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 over 500 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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175 Replies to “How to Create Your Own Real-World MBA – II”

  1. I had a funny thought that once I complete all of the things listed in these two posts I’m going to print out a certificate and mail it to you to sign as Dean of the Tim Ferriss School of Management.

    That got me to thinking about how real experience is far more important than a slip of paper saying you’re ready for experience, which I believe is one of your points.

  2. Is there a space through which ‘advisors’ can be found??

    Angel investment and venture capital are huge industries, thus making it easy to at least know where to look.

    Advisors are not easy to find at all. I’d argue that GOOD advisors are much more difficult still. Advice (from as many quality advisors as possible) at the start is far more valuable than investment, as you power yourself up with a broadened perspective before looking for investment (meaning you can combat arguments/problems that you may not otherwise have forseen).

  3. Thanks for sharing this info Tim, I’ve been interested in Angel investing ever since reading your book. This will help me get started. Time for me to get to work on this!

  4. Hi Tim, I enjoy your blog, writing and thinking, and enjoyed this topic as I’m interested in VC and start-ups generally.

    I would love to hear you talk more about your non-profit activity, and perhaps make more reference to social enterprise, social innovation, and social entrepreneurship. While tech developments and investments are often facilitating transformative social change (netbooks and cell phones may do more to help the poor in developing countries than decades of aid did) innovative business models are required to harness these tools to really change the world. It seems the tech community is generally still more interested in making money entertaining wealthy consumers than empowering those for whom technology itself remains beyond their reach. There are reasons for this, but investment pioneers are moving beyond these constraints — as with SOCAP10 in San Francisco.

    Given the general priorities you’ve specified for your life through your writing, it seems these issues are of interest to you as well, and I think there is an audience for more of your thoughts on these subjects. Social enterprise, impact investment (vc and private equity designed to optimize social returns as well as financial), and related ideas are emerging trends that aren’t getting as much coverage as they deserve.

    Thanks for the great writing!

  5. After last week, I had been wondering how you were making it through all of these angel investing opportunities without losing a good bit of money (i.e. 9 out of 10 you mention above). So, I appreciate you defining the advisor role in this week’s post. It actually sounds more exciting to be an advisor. You are brought in to get results or you get out; kinda like an Old West “hired gun”. Excellent and informative Part II tonight; I’m learning a lot in these posts.

  6. I really like this series, and I just started your book, finally got around to it (been sitting on my table for months).

    But, I have to ask, why focus this series around angel investing when, if I read the terms of being an “accredited investor” correctly, the majority of people will never be able to do any angel investing?

    It certainly is interesting though! Thanks

  7. As some one who is in the process of planning/brainstorming my new venture(even though its primarily offline), the advise regarding investors/advisors/VC’s are good and very useful!

    Thanks Tim!

  8. I am begining to evolve my advisory portfolio into a blended advisory/angel investment portfolio; and the thoughts and the math/numbers really helped me check/verify some of my own assumptions and calculations on this subject.

    On the subject of Super-Angels… what are your thoughts on them and would you be part of one? Would you even consider setting one up (I’d be interested!)

    1. Hi Ben,

      Thanks for the comment!

      I don’t yet believe I know what I’m doing. Perhaps once I have several more exits, and if I maintain a good lose:win ratio, I’d consider it, but probably not. As for the super-angel funds, I would just say this: be very careful! Never forget what you’re dealing with (as I know you don’t): highly speculative start-ups. No matter how you roll them up or rename them, that’s the underlying asset (or liability, as the case often is).

      The other issue is that most of them are invite-only, so it’s usually impossible to sign up as an LP if you aren’t known to the angels. For the learning process, I’ll be focused on making my own mistakes for a bit longer. The rest of money effectively goes in the mattress 🙂

      All the best,

      Tim

  9. Tim – that’s an impressive list of “Start-ups”; there are even some I’ve heard of! 😉

    Also love the idea of investing time, in conjunction or parallel with money – enables you to contribute and show your interest, rather that just throw money and walk away.

