1 Most incubators will give founders $25,000 to $150,000 in seed funding for 5 to 10 percent of their startup.
2 “You get rich by selling too early.”
3 Many Facebook investors sold their shares shortly after the IPO at $18 a share, when Zuckerberg couldn’t figure out mobile.
4 VCs invest OPM and get a 20 percent “carry,” or, simply put, 20 percent of the gains. In our example, if the VCs who invested in the startup owned ten million shares, for which they paid ten cents each, they would have a cost basis of $1 million for the investment. If it appreciated tenfold, to $1 a share, they would have a gain of $9 million, of which the VCs — the decision makers for those shares — would get 20 percent. That’s $1.8 million, a great payday, except most VC firms have six partners chopping up that gain, each getting $300,000.
5 In other words, the angel would have a $900,000 gain, but the VC on this deal who has five other partners is only getting $300,000 — one-sixth of 20 percent of the $1.8 million gain. That’s only one-third of what the angel, who put their own money to work, would get.
6 What do you think that VC is going to suggest when faced with a $50 million exit that earns them enough money to pay for, probably, ten months of family living expenses in Silicon Valley? They are going to say, “Let’s keep going. Let’s build a unicorn!”
7 The VCs also have a board seat, in all likelihood, and would push hard to get the founders to swing for the fences — and rightfully so. If the company becomes worth twenty times more, that individual VC is going to pull down twenty times as much in carry — $6 million for each partner!
8 Startup founders often sell too early, leaving money on the table. VCs often force founders to hold out and swing for the fences, risking blowing up companies and locking in gains.
9 If a founder with 35 percent ownership in their company has no money in their bank account, and they get a $100 million offer for the company, they are faced with a $35 million payday — life changing to be sure. Now, in today’s modern age, I think the first $5 million you make is “take the edge off” money. You now have a decade of capital to rest on. However, when you break $10 million you have “escape velocity,” where you will never have to work again. The $500,000 in yearly interest you net should cover your expenses for a lifetime.
10 However, when you get over $20 million, you’re in the “fuck you money” zone, where you can tell anyone to go fuck themselves. It’s a dangerous test of a founder’s resolve in my experience to go from being under the gun to being able to tell anyone who stands in your way to go make you a ham sandwich.
11 VCs really don’t like to have founders get to “escape velocity” or “fuck you money,” because it could result in them coming in to a board meeting and saying, “Fuck you, I’ll fund the company,” or worse yet, “calling in rich”
12 For angels, secondary shares are a wise way to “dollar cost average” your returns. If you have a chance to sell 25 percent of your position once or twice before the IPO, it would be wise to do so because we’ve all seen companies worth billions go to zero many, many, many times.
13 The velocity at which startups can rise in technology is second only to how quickly they can implode. Remember, these are rocket ships and sometimes they blow up right before they reach orbit — just ask Elon Musk!
14 The odds are wildly against founders making a huge return, while the odds are in favor of a lifelong angel or venture capitalist getting rich.
15 Compare the outcomes of those two efforts: saving $10,000 or raising $100,000 or more — which is a better use of your time? Clearly the latter, which means there is a huge “opportunity cost” for our non-designer founder to wasting their time learning to design.
16 You can make your own luck in this life by putting yourself next to the people who are already winning.
17 If you love taking risks and don’t mind being locked up for a decade, I could see you putting 10 to 20 percent of your bankroll into angel investing. If you can tolerate risk, but don’t love it, and you can handle being illiquid for a decade, I could see you putting 5 percent of your bankroll into angel investing.
18 If you were learning how to play poker, would you sit at the $100,000 buy-in table with a bunch of sharks or would you play at the $100 buy-in table for a couple of months until you were a winner?
19 If you put only about 2 percent of your chip stack to work ($25,000) on your first ten angel investments, and your chip stack is only 15 percent of your net worth (i.e., you allocated $1.5 million of your $10 million net worth to angel investing), well, if your first ten deals return zero, you’ve lost only $25,000 bond portfolio or the stock market returns 4 percent a year, you will recoup that loss in a month.
