But curriculum was just part of business school. The other part was getting to know the “students,” preferably the most astute movers and shakers in the startup investing world. Business school = curriculum + network.
The most important characteristic of my personal MBA: I planned on “losing” $120K.
I went into the Tim Ferriss Fund viewing the $120K as a sunk tuition cost, but expecting that the lessons learned and people met would be worth that $120K investment over time. The 2-year plan was to methodically spend $120K for the learning experience, not for the ROI.
Please note that I would not suggest mimicking this approach with angel investing, unless:
You have a clear informational advantage (insider access) that gives you a competitive edge. I live in the nexus of Silicon Valley and know many top CEOs and investors, so I have better sources of information than the vast majority of the world. I rarely invest in public companies precisely because I know that professionals have more tools and leverage than I do.
You are 100% comfortable losing your “MBA” funds. You should only gamble with what you’re very comfortable losing. If the prospective financial loss drives you to even mild desperation or depression, you shouldn’t do it.
You have started and/or managed successful businesses in the past.
You limit angel investment funds to 10 to 15% or less of your liquid assets. I subscribe to the Nassim Taleb “barbell” school of investment, which I implement as 90% in conservative asset classes like cash-like equivalents and the remaining 10% in speculative investments that can capitalize on positive “black swans.”
Even if the above criteria are met, people overestimate their risk tolerance. Even if you have only $100 to invest, this is important to explore. In 2007, I had one wealth manager ask me, “What is your risk tolerance?” and I answered honestly: “I have no idea.” It threw him off.
I then asked him for the average of his clients’ responses. He said, “Most answer that they would not panic up to about 20% down in one quarter.”
My follow-up question was: “When do most actually panic and start selling low?” His answer: “When they’re down 5% in one quarter.”
Unless you’ve lost 20% in a quarter, it’s practically impossible to predict your response. Also, you might be fine losing $20 out of $100 but freak out when you’re down $20K out of $100K. The absolute number can matter as much as the percentage.
As Cus D’Amato, Mike Tyson’s legendary first trainer, famously said: “Everyone has a plan until they get punched in the face.” To would-be angel investors, I suggest the following: Go to a casino or racetrack and don’t leave until you’ve spent 20% of a typical investment and watched it disappear.
Let’s say you’re planning on making $25K worth of investments. I’d ask you to then purposefully lose $5K over the course of at least 3 hours, and certainly not all at once. It’s important that you slowly bleed losses as you attempt to learn the game, to exert some control over something you can’t control. If you can remain unaffected after slowly losing your $5K (or 20% of your planned typical investment), consider making your first angel investment.
But proceed with caution. Even among brilliant people in the startup world, there is an expression: “If you want to make a small fortune, start with a large fortune and angel invest.”
The First Deal and First Lesson
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So what did I do? I immediately went out and broke my own rules like a dummy.
There was a very promising startup that, based on using Alexa ranking correlations to valuations (beware of this approach), was more than 5 times undervalued! Even if it hit a “base hit” like a $25 million exit, I could easily recoup my planned $120K!
I got very excited and cut a check for $50K. “That’s a bit aggressive for a first deal, don’t you think?” Mike asked me over coffee. Not a chance. My intuition was loud and clear. I was convinced, based on other investors and all of the excitement surrounding the deal, that this company was on the cusp of exploding.
This startup was on life support within 2 years and dead shortly thereafter, so I lost that $50K. Oops.
Following the Rules
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Lesson #1: If you’ve formulated intelligent rules, follow your own f*cking rules.
Below are a few that subsequently worked well for me. Note that I don’t need to satisfy all of them, but I do want to satisfy most of them:
If it has a single founder, the founder must be technical. Two technical co-founders are ideal.
I must be eager to use the product myself. This rules out many great companies, but I want a verified market I understand.
Related to the previous point: consumer-facing product/service (e.g., Uber, Twitter, Facebook, etc.) or small-business focused product/service (e.g., Shopify), not big enterprise software. These are companies whose valuations I can directly impact through my platform, promotion to my audience, introductions to journalists, etc.
More than 100K active users OR serial founder(s) with past exits OR more than 10K paying customers. Whenever possible, I want to pour gasoline on the fire, not start the fire.
More than 10% month-on-month activity growth.
Clean “cap table,” minimal previous financing (or none), no bridge rounds.
U.S.–based companies or companies willing to create U.S.–based investable entities. Shopify started in Canada, for instance.
Have the founders ever had crappy service jobs, like waiting tables or bussing at restaurants? If so, they tend to stay grounded for longer. Less entitlement and megalomania usually means better decisions and better drinking company, as this stuff normally takes quite a few years.
By the end of 2010, following these rules, I was fortunate to have had two successful exits.
