The 'How Do You Know?' Three-Question Test
Money, moat, and relationship — the three filters Altos uses before going all-in on a company.
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 4
- Confidence
- 85%
Ho Nam distilled Altos's investment conviction process into a simple, sequential test he wrote about in a blog post titled 'How Do You Know?' It answers the question of what gives an investor the confidence to buy more shares of a winner instead of taking chips off the table. The test moves from the universal (does the business make money, or have a credible path to it) to the differentiating (does it have a defensible moat, whether via network effects, patents, or hard-won know-how) to the personal (do we actually have a deep relationship and proprietary insight into this specific company, or are we just another outside investor with no edge). Only when all three are true does Altos lean into concentrated, long-duration bets.
Origin
Ho Nam wrote a blog post called 'How Do You Know?' after being repeatedly asked what gives Altos the conviction to buy more shares while up, rather than de-risking by selling.
Core principles
- 01Profitability discipline protects founders from losing control of their own company.
- 02A moat is only real if it survives full disclosure to a competitor.
- 03Without a genuine relationship/insider knowledge, you are just another outsider looking in, no matter how much you like the business.
How to run it
- 1
Check for cash discipline
Confirm the business generates cash, or has a clear, believable path to profitability or cash-flow breakeven, so it isn't perpetually dependent on new fundraising.
Watch out A company that keeps running out of money eventually loses founder control to outside investors.
- 2
Identify the moat
Determine what protects the business from competition — network effects, patents, or, most powerfully, non-replicable know-how discovered through years of operating.
Pro tip The best moats can sometimes survive full disclosure — you could tell a competitor exactly what you do and they still couldn't or wouldn't replicate it.
- 3
Assess your real relationship and edge
Ask whether you have deep, proprietary insight into this specific company and team, or whether you're effectively an outsider with no more information than any public investor.
Watch out Proprietary knowledge decays over time if you stop being closely involved — reassess it periodically.
- 4
Size conviction to the combined signal
Only increase concentration or buy into up-rounds when money, moat, and relationship are all simultaneously strong; if any leg is missing, treat the position like any other outsider would.
In the wild
When Select Comfort's stock cratered in 2008 and commentators assumed no one would buy a $3,000-$4,000 mattress in a recession, Altos applied the framework: the balance sheet and lender relationships suggested the company wasn't going to zero.
→ The company sold roughly $650 million worth of mattresses during the crisis and survived to become Sleep Number.
Common mistakes
Confusing growth with a moat
Fast revenue growth alone doesn't mean a business is protectable; without a real moat, high growth can attract competitors who erode the advantage.
Overestimating your edge without a relationship
Without genuine proprietary access or insight, an investor is no different from any outsider reading public filings, no matter how much conviction they feel.
Is it for you?
Best for
Growth-stage investors deciding whether to concentrate capital in an existing winner.
Not ideal for
Very early pre-revenue startups where profitability and moat cannot yet be assessed at all.
From the transcript
“First rule is, well, does the business make money?”
“the second thing is what Buffett calls a moat.”
From the episode
Special: Ho Nam from Altos Ventures — A Different Approach to VC
Ho Nam