By guest authors Irina Patterson and Candice Arnold
Irina: Do you think about the total available market (TAM) when you invest?
Ho: That’s a good question. We talk about that a lot. We do, obviously, like large market opportunities, but we also have the philosophy that it’s really hard to predict what the next giant markets are going to be.
If we think that we can predict the future like that, I think we would be better off investing in IPOs of the next hot thing. And if you invest in a great company at the IPO stage, you can still make a lot of money.
But we don’t think that’s what the venture game is all about. What we try to do is build profitable, viable businesses in interesting, emerging markets.
A lot of times it’s hard to even size emerging markets because they don’t yet exist. If we get to $10 million to $20 million in revenues and get profitable without a lot of capital going in, we know we’ve created some value.
And some of those companies will keep growing because they’re in a really interesting space or a company’s strategy ends up evolving and changing.
In our experience, every company that we’ve taken to $10 million always gets to $20 million.
But somewhere between $20 million and $50 million, many companies stall out.
And somewhere between $50 million and $100 million, many companies fall out. And between $100 million and $500 million or $1 billion, many companies just never quite make it.
When we take our companies to this, what we consider, first base, between $10 million and $20 million in revenues, we try to make a determination, “Hey, are we on to something really interesting here? Do we have the potential to build a real business?” or “Hey, we’ve created some value here, we have a good business but is it time to sell and look for an exit opportunity?
Our most recent exit is a company called Guardian Edge Technology – acquired by Symantec – would be a good example of that. We built it to about $20 million or $30 million in revenues.
It was really capital efficient. It took a little more capital than we had anticipated, but they got there without burning too much capital (they raised $20 million and had a good chunk of it still in the bank).
We ended up selling it for less than a $100 million exit, but it was still a good exit in which everybody made money. The founder made a lot of money, all the executives made good money so it was a good exit. The key is to be capital efficient –then you don’t need to have the home run to have good returns for investors.
Irina: When you invest in a business, I know people are very important to you. What about their business experience?
Ho: I think we look for business judgment and some business savvy. But business experience may or may not be there. It’s not necessarily that critical. We do look for domain expertise, somebody who really deeply understands the problems they’re solving for customers.
As I’ve said, a lot of people with gold-plated resumes could disappoint you, and for a lot of the great entrepreneurs who have build fantastic businesses, if you would just look at their business experience, you wouldn’t back them. So, their their business experience is not as critical to us.
Irina: I read your article about growing experts within your business.
Ho: Yes. That’s something that we like to tell our companies, because if you think you can hire some expert outside the company to come in and tell you how to run your business better than you can, then you’ve built really nothing that special.
In the great companies that we’ve seen, they’re doing something special, something different, something interesting. It’s not just a culture. A lot of people talk about building a great culture, but it’s really about a specific business model and how you deliver value and there’s a lot of know how that gets built in.
Over time, as you build a business – let’s say over a five- or ten- year period – the world’s leading experts of your business and your industry (and your business is tackling your industry in a unique way) are home grown, are people at your company because you’ve done something unique. Like somebody from outside looking in can’t quite figure it out and coming in, they won’t really know how you operate.
We love growing talent from within, but it takes time. People don’t get there overnight. You don’t teach somebody how to really manage people overnight. You have to just go through many years. Sometimes you make some mistakes along the way, but hopefully they are not fatal and you really develop that experience base that’s relevant to your business.