How to Create Your Own Real-World MBA – II

Brainstorming in Boulder, CO with a class of founders from TechStars, where I’ve been a mentor. After this particular trip, I ended up advising Graphic.ly. (Photo: Andrew Hyde)

Disclaimer: nothing on this site is legal advice, and I am not an investing expert.

This post is continued from Part I.

Part I explained how, instead of getting an MBA, I invested the tuition dollars into angel investing. To recap, my current stats for the two-year “Tim Ferriss Fund” look like this:

15 or so total investments

0 deaths

2 successful “exits”, or sales (including my own company)

If we look at the value of my remaining start-ups on paper, based on subsequent funding and valuations, the portfolio is probably up well over 4x. This means nothing (remember Webvan?), but it’s fun to look at the spreadsheet.

This post will look at how I’ve found deals, how I filter deals, and the rules I’ve set for myself. The latter can teach broader business lessons, even if angel investing never enters your life…

Before we get started: you almost always need to be an “accredited investor” to angel invest. If you aren’t comfortable lighting your money on fire, you shouldn’t invest in start-ups–period. That doesn’t mean, however, that you can’t learn a few things from the sidelines.

Before we get started – part deux: angel investing can be complicated. I’ll be using some fuzzy math and simple examples to get the point across. This is intended as a primer, not as a guide to the intricacies of investing.

Last but not least, I’ll use a gender-neutral “he” for the sake of simplicity instead of “he or she”, which is cumbersome. Both sexes can play well in this game (check out Esther Dyson), and both can screw it up equally badly.

For those who want some resources upfront, here are a few:

If you want to be an angel investor:

Read – How to Be an Angel Investor

Read – Is it Time for You to Earn or to Learn? by Mark Suster – this is a must-read reality-check that takes into account dilution and other nasties. Though written for people thinking of joining start-ups as employees, it applies to angels.

If you want to recruit/be an advisor:

Read – Everything you ever wanted to know about advisors, Part 1

Read – the above Suster piece if you think advising a few start-ups will make you rich. Run the numbers first.

If you want to find angel investors:

AngelList (go here to pitch me or anyone else in their roster)

Consider applying to a “seed accelerator” program that will cultivate you. For a complete list of such programs and upcoming application deadlines, visit Kaljundi’s site. Here are few well-known examples:

Y-Combinator (Mountain View, CA)

TechStars (Boulder, CO)

LaunchBox (Washington, DC)

LaunchPad (Los Angeles)

SeedCamp (London)

Capital Factory (Austin)

i/o Ventures (San Francisco)

Investors vs. Bootstrapping – Some Warnings

As exciting as I find the start-up game in Silicon Valley, it can also be depressing.

I see capable first-time entrepreneurs, full of piss and vinegar, run into fundraising and get their asses kicked by seasoned venture capitalists (often affectionately called “vulture capitalists”). Two or three years later, their start-up baby is either dead or their ownership has dwindled to the point where their enthusiasm is gone.

Here are some questions and warnings that might help avoid this:

1) Why do you need funding?

If you can bootstrap to profitability and one of your goals is to work for yourself, I’d suggest thinking twice. If you take a few million dollars, you will–on some level–be working for investors. If you make a mistake and allow investors to have board control, which can happen if you spend funding faster than expected, you no longer run your start-up. 🙁

2) Avoid angel investors with few or no prior start-up investments.

The family dentist wants to put in $50,000 and will give you whatever terms you want? Sounds great! Don’t do it. Ditto for the successful CEO who’s never done angel investing, as seductive as it will be.

One good friend just had her start-up implode (after millions of investment) because her primary investor, a former tech CEO, didn’t have the stomach for start-up investing. He panicked when things deviated from the business plan (um, welcome to start-up land), and began doling out funding in two-week increments and insisting on near-weekly board meetings. He became the micromanager from hell. No longer was the real start-up CEO able to make CEO decisions, and the company was doomed.

Only take investment from people who have invested in a few start-ups. Having run a start-up doesn’t qualify one as risk-tolerant enough for start-up investing.

3) Don’t take a ton of money just because the valuation is sexy, or because you give up less ownership.

This problem is more common with venture capital (VC), but it worth learning early: it’s a bad idea to take money from someone simply because they offer a high valuation. Let’s say two investors want to be your lead investor. Investor A thinks your start-up is worth $3 million and offers to buy 33% of the company for $1 million — to fund you with $1 million. Investor B thinks you’re worth $10 million and offers to also give you $1 million, but you’ll only give up 10% of the company!

Go with Investor B, right? Well, not so fast. If you come out of the gates with very little to show but a $10 million valuation, things can blow up in your face a few ways:

Your exit options become fewer. If Investor B needs a 10x return for his portfolio and has the ability to block your sale for less, this means you have to sell for at least $100 million. If you’re a first-time founder, putting $1-2 million in your pocket with an early sale for $10 million could have changed your life forever and given you “f**k you” money to do anything you wanted. Now it’s home run or nothing.

– You run the real risk of a “down round”. If you don’t make it to profitability with that $1-million round, you’ll need to raise more money later. If you haven’t made a ton of progress, including a ton of new customers, the fundraising community will be skeptical and probably insist your $10-million valuation was too high, or that you’ve lost value since that round. Now you’ll need to do what’s called a “down round” (some examples here). In most cases, this spells the end for your start-up.

