Angel Chronicles: How Tim Ferriss built a winning angel investing portfolio

kanishka

Published

October 10, 2024

Tim Ferriss is a life, tech, and business OG. He’s most famous for his podcast and best-selling book, "The 4-Hour Work Week," which has sold over 2 million copies and has been translated into 40 languages.

Tim’s journey began after he graduated from Princeton University with a degree in East Asian Studies. After college, he worked for a startup in Silicon Valley and became the director of marketing. Soon, he realized that he was not happy with the traditional work structure and decided to quit his job to embark on a journey of self-discovery.

He’s also a successful angel investor and advisor in companies like Uber, Facebook, TaskRabbit, Twitter, Shopify, and Duolingo. He was an early investor in Uber, investing $25,000 in the company in 2009 when it was valued at only $3.7 million. His investment in Uber alone is now worth over $100 million.

He also invested in Twitter in 2007, when it was valued at only $20 million, and in Shopify in 2010, when it was still a relatively unknown e-commerce platform.

In addition to his big wins, he has had several notable exits from his investments:

In 2013, he sold his stake in StumbleUpon to eBay for $75 million.
He also sold his stake in Shopify for a significant profit in 2015.
In 2017, Duolingo went public, making Ferriss a substantial return on his investment.

Advice he gives to angel investors:

The most important thing angel investors can do is thoroughly research potential investments before committing any money, in other words - due diligence. This means not only looking at the company's financials and market opportunity, but also talking to customers, competitors, and other stakeholders to gain a better understanding of the business. Get to know the founder's vision and plan for executing that vision, as well as assess the competitive landscape and potential risks.

Angel investors should create a diversified portfolio of investments rather than putting all of their money into one or two startups. This helps spread the risk and increase the chances of a successful return on investment. Aim for a portfolio of at least 10 startups, with each investment representing no more than 10% of your overall portfolio.

Angel investing is a long-term game, so be patient and don't expect immediate returns. Avoid getting too caught up in short-term market fluctuations or hype around a particular startup, and instead, take a long-term view and focus on the fundamentals of the business. Successful angel investing requires a willingness to be patient and wait for the right opportunities to arise.

Startups are speculative, and this is gambling. You shouldn’t invest anything you’re not comfortable kissing goodbye. Treat it as casino money.

If you are going to invest in startups despite this high risk, plan on building a portfolio of dozens, very slowly and carefully. This should be just one of many.

Never invest more than 5% of your net worth.

Co-invest with experienced investors.

Don’t invest in a startup just because it’s popular or has famous investors.

What a startup decides to do and how it handles its business, is none of your business.

You might not have the same rights as other investors in future rounds (therefore, less returns). Always check the terms and understand them very well.

Tim’s advice to founders:

A clear vision, a well-defined plan, and a strong team. He advises founders to focus on building a product or service that solves a real problem for their customers and that has a unique selling proposition.

A team should be immensely passionate about the company's mission and also be there to execute the company's plan. Cultural fit is also important, as a cohesive and positive team culture can help drive success over the long term.

Prioritize sales and cash flow. Founders should prioritize generating sales and building a strong cash flow, as these are the most critical factors for the success of any startup.

It's essential to focus on acquiring new customers while retaining existing ones, and ensuring the business has enough cash on hand to weather any unexpected challenges. This focus on revenue over other metrics sustains the business in the long-term scenario.

Embrace experimentation. Founders should be open to experimentation and willing to try new things.

This means being comfortable pivoting the business model, changing marketing strategies, or even testing new products or services to see what resonates with customers. Failure should be seen as an opportunity to learn and improve, and the best founders are those who take risks and are not afraid to fail.