THE ALMANACK OF NAVAL RAVIKANT

INVESTING (GENERAL)

Best investing attitude is contrarian, patient, informed optimism. As @m2jr says, “non-consensus and right.” [11]

The biggest gains in investing come when you bet against a gloomy crowd, on the upside. The low price already bakes their opinion in. Your losses are limited to 1x, and your gains are uncapped. [11]

Venture and value investors outperform via patience. Active trading is just another get-rich-quick scheme, with the same results.

I was trained on the efficient markets hypothesis, and yet every market that I've seen up close has been anything but. [11]

ANGEL INVESTING

What are some of your biggest successes in the investing world?

I’ve thrown a lot of darts.

I don't necessarily take credit for it. Some people might say they were very thoughtful and did a lot of diligence. You know, some of it was luck. A lot of it was luck.

I was a first round investor in Twitter when it was first getting started. I was first investor in Uber, when it was getting started. Thumbtack, Wanelo, Flipagram. I was probably the first real investor in Postmates, after they got out of an incubator.

There's a bunch of them that goes on and on, it's hard for me to draw the full list. The fund I ran is on track to return 10-20x the capital it raised. And my individual portfolio is up by something like dozens of times. [6]

Angel bets and venture bets are great because they have nonlinear outcomes in the positive, but on the downside you can only lose 1x (where x is your investment). On the upside, you can make 10,000x.

I’ve tried to rig the game. Basically, I try and set up good systems and then the individual decisions don’t matter that matter much. I think our ability to make individual decisions is actually not great. For example, as an investor, my system is: I want to see 10,000 companies and I want to pick 500 that have a shot of being huge. Then I want the option to double down on the five winners. I don’t want to just look at 100 companies and pick 10 that I think are winners and go all in on those. I don’t think I have that capability. [4]

Unfortunately, at least in the technology business, there’s a lot of luck required. Right place, right time, market forces, timing, regulatory action against or pro. There’s a lot of things that control where the platforms are shifting, what open source efforts show up. You can never predict the outside successes. What you can predict is the failures.

You can say, “This person doesn’t know this field at all. They’re way out of their depth. This person, they’re a short-term thinker. They’re not going to last the game. They’re not going to go as far as needed.” [4]

What are the things that you look for in founders, or the red flags that disqualify an investment or a founder?

Number one, intelligence; you’ve got to be smart, which means you have to know what you’re doing, to some level. That’s a fuzzy thing but you talk to people and you kind of get a sense of do they know what they’re doing or not. Do they have insight, do they have specific knowledge? Have they thought about the problem deeply? It’s not about the age. It’s not how many years they’ve spent but just how deep is their understanding of what they’re about to do.”

So intelligence is key. Energy, because being a founder is brutally difficult. It takes a long time and in the long run, the people who succeed are just the ones who persevere. So if someone runs out of energy or if they’re doing this in some hesitating, preliminary way where they’re looking for constant positive feedback, or if they’re easily thrown off course, then they’re not going to make it to the end, especially in the highly competitive startup context.

And finally is integrity. Because if you have someone who is high intelligence and high energy but they’re low integrity, what you’ve got is a hard working, smart crook. [31]

I co-founded AngelList because I was tired of saying no to entrepreneurs. I wanted to say instead, “yes, we can help you get funded.”

So, it’s especially disappointing when we get promising startups pitching on AngelList from remote locations. Some we’ve managed to get funded – including ones in Canada and Europe. Others are harder – especially in Russia, Latin America, and Asia.

The problem, as I’ve come to realize, is that funding markets develop in reverse.

In any given geographic region, the first companies that get funded are the ones that least need funding. They have strong operating histories, auditable financials, predictable cash flows, etc.. Funding these companies is less risky, and so a secondary, and then a primary, market forms around them. Call these the public markets.