OK, with those warning out of my system, let’s look at some definitions and how I’ve done things so far.

Investor vs. Advisor, and Some Definitions

When dealing with tech start-ups, the following terms are important to understand. Below are some very general definitions, keeping in mind that almost everything is negotiated and on a case-by-case basis:

“Seed” or “Series-A” = two early rounds of financing common in the start-up world. “Seed” is first, and often either family and friends or $100,000-$1,000,000 from angels. “Series-A” might be around $1,000,000-$5,000,000 and comprise primarily angels and perhaps 1-2 venture capitalists from larger firms that could later participate in larger “Series-B” or “Series-C” rounds, if needed for profitability or to compete. These “B” or “C” rounds usually involve many millions of dollars, which few angels will put up as individuals.

“Dilution” = Having your percentage ownership lowered when new investors come in. If, for example, you own 1% of a start-up at seed stage, if there are any future rounds of financing, your portion of the pie will almost always shrink–you will be diluted. This is critical to keep in mind when calculating potential outcomes as an investor or advisor.

“Investor” = someone who writes checks in exchange for equity (a certain % ownership) in the start-up.

“Advisor” = someone who advises a start-up in exchange for equity over time. “Advising” can include key introductions (to customers, partners, important hires), “syndicating” financing (getting other investors on board), developing/improving the product, helping with PR/marketing/customer-acquisition, or anything else a start-up might need.

So what percentage do advisors get? For someone who’s just doing a few intro’s, or whose name you’re using to get investors, it might be 0.10 – 0.25%. For someone who’s investing real time and helping to build the company, or someone whose involvement could make the difference between success and failure, it could be as high as 2%… or even more. There are start-ups who think giving more than 0.25% is ridiculous, and there are start-ups who find 2% a steal if they can get the right person.

Advisors generally receive their equity over a period of time, often 12-24 months.

This means that if an advisor signs an agreement for 1% that “vests” over 12 months, he would get 1/12 of one percent each month, and the start-up can cancel the deal at any time. If the start-up gets fed up with this advisor after six months, it means he gets the 0.5 percent that vested, but no more.

Different strokes for different folks, but all-star advisors generally = better investors, better investment terms, and faster outcomes. To me, that’s a legitimate no-brainer.

If I were to found a tech start-up and aim for the fences (IPO or sale), I would do what several successful tech CEOs I know are doing right now: give 3-5 bad-ass advisors 1-2% each, depending on time required, and self-fund until you hit break-even or profitability. Then, go out to raise $500-750,000 from key angels who can open doors to potential acquirers and help you get to “scale”. “Scale”, in this context, meaning the point at which you can go big, as in millions of users or nationwide, with the simple addition of money: the costs and revenues of your customer acquisition are predictable. Money in = more money out.

Last, you go to potential acquirers (often potential competitors) to see if they’d like to discuss “partnerships” or funding you; both approaches are used to start conversations that hopefully end with “why don’t we just buy you instead?” from their side.

If that doesn’t work, you get more funding, grow a lean monster, and eat their lunch.

The Start-Ups and Deal Flow

Here are the start-ups I’m involved with, whether as an investor or advisor, in no particular order:

[TIM UPDATE FROM 2013: OK, three years later, here is a more current list. Hilarious that Uber was called “UberCab” back in the day!]

Twitter (investor) – micro-blogging platform

Digg (investor) – see what’s most popular on the web

StumbleUpon (advisor) – Pandora for the coolest content on the web (this is how I find much of my most popular Twitter material)

Evernote (advisor) – capture anything in the world you want to remember

Posterous (investor, advisor) – the simplest blogging platform in the world

CrowdFlower (advisor) – crowd-source just about anything for pennies; 500,000 workers in 70+ countries.

SimpleGeo (investor) – on-demand geodata infrastructure

Graphic.ly (advisor) – the next (gorgeous) evolution of comic books

Foodzie (investor, advisor) – find and buy incredible artisinal food in the US (my favorite cookies in the world are here)

Shopify (advisor) – beautiful and easy e-commerce for selling anything

RescueTime (investor, advisor) – time and productivity tracking

ReputationDefender (investor) – monitor and repair your reputation online

TaskRabbit (advisor) – get any task done, from dry cleaning to research (use code “FERRISS10” for $10 off your first task)

UberCab (advisor) – Fully automated car dispatch with built-in reputation system – ride like a European diplomat.

Badongo, DocumentHosting.com (investor) – file and document hosting/sharing

DailyBurn (investor, advisor) – exercise and diet tracking

iMarket Services (advisor) – creating hubs for niche markets like stand-up comedy

Samasource (not-for-profit – advisor) – outsource your tasks to those most in need (refugees, etc.)

Donorschoose.org (not-for-profit – advisor) – eBay for helping public school children in need of basic supplies.

“Deal flow” refers to how you find the start-ups you invest in, or how they find you. All of the companies except DonorsChoose.org and iMarket Services (respectively: have known the CEO for ages, chance meeting at SuperBowl party) were found through:

– Referrals from friends who are angels and tech CEOs

Y-Combinator (Posterous, RescueTime)

TechStars (DailyBurn, Foodzie, Graphic.ly)

Facebook Fund (fbFund) (TaskRabbit, Samasource)

Twitter DMs from me to the founders (Evernote, Shopify)

My Rules

What makes me interested in a start-up… or rules them out?

