Episode of My First Million with Sam Parr and Shaan Puri.
Transcript
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Kind: captions Language: en and what that means is that you need every company you invest in to be able to get to about 100 million a year in revenue what’s up guys Sean here Sam is out so I am doing this episode solo and I’m going to 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 glad questions and so I thought I would come on the podcast and actually talk a little bit about it what 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 you know somebody like an eland Gil 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 100 companies here’s the five huge ones that you know about where I’ve made millions and let me talk to you about what I look for an 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 want to talk about because that’s where I’m at you know 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 adviser 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 kind of 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 know then you 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 hot dog that Disney world analogy went pretty far so anyways point is I’m a beginner I’m learning as I learn I say this stuff out loud so there’s me just learning in public and if somebody out there is listening because I know a bunch of people would 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 usually do it this way instead those are my favorite types of messages so feel free to message me if that’s the case but all right let’s talk about angel investing so my angel investing life started truly about six years ago seven 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 and an idea lab called monkey inferno so p.m. kind of a boring job p.m. but not at a boring company this was a very interesting company was a company that builds companies an idea lab and I was the only product manager there was only product guy everybody else is an engineer and I’m making 25,000 in 30 companies I need 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 take you would do for for a start-up so I take that as the average that means you need half a million bucks but you don’t need it all up front so you might invest in those 20 companies over a three to four year time period let’s take four years and now you know you need 125 thousand dollars 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 a longer time period 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 point you’re not letting variants work in your favor in fact AngelList did a study and basically found that the best angel investors or the you know the best returns on average just like in the stock market are essentially by indexing so some individuals can be indexing but not consistently over a long period of time and so the same is true of startups if you could just invest in every credible startup that would be the way to do it credible being a key word here that is hard to define but whatever we don’t need to go into it 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 million 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 the speed of speech but that the things they’re saying actually makes 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 don’t but they know it’s 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 I invest in to go have a podcast and go speak at conferences and do all this other I mean 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 they a delusional optimist with 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 have they appropriately assess that risk there’s a lot of people who don’t have what I call credible view of reality they’re out of touch with reality you know you bring something up that’s a risk they they just don’t think it’s a risk and I think that’s 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 six months later as a winner as it being a leader in a 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 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 and the other thing is you know the question I got no 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 Kassam was a friend and at that point I had learned invest in your friends think of yourself as an investor but I went to the hustles office which was just 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 am I 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 two or three 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 million a year in revenue 100 million a year in revenue is a hot there’s a billion dollar 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 in liquidity right a startup that you invest in is probably not gonna be liquid for seven to ten years and so if you have an illiquid if you have an 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 check turn into twenty five million that can happen but you you know I would say the average or they sort of expected return of what I would call the minimum bar of success is to four or five X my money over a seven-year period which Nets out I think to like I don’t know like a twenty percent IRR or something like that the last thing I would say is the reason to do angel investing is not to make money and 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 of 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 only owning like Boeing stock is never going to do for you you know you can go own Apple and you can go make 10% a year return guaranteed and it could be liquid not guaranteed but you know I mean good chance of success compared to startup investing but startup investing will teach you a lot about business it’ll teach you a lot about people because every decision is a judgment call about a person and the last thing is it’ll teach you a lot about the future as you see what different startups 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 it’s coming to me and telling me what it’s going to 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’ve 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 want to 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 in my 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 [Music] [Applause] you