20 If your net worth is only $1 million and you lose the $25,000, well, you’ve lost 2.5 percent of your net worth — which the stock market or bond portfolio would pay you back in just over half a year.
21 If you’re able to put $2,500 into a deal, you’re probably able to “add a zero” and put $25,000 into the next round, and savvy founders know this.
22 Great founders have many options to fund their companies, and your $25,000 isn’t any different from mine or another investor’s.
23 I had a horrible habit — back to those habits — of needing to explain to stupid people just how stupid they were. I’ve since learned that the best way to deal with stupid people is not to have them anywhere near your company and, if possible, not even in your life!
24 Never Say Yes or No During a Pitch
25 You don’t pick billion-dollar companies. You pick billion-dollar founders.
26 While no one knows which of the great founders and startups will have breakout success, it’s fairly easy to know which founders and ideas are so shitty — or worse, small — that they have no chance of breaking out.
27 Eliminate the small ideas and weak founders. Then double down on the great founders and big ideas.
28 While you can’t be sure which businesses will be the next Google, Uber, or Facebook, you can be pretty sure which businesses will not be — and not waste time engaging them. That’s really half the battle, focusing on the winners, the big markets, and the clear ideas.
29 When I get an email, I never go straight to the meeting. I ask how many full-time employees they have, how much money they’ve made, their funding history, how they acquire customers, and why they are building this business. The FTE and money-raised answers tell me what their burn rate is and how much they have left in the bank.
30 There are two types of businesses in my world: insanely scalable ones and everything else.
31 Independent films, restaurants, bars, bed-and-breakfasts, consulting firms, clothing lines, and microbreweries are — with very rare exceptions — the businesses that, no matter how hard you and the founders work on them, will not scale.
32 Scaling in my world means achieving a valuation of billions of dollars, which means making tens to hundreds of millions of dollars, which means my shares become worth a hundred, two hundred, or five hundred times more valuable.
33 Even if you make a movie that sweeps the Oscars, the chances of me making two to ten times my money are slim. Oftentimes the investor agreements for movies cap the actual upside and, if it doesn’t, the studio that buys your film for a flat rate and distributes the hell out of it will make sure you see dollars little or nothing with their creative accounting.
34 As one rich person I know said, “Want to know how to make a billion dollars making movies? Start with ten billion dollars.” Another Hollywood insider told me that the only reason for rich people to invest in movies is to go to cool parties.
35 McDonald’s, Starbucks, and lululemon as examples of things that have broken out, but those businesses were very, very hard to scale, typically taking many decades to reach billions of dollars in enterprise value.
36 Most of us don’t have three or four decades to build our fortunes. We want to do it in five to ten years, which I think is a reasonable window if you read this book and do what I tell you.
37 If you compare businesses made from atoms (brick-and-mortar shops like Starbucks and McDonald’s) to businesses made from bits (software), there is no comparison.
38 In order for Starbucks to reach a billion customers, they needed to open tens of thousands of stores, which on average serve five hundred to seven hundred cups a day, according to reports. Starbucks was founded in 1971.
39 Facebook launched their Messenger product in 2011 and reached one billion customers in 2016. To do this, they put their software on a server on the internet, translated the interface to a couple dozen languages, and it was instantly available to 100 percent of the modern world, capable of making them money (essentially, those people with internet access).
40 If McDonald’s wants to make $1 million in profit today, they have to sell ten million more hamburgers to five to ten million people, as they’re reportedly making about a dime on each.
41 A software company like Slack, which sells each “seat” of their chat software for about $150 a year, needs to sell only sixty-seven hundred executives their software because their incremental cost of selling and delivering software is nearly zero.
42 Once you’ve written software, it costs essentially the same to have one thousand people use it as one million — not so for hamburger or lattes, each of which requires massive amounts of real estate, cows being murdered for their meat or tortured for their milk, and low-paid humans to prepare them and hand them to you with a fake smile and a broken spirit.