Let’s go through the bullet-points–general rules of thumb–first, some of which are borrowed from much more experienced folk like Mike Maples, Chris Sacca, Travis Kalanick, and others.

These are the considerations I run through when looking at start-ups, but it doesn’t mean that all of the companies in the portfolio passed all of the criteria.

In no particular order, and written as a stream of consciousness:

– If my readers won’t shut up about them, I listen (this led me to reach out to Evernote and Shopify)

– I generally look for these questions to be answered via email, but I now much prefer to have them answered through the AngelList form. If you don’t know the terms (“deck”, “traction”, etc.), you need to learn them before pitching Silicon Valley types.

– Does it offer the possibility of at least a 5x return? Good angel investors in Silicon Valley do not invest in lifestyle businesses or profit shares–they want to turn their $100,000 into millions. 5x return potential is just the entry point for working with decent angels at the seed or Series-A level. Many will be filtering for 20-30x potential, depending on the size of their fund.

– If it’s a single founder, the founder must be technical. Two technical co-founders are ideal.

– Have the founders ever had crappy service jobs, like waitering or bussing at restaurants? If so, they tend to stay grounded for longer. Less entitlement and megalomania usually means better decisions and better drinking company.

– I must be eager to use the product myself. This rules out many great companies, but I want a verified market I understand.

– I must understand their customers and be able to recruit, in military terms, HVTs–High Value Targets.

– Do the founders actually test some of what I’m recommending? My data is based on 15+ start-ups and more than $1M in direct response advertising–there are a few things I understand very well, sign-up conversion being one example. I will usually suggest 1-2 elements for testing in an initial meeting, well before investing, and if at least one element isn’t tested within a week, they’re out. If the product (usually a website) isn’t split tested or “iterated” fast enough, it usually foreshadows death for tech start-up. Speed is often the only competitive advantage smaller guys have.

– They need to understand the eco-system in which they play. What recent companies have sold for what amounts? Who are the most likely acquirers? Who are the most formidable competitors, and what types of funding (even investors) and resources do they anticipate needing to compete? It it a winner-takes-all market where only one company will reign supreme (e.g. businesses dependent on network effects), or can many large profitable companies co-exist?

– Founders must pass the “mall test”: if you were to see them in a mall, would you walk in a different direction, would you walk over to say “hi” and move on, or would you invite them to join you for coffee or whatever you’re doing next? If the founders don’t fall in the last group, don’t invest. This is a close cousin of the simpler “would you invite them out for beers just to catch up” test.

– Am I following my rules, but are other investors turning them down? These days, I take this as a positive sign. Mike Maples explained this to me: breaking your rules to co-invest with well-known investors is usually a bad idea, but following your rules when others reject a start-up can work out extremely well. DailyBurn, my only exit to date, was a mild example of this. They hit my checklist boxes, but the majority of the investors (but not all) I asked to participate declined. It thrills me that this start-up–from Alabama!–has so far outpaced most in Silicon Valley. Bravo.

Now the rules that require a little explanation:

1. Don’t do it solely for the money, but know your minimums.

Investing in start-ups has to be, on some level, a labor love. You need to love helping entrepreneurs. That said, don’t actively waste your money and life by failing to do basic math.

Set a minimum threshold for each start-up investment. The minimums could be what a success should cover, or a minimum dollar amount. For example:

A. Each start-up, if it exits at 5x its current valuation, should be able to cover 2/3 of your total fund.

Most entrepreneurs think their start-up will be the next Google, but you can’t base your investment strategy on the assumption that each company has the potential to exit for a billion dollars. Look at comparables (similar companies) that have sold, and their average purchase prices. If you want to keep it simple, you might use 5x at Series A round as your assumed “success” multiple.

What this means:

Let’s say a company is raising $500,000 in a Series A. Investors decide it is currently worth $1,000,000, so–after receiving the $500,000 infusion–it will have a $1,500,000 “post-money” valuation. (For sake of simplicity, we assume that Investors don’t require an option pool for new employees to be set aside in the pre-money valuation. For more on that, read this) Let’s also say that you put in $15,000, so you “own” 1% of the company post-money.

Remember the rule of the header: “Each start-up, if it exits at 5x its current valuation, should be able to cover 2/3 of your portfolio.”

Most of your start-ups will fail, so the successes need to make up for losses.

If we’re using the “2/3” rule, and your fund (like mine from 2007-2009) is $120,000, you shouldn’t invest $15,000 in this start-up, as 15K x 5 = $75,000. 2/3 of $120,000 is $80,000, so you’d either have to invest slightly more, lower the valuation, or add in advising and get more equity in return. This isn’t even accounting for dilution, which is likely in most cases.

B. Each start-up, if it exits at 3x its current valuation, should allow you to walk away with $300,000.

This is one of my preferred methods for qualifying or disqualifying a start-up.

As much as I might love them, I’m not going to take another part-time job for 1-3 years for a $50,000 pay-off. This is where first-time entrepreneurs who refuse to give advisors more than 0.25% often lose the forest for the trees.

Let’s say a start-up ends up with a 3-million (3M) post-money valuation. If I help them more than triple the value of their company to 10M, how much do I walk away with if there are no more rounds of funding? If they offer me 0.5%, I walk away with $50,000. If, considering the time invested, I could earn 5x that doing other things, it makes no sense to do the deal if this is my rule.