The first, Daily Burn, was acquired by IAC. This guaranteed that I would not lose money on my 2-year fund, assuming I didn’t piss the proceeds away. Relevant side note on Daily Burn: They checked the boxes on my checklist, but the majority of the investors (but not all) I asked to participate declined because the co-founders lived in Alabama and Colorado instead of a tech hub. Mike Maples explained a simple rule of thumb to me at the time, and I’ve applied it to many deals since: Breaking your rules to co-invest with well-known investors is usually a bad idea, but following your rules when others reject a startup can work out extremely well.
The second exit might seem odd. Remember that learning was my main reason for doing the real-world MBA in the first place.
My second exit was my own company! Using what I learned through angel investing about deal structures and the acquisition process, I became less intimidated by the idea of “selling” a company. It need not be complicated, as I learned, and BrainQUICKEN was sold in late 2009. This means the ROI on my personal MBA was, based on those two alone, well over twice my “tuition.”
Now, that might seem like a paltry sum to some people ($120K–200K for two years of effort?), but it’s important to note two things:
Selling my company completely freed up my time to focus on other things, such as The 4-Hour Body, which hit #1 on the New York Times bestseller list and created thousands of opportunities.
Two exits is not where the story ends. That was just the beginning.
Startup investments can be illiquid and locked up for 7 to 10 years. This is why the “fund life” of most venture capital funds is 10 years. That is how long it takes most big successes to reach IPO or get acquired. In other words, you might not know if you’re good or bad at angel investing, right or wrong in your bets, for a LONG time.
So, what are some of the other bets I made between 2007 and 2009? Some of them ended up being later-stage than Seed or Series A, as I began getting invited to such deals:
Shopify (IPO—advisor)
Uber (TBD but looking to be my biggest of all)
Facebook (IPO)
Twitter (IPO)
Alibaba at $
9/share (IPO)
As I write this in 2016, I’ve had 6 to 10 additional successful exits, and I’ve also been able to sell some private stock on the “secondary market.” When startups raise new rounds of financing, this is sometimes offered to existing shareholders.
It’s worth mentioning that I had to adjust my investment approach from 2008 to 2010 due to my $50K slip-up and the self-imposed limit of $120K of starting capital.
I adopted the additional rules below, which—while seemingly arbitrary—helped me to filter out 90% of deals and not lose money. I used these until roughly 2010, at which point I had more capital and A) preferred to invest cash instead of time (easier to scale), and B) could use slightly different rules, as I had a bigger safety net.
Even if you have no interest in the startup game, you should have an interest in formally deciding on rules that make damaging, bad decisions hard. Here are a few that helped me.
If each startup exits at 5 times its current Series A valuation, it should be able to cover two-thirds of your fund capital.
Most of your startups will fail, so the successes need to make up for losses.
Let’s say there’s a startup that’s offered you $15K worth of investment, and they’re going to have a $1.5 million “post-money” valuation after the round of financing. If we’re using the “two-thirds” rule, and your fund (like mine from 2007 to 2009) is $120K, you shouldn’t invest $15K in this startup, as 15K x 5 = $75K. Two-thirds of $120K is $80K, so you’d either have to invest slightly more, lower the valuation, or add in advising (expanded upon below) and get more equity in return. This isn’t even accounting for dilution, which is beyond the scope of this book but likely in most cases.
If a startup exits at 3 times its current valuation, it should allow you to walk away with $300k.
This was one of my preferred methods for qualifying or disqualifying a startup. As much as I might love someone, I can’t take another part-time job for 7 to 10 years for a $50K payoff.
Let’s say a startup ends up with a $3 million post-money valuation. If I help them more than triple the value of their company to $10 million, how much do I walk away with if there are no more rounds of funding? If it works out to $50K, it isn’t worth it for me. If, considering the time invested, I could earn 5 times that doing other things, it makes no sense to do the deal.
Move from Investor → Investor/Advisor → Advisor
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Let’s assume you have committed to spending $60K per year on angel investments, just as I did without really knowing what I was signing up for. This means two things:
You aren’t going to be able to satisfy the previous rules of “covering two-thirds of the fund” or “making $300K at 3x” for many companies. Perhaps you’ll make 3 to 6 investments.
3 to 6 investments generally doesn’t work in angel investing, where most pros assume that 9 out of 10 will fail.
It’s therefore nearly impossible for you to get a good statistical spread with $60K per year. The math just doesn’t work. The math especially doesn’t work if you screw it up like I did by getting overexcited and dropping $50K on your first investment.
Here’s how I did a course correction and dealt with this problem:
First, I invested very small amounts in a few select startups, ideally those in close-knit “seed accelerator” (formerly called “incubator”) networks like Y Combinator and Techstars. Then, I did my best to deliver above and beyond the value of my investment. In other words, I wanted the founders to ask themselves, “Why the hell is this guy helping us so much for a ridiculously small amount of equity?” This was critical for establishing a reputation as a major value-add, someone who helped a lot for very little.