  10. I really like the fact that you are shedding light on alternative means of educating oneself.

    I personally believe that spending money on bootstrapping your own business(es) is a much more worthwhile endeavor as it surely leads to more value and productivity than participating in a game as [relatively] mutually disadvantageous as professional angel investing.

    Nonetheless, on the whole, I’m a big fan of this 2-part post for questioning traditional education and promoting real word education.

    “I have never let schooling interfere with my education.”

    – Mark Twain

    Cheers,

    Jeff

  11. Tim, very sorry to ask you this invasive bureaucratic technicality, but I am curious about how is the legal structure of it all in your case?

    I mean, have you created a legal entity (You Inc.) company that you own 100% and THIS company will own the equity of all the startups and eventually bill for some advices (as a service provider) or is it actually you, Mr. Ferris, who becomes a minor partner of each single company?

    Jus wondering here about tax planning and legal organisation of it all…

    Best and thanks for the clearest explanation I have read so far about real life investments!

    1. Hi Ricardo,

      Most are personal, and a few are through a C-corp. Since it’s not a “fund” with limited partners, it–based on my counsel–doesn’t matter as much.

      Be sure to get your own acccounting and legal counsel!

      Tim

  12. Thanks Tim. A really great article. I appreciate how much time it must have taken to write, well done. As an entrepreneur I was always interested in moving into angel investing, and your blog post will help me do that. I suspect I’ll refer back to it over and over. Thanks again and God bless.

  13. Excellent work. This is the real Tim.

    It would seem that angel investing is a lower stress, higher return way to put your capital to work, and that it can absorb quite a bit of capital without overstretching the investor.

    I suppose as you start working with larger sums you will need to move towards VC?

  14. Before I read this article, I figured it made more sense for me to stay focused on my own companies throughout my career. To continue working in my area of expertise and passion, and invest surplus capital in something like real estate that could be handled by competent people working for me.

    Now that I’ve seen second-hand yet in great detail how angel investing can continue leveraging one’s passion and expertise while also putting one’s capital to work, I’m much more open to a hybrid approach.

    I see Tim’s substitute-MBA odyssey less as a one-off education and more as a reasonable next step from the muse phase. After this article, the continuum from muse entrepreneur to Warren Buffet isn’t as obscured by imaginative failure.

  15. Well done, this goes into what I wanted to learn! Though I had heard yet that CEOs of big companies are often not the most skilled advisors… I know a startup which has two of this kind on their board, but not invested in equity.

    A note on MBA part I – I consider my postgraduate study in finance also as something I could have taught myself (with respect to the content), but the social network any MBA study at Wharton/Stern/HBS etc. can provide you with (if you engage with the people), is almost priceless. This comes close to what you mentioned about your location in the valley, which gives you a lot of private information. The same applies for an MBA, the question at this point is of course why someone decides to study for an MBA. Anyway, good post – keep up the good work!

  16. Hey Tim,

    As someone interested in finding these “3-5 bad-ass advisors” to fit in with my startup, it’s easy to rule possible advisors out based on lack of previous start-up experience but what I want to know is……

    When does an advisor have TOO much on their plate to be of use? When involved with 20, 30, 100 start-ups? While it may be a perfect fit, how can we be sure we aren’t taking on a serial-advisor, who has diluted their time beyond usefulness. Sure, they can be fired a few months down the line but then you’re back to square one.

    Same with investors, while they may invest what WE think is a good amount into the pot, we might be a teeny fraction of their total investments. How do we stay on their radar and get the help, intros and possible benefits that may come with their help.

    Basically, how do we ensure we are the kick-ass start-up that folks want to ‘invite for beers’?

    1. Most definitely, but keep in mind: the goal of 4HWW was never idleness, and I make this clear in “Filling the Void.” I’m spending my time on exactly what I want to spend my time on, and having a blast. That’s what I want to encourage people to strive for.

      Thanks for the comment,

      Tim

  17. Great explanation of the whole process Tim. Makes me think twice about all the cash I’ve dropped on business education. One point though – not sure if I agree with Naval’s tip (given the point of the article). If you hand over your cash to a super-angel fund you’re not gonna get the educational benefit (in my opinion).