Woe is the angel who bases his or her decisions on all start-ups having the potential for a billion-dollar exit. Rule #1 in angel investing is, as far as I’m concerned, the same as Warren Buffett’s first two rules of investing:

Rule #1: Don’t lose money.

Rule #2: Don’t forget Rule #1.

2. Move from investor –> investor/advisor –> advisor

Let’s assume you have committed to spending $60,000 per year on angel investments, just as I did. This means two things:

– You aren’t going to be able to satisfy the above rule of “2/3” or the $200,000 minimum for many companies. At best, you’ll have 1-3 investments.

– 1-3 investments doesn’t work in angel investing, where most pros would agree that 9 out of 10 (on a good day) will fail.

– It’s therefore impossible for you to get a good statistical spread with $60,000 per year. The math just doesn’t work.

The math especially doesn’t work if you f*ck it up like I did (see Part I) by getting over-excited and dropping $50,000 on your first investment. Oops!

Here’s how I dealt with this problem:

First, I invested very small amounts in a few select start-ups, ideally those in close-knit “seed accelerator” (formerly called “incubator”) networks like Y-Combinator and TechStars. Then I did my best to deliver above and beyond the value of my investment. In other words, I wanted the founders to ask themselves “Why the hell is this guy helping us so much for a ridiculously small number of options?” This was critical for establishing a reputation as a major value-add, someone who helped a lot for very little.

Second, leaning on this burgeoning reputation, I began negotiating blended agreements with start-ups involving some investment, but additional advisory equity as a requirement.

Third and last, I made the jump to pure advising. Since the end of the first year of the “Tim Ferriss Fund,” more than 70% of my start-up “investments” have been with time rather than cash. In the last 6 months, I have written only one check for a start-up. The goal is still the same as in the first phase: deliver above and beyond the current value of my potential equity (if fully vested) as quickly as possible. The next post this week will give an example of this.

Comment from a proofreader and experienced angel, Naval Ravikant, who was also a co-founder at Genoa Corp (acquired by Finisar), Epinions.com (IPO via Shopping.com), and Vast.com (largest white-label classifieds marketplace):

One thought – if someone really wants to invest $200K as an angel investor, you’re right in that they can’t spread it across enough companies to diversify it or have it be worth their time. In that case, they could do advisory work as you suggest – or they could fork it over to a super-angel fund. They’d end up paying a 15% in management fees and 20%+ of the profits in carry, but most of the super-angels have pretty good returns and they would get startup exposure for basically a $30K + 20% of the profits cost, and their time is surely worth more than that…

Moving gradually from pure investing to pure advising allowed me to reduce the total amount of capital invested, increase equity percentages, and make the $120,000 work, despite my early slip-ups. This also, I believe, produced better results for the start-ups.

The reason for the better results is related to a common objection.

Some counsel against pure advisors, the belief being that pure advisors have no “skin in the game.” To address this, start-ups might insist on an investment before advising can be discussed. The logic isn’t bad–that an advisor will do more if they have something to lose–but this argument has never compelled me, and I don’t know many good advisors who are compelled by it.

Why?

I feel more compelled to help companies that I have pure advising relationships with for two reasons.

First, if I’ve given a start-up capital, I’ve already given some value. If it’s pure advising, I need to prove my value within the small world of start-up investing or my reputation goes downhill. Second, because my reputation is at stake, I do more due diligence than with pure investments to ensure an excellent fit (their needs + my capabilities) before signing up. Just as important: before offering real equity for advising, a start-up will do likewise, and our marriage–if we get to that point–ends up better as a result.

The start-ups that aren’t great fits, those who haven’t mapped my strengths and weaknesses to their own, look at me, laugh, and ask themselves: “Tim Ferriss wants what?!?”

They’re right, I’m not a good fit. If their desire for me as an advisor is contingent upon an investment, they probably haven’t thought enough about how I’d be able to help (or not help). Either I really can’t help much, in which case I shouldn’t be offered advisor equity at all, or I can really help, in which case they should get me on board with a compelling arrangement for everyone. Start-ups often forgot that the advisor equity vests monthly–advisors still have to earn it or they can be fired.

It’s a hell of a lot of fun advising start-ups with good product and personality fit, even if the companies don’t become the next Google.

But, I do miss a lot of great opportunities by focusing on advising and tight fit. This doesn’t bother me. I haven’t yet lost any money. Rule #1.

Let’s be clear on one point: if you don’t deliver real results for your start-ups, you do not deserve to be an advisor. If you can’t point to a track record of some sort, you haven’t earned the right to ask for advising equity. Pull out the checkbook and pay your dues.

Related Reading

Picking Warren Buffett’s Brain: Notes from a Novice

Rethinking Investing: Common-Sense Advice for Uncommon Times

The Tim Ferriss Show is one of the most popular podcasts in the world with more than 900 million downloads. It has been selected for "Best of Apple Podcasts" three times, it is often the #1 interview podcast across all of Apple Podcasts, and it's been ranked #1 out of 400,000+ podcasts on many occasions. To listen to any of the past episodes for free, check out this page.

