S28 Capital's Kent Ho on what he looks for in a startup

The founder of early-stage venture fund S28 Capital shares his investment strategy, what he looks for in a founder and the pitfalls to avoid in the early years of a startup

Valuations, venture capital and a very uncertain economic outlook—this may not be the optimal time for fundraising, but there are still pockets of opportunity, says Kent Ho, founder of S28 Capital.

The US-based early-stage venture fund with $300 million under management invests primarily in enterprise SaaS (Software as a service) companies. It has invested in companies such as Zoom, Coupang, Teleport, and helped to build Panther Labs and Rudder Stack.

Last December, Ho participated in our Catalyst Series roundtable with J.P. Morgan Private Bank, speaking to a group of Gen.T honourees about investing and innovation in Hong Kong.

Regarding himself as a generalist investor, Ho enjoys discovering new opportunities in old industries, where software has an opportunity to drastically improve productivity and efficiency.

The Kentucky-born, former Goldman Sachs banker spent a decade in Silicon Valley before moving to Hong Kong in 2012 where he is currently based. He also serves as a board member of Hong Kong Science and Technology Park (HKSTP).

Here, he shares more about his investment strategy and whether startups should be raising funds in this current economic climate.

Just because you can raise money doesn't mean you should. You have to ask yourself why you are raising money

- Kent Ho -

What do you look for when considering investing in a startup?

Kent Ho (KH): It’s different depending on what stage of investing you’re doing. We’re seed investors, so we’re oftentimes investing in companies at a pre-product or no-revenue stage. So it’s a function of evaluating market size and founders. I always say it's founders first and market sizing second.

Market sizing is obviously important—is somebody building a company in a market that is worth building something?

There are many layers you can peel back, and evaluate a market and the opportunity. Every market is not a $100 billion market opportunity, and [the next question is] what percentage of the market are you really going to capture? These are things you have to come to some sort of unique insight or have conviction about.

The other really important thing is the founder because you need to understand that personalities are all different.

It’s really challenging to be a founder because it’s such a long grind. [The journey is] not always rosy; it’s probably more negative [and filled] with problems than it is rosy. And you never have perfect information, so you’re trying to figure things out and make decisions rapidly.

You need to be able to identify which founders are special. Sometimes they have great strengths and extreme weaknesses—how do you identify these and combine them with other people to be able to build companies? That’s an art, and that’s also why you need to have a portfolio approach to venture capital. You can’t just invest in three companies and call it a day.

It’s interesting how you describe the founder selection process as an art.

KH: There isn't a formula. Think about [it in the context of] art—how do you know which artists will be popular and successful in the long term and which will do well as an investment? It’s hard to tell, although some people may have personal connections with certain artists and think they’re geniuses and that kind of drives demand.

I think it’s similar, in a sense, with founders. The only difference is, for companies, we have to find product-market fit.

Above Ho and several Gen.T honourees discuss investing and innovation in Hong Kong at a session of Gen.T's Catalyst Series roundtable event last December, organised in partnership with JP Morgan

What traits do you then look for in a founder?

KH: The reality is, it might be difficult to connect with some founders. You’re also not going to like a lot of founders, but you’re not investing in people for them to be your friends.

The question you want to ask is if there is value alignment. You also need to believe that they have other traits that are necessary to be successful. The main one is persistence. They have to be able to grind. There's no scorecard. You need to spend a lot of time with the founders and, at some point, you either feel it or you don’t.

Later-stage investing is a different animal. There are conventional metrics; you have numbers and data that you can evaluate.

What are some of the pitfalls to avoid in the early years of a startup?

KH: A lot of times, early founders over-optimise on the wrong things. Specifically, valuation, where it’s probably more important to have the right investors.

In the early stage, if you make mistakes on valuations and how much you’re raising and equity, it creates complexities in the later round. More often than not, people need to raise an extra seed round as things don’t go perfectly.

People are not starting companies for small outcomes. If they work and they’re successful, everybody will do well financially. So I tell founders to think about the bigger picture and [think] longer term. And it’s not because I'm trying to get more equity, but the ecosystem needs to be balanced in terms of incentive alignment for the long term.

You need to spend a lot of time with the founders and, at some point, you either feel it or you don’t

- Kent Ho -

Most founders, if not all, probably hope to create a unicorn. Are there certain “tells”, perhaps, that a startup might become a unicorn?

KH: A lot of companies will not be a unicorn. A conversation I have with some people is whether the business they're building is something that they should even raise venture capital [for]. That's an important question as you think about the opportunity.

Just because you can raise money doesn't mean you should. You have to ask yourself why you are raising money, and you have to think about the exits.

There are certainly more companies that are not going to be a unicorn or may never exit. There are businesses you could probably build just for acquisition; you could build a brand in the consumer space and somebody can just come and buy you for $50 or $100 million. The Unilevers and Procter & Gambles don’t know how to build a new, young and cool brand, but once they have the brand, they can help grow it. There are all kinds of different [avenues] one can look at.

Let's talk about the outlook for 2023 and how it’s going to impact valuations, capital flows and your investment strategy.

KH: This is more US-centric, but the simple answer is that there’s a lot of uncertainty for 2023. There’s probably a recession coming. There’s a lot of venture capital money sitting on the sidelines, but just because it’s a bad year, it doesn’t mean innovation doesn’t happen. So companies will probably get funded at a slower pace this year.

Valuations have already adjusted quite rapidly and I think people are being cautious. For us, we’re not not deploying [funds], it’s just more opportunity-driven. If we see the right opportunity, then we’ll do it. The bar is higher for people to deploy capital in general.

Valuation-wise, there’s more sensitivity; people may want to see early traction whereas in the past they may be fine with no traction.

So if you were talking to 100 investors before, you probably have to talk to 200 investors now. Don’t think about what valuations were like two years ago or a year ago; calibrate your expectations.

If you are concerned about valuation, then raise less now and stretch your dollars, make some progress, and then try to raise again later. Focus on the long-term opportunity.

The Catalyst Series is a series of roundtables co-organised by J.P. Morgan Private Bank and Gen.T. Each event features a guest speaker, with the aim of providing actionable insights that Gen.T honourees can take back to their business. See more content from the series.

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