43 Bill Gates, the greatest entrepreneur-turned-philanthropist in history, and his wife, Melinda, are busy leading the charge to eliminate abject poverty in the world. And you know what, they’re going to succeed. When they do, we’ll have another couple of billion customers available to sell into.
44 “I don’t need to know if your idea is going to succeed, I need to know if you are,” — Jason Calacinis
45 Try to choose companies based on the people running them, not the idea or market.
46 The life of an angel is all about managing a deal funnel, which includes three distinct steps: sourcing deals, evaluating deals, and, finally, picking which founders you’re going to fund.
47 If you want to make a lot of money, you’re better off being a world-class programmer on a very esoteric and in-demand vertical and getting Google or Facebook to give you $1 million-plus a year in stock and cash for ten years in a row. You have no downside, you can work a couple of hours a day, and you get unlimited free food.
48 The big problem with “founders” who build a feature that a market leader will inevitably get to — and I use quotes here for a reason — is that they lack vision. The act of selecting a feature as their life’s work, as opposed to a full-blown product or a mission, disqualifies them from being a true founder.
49 Elon Musk didn’t build a battery pack: he built a car and eventually an energy solution that included solar, home batteries, and, perhaps when you read this, a ride-sharing service like Uber’s.
50 It’s okay to start small, but it’s not okay to be a small thinker.
51 Mark Zuckerberg was awkward with the ladies, so he built a social network that would show him their relationship statuses. Think about that for a second: Is there anything more important than procreation? Not according to Darwin or Freud, so Zuck’s lack of game led to the fastest-growing consumer product in the history of humanity, largely based on people needing to find a mate or to connect with previous lovers (as demonstrated by the number of divorces that mention Facebook in their filings).
52 Google was the twelfth search engine. Facebook was the tenth social network. iPad was the twentieth tablet. It’s not who gets there first. It’s who gets there first when the market’s ready.
53 Ask four questions to founders: Why has this founder chosen this business? How committed is this founder? What are this founder’s chances of succeeding in this business — and in life? What does winning look like in terms of revenue and my return?
54 Tactical Questions: Tell me about the competition. How do you make money? How much do you charge customers? How much does your average customer spend? Tell me the top three reasons why this business might fail.
55 If a startup called the Delta Corporation is making $10,000 a month selling enterprise software and they have five FTEs here in Silicon Valley, I simply calculate the FTEs by $120,000 each all in — or $10,000 a month — because they might have non-engineers getting $70,000 sitting next to developers making $150,000. Everyone is getting benefits and you have to pay some payroll taxes.
56 In another American city, I’d put it at slightly less, say $8,000 a month per early-stage FTE. So, Delta Corp is spending $50,000 on head count and probably has $10,000 in miscellaneous expenses a month, for a total spend of $60,000 a month, which means they have a burn of $50,000 (remember, they make $10,000 selling their software already).
57 Let’s say they raised $1 million a year ago. I can now estimate that they’ve lost $50,000 a month over twelve months, for $600,000, and have $400,000 left in the bank. They are burning $50,000 a month, so they have eight months left.
58 Apple making more in a single quarter these days ($78 billion) than the music industry makes in a year — globally ($42 billion).
59 No one remembers how you won or lost, only whether you won or lost.
60 The results are all that people will judge you on.
61 Anyone can come to work if there is three million in the bank, people are getting paid top salaries, and you have free food.
62 The noisy students often quit during the two-year-long experience of being a brown belt. It’s the quiet, focused students who move on to become black belts. “The empty can makes the most noise,”
63 99 percent of people who write an idea on the back of napkin never do it. 95 percent of people who write a business plan never execute on it. 90 percent of people who build a prototype never build an MVP. 80 percent of people who build an MVP never do a beta test. 80 percent of people who do a beta test never incorporate. 95 percent of people who run a successful beta never raise money.
64 Venture capital firms invest larger sums of money in a smaller number of startups than angels.
65 A venture capitalist typically invests millions of dollars while you will be investing tens of thousands of dollars. An individual venture capitalist might invest in one or two deals a year and join each company’s board of directors until they’re on eight or ten boards. You will invest in five to fifteen startups a year and join no boards.
