It’s fun to think about getting an MBA.
They’re attractive for many reasons: developing new business skills, developing a better business network, or — most often — taking what is effectively a two-year vacation that looks good on a resume.
In 2001, and again in 2004, I wanted to do all three things.
This post is the first of two that will share my experience with MBA programs and how I created my own…
In the process, it’s my hope that these writings will make you think about real-world experiments vs. theoretical training, untested assumptions (especially about risk tolerance), and the good game of business as a whole. There is no need to spend $60,000 per year to apply the principles I’ll be discussing.
Last caveat: nothing here is intended to portray me as an investing expert, which I most certainly am not.
Stanford University Graduate School of Business (GSB). Ah, Stanford, with its palm tree-lined avenues and red terra cotta roofing, always held a unique place in my mind.
But my fantasies of attending GSB reached a fever pitch when I sat in on a class called “Entrepreneurship and Venture Capital,” taught by Peter Wendell, who had led early-stage investments in companies such as Intuit. The class is now co-taught by Eric Schmidt, CEO of Google, and Andy Rachleff, founding general partner of Benchmark Capital.
Within 30 minutes, Pete had taught me more about the real-world inside baseball of venture capital than all of the books I’d read on the subject.
I was ecstatic and ready to apply to GSB. Who wouldn’t be?
So I enthusiastically began a process I would repeat twice: downloading the application to get started, taking the full campus tour, and sitting in on other classes.
It was the other classes that got my panties in a twist. Some were incredible, taught by all-stars who’d done it all, but others — many others — were taught by PhD theoreticians who used big words and lots of PowerPoint slides. One teacher spent 45 minutes on slide after slide of equations that could be summed up with “If you build a crappy product, people won’t buy it.” No one needed to prove that to me with differential calculus.
At the end of that class, I turned to my student guide for the tour and asked him how it compared to other classes. He answered: “Oh, this is easily my favorite.”
That was the death of business school for me.
How to Make a Small Fortune
By 2005, I was done chasing my tail with business school, but I still ached to learn more.
Then, in 2007, I started having more frequent lunches with the brilliant Mike Maples, a co-founder of Motive Communications (IPO to $260,000,000 market cap) and a founding executive of Tivoli (sold to IBM for $750,000,000).
Our conversations usually bounced between a few topics, including physical performance, marketing campaigns (I’d just launched The 4-Hour Workweek), and his latest focus: angel investing.
“Angel investing” involves putting relatively small amounts of money — often from $15,000 to $100,000 — into early-stage start-ups. In Mike’s world, “early-stage” could mean two engineers with a prototype for a website, or it could mean a successful serial entrepreneur with a new idea. The angels usually have relevant business experience and are considered “smart money” — their advice and introductions are just as valuable as the money they put in.
After several lunches with Mike, I’d found my business school.
I decided to make (in my mind) a two-year “Tim Ferriss Fund” that would replace Stanford business school.
Stanford GSB isn’t cheap. I rounded it down to $60,000 a year, for a total of $120,000 over two years (these days, it’s $80,000+ per year).
For the “Tim Ferriss Fund,” I would aim to intelligently spend $120,000 over two years on angel investing in $10-20,000 chunks, so 6-12 companies in total. The goal of this “business school” would be to learn as much as possible about start-up finance, deal structuring, rapid product design, initiating acquisition conversations, etc. as possible.
The curriculum could be thought of as “The Start-up Lifecycle from Birth to Acquisition/IPO or Death.” But curriculum was just part of business school; the other part was getting to know the “students,” preferably the most astute movers and shakers in the start-up investing world. Business school = curriculum + network.
The most important characteristic of my personal MBA: I planned on “losing” $120,000.
I went into the “Tim Ferriss Fund” viewing the $120,000 as sunk tuition costs, but also expecting that the lessons learned, and people met, would be worth that $120,000 investment. The two-year plan was to methodically spend $120,000 for the learning experience, not for the ROI.
I would not suggest mimicking this approach:
1) Unless you have a clear informational advantage — insider access — that gives you a competitive advantage. I live in the nexus of Silicon Valley and know many top CEOs and investors, so I have better sources of information than the vast majority of the world. I don’t invest in public companies precisely because I know that professionals have better access to information than I do.
2) Unless you are 100% comfortable losing your “MBA” funds. You should only gamble with what you’re very comfortable losing. If financial loss drives you to even mild desperation or depression, you shouldn’t do it.
3) Unless you have started and/or managed successful businesses in the past.
4) Unless you limit angel investment funds to 10% or less of your liquid assets. I subscribe to the Nassim Taleb school of investment, with 90% in conservative asset classes like AAA bonds and the remaining 10% in speculative investments that can capitalize on positive “black swans”.
