How To Turn $10,000 Into $150,000 With Angel Investing

Angel Investing, Compounding Returns, Long-Term Bets - March 26, 2022 (about 3 years ago) • 15:07

This My First Million episode features Sam Parr and Shaan Puri discussing Shaan's recent angel investing success and strategies. Sam expresses interest in replicating Shaan's success, leading to a deeper conversation about long-term investing and the power of compounding in startup investing.

  • Shaan's Angel Investing Wins: Shaan shares his recent successes, highlighting how his podcast and network have led to access to exclusive deals, like Hostfully, a SaaS company for Airbnb property managers. He explains the importance of being selected by the investment, emphasizing the role of personal brand and reputation.
  • Networking and Deal Sharing: Shaan credits his network, including friends like Julian Shapiro and connections with specialized venture capital firms like Kraft Ventures, for a substantial portion of his deal flow. He emphasizes regular communication and information exchange within his network.
  • Thematic Investing: Shaan explains his strategy of identifying promising themes, like neobanks, and aggressively pursuing related investments. He cites examples like Nubank, Revolut, and Monzo, illustrating how he applies this strategy across different geographies and customer segments.
  • Sam's Angel Investing Journey: Sam discusses his own experience with angel investing, noting both the initial slow burn and the eventual high returns. He expresses a desire to invest earlier in promising companies.
  • Long-Term Orientation as a Competitive Advantage: Shaan emphasizes the importance of long-term thinking in startup investing, referencing Jeff Bezos's approach with Amazon. He argues that patience allows for lower-priced bets with higher potential returns.
  • Compounding in Startup Investing: Shaan explains how reputation and network effects compound in startup investing, creating a snowball effect that attracts better deals and founders. He contrasts this with traditional stock market investing, where outperforming the market requires proprietary intelligence.
  • E-commerce vs. Angel Investing: Sam and Shaan compare the potential returns of Shaan's e-commerce business and his angel investing activities. Shaan acknowledges that his e-commerce business, due to his majority ownership, will likely yield higher personal returns. However, he highlights the less demanding nature and intellectual stimulation of angel investing.

Transcript:

Start TimeSpeakerText
Sam Parr
So, I started angel investing almost a year ago. Well, I did 5 or 8 companies in the last... before that, I forget. A couple of them have turned out to be meaningful, like turning $20,000 into $300,000, $400,000, or $500,000. I'm like, "Holy shit, this is how it works!" But it sucks for a while, right? Because you just invest, and you're like, "Well, that money's gone," and you don't ever hear about them. Then you're like, "Oh, nice, it works!" In some of those cases, those are huge markups. In other cases, I'm just now experiencing like 2x, 3x, and 4x markups, and I'm like, "That's awesome!" What would have happened if I had invested in this company at a $10,000,000 valuation instead of a $50,000,000 valuation? That would have been wild. I've noticed that your angel investing is on a tear. Our friend Sully just said, "Whatever, Sean..." What did he say? Whatever, Sean...
Shaan Puri
It turned out to be a joke. He was like, "Oh, I got this new brilliant investment strategy." Sean invests in something, and then he tells me about it 2 weeks to 2 months later. Then I pay 10 times the price for the same item from the same company. Yeah.
Sam Parr
it was great
Shaan Puri
Which is... and he's like, "Anecdote." He was joking, obviously. That's not great. He's making fun of himself because that's literally what's happened in like, I think, 6 or 8 deals now. I'll even tell him about it, but he just delays responding for a couple of weeks. Or I forget to tell him, and I tell him, or he tells me about the company a few months later. I'm like, "Oh yeah, I invested in that." He's like, "Awesome! Can you make an intro?" I make the intro, but the price has gone up dramatically because the company has more traction or more whatever. So that's what he was joking about.
