How to Create Your Own Real-World MBA

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(Photo: DavidDMuir)

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.

Beginnings

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)
0 deaths
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:

AngelList (I’m now an advisor; here is my profile)
AngelSoft
VentureHacks

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”.

Continued in Part II…

Posted on: June 28, 2010.

Watch The Tim Ferriss Experiment, the new #1-rated TV show with "the world's best human guinea pig" (Newsweek), Tim Ferriss. It's Mythbusters meets Jackass. Shot and edited by the Emmy-award winning team behind Anthony Bourdain's No Reservations and Parts Unknown. Here's the trailer.

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311 comments on “How to Create Your Own Real-World MBA

  1. Dude, what an eye opener you just wrote. I attended an MBA program for 2 semesters until I realized the monumental waste of time and resources it was draining from me. Sure, some of the lessons I learned were great theory, but nothing taught me more about business than getting out there and testing different ideas. I believe you hit the nail on the head with creating your own MBA. You’ve been a great influence in my life and this is a prime example why. Thank you for all the insight you’ve given me into modern business.

    Like

  2. Thanks for this Tim. Regardless of which way you go, investment in yourself is only going to help in the long run. One would the think the more you learn, the better you become.

    I went to a seminar where someone defined INVESTMENT as ‘I INVEST IN ME’.

    My personal mantra is that the minute you stop learning, is the minute that you’re dead.

    Thanks for providing the informative post once again.

    Cheers
    Anthony

    Like

  3. This is good advice, Tim. I’ve gained the vast majority of my training in the real world, only taking a school credential to fill in some blanks, also enabling me to put something (including the name of a respected school) in the place many managers automatically look for it.

    QOD: I’d like to know what kind of package startup CEOs typically negotiate (or try to negotiate) for the possibility that they’re forced out or otherwise need that parachute.

    Thanks!

    Like

    • Hi Michael,
      I’m interested in something along the same lines of a school credential to fill in some blanks – what you would recommend.
      Thanks!

      John

      Like

  4. Angel investing is new to me. I see the name cropping up everywhere on the web and your post has certainly made it clearer. Looking forward to the other posts on the topic.

    Like

  5. Love it, love it, love it. This is the exact article type that I first fell in love with way back in the day. Tim, I would pay you for more posts of this high quality. Thank you for your insight.

    Like

  6. Nice encapsulation of Angel Investing and how creating your own Personal MBA curriculum can increase the chance of getting better ROI over the investment in education in today’s time.

    I have also created a personal MBA program for myself which consists of books recommended from PersonalMBA.com (Josh Kaufmann) and few other mentors giving there industry specific insights into the liking of my subjects.

    Awesome read, Tim! Waiting for the next post!

    Like

  7. Once again your out-of-the-box perspective on things puts your ahead of the curve.
    I do believe that a “real world” education can be far more valuable than an MBA. Here in Australia the value of having an MBA has been eroded due to the slacking of entry requirements of the major universities.

    Once I have enough leverage, the advice you have offered in the article is something I am going to take up.

    Awesome stuff Tim:)

    Like

  8. Tim,

    Great read. I very much love the idea that you’ve presented with “Tim Ferriss Fund”. I don’t have that kind of money but I’d really have to come to terms with ‘losing’ that amount of money.

    Still, the idea of creating one’s own MBA program == pretty damn awesome.

    Like

  9. Hi Tim,

    I think you made a damn cool real world MBA and based on your crunchbase, I predict a financially successful one to boot.

    To answer your question… Did you enjoy angel investing? What was the process like, especially for someone new to the game?

    Finally, after doing some angel investing has your perspective changed on muse project/lifestyle businesses versus (venture backed) startups?

    Like

  10. Tim,

    I read Rework right after I had a chance to watch your last episode of random. The book had a lot of advice like yours and was a good refresher with some new angles.

    Something about this last read mentally pulled my trigger finger from “what if” to “what the hell” and I am testing like a mad man.