The problem is often that, even if the above criteria are met, people overestimate their risk tolerance. From my previous post, ‘Rethinking Investing: Common-Sense Rules for Uncommon Times’:
I’ve come to realize that the questions most investment advisers (and investors) ask are the wrong questions, or incomplete. Even if you have only $100 to invest, this is important to explore.
Most advice and decisions center on one question: what is your risk tolerance?
I had one wealth manager ask me this, and I answered honestly: “I have no idea.” It threw him off.
I then asked him for the average of his clients’ responses. The answer:
“Most answer that they would not panic, up to 20% down in one quarter.”
My follow-up question was: when do most panic and start selling low? His answer:
“When they’re down 5% in one quarter.”
Unless you’ve lost 20% in a quarter, it’s hard—neigh, impossible—to predict your response.
It’s not dissimilar from a common boxing maxim: everyone has a plan until they get punched in the face.
To would-be angel investors, I suggest the following: go to a casino or racetrack and don’t leave until you’ve spent 1/5 of a typical investment and watched it disappear.
Let’s say you’re planning on making $25,000 investments.
I’d ask you to then purposefully lose $5,000 over the course of at least three hours, and certainly not all at once. It’s important that you slowly bleed losses as you attempt to learn the game, to exert some control over something you can’t control. If you can remain unaffected after slowly losing your $5,000 (or 1/5 of your planned typical investment), consider making your first angel investment.
But proceed with caution.
Even among brilliant people in the start-up world, there is an expression: “If you want to make a small fortune, start with a large fortune and angel invest.”
The First Deal and First Lesson
So what did I do? I immediately went out and broke my own rules.
There was a very promising start-up which, based on comparables using Alexa ranking correlations to valuations, was more than 5x undervalued! If it hit even a “base hit” like a $25,000,000 exit, I could easily recoup my planned $120,000!
I got very excited — it’s the next Google! — and cut a check for $50,000. “That’s a bit aggressive for a first deal, don’t you think?” asked one of my mentors over coffee. Not a chance. My intuition was loud and clear. I was convinced, based on other investors and all of the excitement surrounding the deal, that this company was on the cusp of exploding.
Two years later, it still hasn’t popped.
[TIM UPDATE, 2013: This start-up is now dead, so I lost that $50K.]
Following the Rules
Lesson #1: If you’ve formulated intelligent rules, follow your own f*cking rules.
I learned many more important lessons over the following two years, most of which I’ll share in the next post. Thus far, following the rules, the stats look something like this:
15 total investments (some of which are listed here)
1 successful exit
The one successful exit thus far, DailyBurn, guarantees that I will not lose money on my two-year fund. But, as they say, “Once you’re lucky. Twice you’re good.” I’m still not convinced I know what I’m doing.
My hope, and that of most angels, is that each start-up will “exit”, or be bought within 3-5 years. I’ll therefore have a more complete view of the “Tim Ferriss Fund” two-year portfolio by 2013 or 2014. There will be fatalities, no doubt.
[TIM UPDATE, SEPT. 2013: Now, I'm in 20+ investments, and I've made (cash in bank account) about 3-5x back what I invested. I have several million dollars on paper with investments like Twitter, Uber, Evernote, and others. If half of them pan out, I will make more in angel investing than all of my books combined. Only time will tell. Still plenty that could go wrong. Oh, and there have been more startups "deaths," too. It's a full-contact sport.]
But recall that the learning was my main reason for doing all of this.
I had one other exit: my own company. Using what I learned about acquisition deal structures through angel investing, I became less intimidated by the idea of “selling” a company. It need not be complicated, as I learned, and BrainQUICKEN was sold in late 2009. This means the ROI on my personal MBA is, so far, well over 2x and could end up more than 10x.
Creating Your Own MBA
How might you create your own MBA or graduate program? Here are three examples with hypothetical costs, which obviously depend on the program:
Master of Arts in Creative Writing – $12,000/year
How could you spend (or sacrifice) $12,000 a year to become a world-class creative writer? If you make $50,000 per year, this could mean that you join a writers’ group and negotiate Mondays off work (to focus on drafting a novel or screenplay) in exchange for a $10-15,000 salary cut.
Masters in Political Science – (same cost)
Use the same approach to dedicate one day per week to volunteering or working on a political campaign. Decide to read one book per week from the Georgetown PoliSci department’s required first-year curriculum.
MBA – $30,000 per year
Commit to spending $2,500 per month on testing different “muses” intended to be sources of automated income. For an example of such, see “How I Did It: From $7 an Hour to Coaching Major League Baseball MVPs.”
If you’re interested in experimenting with angel investing, whether as an angel or as a start-up, here are a few of my favorite resources:
Commit–within financial reason–to action instead of theory. Learn to confront the realities and rewards of the real world, rather than resort to the protective womb of academia.
Question of the day (QOD): what would you like to learn specifically about start-ups, angel investing, or start-up financing? Please let me know in the comments with “QOD”.
Posted on: June 28, 2010.