#82 - My Angel Investing Strategy

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and check it out it's actually free so quiet light brokerage dot com that's quiet like be quiet light like a light switch light and brokerage dot com slash my first million course and it's a course that talks about selling your online business and what you can do to plan for your exit so go ahead check it out quiet light brokerage dot com slash my first million course peace 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 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 ten years you know somebody like an el gil jason cal 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 hundred 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 little whole lot about that i'm sure somebody has blog 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 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 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 know 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 dog that disney world analogy went pretty far so anyways point is i'm a beginner i'm learning as i learn i say to stuff out loud so there's me just learning in public and if somebody out there is listening because know 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 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 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 at an ideal 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 that builds companies so an ideal lab and it was the only product manager there it was only product guy everybody else was an engineer and i make a hundred twenty thousand dollars a year and so i don't think of myself like an investor right hundred twenty 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 in an his investor so the first thing was the first lesson of angel investing was think of yourself as an investor because those first three or four 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 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 twenty k checks to all of those friends it might have been i might needed a two fifty k but i would have turned that into know at least five million dollars 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 toil away and i remember thinking hey this guy is i've 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 a lot of people will want to have more common 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 been on six or seven of those companies and and several of them did really well calm now as a you know a multi billion dollar company so out of just that group of friends i think there were probably two or three companies that have reached over five hundred million dollars in value valuation and i would have been investing when they were like under five so the lesson i learned four 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 and as investor that an 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 four five years i still don't you know have you know millions of dollars on the bank to go write these checks and i see this company called lambda school and i had been thinking about a a product like this or a project like this to go do myself and when i saw i was like whoa this guy doing a much better version of what i was thinking might might work something i thought about doing so i started calling the guy started talking to him and i told them you know i wanna invest in your company which was true not a lie i did want investment 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 wanna invest and he started sent you know sharing his slide deck sharing the materials and i'm like you know i have to find a way to invest this company and i thought to myself okay i need to invest twenty five k in this company okay no problem i can sell a 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 ten companies you would expect some kind of distribution where you're gonna get four or five of the companies to go to zero you know two or three of the companies to return somewhere between one and three x and then hopefully you know you end up with one or two companies that actually break out and do ten x plus ideally you get to something that does a thousand x plus or ten thousand x plus those are the the the early investors in uber for example so anyways i always knew i could invest in one company but i never you need about thirty bets to really be you know an angel investor to have a 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 twenty five thousand dollars thirty companies i need seven hundred fifty thousand dollars i didn't have that so that's why i didn't pick myself as a investor but what i did was very smart i gotta get myself credit on this one when i knew i wanna an invest in land school i said okay how do i get the money to invest in this and so i talk to a friend and i said who i knew invest and i said hey at 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 a sort of a venture partner and an an entrepreneur who who can help you with your investments and we can set up a deal so here's you know the first deal we set up was cool any deal we invest in i get ten percent carry meaning i don't put any capital in i take zero financial risk and i get ten percent 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 fifty percent to their scouts you know they were extremely extremely generous so forty five percent something like that so this wasn't that but then again s sequoia didn't pick me they didn't even know 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 wanna 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 point to and say yep i invested in that company i invested in that company and that company and you would be in good company if you were with those companies right that's the core idea so i said let me start building this portfolio this guy wanted to put up all the cash 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 bank rolling me in that and i think it was a you know fair enough deal and so we invested when it was you know it was still a pretty expensive deal because by the time i organized this the valuation had gone up about three x so i lost a three x return just in the time it took me to to get you know sort of a back in on the deal if it was just my own money and i could've have invested after that first phone call i would but anyways it's gone up about ten times in value since then that that investment which is ill liquid but that's the sort of paper valuation of that company today so that was the first dip in my feet in the water and i said alright that was good and i made a deal with myself which is cool i'm gonna try to invest in about five to ten companies per year this is what i my my goal was said but you know i think five is the right sweet spot unless i'm you know if i have free time i'll go do ten a year but i'll do five a year and whether it's my own money or other people's money now i'm thinking of myself and this vet as an investor so that'd be the first thing i would say to you guys is if you ever want to invest if you ever wanna be an angel investor and play this extremely high risk high reward game of start up investing the the number one advice i i'd would give to you is don't wait till you're rich to do it because at that point 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 one 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 s who was a thirteen year old kid living in canada and he used to use our product we built this website called lab it's like kind of this zoom type of product but he used to get lab all the time and he was like he came to me and said hey i wanna don't 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 three 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 would be a bad investment and your kind of overall recommendation and one of those companies now several years later he's i think twenty years old now so seven years later the very first company he sent me is a company called a p board that just raised money at a one point one billion dollar valuation he brought that email back up to me emailed me again being like hey why didn't you invest in this thing i told you about i was i don't know you're thirteen 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 carried and you could