Silicon Valley Bank, work with quite a few bootstrapped companies. I think as much as a third of their portfolio companies don’t have any venture funding. If they can help their clients raise some venture funding, it would help their portfolio.

Irina: Out of all the sources of deal flow, which one do you think is the best?

Ho: There’s no question our best sources are entrepreneurs whom we know and have worked with before.

Irina: If entrepreneurs want to seek funding from you, how can they reach you?

Ho: Mostly, people come to us when an introduction is made. But we take quite a few business straight over our website or e-mail. We don’t have any problems with people cold calling us. Usually, we ask for an executive summary or some kind of background materials before I’ll have a conversation or meet with someone.

Just a couple days ago, an entrepreneur sent me an e-mail, introduced himself. He seemed like a credible guy. He’d actually bootstrapped his two companies, quite successfully. He had a good reason why he needed venture capital was to start his third company.

Based on that background I said, “Let’s have a meeting.” As it turned out, during that meeting we discovered that, among things, we have many common friends. He’s been in the industry. It would be pretty easy for me to check him out. It’s not clear that we’re going to be investing in the company, but certainly it was a good first meeting and I’ll follow up.

Irina: On average, how many pitches do you receive a month from all sources?

Ho: We probably get somewhere between 150 and 200 plans a month. I think we keep track of it on annual average, about 2,000. Out of that, we meet with about 200–300 companies. Out of that, we’ll have second meetings with about 50–60 companies. Out of that, we’ll dig in deeper with about 20 companies within the course of a year, maybe 25 companies. We’ll end up, typically, making anywhere from four to six investments a year.

Irina: What’s your next step after you’ve received a promising pitch?

Ho: After an initial meeting, if there’s a lot of interest, what we try to do is get as many of the partners involved at once to help do the due diligence. We work as a team. It’s a small team of just four partners but we don’t need unanimous approval to get a deal done.

A key part of our process is really getting to know the founders. We tend to have a bias against replacing founders. So, if we don’t think we can work with the founder and if we don’t think the entrepreneur we’re backing has the potential to take it pretty far, at least profitability or $10 million in revenues, then most likely we would not invest.

We don’t like going into companies thinking that we’re going to bring our own management team. We certainly don’t have the capacity or ability to go in and run companies; that’s not our business. What we do is back the people who run the companies. We will tend to make mistakes of holding on to people for too long.

There’s a saying in the Valley that “When you fire somebody, you always wish you had done it six months earlier.” In hindsight, you always realize, “Geez, why didn’t I act sooner?” We agree with that statement, but we tend to make the mistake of working with a founder longer before we make a change. We prefer the devil you know versus the devil you don’t.

We’ve replaced plenty of senior management – C- and VP-level execs – over the years. And we just know that it doesn’t matter which famous recruiting firm you use, it’s always a crap shoot.

This segment is part 2 in the series : Seed Capital From Angel Investors: Ho Nam, General Partner, Altos Ventures
1 2 3 4 5 6 7