  18. QOD:

    Hi Tim,

    Thanks for awesome insight on angel investing ….

    I also liked the idea of Naval Ravikant … can you tell us more about “super-angel fund” or ask Naval to write about it.

    Also where do I find these super-angel funds? or which are the most reputed super-angel funds?

    thanks,

    vr

  19. As much as I think this series of posts is valuable and interesting, calling this process a “Real-World MBA” is a mischaracterization. While there should be lots of study, discussion, and work on entrepreneurship and investing in an MBA program, that is only a small part of it in my experience. I fear that this series of posts gives your readers (at least those that are not familiar with the ins and outs of MBAs) the impression that this is what most programs are all about.

  20. Tim

    Enjoying this little series and your financial experiments. I think your onto something with a startup around thats lets comic book lovers read their favorite issues online. Thanks for the play by play of how your breaking it down and redesigning the MBA world of investing.

  21. Great post Tim, solidified my opinion that when starting/creating a business for a monetary reward (as well as for lifestyle, love and all the other reasons), there are two options, build it up slowly, using your own or family/friends investment with a view to either create a dependable income slowly, or to sell with high ownership. The other option being hitting for the fences and creating a business who’s end goal is sell/IPO with a much smaller ownership but the reward of a huge payoff in a much shorter time period if all goes according to plan. The second requiring a track record of successful start ups and technical knowledge of the market you’re entering into.

    *A question though, as a young student (21) / entrepreneur what options are there for start ups that have a good chance of a 4x return on investment within 3 years, but the investment needed being relatively small, say £80,000 overall. Is angel investing still an option? With a business of this size I wouldn’t want to give up a huge portion of it (especially as it’s a partnership) but family/friend investing really isn’t an option either.*

    @Justin Popovic: As a student myself I think the lessons learned/contacts made while in university are worth the investment, there’s nothing stopping you from starting a business while you’re still learning there and worst comes to worst you have a credible degree to fall back on if your first start ups don’t succeeed.

    P.s. Where is the collab article with Alwyn Cosgrove? Was looking forward to that!

  22. This is a great series. The important thing to remember about real universities though, is that most of what you learn happens at the bar, on the couch, or in the men’s room. The quality of students is more a determining factor in your education than the quality of the professors. There’s few substitutes for being jammed in a series of rooms with similarly minded people 24/7. Is it worth 60k? Depends on the people you meet.

  23. As a real estate investor, it’s interesting to take a gander at the other parts of the investing world. I find that at it’s core, investing is investing and investors are investors, regardless of what you choose to invest in. They have the same key questions: What’s the investment, what’s the perceived value of what I’m investing in, how did you arrive at this value, how much control do I have and how soon do I get my money back? Also, every investor has their own particular standards in conjunction with industry standards. For example, most professional rehabbers will not take on a project unless they make at least $30k on the deal. That isn’t an absolute rule, but it’s pretty standard, especially when you’re dealing with seasoned professionals.

    You spoke about being careful not to take money from unqualified investors (what would we would call unqualified lenders). I see it in my own business constantly. We work with individuals who want to fund deals or who want to buy our real estate deals, but mentally and/or financially, are not ready. Most times, it’s a matter of mentality, lack of risk tolerance and the understanding that as an investment, there’s risk involved and it’s not a guarantee. As a result, they want us to give them the investing education they themselves should already have. Their lack of knowledge and confidence can lead to a mental breakdown out of their fear of losing their money. I have wasted precious time working with individuals like the “dentist” you spoke about, trying to put deals together, not realizing that I was not dealing with a professional who understood the game as well as the potential rewards and risks.

    Recruiting like-minded individuals with valuable expertise is huge too. Only bring on additional people when they bring something of GREAT value to the table. Don’t recruit partners or investors just for the sake of having them and thinking that it’s an inherent part of the start-up process. These guys MUST bring quality knowledge, legwork or money. Otherwise, they’re taking up space and slowing you down.