bring it to multiple people so you don't have to be exclusive with one person you could say great these five people all agree that if i bring them a great deal they'll give me a slice of the upside great you could you could do that with five five different more established investors any given time okay enough on that so since then i've invested in about i've looked at the i've looked at about fifty companies i've invested in about four or five 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 too but if you look at quality the best stuff is me going direct to 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 have to get on a phone call and then i end up investing in their company and so that's one way another way is just your friends so if now if i have a friend who's doing something my goal would be to be the first check into them there are exceptions of course my buddy tyler worked with me at be before we got acquired and when we got acquired he didn't wanna join us he wanted to go do a startup i said fantastic what he gonna do and he said i'm working on this crazy robotic arm you robotic arm for amp amputee you know if you have your arm amputated there's this amazing you know i don't know you know what you call prosthetic yeah it's sort of robotic prosthetic arm that is basically you know as close as you can get back to 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's sounds super hard it sounds like it's 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 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 twenty or thirty bets so let's take twenty as the low end and i think you wanna assume you're gonna invest twenty five thousand dollars on average into the companies typically you can get away with a little bit less if you need i've invested ten thousand into a company before but twenty five thousand is sort of the the realistic big buy in that you would you would do for for a storm so i'd take that as the average that means you need half a million bucks but you don't need it all up upfront so you might invest in those twenty companies over a three to four year time period let's take four years and now you know you need a hundred twenty five 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 longer time period that's fine the thing i wouldn't do less of is less total companies so i wouldn't go below twenty bets twenty different companies because at that point you're you're not letting variants work in your favor in fact angel did a study and basically found that the best angel investors ortho 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 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 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 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 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 know about they know so much about the subject which is what you should expect from somebody who's building out a company on space the next thing i think about is are they an executor or just a talker of course you wanna execute 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 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 they a delusional opt what 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 have they appropriately assess that risk there's a lot of people who don't have what what i'll 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 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 well 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 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 direct 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 doesn't mean it's it's a bad you it doesn't mean you know you eliminate them but it is obviously a huge huge factor if you can do it the the other thing is you know the other the 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 oh 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 point i had learned invest in your friends think of yourself as an investor but i went to the hustle office which was just like you know tiny rink 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 wanna 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 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 invest in to be able to get to about a hundred million a year in revenue a hundred million a year in revenue is a is 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 liquidity right a startup that you invest in is probably not gonna be liquid for seven to ten years and so if you have ill if you have a ill investment that's extremely high risk you need to 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 twenty five thousand dollars for you okay so you need four thousand students in a in a year to generate you about a hundred million dollars okay four thousand students i believe you can get there that's not a crazy number that's not four hundred thousand students is not four million students four hundred thousand i think four i think four thousand students will take up in this offer at the time that i invested in i think land will at that time had graduated maybe eighty one people total you know there wasn't eighty one wasn't four thousand but it was clear to me that four thousand was an achievable number and that four thousand would get them to the point where they're somewhere between fifteen million and a hundred million dollar revenue business depending on what the value per student was was gonna end up being and so that was believable and that that alone was enough justification to say write the check in addition to austin's an incredible founder he spoke very clearly about what he was doing there was clearly evidence that their approach was different than other people's approach and might get a different result than what other people other companies in the space have gotten for example most of the coding boot camps were in person and lambda of school was online most of the coding boot camps were in a very short period three to three months and lambda school was like a nine month program and what ended up happening was that most online learning things had like a ninety five percent dropout rate people did not complete the course and lambda school had like i don't know what the exact numbers were but eighty to ninety percent of people finished the program and eighty percent to ninety percent of them got jobs a high ping jobs and so i was like well they've you know those are amazing signals and i believe that they can get to four thousand students i believe they can give that experience to four thousand students which would get them into a hundred million dollar year range so that's what type of returns you look for and so i i assume that in a batch of thirty companies three of them will drive ninety five to ninety nine percent of all the returns i hope that in the end this nets out into you know i put in let's call it five hundred thousand and i i basically quadrupled to five x my money over the seven year period and so you know five hundred thousand in and let's say i at five exit that's two point five million out you 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 then you know i've seen a twenty five thousand dollar check turn into twenty five million that can happen but you you know i would say that average 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 something like that the last thing i'd 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 a 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 owing owning like boeing stock is never gonna do for you you know you can go own apple and you can go make ten percent a year return guaranteed and it could 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'll teach you a lot about people because every decision is a judgment call about a person and last thing is it'll teach you a lot about the future as you see what different start are doing each one of them is pitching you with these 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've 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 it's a great feedback loop for learning so that's everything about angel investing that i've i don't know learned or would would wanna share with you guys that went a lot longer than i thought if you like that we could 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