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176 Replies to “How to Create Your Own Real-World MBA – II”

  1. Tim

    Enjoyed the post. I have found joining a seed accelerator program as a mentor as given access to a number of great start ups. I saw the massive difference Techstars made to Graphic.ly which inspired me to get involved with the UK equivalent to Techstars called thedifferenceengine. They are about to close applicants for the 2nd cycle in September on 23rd July see http://thedifferenceengine.eu/

    The first cycle has just finished and has got some interesting businesses in

    see the blog entry for teams at http://blog.thedifferenceengine.eu/

  2. Make sense? Keep in mind also: I can’t code, so I’m a “business guy” by the looks of it.

    Why is this? Did you just never have the desire to learn coding, or what? 🙂

    1. I’ve played with coding, but I’m not serious (or perhaps competent) enough to be world-class at it. I chose instead to become good at other things. Hasn’t hurt me too much so far.

      I’d love to be great at coding, but I could say the same about the piano or guitar. In the end, I am simply not driven enough to pursue it!

      Tim

  3. Hi Tim, Read the 4 hour work week book. How does it relate to Europe as I live there and want to apply the principles there, and just try it out. Thank You

  4. I wonder if a technical solution that is used for certain web product can be a decisive factor for investing ( a la is it done as PHP solution or ASP or Ruby solution ).

    How do you evaluate if Ruby on Rails or Python architexture is best choice for your startup web application – if you are not a programmer yourself

    Cant it be that startup is founded with some architexture that is not scalable and expandable in the end

    1. Hi Tom,

      It could most definitely be the case. This is why I ask my friends who are world-class engineers 🙂

      Tim

  5. hi!!!!! great post!!!!!!!

    but i´m stil in the way to get may degree…..i´am not brilliant like you .

    i am an employee and iam reading the book and doing the exercises and waw for me the first exercise is really hard but iám still doing.but its hard when you leaving your safety mediocrity.

    thanks TIM and do you have Pxmethod in spanish ?? because iam noto so birlliant like you!!!

    bye!!!!!!

  6. I just ran across a website called escapethecity.org that helps people to make the transition from corporate drone to self-employed success story. This site along with Tim’s site here is helping me put together a few ideas.

  7. Another good post Tim.

    Ouch, guess I’m going to have to take a smaller percentage on my next idea after my current muse is financially viable.

    No matter. Payoff could still be great.

  8. Thanks for the insights, Tim.

    Question about finding people to help you shape, develop and fund your brain child into a company.

    When talking to early stage investors or advisors, you expose your ideas to disclosure. How do you prevent someone to (unintentionally) pass your ideas to others? Rely on trust or NDA’s? What is the common thing to do?

    Your feedback is much appreciated!

    Cheers,

    Daan

    1. Hi Daan,

      The common thing to do is to get a referral to someone with a good reputation. Angels and advisors won’t sign NDAs, so you’ll need to ensure you are dealing with someone with a reputation for behaving well.

      Good luck!

      Tim

  9. You really like to pull that “Bama” card out, huh? Contrary to popular belief, we do wear shoes 🙂

    Glad you were part of our advisor/investor team Tim.

    1. Buahahaha… YOU WEAR SHOES?!? Just kidding, of course. I pull out the “‘bama” card because I think it’s an awesome example of geographic irrelevance. It can help to be in SF, but SF start-ups tend to get pretty uppity and stare down their noses at start-ups outside of SF or NYC. I think DB showed that to be just plain silly. Winning teams and products can come from anywhere.

      Congrats again 🙂

      Tim

  10. Tim,

    Great blog and posts. I am becoming an avid reader.

    Currently I have a muse, am working on another, which by itself a good product, methinks 😉 . One question, what would be a good source (book, site, etc.) to read about how to sell one’s online business, what mistakes to avoid, etc.?

  11. Tim:

    I have a business built and I would like to get some angel money to hire a ceo and run the business.

    Are angel investors typically receptive to this kind of setup or would they want me to run the company?

    Thanks,

    Brad

  12. (HAND RAISED)

    Tim:

    One more question: In your experience, do you see most funding coming through angel investors that met business owners through personal introductions……OR, Can the introductions on sites like venturehacks really turn into deals?

    Thanks,

    Brad

    1. Hi Brad,

      Most are personal intro’s, but VentureHacks’ AngelList IS personal intros. Naval and Nivi know me and the other angels they’re passing deals to, so it’s the same thing. They’re just helping us filter. Naval and Nivi are legit.

      Tim

  13. Tim,

    just to let you know that there was an ad for suicidegirls.com on your top right square banner ad… not sure whether this is the kind of things you want to see promoted on your blog… just thought I let you know. Feel free to delete comment, I understand.

  14. Great dialogue going on in these comments!

    I have found the angel/vc world to be heavily male skewed, and often find myself seeking out female role models. Esther Dyson is a good example, but someone who greatly inspires me is Caterina Fake (www.caterina.net).

  15. Hi Tim, I have MD, MPH degree from Yale. In the past 12 months I have been thinking about getting a MBA degree. The main purpose was two-fold: 1) to have the skills to launch a business that sells Navajo products world-wide; and 2) have the skills to decrease unemployment rate from 80% to 5% on the Navajo Nation. BUT I may not need this degree now, thanks to you!! PS Can you provide me the personal email addresses or phone #s for Mr. Buffet, Mr. Gates, and Mr. Bruce Nordstrom (CEO of Nordstrom)? Thanks! I will keep you posted on my exciting goals!