Sam Parr
but how are you getting such good shit
Shaan Puri
I don't know, like, dude, it's amazing. So I feel like there's... I think the easy answer is, "Oh cool, I do this podcast, and because of this podcast, people come inbound." The bigger this podcast gets, the more people want you to invest. There's this great thing my buddy Vishal taught me, which is that startups are the only asset class. Real estate doesn't work this way. In the stock market, if you want to buy it, you go buy it. In real estate, if you want to buy it, you go buy it. Startups are the only thing where even if you want in, you don't just get in. The security selects you; the asset selects you just as much as you're selecting the asset. That one insight is pretty important. It basically means you need to build your brand and your reputation so that people want you in deals. The best deals are all super competitive to get into. You want people, when they're first thinking of an idea, to reach out to you because they know... Oh, you know, like, for example, I did a great deal recently, and it's so funny. You're going to hate this; it's going to piss you off so much. You've been talking about short-term rentals. Somebody came to me with a short-term rental startup idea because they thought I was you or something, or somebody was like, "Hey..."
Sam Parr
bro why didn't you send that to me
Shaan Puri
Well, by the way, the subject line that she reached out with was "Last One." It was like, "Hey, I have the smallest bit of allocation left in this."
Sam Parr
motherfucker and it's a company
Shaan Puri
Called Hostfully. You'll love it because it's literally exactly what you're doing. You should get in. I'll enter you; you will get in. But basically, what they're doing is if you own a bunch of Airbnbs, which is kind of like a new market, it's basically like you're a property manager. So you're more than just renting out your home or one home; you have multiple properties. But you're not a traditional property manager who owns a multifamily building of like 32 units. This is for people who run multiple Airbnbs, and it just makes your life way easier as the owner of that. They have a few million dollars in recurring revenue, and the valuation was great. The founder was really impressive. So I was like, "Oh yeah, great SaaS software for people who manage multiple vacation rentals." And then you're over here building a short-term rental club, building this community, doing this thing. I got the benefit because people thought I was you. That's one answer. The "piss you off" answer.
Sam Parr
That's ridiculous. That is the "piss me off" answer. Whatever it is, it is what it is. Send me the... what? I'll send you that one. What's the company called? Hostfully? Can we talk about it?
Shaan Puri
yeah hostfully
Sam Parr
Hostfully. Yeah, well then I can just email her. Do they have a bunch of VCs behind it or are they all angels?
Shaan Puri
I think this rounds up a lot of individuals. I'm not sure; it was like I was kind of late to the party, so I was just pretty quick to be like, "Okay, this makes a lot of sense." You know, once you have revenue in a few million dollars that's recurring, and they really haven't even figured out what their marketing strategy is going to be yet, it's like, "Okay, that's a pretty good signal that this is going to work." It's a pretty indispensable tool for a property owner, so I like that one. But I would say, okay, here are some of the things that have happened. One is when I share deals with you, you share deals with me. My buddy Julian Chapiro shares some of the best deals. He's just very active; he's very consistent with it. Meaning, like, every week he's sending me some good stuff. I would say 40 to 50% of the portfolio is relationships with friends who themselves are experts, specifically people who are experts in one niche. So, it's like we've been doing a bunch of salesperson software, and it's because we have a relationship with Kraft Ventures, which was started by David Sacks. He's kind of like the enterprise SaaS guy; he built Yammer and sold it for $1 billion. His fund specifically just focuses on SaaS companies.
Sam Parr
and what you're you you talked to so david sends you stuff
Shaan Puri
David, not me particularly. My partner, Ramin, who runs my fund, has a good relationship with somebody at Kraft. For example, when they're seeing something good, they're just trading notes all the time. So, we're getting to get in on a lot of their deals. So if you...
