Angel Investing Advice & Tips From a Millionaire Investor (How to Guide) My First Million 06/09/2020

Shaan Puri

And what that means is that you need every company you invest in to be able to get to about a 100,000,000 a year in revenue what's up guys sean here sam is out so I am doing this episode solo and I'm gonna do something a little bit different I'm gonna start by talking a little bit about some of the angel investments I've made you know in our facebook group I posted something about angel investing and a whole bunch of people had questions and so I thought I would come on the podcast and actually talk a little bit about it when I wanted to learn about angel investing I would only ever read things from the people who had killed it usually over the last 10 years somebody like an elad gill jason calacanis talks a lot about angel investing and I would read their stuff and it was sort of like I'm an angel investor I've invested in a 100 companies here's the 5 huge ones that you know about where I've made 1,000,000 and let me talk to you about what I look for in angel investing now and that was cool but it didn't actually tell me sort of their thought process at the beginning how they decided to do it or how they got started how much money it required all those just the actual tactical questions about doing it I didn't hear a whole lot about that I'm sure somebody has blogged somewhere about it but that's what I wanna talk about because that's where I'm at you know for when it comes to angel investing I am by no means an expert and I don't mean that just kind of in a you know sometimes you say something and you're like you know but I'm not a financial advisor don't listen to me this is not that because when I say that that means hey I really think this is true but don't sue me this is I'm for real when I say I'm not an expert meaning I'm actually kinda like a beginner I'm just one notch above a total beginner a total beginner hasn't even taken any action yet they don't even know which direction they're going they're just lost in the middle of disneyland so I'm one level above that where I've been on space mountain but I you know I just have a map in my hand I'm just trying to figure it out I'm still looking for a hotdog that disney world analogy went pretty far so anyways.

Shaan Puri

Is I'm a beginner I'm learning as I learn I say the stuff out loud so this is me just learning in public and if somebody out there is listening because I know a bunch of people who listen to this there are actual investors who have been doing this for a long time feel free to correct me and say hey you know that thing you said made no sense you should do it this way instead those are my favorite types of messages so feel free to message me if that's the case but alright let's talk about angel investing so my angel investing life started truly about 6 years ago 7 years ago when I first moved to san francisco so I moved to san francisco I get a job as a product manager at a at an idea lab called monkey inferno so pm kind of a boring job pm but not at a boring company this was a very interesting company it was a company that builds companies so an idea lab and I was the only product manager there I was the only product guy everybody else was an engineer and I'm making a $120,000 a year and so I don't think of myself like an investor right 120 k living in san francisco paying california taxes you're not like rolling in money at all I had a little bit of money saved up from my previous company but again I didn't think of myself as an investor so the first thing was the first lesson of angel investing was think of yourself as an investor because those first 3 or 4 years I was in san francisco I had the opportunity I was doing mastermind dinners I was organizing dinners and my friends were the founders of other companies and you know if I had just stopped working on my company if I had stopped you know quit my job and all I did was just write 20 ks checks to all of those friends it might have been I might have needed 250 k but I would have turned that into you know at least $5,000,000 just off the success of those friends companies and I was helping them and I thought a lot of their ideas were good I thought a lot of them would succeed I remember I talked to the founders of calm early on when calm was struggling they couldn't even raise their next round you didn't know what was gonna happen it was just kinda alex toiling away and I remember thinking hey this guy's like really committed to this and this guy's really creative and I think he's right about the world like I think he's right that a lot of people will want this a lot of people will want to have more calm in their life and I think people more people will meditate and you know there was obviously it wasn't clear cut but I would have bet on that company and I would have bet on 6 or 7 of those companies and and several of them did really well calm now is a you know a multi $1,000,000,000 company so out of just that group of friends I think there were probably 2 or 3 companies that have reached over $500,000,000 in valuation and I would have been investing when they were under 5 so the lesson I learned 4 years later was why the hell was I investing in these guys' companies I believed in them I had access to them I just didn't think of myself as an investor the excuse I gave myself was I didn't have the capital but the real the reality was if you are creative enough if you're resourceful enough if you're persuasive enough if you're determined enough you can get capital you can get any resource you need and so that actually brings me to my first angel investment so the next company I got really excited about fast forward 4 or 5 years I still don't you know have you know 1,000,000 of dollars in the bank to go write these checks and I see this company called lambda school and I had been thinking about a product like this or a project like this to go do myself and when I saw it I was like woah this guy's doing a much better version of what I was thinking might might work what something I thought about doing so I started calling the guy started talking to him and I told him you know I wanna invest in your company which was true not a lie I did wanna invest in this company but I didn't tell him I've never invested in any company so I definitely withheld that and I said tell me about your company I want to invest and he started sharing his slide deck sharing the materials and I'm like you know I have to find a way to invest company and I thought to myself okay I need to invest 25 k in this company okay no problem I can sell a stock that I own or I can say I can just take some of my savings and do this one company was never gonna be a problem but with angel investing you need a portfolio of companies because you're investing in early stage startups this is extremely high risk of failure so in a portfolio of 10 companies you would expect some kind of distribution where you're gonna get 4 or 5 of the companies to go to 0 you know 2 or 3 of the companies to return somewhere between 1 and 3x and then hopefully you know you end up with 1 or 2 companies that actually break out and do 10x + ideally you get to something that does a 1000 x + or 10000 x + those are the the the early investors in uber for example so anyways I always knew I could invest in 1 company but I never you need about 30 bets to really be an angel investor to have enough of a portfolio where you give yourself a chance to succeed so you know I was sitting there doing the math and I said if I need to invest $25,000 in 30 companies I need $750,000 I didn't have that so that's why I didn't think of myself as an investor but what I did was very smart I gotta give myself credit on this one when I knew I wanted to invest in lambda school I said okay how do I get the money to invest in this and so I talked to a friend and I said who I knew invested and I said hey I have this company that I think is really great I wanna introduce you to them and in general I see a bunch of companies that are really interesting and I know you like to invest do you wanna do a deal where you know I can sort of be a scout I can be a sort of a venture partner an entrepreneur who can help you with your investments and we can set up a deal so here's what you know the first deal we set up was cool any deal we invest in I get 10% carry meaning I don't have to put any capital in I take zero financial risk and I get 10% of the upside after he's paid back his investment so it's not huge returns right like sequoia scouts sequoia is one of the biggest venture capital firms they had a scout program and they gave 50% to their scouts you know they were extremely extremely generous so 45% something like that so this wasn't that but then again sequoia didn't pick me they didn't even know who the hell I was so I took what I could get and I realized in order to get into good companies if you talk to one company they usually wanna know what other companies have you invested in and so I knew I needed to start building a portfolio of labels so a bunch of logos that I could.