  16. Hi Tim,

    Your article rings true. I’ve invested some amount to start my first business and I always thought if it did not become profitable, it would be still cheaper than an MBA or losing it all in the stock market. Knowing what I am prepared to lose (say 100K), I can sleep better and not let the extreme uncertainty hold me back. In fact, while taking the risk I slowly transitioned to 4 day work weeks and now have the 1 extra day to pursue new projects. I’m ever grateful to have read you book which showed me a different path. 🙂

    A month ago, I created a MeetUp group in Sydney to meet like-minded people who had read 4HWW. There seems to be one in New York and California too.

    Mine is http://www.meetup.com/The-4-Hour-Work-Week-tribe/.

    Tim, if you’re ever in Sydney. Remember to meet your fans here! Happy to organise a small secret get-together and show you the best secret food places here. So it wouldn’t be a large scale thing. 🙂

    Cheers,

    Fai

  17. Hi Tim. Usual great post.

    I read the book two years ago, and have been lurking the blog from time to time, everytime spending a lot of hours on it, going really in information overload.

    I have two questions for you:

    1- given what you said/wrote about new technologies and all the time they suck from us, how long do you spend for this blog? or you outsourced it? do you read all comments?

    2- I am a big fan of your micro-analysis approach to learning. But I wonder if you ever applied it to what I discovered being one of the most (if not the most) difficult sports: surfing. Have you ever surfed? do you think all principles apply to surf as well as Yabusame for example? 😉

    thanks in advance

  18. It is good to know that there is someone like you that really know the realities of Angle investing. It is refreshing. A great post.

  19. Hey Tim and community,

    I am getting my personal MBA by starting my second company, but I need your vote to raise $50k through a GE challenge viral campaign: Offshore Wind Not Offshore Oil.

    I hope you all can help another community member out by voting.

    Cheers,

    James

  20. I admit I just skimmed this.

    I’m in Thailand with 5 minutes left at the Internet Cafe.

    Question for you Tim: About how many hours per week have you dedicated to learning about investing & investing, in the past few years?

  21. Both of your posts on this subject make for some very good reading. within your first post you also highlight something else which is equally true in many ways.

    ” It’s not what you know, but who you know”

    People networking is very important within modern society. The piece of paper you get after studying for 2 or 3 years at university doesn’t really mean that much in the real world. Ok it might get you through the door of a company for a job, but experience is worth so much more.

    I was once told the story the story of an agricultural graduate who started his first job on a form. Only for the farmer to then find out that the graduate could not drive a tractor.

    So I say it again. What good is paper if you do not have experience.

  22. Hi Tim, I really love this blog. I’d like to love your book but can`t buy it here in Colombia. Can you tell me which booksellers in my country sell your book?

    thanks a lot

  23. If you are out there looking for investment for your business I would massively echo Tim’s words. Be VERY careful whose investments you take.

    I am reminded of those career talks at school that helped prepare you for your first interview (be polite, shine your shoes, wear a suit, ask sensible questions). Nonsense! You are interviewing them! Look closely at the company and really investigate its soul. Ask for a tour, speak to current staff etc.

    It’s the same with angel investing. I think there’s a lot of the “alpha male” at work amongst some angels. It’s all about kudos, being seen as the one with the cash to splash. If someone cuts you a check and no-one else will you really need to investigate their motives.

    It could be as simple as post-sale boredom for a guy who’s recently stopped doing 80 hour weeks and you’re the next micromanagement victim. If you can get the angels fighting over you, you’re much more likely to be on to a winner. You pick the guys you really click with and who can add value. As Tim says, if you can fund it yourself and take “time investors” then I would urge you to do it. They are much more likely to be in it for the right reasons.

    Believe me, no money is better than the wrong business partner.

  24. thanks tim, you just single-handedly started the next venture capital bubble. thanks, thanks a lot..

    🙂

  25. Tim,

    You have motivated me to create my own learning experience. I think it will be more exciting trying to start a business and I will learn more than I will get from sitting in a classroom.

    Josh Bulloc

    Kansas City, MO

  26. So glad to hear that one rule you follow is that you would actually want to use the product or service that you’re investing in.

    At a recent Angel Forum one guy came over to talk to me about our product after being impressed by the pitch and saying he was interested in investing and therefore talking more. I offered to show him our product right then and there so he could get a feel for it and he said he had to head off.

    I wouldn’t want an investor who couldn’t even take 2 minutes to actually see the product they `might’ invest in.

  27. QOD:

    Tim, this is a fantastic series of blog posts. I’ve had “4HWW” on my to-read list, and reading this new content is pushing the book up the list quickly.

    My question deals more with the business needs of these startups. I’ve worked in Corporate America for some time and want to start my own company providing contract/virtual CFO and CIO services for start-ups and established small businesses. I want to have more say over how I perform my work and how flexibly I can do my work instead of adhering to the corporate grind. Here are my two questions.

    1) Besides the obvious answer of fund-raising, what are two or three key needs of these businesses from a financial or operations standpoint? Are these businesses looking for people who understand how to execute operations, plan and monitor performance, etc.?