    Also know what YOU bring to the table, whether you’re an investor, advisor or founder. Knowing your strengths and track record and believing in your ability to see results gives you added negotiating power/leverage when you sit down to hammer out the contracts. I once had a realtor tell me to go pound salt when I presented a short sale offer to him. At the time, I was new to the business and didn’t know as much, so I didn’t realize the realtor HAD to present the offer. But, I knew he would ask me why I thought I could handle such a deal. I had my pitch ready to go, knowing what I was good at and what he needed to hear. After my 30 second pitch, he was more than happy to work with me. My confidence and knowledge earned me respect and the right to play.

    Good luck to my fellow investors! It’s a great world to play in.

  24. Interesting post.

    However, a decent MBA covers more then “just” investing and entrepreneurship : finance, accounting, logistics, hrm, ict, law, ethics…

    Not interesting for you? Well, it all depends.. who do you want to be? A multinational CEO? CFO? CIO? An angel investor? An advisor? The next president?

    I’m sure that there are 1001 ways to reach the top (whatever that might be for you), with or without an MBA. Just do your own thinking, dare to be different, connect with the right people, take action, be confident etc.

    By the way, in your previous post you based your opinion about a business school on one students vision. Maybe you should have talked to someone else too, instead of just that hot girl 🙂

    Anyhow, thanks for the post. And good luck Tim.

  25. Great last couple of posts on schooling. You made me rethink a goal of mine to pursue more knowledge through school-based education. I already have the plans set to reinvest that money in real-life education that will be much more gratifying and cost-effective.

    I’m so jealous about you working with Graphic.ly. I have to ask, are free comics one of the perks?

  26. Excellent info, as always, Tim.

    I was checking out some of the companies you are involved with.

    iMarket Services link does not actually go to the company, and a google search yields in the number one spot a website that is a one page summary.

    Is that the right company? http://imarketservices.com

    Thanks!

  27. What do you think is the best way to calculate a valuation of an early-stage company that is experiencing accelerated month to month growth (in sales and/or profits)?

    It seems that Foodzie is the only company you’re investing/advising in that engages in re-selling physical products. How did this fact play out in your decision to get involved with them? Are you concerned by the Deck Template’s quesiton #10? http://venturehacks.com/articles/deck (Describe any competitive advantages that remain after the competition decides to copy you exactly.) Why or why not?

    Thanks for your insight.

  28. Awesome post guys. I have a traditional MBA from a major university and I can honestly say the real-world thing is just as important (and a lot cheaper…).

    Also, being an investor was also never even mentioned in my MBA.

  29. Hi Tim,

    Been following you for a little while now. I have a great idea on a needed online service that is not currently being offered. Any advice on who I can bounce this idea off of? Not looking for investors or money, just feedback on whether I should scrap the idea or not.

    Tim

  30. Thanks tim, after my next venture (which im not talking about) goes public this is something i’ve been looking into doing so any help will do.

  31. Very powerful stuff here Tim. You certainly know how to get a group fired up about your latest interests. I can’t imagine a better way to stay on your game and continue to grow, than working with 10-20 startups.

    But my question is, on the othe side of Helen’s, how do you have time to add meaningful value to that list of 19+ startups, especially while still enjoying mini retirements and seeing the world? There must be a point of diminishing returns on your time and enjoyment at some point.

    What’s your 80/20 for startup advising/investing?

    Excellent post. Keep em coming!

    Scott

  32. Tim-

    Thanks again for great content. The offer stands from part one, but I just had a huge (personal) revelation after reading this one and comments…I don’t want to be an angel investor! I am totally certain that I don’t have the skills or the investment stomach for it right now! Craziest feeling ever for me as i’m usually the, “Go for it!” type. Wild…Love it.

    PPC4

  33. Tim,

    Awesome post. I am part of a “revolution disguised as a University” and we focus on lifestyle design in a big way.

    We are primarily focusing on empowering people to become world changers to seed ecological and social regeneration. To do that in today’s world, they need to be business minded and self actualized.

    We are also quite focused on generating funding options for start up ventures (albeit ventures that often times have fairly low financial ROI)…so your advice here is a great window into the world that many of us have shied away from.