Shaan Puri

To say, "Yep, I invested in that company, I invested in that company, and that company," you would be in good company if you were with those companies. That's the core idea. So, I said, "Let me start building this portfolio." This guy's willing to put up all the cash, and I get a piece of the upside. Let's do it! So, we wrote the check into Lambda School, and I'm very grateful to him for, you know, bankrolling me in that. I think it was a fair enough deal. We invested when it was still a pretty expensive deal because by the time I organized this, the valuation had gone up about 3x. I lost a 3x return just in the time it took me to get, you know, sort of a backer in on the deal. If it was just my own money, and I could've invested after that first phone call, I would've. Anyways, it's gone up about 10 times in value since then. That investment is illiquid, but that's the sort of paper valuation of that company today. So, that was the first dip of my feet in the water, and I said, "Alright, that was good." I made a deal with myself, which is cool: I'm going to try to invest in about 5 to 10 companies per year. This was my goal. I said, "But, you know, I think 5 is the right sweet spot. Unless I have free time, I'll go do 10 a year, but I'll do 5 a year." Whether it's my own money or other people's money, now I'm thinking of myself as an investor. So, that'd be the first thing I would say to you guys: If you ever want to invest, if you ever want to be an angel investor and play this extremely high-risk, high-reward game of startup investing, the number one advice I would give to you is: **Don't wait till you're rich to do it.**