Sam Parr
if are
Shaan Puri
they giving you the deal being the deal
Sam Parr
but do they do do are they giving you the deal because they like sean or they like ramin
Shaan Puri
In this case, it's Ramin because he has that relationship. He's catching up with that guy every two weeks, going to get coffee or whatever it is. But then I do the same with my guys, right? I do the same with the people in India or the people in Southeast Asia because I think that's where a lot of opportunity is and that's where I have the right relationships. So we're sharing stuff just amongst that. Then the other thing is themes. For example, once I decide that a theme is correct—worth betting on—what I learned from Sully is the level of aggression you need to have. Once you decide that something is a good idea, you need to go invest in that company and then in the five other companies that are adjacent to it. For example, there's this trend of banking, like neobanks. This started several years ago where people basically said, "Look, banks are something everybody uses but have super low customer satisfaction scores. Their apps sucked, their marketing sucked." So basically, people were like, "Look, we can create a digital-first bank." This started with Nubank, which is probably the best example of this. It's in Brazil, and they're like, "Oh, look..."
Sam Parr
yeah and they're about to go public
Shaan Puri
People are underbanked, so they started a new bank. A friend of mine led their investment, and now it's a $10 billion company with millions of customers in Brazil. The same thing happened in the UK with Revolut and Monzo. This idea of **neobanking** is basically about creating a super slick app for customers, digitally marketing to acquire customers. You're not actually building the banking part; you usually partner with a bank like BBVA or something like that. Under the hood, it's BBVA, but the customer relationship is with a company that's really good at taking care of customers and building good user experiences. Anyway, the short answer is to decide that this is a good idea, which takes many forms. We talked about this before, like Ramp or Brex. Brex, I think, was the fastest-growing YC company in the last few years. You look at it and ask, "Is this a good idea?" Well, what are they actually doing? They're basically giving credit cards to a group of people who were dissatisfied with current credit card providers. Brex did it for startups, and they get a portion every time that card swipes. Oh, interesting! So if a million people are spending $1,000 a year on it and they're keeping 1.3% of the interchange fee of the debit card, you can come up with some number and say, "Wow, this company is going to get big pretty fast." We did that math for neobanks: how much is a neobank customer worth, and how much is a credit card customer worth? Then we went and did it in every niche we could think of. We invested in Keep, which is doing this for Canada, and then we invested in Pluto, which is doing this in the Middle East.
Sam Parr
but but did you holler at them
Shaan Puri
Yeah, then we go search and destroy. Basically, it's like how do you go hunt for the best companies that are doing this in either this geography or with this customer base? So, for example...
Sam Parr
you just dm them on twitter probably
Shaan Puri
Yeah, exactly. We just reach out, cold DM, and say, "Hey, I'm a believer in this for this, this, and this reason. What you're doing looks super interesting. I would love to invest." Sometimes it comes inbound. Sometimes it's, "Oh, you got a hundred things inbound," but you know what you're looking for. So you quickly pounce on the four that fit your thing.
Sam Parr
aren't you out of money at this. From the fund though
Shaan Puri
I raised more money because I was like, "Before, I thought, dude, will I get $1,000,000 worth of deals every quarter that are good deals?" I'm not just trying to invest in crap, so I need to invest in good deals. I was like, "I don't know how many high-quality deals I'll have." Now I realize that whatever I had before was too low. So now we're doing almost $2,000,000 a quarter. We raised more money because we just had better deals.
Sam Parr
Man, I started angel investing almost a year ago. Well, I did it with 5 or 8 companies in the last... before that, I forget. A couple of them have turned out to be meaningful, like turning $20 into $300,000, $400,000, or even $500,000. I'm like, "Holy shit, this is how it works!" But it sucks for a while, right? Because you just invest, and you're like, "Well, that money's gone," and you don't ever hear about them. Then you're like, "Oh, nice, it works!" In some of those cases, those are huge markups. In other cases, I'm just now experiencing like 2x, 3x, and 4x markups, and I'm like, "That's awesome!" What would happen if I had invested in this company at a $10,000,000 valuation instead of a $50,000,000 valuation? That would have been wild! How do I do that?
Shaan Puri
One of the reasons I hated startup investing for a while was because I was like, "Is this the best use of time and money?"