After the public markets come the mezzanine investors, investing just before a company goes public. And because the mezzanines now exist to pick up risk, late stage private investors start forming behind them. And so on and so forth until you end up with Seed incubators and Angel investors.

Essentially, the single biggest risk you have as an investor is “downstream financing risk.” The risk that the company won’t be able to raise more money once it has spent all of your cash.

This explains the apparent paradox that in less mature innovation cities, you’ll have an easier time finding VCs who will invest $10M in a mature business, than Angels who’ll invest $100K in a raw startup.

It’s a measure of the incredible strength of the Silicon Valley ecosystem that Y Combinator has chosen it as its hometown. YC and its brethren can only exist because of the rich Angel ecosystem. Paul Graham was smart enough to realize that his graduates couldn’t function without a rich Angel ecosystem, and went to great pains (such as AngelConf) to foster it.

Similarly, the true evidence that the NY Angel market has finally blossomed is that TechStars and a number of other seed combinators are choosing to do business there.

As an entrepreneur choosing your base of operations, take a careful look around. If you don’t see many VCs, you’re not likely to find many Angels either. Even though the VCs invest more money, they actually take less risk.

Angels should realize how this whole pyramid functions. Investing in companies that won’t have access to Venture is incredibly risky. Investing at Venture valuations in Angel-stage companies means that your portfolio will likely generate negative returns. [22]

In startup financings, each new investor brings new information but doesn't move the price. Ergo, following the herd is rational. [11] Startup financings exhibit herd mentality because there's no pricing. If first movers paid *a lot* less, financings would be rational. [11]

You've probably seen more entrepreneurs before and after success than just about anybody ever. Of all the people who made it, how many could you tell five minutes after you met them “this one's gonna make it” and it doesn't even matter what the idea was?

It's hard to tell which businesses are going to work because a lot of businesses fail. And a lot of good entrepreneurs chasing bad businesses fail. But the entrepreneurs themselves don't fail over a long period of time. When you meet the entrepreneurs who can be winners, they will be a winner, the question is just how many times. You may have to back them a few times. [73]

What are some of the mistakes you’ve made investing?

I passed on Twilio very early on. Jeff Lawson is a great founder, and he gave me every chance to invest.

I passed on Pinterest, Ben Silberman gave me every chance to invest. We'd helped Ben a little bit with AngelList, although not a lot, we were just getting started. He was raising money for Pinterest. And I saw the numbers going up month to month to month. I had a chance to invest the first time, the second time, third time. He kept offering it to me. I was sitting in bed next to my fiance, and she was obsessively using Pinterest. She said, ‘I think you should do this.’ I was like, ‘I don't get it, it’s images, who's going to use that, how is it going to make money.’ So I passed on Pinterest. I've got a lot of stupid ones like that.

I could have been an Advisor YouTube in the early days. I helped them out, but didn't take any stock, even though they were kind enough to offer it.

There's lots and lots of misses. Square, I could have done the first round, and I thought it was too expensive. Even Twitter where I did my piece I did a much smaller piece than I was allocated, just because I thought it was too expensive. [6]

What are the things that lead to you make bad investments, overriding your rules or intuition?

I don't actually dwell on the bad investments much. In the startup world, you're betting that 90% of these companies will go to zero, or just return your money and the remaining 10% are going to post huge multiples. The Twitter investment is probably up 400x, Uber is probably up around 4,000x. So the returns of the winners can be staggering and can overwhelm the losses in the portfolio.

You always focus on the upside, you don't really pay much attention to the downside. I would say most of the downside mistakes I think about are the mistakes of omission, not mistakes of commission.

Mistakes of commission are usually because you didn't have time to get comfortable with a deal, you got caught up in the heat of it, where someone was pushing you to make a decision very quickly, you didn't have the data, you didn't have the the gut feel for it, we just went ahead and did it because of fear of missing out. That said, a great company will raise money very, very quickly. Very often you just don't have much time.

The mistake of commission that really bothers me is when I waste my time. [6]

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