Shaan Puri

You know the financial returns it'll just be a part of a broader portfolio it's not gonna be that exciting but if you really wanna do this start thinking of your yourself as an investor from day 1 and find ways to access the capital there are a ton of people out there with capital myself included who would love for you to be bringing them deal flow and would happily give you carry on any deal that they invest in I remember there was a a guy named sarush who was a 13 year old kid living in canada and he used to use our product we built this website called blab it's like kind of this zoom type of product but he used to use blab all the time and he was like he came to me and he said hey I wanna I don't even remember what what our arrangement was but basically I told him I said you wanna learn about this stuff I want you to go scout out 3 companies a week email me the best one you know the best one that you saw and why you think it would be a good investment why you think it would be a bad investment and your kind of overall recommendation and one of those companies now several years later he's I think 20 years old now so 7 years later the very first company he sent me is a company called applyboard that just raised money at a $1,100,000,000 valuation he brought that email back up to me he emailed me again being like hey why didn't you invest in this thing I told you about and I was like I don't know you're 13 I didn't believe you but yeah there's a bunch of examples like that where you can bring deals to other people and if they invest you can get carry and you can bring it to multiple people so you don't have to be exclusive with any one person you can say great these 5 people all agree that if I bring them a great deal they'll give me a slice of the upside great you could do that with 5 different more established investors at any given time okay enough on that so since then I've invested in about I've looked at I've looked at about 50 companies I've invested in about 4 or 5 and some of the questions that came up when I posted about this were you know first question was how do you approach these companies are they sending stuff to you do you go reach out to them and I told my answer to this is if you looked at the quantity I get more coming to me than I reach out to but if you look at quality the best stuff is me going direct to a founder or a the maker of a product that I see that I love and just saying hey I'm a big fan of what you're doing like I love this I think this could be really big you know would love to chat and potentially invest in the company and then I get on a phone call and then I end up investing in their company and so that's one way another way is just through friends so if now if I have a friend who's doing something my goal would be to be to first check-in to them there are exceptions of course my buddy tyler worked with me at beboe before we got acquired and when we got acquired he didn't want to join us he wanted to go do a startup I said fantastic what are you gonna do and he said I'm working on this crazy robotic arm robotic arm for amputees you know if you have your arm amputated there's this amazing I don't even know what you'd call it prosthetic yeah it's sort of robotic prosthetic arm that is basically you know as close as you can get back to what a normal arm would be and I said tyler that's amazing for the world I won't invest in that because that sounds super hard sounds like a ton of risk and I'm just not gonna do it but most of the times I would love to back back my friends and so that's the other way that I get deals okay so now somebody else asked what is the bank role that you think is required to get started I'll tell you what my answer is my answer is I think you're gonna need to get down 20 or 30 bets so let's take 20 as the low end and I I think you wanna assume you're gonna invest $25,000 on average into the companies typically you can get away with a little bit less if you need I've invested 10,000 into a company before but 25,000 is sort of the realistic big buy in that you would do for for a start up so I'd take that as the average that means you need half a $1,000,000 but you don't need it all upfront so you might invest in those 20 companies over a 3 to 4 year time.

Shaan Puri

Let's take 4 years and now you know you need $125,000 per year to put down the the number I would if you need to make your check size go up or down that's fine if you need to do it over a slightly faster or shorter time or longer time. That's fine the thing I wouldn't do less of is less total companies so I wouldn't go below 20 bets 20 different companies because at that. You're not letting variance work in your favor in fact angellist did a study and basically found that the best angel investors or you know the best returns on average just like in the stock market are essentially by indexing so some individuals can beat indexing but not consistently over a long. Of time and the same is true of start ups if you could just invest in every credible start up that would be the way to do it credible being a keyword here that is hard to define but whatever we don't need to go into that okay somebody else asked what do you look for when you when you talk to the founders you know how do you make your decision if you're gonna if you're gonna make the investment or not so here's what I said I said you know there's a 1,000,000 intangible signals that you're thinking about and going over but really you know it boils down to the following does this person know what the hell they're talking about when I talk to them do I get this sense of confidence and certainty that's not about the style of speak of speech but that the things they're saying actually make sense and when you push and probe a little bit you can tell that they've already thought through those things they have a thoughtful answer about it and they know more about the subject they know about they know so much about the subject which is what you should expect from somebody who's building a company in a space the next thing I think about is are they an executor or just a talker of course you want an executor are they all in on this or are they doing this as a side project do they have a habit of quitting projects or habit of splitting focus like you know I don't want somebody to invest in to go have a podcast and go speak at conferences and do all this other shit and some people get caught up in that and there's a reason I started this podcast after I sold my company not during the last thing I really think about is are they in touch with reality or are they a delusional optimist what I mean by that is do they actually understand the main risk and challenge of their business so like have they correctly identified what the big challenge is to make their their vision come true and are they thinking about you know do they appropriately assess that risk there's a lot of people who don't have what what I'll call a credible view of reality they're out of touch with reality you know when you bring something up that's a risk they just don't think it's a risk and I think that can be a very very big problem and so you know the overwhelming feeling I get when I walk away from those conversations is either wow this person had a lot of clarity and quality of thought about their business or they don't and I basically just don't invest if they don't have clarity or quality of thinking around their business you know the other thing that I sort of think about is you know what have you done in your past so a track record of doing interesting and unique stuff does tend to carry forward throughout your life and so sometimes somebody has zero experience in a given domain but I look at their background and they also went into other things with zero experience and came out 6 months later as a winner as being a leader in the space and so I think that looking at somebody's track record for success is obviously a good sign just because they don't have it doesn't mean it's a bad it doesn't mean you know you eliminate them but it is obviously a huge huge factor if you can do it the other thing is you know the other question I got and I'll this will be the last thing on angel investing is what are the type of returns you're looking for some people think and sam often talks about like he loves great businesses that are like the hustle so this is actually a good example so when sam started the hustle I had an opportunity to invest because sam was a friend and at that.

