Shaan breaks down his framework for angel investing: what he looks for in founders, how he evaluates their clarity of thought, and how to think about portfolio construction and expected returns. He uses Lambda School as a concrete example of how he underwrites an investment, and explains why he passed on The Hustle despite believing it would succeed.
Speakers: Shaan Puri (host)
What to Look for When Evaluating Founders [00:00:00]
Shaan: What that means is that you need every company you invest in to be able to get to about a hundred million dollars a year in revenue.
What do you look for when you talk to founders? How do you make your decision if you’re going to make the investment?
There’s a million intangible signals you’re thinking about and going over, but really it boils down to the following. First: 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 — not about the style of the speech, but that the things they’re saying actually make sense? When you push and probe a little bit, you can tell that they’ve already thought through those things. They have a thoughtful answer, and they know more about the subject. 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 a habit of splitting focus? I don’t want to invest in somebody who’s going to start a podcast, go speak at conferences, do all this other stuff. 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 are they a delusional optimist? Do they actually understand the main risk and challenge of their business? Have they correctly identified what the big challenge is to make their vision come true? And are they thinking appropriately about that risk?
There are a lot of people who don’t have a credible view of reality. You bring something up that’s a risk, and they just don’t think it’s a risk. That can be a very, very big problem.
So 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.
The other thing I sort of think about is their track record. A track record of doing interesting and unique things does tend to carry forward throughout your life. 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 a leader in a space. So looking at somebody’s track record for success is obviously a good sign. Just because they don’t have it doesn’t mean you eliminate them, but it is obviously a huge factor.
Why Shaan Passed on The Hustle — And How He Thinks About Returns [00:05:00]
Shaan: When Sam started The Hustle, I had an opportunity to invest. Sam was a friend, and at that point I had learned to invest in your friends — think of yourself as an investor. But I went to The Hustle’s office, which was this tiny rinky-dink place, and they sat me down, they walked me through the vision. I thought to myself: this is totally gonna work — and I totally don’t want to invest.
My thinking was: I don’t think this type of business will generate the type of returns I’m looking for.
Angel investing works best when you put small checks into many companies and you’re not looking for what the median return is — 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. A hundred million a year in revenue is a hot 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 well to justify the risk you’re taking. Because you’re taking both risk and illiquidity. A startup you invest in is probably not going to be liquid for seven to ten years. So if you have an illiquid, extremely high-risk investment, you need the payoff to be huge.
Lambda School: How to Underwrite an Angel Investment [00:09:00]
Shaan: I’ll give you an example. With Lambda School, I realized pretty quickly — okay, sounds like the average student is worth roughly $25,000 for you. So you need 4,000 students a year to generate about a hundred million dollars. Four thousand students — I believe you can get there. That’s not four hundred thousand, that’s not four million. It’s four thousand students.
At the time I invested, Lambda School had graduated maybe 81 people total. There 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 somewhere between a hundred and a hundred fifty million in revenue, depending on what the value per student ended up being. That was believable, and that alone was enough justification to write the check.
In addition to that, Austin was an incredible founder — spoke very clearly about what he was doing. There was clearly evidence that their approach was different than others. Most coding bootcamps were in-person. Lambda School was online. Most bootcamps were three months. Lambda School was nine months. Most online learning things had a 95 percent dropout rate. Lambda School had like 80 to 90 percent completion, and 80 to 90 percent of those people got coding jobs. So I was like: wow, those are amazing signals, and I believe they can get to 4,000 students.
Expected Returns from Angel Investing [00:13:00]
Shaan: I assume that in a batch of 30 companies, three of them will drive 95 to 99 percent of all the returns.
My hope is that in the end, it nets out to: I put in let’s call it $500,000, and I basically quadruple to 5x my money over a seven-year period. So $500,000 in, at a 5x exit that’s $2.5 million out. This is not the biggest life-changing thing ever. But there’s a chance it’s much more if you hit one of the real winners — I’ve seen a $25,000 check turn into $25 million. That can happen.
But I would say the average expected return — what I’d call the minimum bar of success — is to four or five X my money over a seven-year period. That nets out to something like a 20 percent IRR, which I think is a good result for the risk I’m taking.