    I am curious to hear your thinking about applying this kind of business acumen to ecological and social ventures.

    onward

    Gregory Landua

    Co-Founder Financial Permaculture

  34. As alternative of MBA, I would definitely prefer angel investing.

    And I want to “grow up” to be an angel investor (perhaps more for women business). It is the best way to keep learning & investing (from what I read your blog). And I even like it more than other types of investments. Sounds more responsible .. and fun.

    Now, I am still in incubator for more business & life experience. Would love to get help from angel investors.

    Can’t wait to be one soon!

  35. Hi Tim,

    This is really informative stuff and a great follow-up to the first post.

    Three quick questions if you have the time!:

    1. You mentioned you look for technical founders … do you mean they’re coder/engineer types (with a tech-y product) or just tech-savvy?

    2. You’ve stated previously that you really only wanted to invest in opps in the SF area…it seems like that has changed with your investment in DailyBurn. Why so?

    3. For those of us operating companies outside the Valley, where might you suggest finding advisors, not investors? Do these folks naturally evolve from volunteer board positions, or should we look specifically for such characters.

    (Off-topic comment!) I think we need to buy some of your books for the local PA libraries where I now live. I’ve had your revised edition on ILL request for (no-kidding) three months! I’ve already read half in Barnes and Noble. I own the first one. 😉

    Cheers,

    Doc

  36. You mentioned angel super funds…what are some of the better known/trusted ones out there for smaller investors to get into the game. Thanks for the great post Tim!

  37. Thanks for part II, I was looking forward to more. Would you agree that it is a bit easier to get involved with this circle of people once you have a best selling book? I’d be interested in a case study of someone who doesn’t have a network like yourself yet.

  38. Tim great post! I have invested in two companies to date. A barbershop chain and a financial services company. I could have used some of this 2 years ago. 🙂

    2 questions. I love your litmus test that you give for so many reasons. Recommending that they test something, and if they wont or dont you cut them or the investment. I am just curious could you give some examples of that for Tech related start ups and non tech start ups, lets say a barbershop. I would love to know what those are in more detail.

    Also after funding and being a part of two start ups myself one thing I am curious on is, exiting before buy out. In one of our companies we are currently getting ready to break apart because the owners could not get a long. Before you get into a deal do you look for a way out before buy out? What if you decide half way through you dont like somebody? Do you see that in current agreements. I know you can always buy out shares but have you seen a clean way to do that.

    Long winded.

    Thanks for what you do.

    Blessings,

    Chris

  39. Since it appears difficult for the majority of people to become an “accredited investor,” I was wondering if you had any alternative methods for acquiring the necessary education to angel invest. In particular, I’m thinking of what jobs – part-time or otherwise – might help one to acquire this knowledge, without the risking of capital (which for many people, at any rate, is initially beyond reach).

  40. Tim, you are a very good writer, and are generous with your knowledge.

    …I’ll use a gender-neutral “he” for the sake of simplicity instead of “he or she”, which is cumbersome.Last but not least, I’ll use a gender-neutral “he” for the sake of simplicity instead of “he or she”, which is cumbersome.

    But man, cumbersome to write he/she? Are you that effing lazy? That argument is sooo 1980s. Please grow a set and make your fingers type the additional three characters so that you can avoid coming off like the arse of a horse.

  41. Tim,

    As I’m sure you know, an MBA is much more than learning what to invest in, how to create a successful start up, how to find investors, etc. I guess what I’m struggling with here is your title of the article has nothing to do with what an MBA teaches you. You’re sharing fantastic information. But it’s not real world MBA information.

  42. @beatty I think he meant that it makes the prose cumbersome.

    Although this is a ridiculous linguistic dilemma. Why haven’t we come up with a gender-neutral pronoun yet?

  43. Tim, reading about these giant amounts of money being thrown around is pure inspiration. It only makes my goals seem smaller and more reachable! My side businesses are, by comparison, tiny but bring me closer to total freedom. Automated, passive income has become my #1 focus. It took several reads of your book to get the lighting-bolt-to-the-forehead wake up call I needed. All of my time and energy is now directed at creating and maintaining ‘multiple streams of income’, which also happens to be the title of the first book written on the subject.