    2) While I understand the funding situation of these businesses, are they ever open to contract-based cash payment in the right situations? I could see where these types of startups could require someone to challenge assumptions and promote different ways of thinking, and that may be tough to do with an equity stake. While I obviously want to act in my clients’ best interest, sometimes that means being independent enough to tell them their idea is not such a good one.

    Thanks!

    Dallon

  28. Great post Tim. Thanks again for the lifehacking advice.

    A few comments; I definitely don’t have $120K lying around – especially that I can afford to lose. Not sure about other people’s backgrounds, but I haven’t met many people going into an MBA program that fund it themselves without the help of student loans – especially at a top-tier program. Congrats to you for having that kind of capital early on.

    I guess the “Poor Entrepreneur self-designed MBA” would be the flip side of the program you described – more likely as the recipient of one of your investments. Having this kind of experience starting something from scratch; in my experience will teach you more than you can learn in a classroom.

    Not all MBA programs are designed to make you an investor in this sort of capacity – especially without a background in internet technology, but working with a startup, learning the industry, and in the chance of a successful exit, would give you the credentials and insight to evaluate other startups.

    Still appreciate the helpful advice – any chance of “How to create your own real-world MBA” part 3 ?

  29. Hi Tim,

    Really liked your posts even though it gets too mathematical for me at certain points. I’ll probably have to read some of the calculations again to make sure I get them fully.

    Because you mostly seem to cover technical products with user-generated-content like Twitter and StumbleUpon, but still outline very clear stages (early/seed, A, B and C) that can be applied to almost every kind of startup, I was wondering how a company that focusses more on a niche audience and original content can appeal to investors in online media.

    We live in the time of quirky little applications, but online media is online media right? A company like LXtv.com comes to mind – niche audience, original content, walked through all the stages and eventually acquired by NBC Universal. Is there still interest from investors in something other than apps?

    Cheers

  30. could not resist the temptation to ask a tech related follow up question to the audience –

    is there possible any prejudice towards certain programming languages – any preference given to specific programming languages in 2010 among the big venture capitalists – if talking about web projects that could have worldwide potential

    I mean – can you take a php application completely seriously in 2010 or its a sign of caution, if there is Ruby and Python, Java, ASP.NEt available these days –

    or for example – is using Ruby on Rails already half the way to victory .. )

  31. Hey Tim,

    I just wanted to let you know that I really liked reading the MBA posts. I personally like part 1 better. I think it had something to do with the $30K a year MBA model, and invest $2,500 each month in to testing different muses. Too me this just makes more sense then spending the money on an MBA, but this really depends on what your goals are.

    -Tyler

  32. Great post. I worked for a startup 6 years ago as a CTO and used to make presentation for VC funding. This series of articles is refresher course to me. Thanks. Subra

  33. This is the first of your blog posts I have read and like the the 4-hour work week it’s top stuff, that book provided me with a lot of the thinking behind my new online business!

  34. Love this so much. Kind of reminds me of PersonalMBA.com, though that guy focuses more on reading books than actual hands-on stuff.

    Btw, Tim, I’d pay a couple of limbs to see your thoughts on other areas of finance/business. Like, say, investing? Do you own any traditional investments?

  35. Tim contact me if you want to know the fundamental flaw with postereous as it stands and how it can affect your future return. Super super simple design omission !

    I’l also teach you how to punch 10x harder with 50% less effort if you ever get over to East Asia…..

  36. Hi Tim,

    It’s interesting how Google adwords manages to generate loads of MBA adverts on an article proposing alternatives to an MBA!

  37. I read this entire post on my iphone it was so interesting. Takes a lot of guts to go this route, and I guess it helped having already had so much success.

  38. Hi Tim!

    I just finished reading you book and now I’m reading your blog. I’m a big fan. I noticed you are an advisor to Shopify which you describe as a “beautiful and easy e-commerce solution for selling anything” which I’m sure is true. I’m a type a kind of guy and I want the “best” of whatever exists especially if it pertains to my business. I googled a review by ecommerce-software reviews toptenreviews.com which rated Shopify at 12/15. Should you be advising Shopify to make a better product? Is the review I read biased? Am I being neurotic? I just started a very small business selling used textbooks online(16 days ago) and have made all of 7 sales thus far but I have greater things in mind and I need to decide on an ecommerce-software solution soon.

  39. If you disqualify prospective start up founders without technical backgrounds then would other angel investors invest if the founders assemble a team of offshore Masters/PHd I.T. heads from the investing location ?

  40. Sorry , I see “Joe Adkins” beat me to that question … Good to know, as that has worried me .Semi-technical gets a foot in the door….

  41. I’ve started my own Real World MBA – I can’t afford angel investing (I’m in a middle of starting my own company, and all resources are directed that way), but I’m good with marketing, so I’m selling my advisory services to starting companies. It’s good money (enough to pay my bills, and a little extra), but main benefit is the expirience and working with passionate people. Thanks Tim – you inspired that move.

  42. Kawasaki’s Law of Premoney Valuation: For every full-time

    engineer, add $500,000. For every full-time MBA, subtract $250,000.

  43. Often I have wondered why we educate our society for so long (for the highest degrees) with so little real world application. Don’t get me wrong I think our education system is one of the best in the world but there is always room for improvement.

    Your Real World MBA is a perfect example of this. Obviously not everyone has the capital for this, but all the more power to you for taking this upon yourself.

