Tae Yoon, a Partner at Altos Ventures, shared some eye-opening thoughts about venture capital. He explained that the industry often focuses on quick wins and rapid exits. Still, his experience has shown that real value creation requires patience, conviction, and a strong understanding of the fundamentals.
Drawing from the wisdom of Professor Jack McDonald, known as the West Coast Warren Buffett, Tae talked about their unique investment philosophy, which challenges conventional startup thinking. A prime example is their investment in Roblox, where an initial $1.5 million grew significantly over 16 years. It’s a powerful reminder that long-term vision and strategic patience can lead to extraordinary success.
The Power Law: Understanding Where Value Lives
The first fundamental principle is the power law distribution of returns. In both public and private markets, a small number of companies generate most of the value. This is particularly true in venture capital, where a handful of exceptional companies dominate portfolio returns.
This reality demands a different approach to portfolio management. Rather than spreading investments thin across many companies hoping for quick exits, we need to:
- Identify companies with the potential for exceptional long-term growth
- Provide substantial support to these companies throughout their journey
- Maintain the patience and resources to support multiple funding rounds
The Magic of Long-Term Compounding
The second principle revolves around understanding the true nature of value creation through compounding. Consider this: would you rather have $1 million today or a penny that doubles daily for a month? Through the power of compounding, the penny becomes worth over $10 million in a 31-day month.
This same principle applies to company building. The most significant value creation happens in years 10, 15, and 20 – not in the early years. This insight fundamentally changes how we approach investment horizons and company development.
We believe in this notion of the infinite game, which has no time bound. The compounding of value of these special assets happens in years 10, 15, and 20, not in years 1, 2, 3.
The Hedgehog Principle: Finding Focused Founders
The third principle identifies “hedgehog founders” – leaders who demonstrate unwavering focus on solving specific problems. Unlike “fox” founders who pursue multiple opportunities simultaneously, hedgehog founders exhibit:
- Maniacal focus on solving one core problem
- Deep commitment to their mission as their life’s work
- Resilience through the inevitable ups and downs of the startup journey
The best hedgehog founders possess strong opinions that are loosely held. They maintain clear visions while remaining adaptable enough to adjust their approach based on new information and learning.
Practical Application: The PushPress Example
This philosophy comes to life in companies like PushPress, a gym management software company. The founders, former CrossFit gym owners, built solutions to problems they personally experienced. Their deep industry knowledge and focused approach exemplify the hedgehog principle in action.
The Role of Partnership in Long-Term Success
Building lasting companies requires meaningful partnerships between investors and founders. This relationship isn’t about quick decisions or the highest valuations—it’s about alignment in vision and values.
The most successful partnerships develop through careful cultivation of mutual understanding and respect. As investors, we must recognize that while founders know their companies best, we bring valuable pattern recognition from working with numerous companies over time.
This dynamic creates a symbiotic relationship where both parties contribute unique perspectives and capabilities to increase the odds of success.
Frequently Asked Questions
Q: What makes the hedgehog approach more effective than the fox approach in startup leadership?
Hedgehog founders demonstrate superior resilience and focus by dedicating themselves to solving one specific problem exceptionally well. This concentrated effort often leads to deeper insights and more sustainable solutions than Fox Founders’ scattered approach.
Q: How long should founders expect to wait before seeing significant returns through compounding?
Significant value creation typically occurs after year 10, with the most substantial growth between years 10-20. This timeline requires patience and long-term commitment from both founders and investors.
Q: What role does pattern recognition play in venture capital success?
Pattern recognition from seeing numerous companies allows investors to provide valuable guidance on avoiding common pitfalls and accelerating growth. However, this must be balanced with respect for the unique aspects of each company and founder.
Q: How can founders identify the right long-term investment partners?
Founders should take time to build relationships with potential investors, ensuring alignment on vision, timeline, and values. Quick decisions based solely on valuation often lead to misaligned partnerships.
Q: Why is the power law fundamental in venture capital?
The power law principle shows that a small number of investments will generate the most returns in a portfolio. This understanding should guide investment strategy and resource allocation, focusing on supporting potential breakout companies.