  44. Hi Tim

    Another fascinating post and a real insight into not just your world but the wider sphere of angel investing.

    Reading through the post and the comments above though, what strikes me above everything else, is that at the heart of so many of these businesses is a core group of passionate, like-minded individuals who don’t just have a clear vision but perhaps most importantly, understand how to communicate it.

    For the technology sector in particular, this has been a real barrier in the past, where the focus has been on the product or service, as opposed to the problem it solves. Smart angel investors often pick up on this early on and address it.

    Where does communications advice fit for your investments, Tim? The lessons learnt promoting 4HWW must be pretty sought after, right?

    Adam

    PS – thanks for all the advice in 4HWW. The blueprint is being rolled out!

    1. Hi Adam,

      It’s key. If they can’t sell me in 5 minutes or 5 paragraphs in email, they won’t be able to sell to customers, investors, or partners. Clarity and conciseness are paramount.

      Tim

  45. Oh man, this is great information! I’ve pitched some ideas before, and through this and the first real life MBA post some questions (that I didn’t even realized I had) were answered. Awesome.

  46. Hey Tim, my name is Mohamed and I’m a huge fan of your book and I’m halfway through and already implementing your methods. I work a flexible commission job that’s netting me roughly $25 to the hour plus other incentives. I’m also getting expertise in some other areas. Recently I took time off from college, I’m 20 years old and I was undecided on majors since last semester, but I will go back in January to do something I value. This time off has allowed me to read up on your book and cultivate myself through your ideas and lessons and I’ve started weight-lifting, now I do it 7 days/week. I’ve accomplished more personally in a few weeks of my off-time than 20 years of traditional schooling and lifestyle patterns. I’m well on my way to creating my own call center or a technical business of that type. I’m also taking a 30-day challenge that I’m working towards now, and one of the steps is to find a mentor. I would love nothing more than to go under your wings. My email is mentioned on this comment, you shall find me if you need me. Thank you for your time.

    1. Congratulations on your growth, Mohamed! As you might guess from my advising list, I’m at capacity for mentoring, but there are thousands of impressive entrepreneurs at your finger tips. You’ll find one.

      Best of luck,

      Tim

  47. This sounds like some excellent advice, and I think its great that you readily admit to deferring to the people who already have a proven track record. It seems in most anything, its best to get a solid base in what’s already out there, and then apply your unique skills to innovate as an individual.

  48. Awesome article! I think its great that you readily defer to those who have a proven track record in the industry. It seems with most things, its best to get a stable base in what’s out there, then apply your unique skills to innovate in that industry.

  49. I own several successful businesses and you just painted the way on what to do with them. My partner & I are the forces behind the biz.

    Thanks @Tim for a excellent post.

  50. Tim, in your earlier writings you mentioned that you learned Mandarin. was this for school, business, or fun? Would you suggest a university to learn this language or a place like Language Door (off site language center)? or perhaps Primsleur or Rosetta? I just picked up your book today “4hr work week” and can’t wait to start. thanks

  51. Tim,

    The homepage for The Laugh Button is not loading. You can still get to the subpages (/watch) if you know the URLS. Just figured you’d want to pass word along to iMarket.

    -MH

  52. Long time lurker/reader, first time poster.

    I swear I saw a guy who looked exactly like you pulling out of a gas station on 148th on Wednesday.

    Then I saw the license plate and thought it might actually be you 🙂

    If you’re in town much longer I’d love to get my book signed and buy you a glass of wine.

    Have fun on your travels.

    Cheers,

    Tim

  53. You mentioned under your rules that ‘If it’s a single founder, the founder must be technical. Two technical co-founders are ideal.’

    Curious…

    By ‘technical’ do you mean they’ve written the initial site code themselves?

    I’m curious if the founders of companies you look at have to write the initial code themselves or if you are okay with founders who are semi-technical and have outsourced the heavy lifting and focused on marketing?

    Strong Post. Thx

    1. Hi Joe,

      Semi-technical is OK as long as they bring something valuable to the table (like major client relationships, etc.). Someone who says “I have a great idea and just need someone to build it, and I want 50% of the company stock as a co-founder” is in for a world of disappointment unless they have established skills to bring, OR if they have a technical friend with little interest in fighting over equity (Steve Wozniak comes to mind as such an example). But how many Steve Jobs are there among “business” people? Not many.

