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Friends, 

Venture capital firms and wolverines have similar lifespans if I had to guess. Wolverines survive approximately ten red-eyed, furious, and murderous years in the wild. Many die much sooner. 

Though the average venture capital shop must wait a decade, at least, to see how their portfolio companies fare, there are more expeditious ways to die. You could incinerate capital in a terrific fit of exuberance, never to be trusted with LP money again, for example. Alternatively, you could limp along meekly, waiting for an opportunity that never arrives. There are dozens of such failure modes, and even practitioners of sound minds and morals may find them unavoidable, such is the inherent volatility of the underlying assets that make a firm.

The industry’s precarity makes enduring firms all the more impressive. Slice into the gnarled and worn trunks of firms like Kleiner Perkins, Sequoia Capital, and Greylock Partners, and you will count more than fifty concentric rings earned through a half-century of investing. Bessemer Venture Partners, founded in 1911 by a co-founder of Carnegie Steel, boasts double that number.  

These are the outliers. They are also the benchmarks. 

It is not a prerequisite that practitioners of the asset class aspire to longevity. But there is no greater testament to your abilities as a manager than to cultivate a franchise that outlasts your contributions.

After nearly 30 years in operation, Altos Ventures has already outperformed and outlived many of its peers. Since its inception in 1996 – the year the first “clamshell” mobile phone was released – the firm has not simply survived but thrived. 

Though luck plays a role in every investing journey, such durability does not occur by happenstance. It is the consequence of consistent excellence and thousands of good decisions, including those made by co-founder and Managing Partner Ho Nam. 

Over the previous two editions of my correspondence with Ho, we explored his investments in Roblox and Coupang, his preferred founder archetype, the importance of leaning into your winners, respecting the power law, venture’s unsung legends, and much more. 

In this final part of the series, Ho and I discuss legacy. What does it take for a firm to build an enduring franchise? How do you guard your mind against outside noise? How do you build a productive, aligned partnership? What near-death moments must you endure together? And how can you prepare to hand over the reins to the next generation? 

We also touch on the state of the asset class today and reflect on what it means to have a true venture education. 

As a final note, right after I sent my letter to Ho from London, he responded by saying he was in town. We met for a lovely breakfast, during which we discussed many of the themes in this and previous pieces. You’ll see it referenced below. 

Lessons from Ho

1. Talent is the scarce resource. The venture asset class has grown significantly over the past decade. Ho believes this bodes poorly for the majority of practitioners. While capital is abundant, entrepreneurial talent remains scarce. He estimates that the top 10% of the asset class will continue to deliver; much of the rest will struggle. 

2. Learn the craft, not how to play politics. In Ho’s view, as firms have grown larger, they have also become more political. To get ahead, young investors learn how to work the system, spending more time politicking than learning the craft of investing. While this may yield short-term results, it represents a weak education.

3. To find a great partner, be one. Ho returns to Charlie Munger for advice on building a fruitful partnership. The best way to do so is to be a great partner yourself. Listen to what they have to say. Understand that you won’t get your way every time. And learn from the process. 

4. Prepare for near-death moments. Altos is one of venture’s leading firms today. For much of its life, though, success was far from assured. Ho shares some of the fund’s near-death moments, including the 1998 Asian financial crisis. 

The rest of the letter is packed full of insights and other priceless lessons from a venture capital legend. To access them all and every future edition, become a member today.

Mario’s letter

Subject: An investor’s legacy
From: Mario Gabriele
To: Ho Nam
Date: Monday, June 17 2024 at 3:35 PM BST

Ho,

Hello from London! The weather is far from summery (chilly and grey), but it’s a pleasure to be in this part of the world. I’ve been enjoying some long runs through the city’s parks and reconnecting with old friends. I hope your summer is off to a good and significantly balmier start. 

I so enjoyed reading your last letter on VC’s power law, and the practitioners you’ve learned the most from. Once again, I have to thank you for sending me down a delightful rabbit hole. While I was familiar with Arthur Rock and Don Lucas, I hadn’t heard of Arnold Silverman’s work. As you highlighted, his track record is beyond remarkable: founding investor at Oracle, Informatica, Business Objects, and many more. I hope to find many other investors like him to study in the coming years. 

To conclude our correspondence (which I have enjoyed greatly), I wanted to hone in on two primary areas: (1) your thoughts on today’s venture landscape, and (2) the principles that have allowed you and the Altos team to build a firm positioned to become a multi-generational franchise. Very few people in the world have the experience to comment on these topics as comprehensively as you do. Considering them is invaluable to every investor who wishes to succeed in the current environment and position themselves for a productive future. 

The modern venture landscape

In 2012, you wrote a piece called “They Need 34 Instagrams.” It’s short enough that I’m sharing it in full in the snapshot below, and because you express the point so neatly. In the piece, you point to Andreessen Horowitz’s impressive $78 million return on their Instagram investment and note that the firm would need 34 more such outcomes simply to return the $2.7 billion in capital they’d raised in their first three years of business.

In the twelve years since writing that piece, much has changed. It is increasingly common for the world’s most prominent venture firms to raise multi-billion dollar vintages, without even referencing the crossover funds like Tiger Global or Coatue. A16z has $42 billion in assets under management, split across multiple billion-dollar mini-franchises in crypto, gaming, biotech, American Dynamism, and beyond. 

Though I certainly don’t have detailed information on a16z’s returns, as early as 2016, the Wall Street Journal reported that the fund had “nearly doubled” invested capital on paper, and returned $1.2 billion by 2015. (The article became somewhat infamous for its focus on how a16z lagged elite peers, though many investors emphasized that comparing across vintages after just a few years was premature.) By that point, the firm had backed Coinbase, Slack, Stripe, Instacart, Robinhood, Airbnb, and others. Without more reliable information, it’s hard to know exactly how significantly those names translated into TVPI and DPI. 