66 Venture capitalists place a smaller number of bets, so they are much more careful about doing so. I’ve seen venture capitalists not invest in a company for a year or more, while they focus on the startups they have already invested in.
67 venture capitalists look at the startups that have survived the “angel phase” of investing, where products are desperately looking for a market, and the teams are tiny and perpetually under-resourced.
68 Another major difference between your process for investing in startups vs. a venture capitalist’s process is that you will make your decisions alone, whereas VCs will debate every investment over multiple meetings with their partners.
69 In his deal memo, Botha included the following sections: Introduction, Deal, Competition, Hiring Plan, Key Risks, and a Recommendation.
70 As an investor, blog about your investments and deal memos. It helps in connecting with more potential hires, deals, VCs, founders, etc.
71 All relationships that start with lies will end in tears.
72 Avoid the liars. Embrace the delusional.
73 Want to make an angel investor feel special? Ask them how they and their portfolio are doing.
74 I get more updates from startups I passed on investing in than from the ones that I gave money to!
75 Startups raise money targeting 12–18 months of runway, which is amount of money they raise divided by burn rate/month.
76 If a startup with five team members spends $30,000 a month and makes no revenue, they will burn through their $300,000 raise in ten months — which happens really, really fast. If the same startup raises $500,000, they will last just over sixteen months if they don’t have any revenue.
77 Profitability > Breaking Even > Revenue
78 Most startups try to raise eighteen months of runway, they often raise under a year.
79 The bad founders are revealed quickly in year two because they are no longer selling the promise of their ideas, team, and nascent product — they’re selling their performance.
80 Years three and four are when founders confirm for you that you made the right decision when you invested in them, but years one and two are filled with only the confirmation that you are clueless.
81 Founders believe that one magical event is going to save the startup, be it adding a feature or a team member or a customer.
82 The press is not your friend. In many cases they are your enemy. Almost all stories have an agenda and often it’s not a positive one for your company.
83 It sucks to lose, but the more time and energy you put into your losses, the more you will feel like a loser. Instead, you should have been quadrupling down on your winners and spending more time on them.
84 Make no one investment more than 1.25 to 2.5 percent of your net worth.
85 starting is easy, finishing is hard
86 Founders think getting funded is the hard part. Then they get the wires in and start deploying their investors’ capital. At that point, they realize that raising money is easy compared with getting their investors a return on that capital.
87 It’s just like running for president. You think the tough part is campaigning and winning the election, but once you start doing it you realize that the job is even harder!
88 Angels have to understand that anyone can start a company these days, given that servers, software, and bandwidth have become commoditized, costing next to nothing, while designing a decent product with a small number of people is easy, too.
89 Heck, even acquiring a couple dozen customers is easy, given the massive scale and targeting ability of advertising networks like Facebook and Google.
90 You could make a Twitter clone and get to a thousand users in two weeks and build the chat software Slack in half that time. Starting these projects is now thousands of dollars and a couple of weeks, but getting them to a meaningful exit is millions of dollars and many more years.
91 If you were a Facebook or Twitter holder with 90-plus percent in those two companies, there was an obviously sound investment thesis you should have followed: diversification into FANG(Facebook, Amazon, Netflix,Google)
92 “Great companies are bought, not sold”
93 Operators wanting to buy your startup is the second-most-positive sign in all of entrepreneurship. The only sign that’s better is paying customers raving to their friends about how awesome your product is.
94 “Successful startups have a hundred angels but failures are orphans.”
95 Zuck was able to see what Friendster and MySpace created in social media and execute, in the early days, about 20 percent to 50 percent better than they did on any individual feature. Facebook’s site was notably faster and its design was easier to understand.