    Great article, would love to hear about start-ups. Bar tending and working security at a night club for the moment seem to be enough for start up financing using the methods suggested in your book.

    Best Wishes,
    Jason

    Like

  11. Tim, you’re an impressive guy.

    On the surface, this isn’t your most impressive work. Two years to double or triple 120k. Lots of business success books come out every day. Nor is it necessarily an inspiring story of turning a passion into success.

    The proof will be in going forward – how strong are the connections and wisdom you’ve acquired?

    Here’s my challenge to you: Become a billionaire, then show us how it’s done.

    Sure the money becomes meaningless after a point, but money is also an economic measure of how much value you’ve delivered to people, and a partial measure of power to influence the world.

    Like

    • JB,

      Good points. The financial return is definitely not the most valuable part of what I’ve gained, but I would argue that doing 3x ROI isn’t anything to dismiss. In absolute dollars, it’s not a ton, but in percentages, it’s a pretty damn good return from 2008-2010.

      To your last point, I’d rather create a thousand millionaires than become a billionaire.

      Tim

      Like

  12. “The Ten-Day MBA” by Steven Silbiger is a good resource if you want to know what you’re missing in some of the theoretical classes.

    And three months in a face-to-face commission sales job can also be highly educational.

    Like

  13. Thanks for the post Tim

    I have never liked university, and have relied on the school of hard nocks to teach me what I need to learn.

    It’s good to put into perspective for universities as well.

    Ads.

    Like

  14. Tim

    99% of MBA students are financed through their courses and come out jacked to the hilt in debt. If you’ve $120,000 in free cash you’ve unfortunately been successful enough to not require an MBA, for your CV or otherwise.

    I say unfortunately because obviously, and despite your successes, you appear still to have an inferiority complex about your lacking this ‘vital’ qualification which you rightly sight as a two year long, very expensive holiday.

    Good luck in your investing but don’t let’s pretend we all have access to the resources necessary to imitate your actions.

    Like

    • BenJam,

      Thanks for the comment but…

      I have an inferiority complex? Funny that’s how you should read it. Despite the fact that we are all, I believe, insecure on some level, not having an MBA isn’t one of my pet insecurities. Not having a PhD in something else, perhaps.

      Perhaps, also, you didn’t take the time to read the intro and what I hope readers to get from these two posts. I never indicated that all readers would have $120K to spend. That was never the point.

      Tim

      Like

  15. Interesting how quick we are to put money towards “education” but we’re much slower to invest in real world education even if it would be a smaller cost.

    Like

  16. Tim,

    Any thoughts on how much more your learn through investing in a start-up rather than just having a relationship wth people. You seem to have learnt from people like Mike Maples and Nicholas Taleb without the risk to your cashflow.

    Also would be interested on the multiples on BrainQUICKEN, if you’re including this in your ROI then 2x seems low.

    Like

  17. I just started yesterday with reading the Four Hour Work week (at page 98 now). And as with many things I’m going, how on earth do I implement that?!
    For example, how do I cut back on 8 hours a day of work, when my important task spans more than just 1 day?
    If I work too fast it’s going to look bad, because then we planned the project incorrect and we could’ve done the project cheaper. That would not make the customer a very happy customer.

    Then getting to the article, my passion is with writing a novel. It assumes an income of 50,000… I don’t even make half of that! (around 18,000)
    So how do I spend 12,000 a year and cut down on my salary, when my salary is that low already. (filled in the dreamline worksheet and my buffer is more than I make in a month…)
    And to think I have a well paying job for being just 23.

    Like

  18. Great Post Tim!

    QOD: If you are working in a “conservative and conventional” industrial market (i.e. selling optical backbone equipment, like I am), how would you help or guide or protect a two-person startup looking to sell key technologies to a huge company like Cisco or IBM? What can an angel investor do to protect the small from the big while still attracting the big companies as customers?

    How can a start-up/university spin-off make sure they are to be taken seriously by big customers?

    Like