Seed Capital From Angel Investors: Ho Nam, General Partner, Altos Ventures (Part 6)

By guest authors Irina Patterson and Candice Arnold

Irina: When they come to you, should they have a complete team?

Ho: It is usually two or three people, but we have backed single founders before.

Irina: What’s the most important character trait a founder can have that will clinch the deal?

Ho: One word that comes up a lot is scrappy. A scrappy founder, somebody who is very really resilient, won’t give up and is very resourceful. Scrappiness – I think is a sign of real resourcefulness. Of course, you’ve read our blog post on hedgehogs and foxes. Hedgehogs capture the essence of the kinds of entrepreneurs that we like. There are lots of different types of great entrepreneurs, but we tend to like the hedgehog type.

Irina: What is your sector preference, if any?

Ho: We’re roughly a 50/50 mix between B2B and B2C. The B2B businesses tend to be Software as a Service (SaaS), tend to be the cloud-based services. On the B2C side, these days we’ve done quite a few digital media, social gaming types of deals.

There are some companies that overlap both. Our most recent investment is a company that provides analytics infrastructure for Facebook games. It is in the social media space, social network gaming area, but it’s really a B2B company because they are providing a service for other companies.

Irina: What is your investment type?

Ho: We almost always invest in preferred shares, but there have been a few cases when we purchased common shares.

Irina: When you think about an exit, do you usually plan how you might be exiting?

Ho: No. It’s really hard to know up front. Better than to think about exits, we do think about liquidity, getting liquidity for our LPs. So, liquidity in the form of trade sales, M&A, is the most common way we exit. And then IPO for those few companies that make it to that scale. Other ways of achieving liquidity we already talked about.

Irina: What is your biggest investment success to date?

Ho: To date, our biggest company is Vesta. That’s actually a company that’s based in Portland, Oregon, so that’s one of the few investments we made outside the Bay Area. It got to profitability on less than $3 million of capital before doing a much larger round and it has distributed far more than invested capital back to shareholders. In the series B round, they were actually profitable.

They did a $20 million round at over $100 million valuation. Half of that went into the company, and the other half was to buy out some shares of some of the management and early investors. So, that company continues to grow in our portfolio but we have not sold that business, yet.

I remember when we were trying to raise money, in the second round for that company in the late 1990s, it was very difficult to get VCs interested in even having a meeting because it was up in Portland. The dot-com boom was going on here in the Valley. So, we just determined, “Hey, we can’t raise any more money for this company so we have to figure out how to turn it profitable.”

Ho: And of course, once it became profitable and growing to a certain scale, then you had a lot of later stage investors – not venture size – but more growth equity players like Summit and Oak and those kind of folks. Oak ended up coming into that round after we were profitable.

Irina: Tell us more about Vesta. What do they do?

Ho: They provide a back-end payment service for the telecom industry, and they serve mostly wireless carriers, so if you have a pre-paid wireless service and you want to top-up your account using a credit card, Vesta does all the back-end transactions and fraud detection.

So, they’re in some ways like an insurance company because we take all the fraud risk. We’ve done billions in transactions, and all of that flows through our books. We take all the fraud risk on that and end up paying the carriers after taking out a fee. So, we have to be pretty confident in our ability to detect fraud in order to take the risk on all those revenues.

Irina: What do you do with the companies that you don’t invest in?

Ho: Unfortunately, there’s not that much we can do for them. We try to give them some advice. Sometimes we do refer them to other investors but in general, that’s not really the best way to help entrepreneurs.

This segment is part 6 in the series : Seed Capital From Angel Investors: Ho Nam, General Partner, Altos Ventures
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