      In the end, I think you need to understand the building process and be a super salesman if you’ll be asking for “co-founder” status with an engineer, even if it’s your idea.

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

      Best,

      Tim

  54. That’s an impressive list of startups Tim!

    At first glance one would think Twitter is currently highly profitable, but I’ve heard much to the contrary. It seems like only recently has it been more apparent that they are attempting to make money (with things like “promoted” trends and such) Any insight there?

    I can’t think of another company that has experienced such whirlwind popularity but not been “profitable” at the same time. But then again, I’m definitely no expert.

  55. “A Primer on Angel Investing” should have been the name of the post. Absolutely fantastic, intriguing, and educational post – BUT, your correlation to an MBA is off, imo;)

    1) Not many people have $100K ‘to burn’ as an alternative to their likely student-loan funded post-graduate education.

    2) Not many people have the credibility (of Tim Ferriss) to obtain investor/advisor roles @ start-ups.

    Again, great post with a ton of valuable information. Thanks for sharing!

  56. Hey Tim, love the content in this series.

    Just started working with a startup here in Durham, NC, a burgeoning startup incubator area here on the east coast.

    Would love for you to stop by and visit us sometime here at http://www.shoeboxed.com, always looking for great advisers!

    Are you familiar with a lot of the small business service focused startup’s like outright.com and freshbooks.com?

    If I had the money I would invest in addition to working for one!

  57. Army Veteran with the GI bill here for a free college education. I have always hated school and dropped out of the university after freshman year to join the service. Now it’s time to go back, my parents say I’m crazy for not wanting to go (free college!) but I hate the fact that my life will soon become a downward spiral of commuting to the cubicle and back.

    I have always wanted something more. It’s always easy to have freedom when you have money, but when you don’t have money it isn’t as easy as just generating monthly automated cash-flow. That takes brains many do not possess.

    I’m at a stage in my life where I want to travel and grow as a person (22 years old) but see only college and the pressure of my parents to do the normal thing behind me.

    I read this book once, called “The 48 Laws of Power”, in which the author states that when the pressure is on and survival is held in the balance, humans can do incredible things. I have considered throwing everything I know and starting the nomadic life outside the U.S. (and possibly in Europe). I want that pressure feeling so I can have the desire to do well. Life is docile at the moment. My parent’s think I’m crazy (for travel and giving up an education) but I want to attack the fear of “not making it” head on and see what happens. Life is too short to abide by the rules of others, but in the meantime I do not have enough experience to know if this is the right choice, or if finishing school is the right thing to do.

    I realize this wasn’t the best place for this message, so I am asking for forgiveness after posting this here, in the midst of intelligence from others.

    Please share your insight,

    John

  58. Timmy Ferriss,

    For someone who’s just starting a website selling a product or a service (like TaskRabbit for example) what are the questions that need to be answered? What do you recommend to make it so the message is clear and the solution/service is conveyed in the best way? Other than the books you recommend in the 4HWW, what else do you recommend for this sort of thing?

    Thank you, Tim 🙂

    P.S. Are you ever going to write non-fiction? I like your writing in some of your posts and in the 4HWW, I’d be pumped to read it, considering you’ve done so many things, I bet you can get in the zone and write the most intriguing stories.

  59. Hi, tim

    I was reading this post and my head is still spinning. It’s tough for us lower life forms. I’m going to digg this post for now and once my neurons start firing again, I re-read the post until I understand it all. 🙂

    You mentioned that being able to make a effective 5 minute or 5 paragrah pitch in any industry is important. It is always a challenge to communicate effectively and efficiently when I am pitching real estate deals to private investors. I imagine it takes far more sohpisticate communications skills when pitching for angel investment. Some Level stuff. Again, I bow at your brilliance, Overlord. 😛

    Unfortunately, I haven’t heard much of most your start-ups. which one to try first ? I have to say thank you for ruining my schedule for the next couple days as I try out some your start-ups. yes, following you like lemmings. 😛 I’m just a guy who makes silly videos with animoto for my real estate biz and call it “marketing”. Pretty low on man’s intellectual evolutionary chain I am. 🙂

    Back to making “marketing” videos,

    David

  60. Wow, Tim! While you are often generous with your knowledge and experience, particularly in your book, this post is a gem of information. I also find value in many of the comments, and some like Lauryn’s are bang on and provide advice between the lines to ‘newbie’ investors – get educated BEFORE you invest, whatever the arena.