Sam Parr
dude dude it feels like an expensive hobby I'm just spending money and not getting anything in return yeah
Shaan Puri
And then I realized two things. Bezos has this quote, which I believe goes: "One of the biggest competitive advantages you can have is being long-term oriented." Basically, if you prioritize a 10-year view, where you're like, "Okay, I'm going to maximize what I can do in 10 years," and the other guy is trying to make the most they can for their quarterly earnings call, right? This is how Amazon worked. Amazon was basically like, "We're willing to lose money to invest so that we provide two-day shipping instead of seven-day shipping, or free two-day shipping, or a larger selection." But it's going to cost us more because we're going to have more inventory or whatever. So, we're going to go into all these other verticals: books, CDs, whatever. They basically said that his strategy was long-term. This is going to be the most valuable strategy. Short-term, we're going to get punished by the market because our quarterly earnings are not going to look great. But that turned out to be the magic, you know, the sort of like the biggest competitive advantage Amazon had was their ability to be long-term oriented. I think this is true just in general. If you're competing against someone who needs a result in one year, and you're willing to be patient and get the result in five years, seven years, or ten years, you can make bets that they can't make. This means you get to have lower-priced bets that will pay off bigger just over a longer time horizon. So, I think if you have the luxury of a long-term horizon, that's a competitive advantage. That's how startup investing works. If you need money or you need to see positive growth in one year, startup investing sucks. If you're willing to play a 10-year game, this could be an awesome game to play.
Sam Parr
Do you think that... well, do you think? You told me, "Man, I think I could 3.5x my fund," because that's average. Now it seems like it's going to be significantly more.
Shaan Puri
Yeah, like, you know, you think about kind of like what's the floor. I think a 3.5x would be a solid outcome, but nothing to write home about. With a small fund like ours, you could see things where you can get a 15x or even a 20x. There are literally crypto small funds like ours that have had a 100x return. They 100x'd the fund in that period of time. So, you know, you shouldn't really underestimate it. The ceiling is high, but the floor is pretty reasonable. The first thing is, okay, being long-term oriented is a competitive advantage. I like Sharpe investing for that reason. The second point is, you want to do things that compound. For example, if I wanted to beat the market in the stock market, right? I want to beat the S&P 500. I need to have proprietary intelligence; I need to be smarter than anybody else about something. I think just being smarter at a game where money's on the line is really hard to do. Whereas if you say, "Hey, my advantage comes from my reputation or my network of people that I know," that's just going to compound every year. The more deals I share with you, the more deals you're going to share with me. The more companies I have that are winners, that's going to make it easier for me to get into the next winner or for founders to reach out to me. They'll say, "Oh, I saw you did these five Indian unicorns. I'm in India; I want to be the next one of them. Can you invest in me?" So, compounding also comes into play here in a way that doesn't happen in the stock market and doesn't even really happen in real estate. Real estate has it to an extent, but not in the same way as how fast your reputation can compound in startup investing. So, anyway, those are my two reasons why I now actually view startup investing as a game worth playing because it uses two of the superpowers that I believe in and that I think most people undervalue.
Sam Parr
is it gonna what do you think will earn more the ecomm thing or this angel investing thing
Shaan Puri
Probably for me personally, the e-commerce thing is significant because I own the majority of that company. So, you know, if it sells for $50,000,000 or $100,000,000, I'll own the majority of it. Whereas with startup investing, it's like my fund invests $100,000, and we own 0.8% of this startup. I personally have 20% of the carry, but then I share with Ramin, Ben, and Zach. So I personally own 5.14% of the carry or whatever. Sure, sure, sure. So it's not like you're owning a slice of a slice of something big versus just owning the majority of something. Selling for a decent chunk is just better financially.
Sam Parr
It's so much better. And yeah, I think that whenever people raise money, I'm like, "Are you sure, man? You might be able to sell us for $50,000,000 and you'll make more money than if you raise money and sell it for $500."
Shaan Puri
Yeah, exactly. Now, you know, I have to operate that other business. Whereas startup investing is like, you know, a joy. You just read about cool ideas, you meet awesome founders, and you say yes. You write the check, and then they go do the hard work. So it's a, you know, just a different thing.