Shaan Puri

I had learned invest in your friends think of yourself as an investor but I went to the hustle's office which was this like you know tiny rinky dink place and they sat me down they walked me through the vision and I thought to myself this is totally gonna work and I totally don't want to invest and my thinking was I don't think this type of business will generate the type of returns I'm looking for so what do I mean by that angel investing works best when you put small checks into many companies and you're not looking for what the sort of median return is but you're looking for what the maximum return is you basically need 2 or 3 winners in your portfolio to make everything else a rounding error and what that means is that you need every company you invest in to be able to get to about 100,000,000 a year in revenue a 100,000,000 a year in revenue is a $1,000,000,000 company and this isn't about greed it's about the risk and reward profile the risk is so high that you need winners to pay off so so well to justify the risk that you're taking because you're taking both you're taking risk and illiquidity right a start up that you invest in is probably not gonna be liquid for 7 to 10 years and so if you have illiquid if you have a illiquid investment that's extremely high risk you need the payoff to be huge to make up for those two downsides I'll give you an example with lambda school I realized pretty quickly I was like okay so it sounds like the average student is worth what you know $25,000 for you okay so you need 4,000 students in a year to generate you about $100,000,000 okay 4,000 students I believe you can get there that's not a crazy number that's not 400,000 students that's not 4,000,000 students 400,000 students I think 4,000 students will take you up on this offer at the time that I invested I think lambda school at that time had graduated maybe 81 people total you know 81 wasn't 4,000 but it was clear to me that 4,000 was an achievable number and that 4,000 would get them to the.

Shaan Puri

Where they're somewhere between **$50 million** to **$100 million** in revenue, depending on what the value per student was going to end up being. That was believable, and that alone was enough justification to say, "Write the check." In addition, Austin is an incredible founder. He spoke very clearly about what he was doing. There was clear evidence that their approach was different from other people's approaches and might yield different results than what other companies in the space had achieved. For example, most coding boot camps were in-person, while Lambda School was online. Most coding boot camps had a very short duration of **3 to 3 months**, whereas Lambda School offered a **9-month program**. What ended up happening was that most online learning platforms had about a **95% dropout rate**; people did not complete the course. However, Lambda School had, I don't know what the exact numbers were, but around **80% to 90%** of people finished the program, and **80% to 90%** of them got high-paying jobs. So I thought, "Well, those are amazing signals." I believe that they can provide that experience to **4,000 students**, which would get them into the **$100 million** a year range. That's the type of returns you look for. I assume that in a batch of **30 companies**, **3 of them** will drive **95% to 99%** of all the returns. I hope that in the end, this nets out to, you know, I put in, let's call it **$500,000**, and I basically quadrupled to **5x** my money over the **7 years**.

Shaan Puri

And so you know 500,000 in and let's say I I 5 x it that's 2,500,000 out and you know this is not like the biggest craziest life change ever but there's a chance it's much more if you hit one of the real winners than you know I've seen a $25,000 check turn into 25,000,000 that can happen but you know I would say the average or the sort of expected return of what I would call the minimum bar is to 4 or 5x my money over a 7 year. Which nets out I think to like I don't know like a 20% irr or something like that the last thing I would say is the reason to do angel investing is not to make money I don't mean that in a kind of philosophical way what I mean by that is there's much better ways to make money there's ways where your money is liquid there's ways where you have a greater chance greater certainty of success but I do think angel investing gives you one thing it gives you a front row seat on the future and in a way that owning like boeing stock is never gonna do for you you know you can go own apple and you can go make 10% a year return guaranteed and it can be liquid not guaranteed but you know what I mean good chance of success compared to start up investing but start up investing will teach you a lot about business it will teach you a lot about people because every decision is a judgment call about a person and the last thing is it will teach you a lot about the future as you see what different start ups are doing each one of them is pitching you a thesis about how the future is different than the present and I really value that education and I think it's a much better way to get an education I'm getting an education from an expert who is somebody who has seen the future and is coming to me and telling me what it's gonna be I'm gonna get to sit alongside every month and get their updates about how it's coming and the last thing is I have skin in the game so I have money invested in it if I'm correct and they're correct about what the future looks like we get paid if I'm not we get we lose money and that's a great way to learn that's a great feedback loop for learning so that's everything about angel investing that I've I don't know learned or would wanna share with you guys that went a lot longer than I thought if you like that we can do another session on that you know later just ping me I'm gonna put my twitter and my email in the show notes and get in touch that's the best way for me to know what you like what you don't like thank you for listening to the podcast as always okay I'm out of here thank you very much