Second, leaning on this burgeoning reputation, I began negotiating blended agreements with startups involving some investment, but additional advisory equity as a requirement. “Advising” equity is equity that I get over time (say, ¹⁄₂₄ of the total each month for 2 years) but don’t have to pay for. The startup can cancel at any time if I’m not performing.
Third and last, I made the jump to pure advising. After the end of the first year of the Tim Ferriss Fund, more than 70% of my startup “investments” were made with time rather than cash. In the last 6 months of the fund, I wrote only one check for a startup.
Moving gradually from pure investing to pure advising allowed me to reduce the total amount of capital invested, increase equity percentages, and make the $120K work, despite my early mistakes. This approach also, I believe, produced better results for the startups.
Ultimately, startups became my golden goose, and when CB Insights analyzed the top 1,000 angel investors in 2014, they placed me in sixth place. The irony is that I’ve now stopped angel investing completely, even though it will ultimately make me 10 times what I’ve made in publishing and everything else. Why? That’s on page 384.
But enough damn tech talk. Let’s look at some other options for you.
Creating Your Own Graduate Program
* * *
How might you create your own MBA or other graduate program? Here are three examples with hypothetical costs, which obviously depend on the program:
Master of Arts in Creative Writing—$12K/year
How could you spend (or sacrifice) $12K a year to become a world-class creative writer? If you make $75K per year, this could mean that you join a writers’ group and negotiate Mondays off work (to focus on drafting a novel or screenplay) in exchange for a $10–15K salary cut.
Masters in Political Science—$12K/year
Use the same approach to dedicate one day per week to volunteering or working on a political campaign. Decide to read one book per week from the Georgetown Political Science department’s required first-year curriculum.
MBA—$30K per year
Commit to spending $2,500 per month on testing different “muses” intended to be sources of automated income. See The 4-Hour Workweek or Google “muse examples Ferriss” as a starting point.
And Overall
Commit, within financial reason, to action instead of theory.
Learn to confront the challenges of the real world, rather than resort to the protective womb of academia. You can control most of the risks, and you can’t imagine the rewards.
Resources
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For the fellow tech nerds among you, here are a few resources for learning about angel investing, founding tech companies, or picking the right startup to work for:
Venture Deals by Brad Feld and Jason Mendelson
Venture Hacks (venturehacks.com), co-created by Naval Ravikant (page 546) and Babak “Nivi” Nivi. Free how-to content on just about any facet of this game imaginable. Some terms and norms may be out of date, but that’s less than 20% of the content, and the game theory and strategy is spot on.
AngelList, also co-founded by Naval and Nivi. Great for finding deals, seeing who’s investing in what, and finding jobs at fast-growing startups. I’m an advisor to AngelList, and you can see my entire portfolio at angel.co/tim
“Losers have goals. Winners have systems.”
Spirit animal: Toy Australian shepherd
* * *
Scott Adams
Scott Adams (TW: @scottadamssays, blog.dilbert.com) is the creator of the Dilbert comic strip, which has been published in 19 languages in more than 2,000 newspapers in 57 countries. He is the best-selling author of How to Fail at Almost Everything and Still Win Big, God’s Debris, and The Dilbert Principle.
Behind the Scenes
Scott’s mother gave birth to his little sister while under hypnosis, which was offered as an option by her doctor. She did not take any painkillers, did not feel pain, and was awake the entire time.
Naval Ravikant (page 546) regularly credits Scott’s short blog post “The Day You Became a Better Writer” for improving his writing.
&n
bsp; Lesser-Known Cartoons He Reads and Enjoys
F Minus
Pearls Before Swine
The Six Elements of Humor
Scott believes there are six elements of humor: naughty, clever, cute, bizarre, mean, and recognizable. You have to have at least two dimensions to succeed.
“Let me give you an example. Cute is usually kids and dogs, and bizarre is just anything that’s out of place. If you know your cartoon history, you will know that The Far Side used primarily the dimension of putting something out of place. So you’d have an animal talking.
“As soon as the animal’s talking, he’s got one dimension. He’s basically starting a race, and he’s already ahead of you if you’re the cartoonist who’s sitting there saying, ‘I think I’ll do a comic about anything, the world is my canvas.’ He’s got the bizarre, and then he’ll have the animal say something, often in the framing or the type of mood that a human would. That’s the ‘recognizable’ part.
“Take a look at the best comic strip of all time, that I think nearly everyone in the world would say, Calvin and Hobbes. There’s a talking tiger that is both bizarre and cute. So he took The Far Side one dimension further as a starting point. The moment you start reading Calvin and Hobbes, you already have cute because his drawing is amazing. He’s got double cute. He’s got a child and an animal, and it’s a cool animal. So he starts that, before he even writes a joke. So then, if he has the kid doing something naughty—also, anything bad happening to anybody (‘mean’)—that’s of course one of the dimensions. . . .”
Tools of Titans Page 27