I share all of this as background for my real question: with the benefit of hindsight, how do you think about your “34 More Instagrams” piece? Do you feel differently about those fund sizes? How about in the current day – do you think it makes sense for firms to raise multi-billion dollar vintages? 

If so, why? Has the technology opportunity grown so significantly that individual firms can deliver radically more capital? 

If not, what explains the growth of the asset class? Are we in the midst of a sustained bubble that has yet to truly burst? Are we in the thrall of widespread “cargo cult capitalism” as a piece on Altos’ website describes lemming-like VC? Has venture capital’s definition and performance profile fundamentally changed to allow for larger fund sizes? 

Beyond the significance of swelling fund sizes, I’m keen to understand how you assess today’s venture landscape. What aspects of the asset class today do you find exciting? Does the solo-capitalist trend make sense to you? How about the push into added services of the past decade? Where are we headed next? What might we regard as foolish or brilliant in ten years’ time?

A franchise and a legacy

In both your first and second letters, you’ve shared some wonderful details about Altos and the philosophies that guide the firm. It’s a rich topic that I’d love to explore further with you. Many of The Generalist’s readers work at firms that they want to leave better than they found, while others are looking to build franchises of their own (myself included). I am sure that we could all learn a great deal from the thoughtful, principled way in which you and your colleagues have positioned Altos for an enduring life.

In particular, I’d be excited to unpack some of the core tactical and strategic decisions you’ve made over the years, and how you’ve made them. Some that are top of mind: 

• Protecting the “climate in your skull.” In Graham Duncan’s “Letter to a friend who may start a new investment platform,” the East Rock investor highlights the need to “protect the climate within your skull.” You are someone that strikes me as particularly good at maintaining independent thinking, and avoiding the vagaries of popular sentiment. How do you do this? I know that some investors swear against going to conferences, for example, while others stay clear of social media. What measures do you take to guard your brain against groupthink?  

• Investment decision-making. Fundamentally, I believe that a venture capital firm’s product is the decisions it makes. When it comes to selecting startups to invest in, how does Altos make decisions? Do you require consensus among senior partners? Do you track sentiment on the deal over time? I’ve heard of lots of different ways that firms manage this and would love to get a sense of how you do.

• True customer service. Altos’s website outlines a “modest proposal” for venture capitalists to provide better customer service to founders, noting the importance of returning calls and providing a timely yes or no. What are the essential parts of the “customer service” you specifically provide to founders? What does Altos care about on this front that might be different from other firms?

• Hard times. Altos is nearly thirty years old – a remarkable achievement. Along the way, I imagine there have been plenty of hard times where your approach has been questioned, and you have faced challenges. What have been the toughest parts of the journey and how have you and the team managed through them? What challenges should emerging managers be prepared for? 

• Being a great partner. You co-founded Altos with Han Kim, adding Anthony Lee just four years later. How have you succeeded in building such a durable partnership across nearly three decades? Over that period, I imagine there were moments in which different partners disagreed over the direction of the firm, or had to balance differing priorities. What makes for a good partner? How can younger investors put themselves in the position to build long-term relationships as you have?

• Cultivating new talent. You cannot expect to build an enduring firm unless you hire investors capable of taking the reins after you step back. In a previous letter, you mentioned that Altos has a crop of talented young investors who act as leaders already or are capable of becoming them. What has been your approach to talent identification when it comes to hiring up-and-coming investors? What do you look for? What profiles don’t work at Altos and why?

This is not a definitive list. If there are other threads you think have been especially important to the Altos story, please do share them. And, of course, if some of these topics are not particularly interesting to talk through, feel free to elide them. We’re in your capable hands. 

It has been a privilege learning from you through these past three correspondences, Ho. Thank you very much for your openness and wisdom. 

With gratitude,

Mario

Ho’s response

Re: An investor’s legacy
From: Ho Nam
To: Mario Gabriele
Date: Saturday, July 6 2024 at 3:33 PM PST

Mario,

It was great to see you in London. Your questions always make me think. Thanks again for inviting me to do this. In this final letter, there are so many interesting questions that I cannot possibly do justice to them all. So, I will pick a few topics to explore as we wrap up this series.

On the first topic of the ever-growing VC industry size, it’s been the case for a very long time (at least since I got my first job in VC 34 years ago) that “too much money chasing too few good deals” is a reality in the industry. Although the importance and scale of the tech sector has grown by leaps and bounds, so has AUM, all chasing after the next big thing leading to intense competition for deals, which doesn’t bode well for returns. The scarce resource always was, and still is, great entrepreneurial talent, not capital. The lure of more (and stacked) management fees is so great that fund sizes keep growing, and I think the problem will get worse over time. 

That said, I suspect that the top 10% of the industry will continue to do well due to technology and great founders who continue to move society forward. Unfortunately, I believe the vast majority of the industry will continue to struggle to deliver adequate returns required to make up for the illiquidity and risks inherent in investing in fledgling companies.

Now I’ll try to address some of your questions around franchise and legacy. 

To start, how can you be a great partner? I love that phrase because Charlie Munger has said it’s hard to find a great partner. When people ask how you find a great partner, his answer is always to be a great partner. You have to try to do the right thing, not just for yourself but for your partner. You may not always agree, but if your partner knows that your heart is in the right place and that you have good judgment, you can somehow live with the differences, even if you cannot work through them. You might also go along and try something different, especially if your partner feels strongly enough about something, and maybe you’ll learn that it’s not such a bad thing. There is always a ton of give and take in every human relationship, and you should not expect to get your way every time. And there is often no right or wrong path; even in hindsight, it’s hard to know. You just try to make the best decision and change your mind if you are wrong. ...