1Mby1M Virtual Accelerator Investor Forum: With Ho Nam of Altos Ventures (Part 2)

Sramana Mitra: Let’s switch back to our sweet spot which is the early stage venture game. Series A VCs these days are looking for a million dollar annual run rate and 100% growth rate. If you don’t deliver that, you can’t raise Series A except in very rare exceptions where you have a track record.

If you are a regular founder looking for a regular Series A, these are the things that you need to come to the table with. Let’s say a startup gets to that. What are the circumstances under which they ought to consider working with you as opposed to one of the larger VCs with bigger brand names?

Ho Nam: That’s a good question. The answer is very situation specific. We just signed a term sheet last week. We won a deal against three other VCs. Two of the VCs were clearly bigger than us. One of them offered more money at a higher valuation than us. Their pre-money was about the same as our post-money valuation.

Why did the entrepreneur choose us? I think the reason, from what he told me, is he felt that we had the deepest understanding of his business and we saw eye to eye on how to grow the business. It’s very simple stuff like building a solid business in the short term in a pragmatic, capital-efficient way while keeping an eye on the home run opportunity. The reason we’re investing is because of the home run. This is a company we’ve been tracking for 18 months. Last year, I was convinced that there is a home run opportunity.

What I wasn’t as convinced was how to get from here to there and how to build a solid business in the meantime so that we can afford to be patient and don’t go out of business. They continue to make progress. I was already convinced that, in the long term, there could be a fantastic home run opportunity. I remember another instance where there was a firm where no VC wanted to invest because the deal was too small. We offered these guys a $2 million Series A financing. Even for us, that’s a little bit small.

We had to interview with the founder’s father and brother who were both on the board. They didn’t really need our money. We had to try to convince them to take our money. When we submitted the term sheet, they came back to us and said, “This is too much money. We’ll take $1.5 million.” We invested $1.5 million. The company has continued to grow. It will hit a $100 million run rate this year. We continued to invest more as the company grew. They weren’t convinced that they needed all that much money.

As you grow, you have needs for capital. We invested some money late last year. It was $2 million just to give the founders some liquidity. It’s hard to grow a business. It’s expensive. We invested some more last year. The company didn’t necessarily need the money. They also have to deal with large VCs offering funding at big valuations. We love working with entrepreneurs like that. We’re happy to invest more and more money.

Sramana Mitra: Let me actually point out something to our audience which I think is a synthesis of what you are talking about here. The investment world or the startup world is bifurcating between two completely different philosophies of business building. One is this capital-efficient organic business building. Even if you take some amount of money, it’s small amounts of money and being more conservative and being more fundamentals-oriented in how you grow.

The other side of business building is raise as much money as possible, drive your burn rate as much as possible, and swing for the fences without protecting your fundamentals as much. There are all sorts of dynamics. There are large funds that can only do so many deals and they need to do deals that deploy large amounts of capital because they need to get large management fees for these large funds. That’s the dynamics that’s driving the latter kind of financing.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Ho Nam of Altos Ventures
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