96 Then he made the sign-up flow 50 percent better by not letting you see profiles before you signed up and the entire service 100 percent better by building a better newsfeed — inspired by Twitter’s work
97 After that, he sorted the newsfeed 50 percent better than Twitter’s by sorting not chronologically but by which posts got the most likes and comments (i.e., engagement). That’s why, when you load Twitter, you see a bunch of random tweets from the past fifteen minutes, but when you open Facebook you’re greeted with a baby announcement, a death announcement, and the most popular viral video in the system.
98 “everything is amazing right now and nobody’s happy.”
99 Do you sell Vitamin or Painkiller.
100 There is a simple tool for figuring out how delightful a startup’s product is. It’s called NPS and it stands for Net Promoter Score.
101 I am on a first-name basis with all of them: Esther Dyson, Mark Cuban, Stewart Alsop, Mitch Kapor, and Ron Conway top my list of angels who just won’t stop.
102 If you’re qualified to be an angel, you are overqualified to be a venture capitalist, and venture capitalists have a much easier and more financially rewarding life. Angels deal with a mortality rate in the 80 and 90 percent range, which can make your life feel more like that of a hospice worker than a financial wizard. Venture capitalists can move so far downstream that they deal with a mortality rate half that — or less of that of an angel.
103 Because venture capitalists are putting more money into a smaller number of deals, they have fewer people calling them and fewer deals to negotiate. As a reward for doing less than angel investors, they get paid more by placing a small number of bigger bets and have the management fee teat to suckle on.
104 The only requirements would be that I engage in one or two new investments a year and be on the boards of six or eight startups. I could take off summers and winters, too, and jet off to Italy and Aspen and . . . and . . . Fuck, I should do that!
105 The first ten being $1,000 syndicates and the next twenty being $25,000 bets, and then putting an extra $100,000 into each of the top five startups in your portfolio.
106 You will have put $510,000 into your first thirty deals, watched for winners, and put another $500,000 into the winners. You’ll have put just over $1 million to work.
107 You Return Less Than You Invested: If 90 percent of your startups die and five have modest exits that return just your money invested, you will have gotten back around $500,000 of your $1 million, losing a half-million dollars. As a high-net-worth individual, this loss will not feel great, but you will have only lost 5 to 10 percent of your $5 million to $10 million net worth. You’re rich and your other investments returning 5 percent a year in the stock market will easily make up for this $500,000 loss.
108 If you’re exhausted from angel investing but you are addicted to startups, you’ll have a nice track record with founders that will allow you to join a venture capital firm with a $500,000 starting salary, making this a fantastic investment similar to getting your undergrad and graduate degrees!
109 You Return What You Invested: You now have the option to keep being an angel, join a firm, or perhaps even take a management team or board seat at your highest-performing investment, getting you 1 to 2 percent of the company and a nice salary as you help build the company to a billion.
110 You Return Two to Five Times What You Invested: If you put $1 million to work in this scenario of investing for a year, you could return $2 million to $5 million by simply having your top five double down bets (those where you put an extra $100,000 on top of your first bet of $1,000 or $25,000) return four to ten times each, or even one of them returning fifty times your investment. While a fifty-times return isn’t common, four- to ten-times returns happen all the time in Silicon Valley
111 If this happens, you will not only have the ability to join one of your startups, get on boards, or join a venture capital firm, but you will also have a track record to raise your own fund by sharing your return data with all the other rich people you’ve met, giving you a large multiplier on your future investing. Raising your own fund is another option.
112 You Return More Than Five to One Hundred Times What You Invested: one of your bets went supernova and you got two hundred or three hundred or four hundred times your money. A company you invested in at a $4 million valuation got sold or went public for $5 billion or $10 billion and you now have $25 million to $100 million in returns.
113 When you have FUCK YOU money : Don’t get divorced, Don’t get addicted to flying private, or buy a boat.
114 If you hit a home run like this, you are a legend in our industry and can work for a top-tier firm or even start your own incubator like I did, with investors and founders flocking to it.
115 Life is random, but luck isn’t. It can be engineered. Lucky people surround themselves with the most successful people in the world and take chances. It isn’t hard or impossible. It just takes work.