Unveiling Altos Ventures' Long-Term Investment Strategy: West Coast Warren Buffett's Power Law, Compounding, and Hedgehog Founders

As a partner at Altos Ventures, I've learned from Professor Jack McDonald's teachings on the power law, compounding value, and hedgehog founders, which have shaped our approach to investing in software companies with a long-term focus.

1. Jack, also known as the West Coast Warren Buffett, taught three core principles: power law, compounding, and hedgehog concept.
2. Tae is a partner at Altos Ventures, a global generalist tech investor firm started in Silicon Valley in 1996.
3. Altos focuses on founders' orientation and alignment, taking a long-term approach to company building and investing, often thinking in decades rather than years.
4. They prefer partnering with founders who aim to build durable businesses over an extended period.
5. Software companies exhibit characteristics that align with Altos' broader goals due to their capital efficiency and role in digitization.
6. In the early days (1996), Altos planned to invest in seed stage startups and pass them on to well-known Silicon Valley VCs for high valuation investments, a strategy that worked until it didn't in
7. This failure led Altos to reconsider their approach, focusing on value creation and building durable businesses, adopting Warren Buffett and Charlie Munger's investment philosophy with the help of
8. The power law principle states that a small number of companies or assets in any asset class drive all returns (e.g., Apple, Google, Meta driving S&P 500 returns).
9. Compounding value over time is crucial, as most value creation happens in the latter years when the base is bigger and growth is more significant.
10. Patience is key to letting compounding work its magic; for example, Altos invested in Roblox 16 years ago and continued investing until the pre-IPO round, remaining the largest shareholder upon go
11. The hedgehog concept distinguishes founders focused on solving one problem and doing it extremely well (hedgehogs) from those with many ideas or projects (foxes).
12. Altos prefers working with hedgehog founders who have strong opinions but are willing to learn, adapt, and change course when needed.
13. The journey of building a startup is not always linear; it involves ups and downs, making resilient hedgehog founders essential for long-term success.
14. Altos values long-term partnerships with founders, viewing the relationship as a marriage that requires time to develop and ensure alignment.
15. As investors, Altos aims to be helpful stewards, providing guidance based on pattern recognition from working with numerous companies over the years.
16. They also recognize their limitations in understanding individual companies and respect the founder's unique insights into their businesses.
17. The goal is to increase a company's odds of success by controlling inputs and maintaining a strong partnership that allows for continuous learning and adaptation.
18. Belarus example not directly related to core principles but highlights the importance of being free, independent, and avoiding dependency on any single entity or rule set.
19. The person from Belarus is looking to get free, and the speaker advised them that working in a specific job would provide that freedom.
20. This anecdote reinforces the idea of controlling inputs and seeking opportunities that increase independence and autonomy.

Source: EO via YouTube

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