    Luke

  44. Hey Tim, the only reason I think you’re advising is to stay social and fill the void, not for money…

    I can dig it, I would do it too if I had a 4 hour work week and was bored and lonely out of my mind.

  45. Tim,

    (QOD)

    I hope this reaches you, as I have recently stumbled across your blog and may have read this one to late to generate a response. I must first say, I am very intrigued with your blogs and quickly becoming a huge fan.

    I would like to know, from the stand point of seeking angel investors as opposed to investing in start-ups, What do you look for when deciding if and when and how much to invest in any given start-up? I am an entrepreneur at heart and always developing new business ideas, none of which have gotten anywhere due to the lack of funds to launch idea/business. So my question for you is, how would someone go about seeking out angel investors to launch a start-up and what type of things should I be prepared for, in terms of offering a business idea/plan that would draw attention from potential investors?

    Any advice would help and thank you very much in advance!!

    -vince

  46. I found this article very useful thank you! Have you ever considered financial counseling like virtual cfo or virtual service desk? They have worked wonders for me!

  47. Tim-

    I am trying to figure out the best way to contact you regarding my new company that will be launching this month. Our funds are rather low and we are looking for some investors. Please check out the site to get an idea of what we are doing and if it seems like something you would be interested in being a part of please let me know.

    Thanks

    Brian Chace

  48. I think the greatest lesson I have learned as I have been building my company is that you learn the most useful and hard lessons that are necessary to project you to the next level. Although sometimes it sucks to go out there and fail and make mistakes there is no better way to get educated than to just get in the trenches yourself.

  49. Tim,

    I know I am way late getting to the party here since this post was published like a year and a half ago but I just read Part I and Part II of this series and it’s great information. I think this should be your next book (title “4 Hour Investor”?). Anyways, it’s been a ton of help and since I am currently starting a company and trying to raise money I have used a lot about what you talk about in these two postings. The tips on why you choose certain companies and not others has been really influential. But seriously this should be your next book, lots of people would find both sides, the investor side and the startup side, really interesting and helpful.

    Thanks a ton, again!

    Alex

  50. I am currently reading the 4-hour Chef and very intrigued to use the Meta Learning philosophy for my latest challenge – passing the Series 7 exam. I have no experience in the financial industry – I actually have a double major in French and Spanish and MA in Spanish, so I understand all the info about learning languages quickly but I do not know where to begin in using this methodology with the foreign world of finance! All I care about is passing the Series 7!!! Any suggestions or advice?

  51. Hi Tim,

    This blog post is one of my favourite on your website, thank you for sharing your thoughts. I especially like the idea of getting advisors instead of money.

    However, I have a different perspective about high valuation rounds. I believe that if an entrepreneur gets a higher valuation and a lower valuation, everything else being equal – such as the amount being raised and non-financial support given to entrepreneur etc – by taking lower valuation entrepreneur leaves money on the table.

    **Disclaimer: I am no expert in VC financing or have real deal experience, but I have studied and read about startup financing since 2007. Below anaylsis do not assume stock options for simplicity of calculation.

    Lets assume both investor A and B invests $1mn with $4mn and $10mn post-money valuations respectively.

    There are two outcomes regardless of which investor’s money is taken. Either the startup makes good use of its funds or not. Lets look at both cases. If everything goes well and startup gets more funding, everything is good for entrepreneur, investor A and investor B in either case.

    Usually things get ugly if the next round is at a lower valuation. In this case, the entrepreneur will get diluted, especially if the anti-dilution provision is full-ratchet. Lets assume the startup is valued at $6mn post money in the next round and new investors funded the startup with $2mn. Now with this information we have below cap tables.

    Investor A case:

    Since startup is valued at $6mn (higher than first round valuation of $4mn), this round is not subject to anti-dilution provision I mentioned. The cap table looks like this.

    New Investor: 33% valued $2mn

    Investor A: ~16.7% valued at $1mn

    Founders: 50% valued at $3mn

    Founder owned 75% of startup prior to new round of investment.

    Investor B case:

    This round is subject to full ratchet anti-dilution provision.

    New Investor: 33% valued at $2mn

    Investor B: ~16.7% valued at $1mn

    Founders: 50% valued at $3mn

    If you noticed, in the first round Investor B had only 10% of startup after $10mn post money valuation and $1mn investment. In the new round, full ratchet provision protected investor B and increased investor B shares from 10% to 16.7%.

    Conclusion: Founder shares would go down from 90% to 50% if they were to pick the investor offering higher valuation (Investor B). However, in both cases founders have 50% of shares after the last round of investment.

    Thanks,

    Nedim T.

  52. Under Rules – #1 Letter A. – Why does lowering the valuation help with the 2/3 math? You still only get 5x your money.

  53. Hey Tim,

    8 years later, would you still focus on angel-investing, or go somewhere else? ICOs/blockchain? Wealthfront? Something else?

    Thanks!

  54. I remember reading this section in Tools of Titans just before I graduated university last year. It inspired so many great ideas and I felt such awe and wonder at the possibilities that exist when we think outside box.

    At that time I was still considering careers in business/finance. While I didn’t pursue that route, I still think this concept is a game-changer!

  55. I think the end if part I are where the real gems lay. Mist of us cant give up jobs, willing to go into debt, etc. But a plan that puts a value on what I want to learn followed by a real commitment, that’s golden. More ideas like that will change a life