    Thanks, as always, for the valuable info. that most of us wouldn’t stand a chance of gaining on our own. Someone asked if you would post more about social contribution (my words) and I’d say this fulfills that in a big way, all by itself. There is much to learn and ponder here.

  61. Great post. Education has its place but make sure you know that it will help you before you pay thousands and thousands of dollars for university.

  62. Hi Tim, I love your work!!! I did get an MFA in Creative Writing and subsequently published a memoir and a novel. Let me know if you are interested in a guest post/ideas on how your blog readers can create an MFA equivalent without paying, akin to your MBA equivalency idea. Is this going to be a section in your next book? Also, there are MFA programs that are not exorbitant — UC Irvine’s, I believe, is not expensive, because it’s in the UC system, and Cornell, where I went, is fully-funded, plus you get paid to teach.

  63. I just started reading your book after it was highly recommended to me by a friend… I think it’s awesome since I have already been applying some of the principles that you talk about in the book.

    I came out to Vietnam on holiday and ended up staying… since there was more opportunity here and I can travel around the region on the cheap, and with skype, all of my clients back in the states wouldn’t really know I was away.

    Then when I started doing a business out here… I figured no MBA school can teach you live experience of doing business in a emerging market. And I was willing to to ‘take a lost’ on my first 2 years since it would be cheaper than grad school. I ended up getting VC funding 6 months into ‘the project’; and while I maybe no longer working ‘4 hrs a week’… but it’s been a great learning experience (i also blog about applied lessons learned).

    So I would also recommend… looking at starting or seeding businesses overseas (assuming they have the stomach for it).

  64. Hey Tim, I’m really glad to have found your blog. I am set right now to attend the Air Force Academy and become a pilot for the U.S. Air Force. While I would absolutely love to fly a plane, I am also very passionate about traveling and going out for wild, crazy, and fun party nights and really just enjoying life and living for the moment.

    I am only 16 so I have not yet got a clear picture of everything I want to do, but I have been self- actualizing and improving my self a lot. I have bought your book but haven’t read yet, however, I have an idea of a life of passion and excitement every day like you and not just working all the time. Do you think the Air Force would be a good way to do that? They do pay for both college degrees( MBA and doctorate), but for the second question: to live the ideal life- are those degrees even necessary?

  65. Great advice and insight Tim, as always. I’m not sure if I’m in the angel investing stage of my career yet – but this has been bookmarked for future reference! 🙂

  66. I feel a bit sorry for the guys waiting on the exit that never comes and are not diversified (unlike you). IE. either an angel who has all of his or her money tied up in one investment or even more so the entrepreneur who has spent the last few years endlessly working on his “baby” for the exit that never comes… that has to be devastating. That’s why I’m much more a fan of cash flow emphasized in the here and now (ie. your supp company) that can still be sold later (exit)

  67. 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/

  68. 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

  69. 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

  70. 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

  71. 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!!!!!!

  72. 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.

  73. 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.

  74. 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

    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

  75. 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.?

  76. 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

  77. (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

  78. 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.

  79. 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).

  80. 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!

  81. 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

  82. 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

  83. 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

  84. 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?

  85. 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.

  86. 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

  87. 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.

  88. 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

  89. 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.

  90. 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

  91. 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 ?

  92. 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

  93. 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 .. )

  94. 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

  95. 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

  96. 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!

  97. 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?

  98. 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…..

  99. 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.

  100. 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.

  101. 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 ?

  102. 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.

  103. 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

  104. 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.

  105. 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

  106. 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

  107. 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.

  108. 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

  109. 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?

  110. 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.

  111. 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!