Peter Thiel, billionaire founder of PayPal, is one of the best startup investors of all time. He invested $500,000 in Facebook in 2004, when the fledgling company was worth around $5 million.
He sold most of that stake after Facebook’s IPO in 2012, when shares traded around $20. All told, Thiel made more than $1 billion on that investment alone.
Today, Thiel’s venture capital (VC) firm, Founders Fund, is one of the largest and most powerful VC firms in the world. Its portfolio includes Airbnb, Lyft, Stripe, Spotify and many more.
Thiel has some very smart views on startup investing. And most of the time, I’d say he’s a great source for learning about startup investing.
However… I disagree strongly with him on one big, important aspect of startup investing.
And that is how many startups we should invest in. This is an important topic for investors to start thinking about.
Why Thiel’s Advice Doesn’t Apply to Us
Thiel believes in highly concentrated portfolios with five to seven investments per VC fund. That’s extremely concentrated in the startup investing world. The number of investments per fund varies widely, from 30 all the way up to hundreds. But it’s definitely not usually as small as five to seven, which Thiel suggests is optimal.
Here’s how Thiel described his views a few years back on The Tim Ferriss Show.
One of the reasons I don’t like that sort of approach to investing is that I don’t think it’s good to treat companies as lottery tickets. I think it’s terrible to treat the founders of companies as lottery tickets, and I think it’s not just sort of a bad thing morally to treat people as lottery tickets, I also think it’s really bad as an investor. As an investor, once you say that there’s a small probability of a big payoff, small number times big number normally equals a small number. So once you’re thinking in lottery ticket terms, you’ve already psyched yourself into writing checks without thinking and, therefore, losing money.
I see his point. And this strategy works fantastically well for him.
BUT you and I are not Peter Thiel. We don’t have the connections a guy like Thiel has, for one thing. I guarantee almost all of his deals come from within his impressive network of friends and co-investors in Silicon Valley. We can get access to some fantastic deals online, but you can’t just recreate that network.
Secondly, we’re not investing the same amount of money as Thiel is. Founders Fund can invest $30 million or more in a single deal. That, along with its network, gives Thiel access to amazing “growth-stage” deals. These are later than early-stage deals, but not yet considered “pre-IPO.” We can access these types of deals occasionally online, but great ones aren’t exactly common (most of the good ones I’ve seen have been on AngelList). Thiel has access to amazing growth-stage deals all day and night. We don’t.
(So for those of you who, like me, are looking for earlier-stage deals, we will usually be investing at a stage earlier than Thiel does. That means more of our early-stage companies will fail. On the bright side, it also means that the companies will be worth less when we invest and will show a greater multiple when they do succeed.)
Lastly, we weren’t Thiel’s intended audience here. He is talking to other venture capitalists. VC firms are less concentrated than they used to be. Over the past decade, the number of VC investments per fund has been steadily rising. And that doesn’t sit well with him. The rise of venture funds like 500 Startups, which has well over 500 early-stage investments at this point, disturbs guys like Thiel.
Thiel is old school Silicon Valley. He doesn’t like people raising hundred-million-dollar funds and spreading it out across hundreds of deals. It seems unprofessional to him.
Either way, his advice doesn’t apply to us part-time online angel investors. We don’t have months to evaluate each opportunity or a team of 50 to evaluate deals.
Spread Out Your Early-Stage Bets
So my advice is to spread out your early-stage bets. Start small at first and just get your feet wet. I invested in 30 deals my first year.
I was excited and probably made a few more than I should have. But I don’t regret any of them. There are some big winners in there, such as Cabify, my sixth investment ever, and Eaze, which was my 11th. And I made sure to take plenty of lessons from the losers. I saw common red flags that kept popping up, and these have guided me well since.
I learned what to look for in deals and what a reasonable valuation looks like at the early stages.
You can’t learn stuff like this just by reading. You have to do it and experience it.
So my advice is to get out there and start investing in some deals. If you find you like early-stage investing, don’t stop. I’m up to around 100 startups at this point and don’t plan on stopping anytime soon.
If you’re looking for a number of investments to shoot for, I think 100 early-stage investments is a good long-term goal. If you spread your investments out over a few years and pick well, you should have at least a few major winners in there (that’ll return 25X to 1,000X).
My advice for everyone who’s new to this is simple: start small. The downside is limited to what you put in, so don’t invest more than you can easily afford to lose. Before you know it, you’ll be evaluating early-stage deals like a pro. It’s a skill like anything else. It just takes time and practice.
Fortunately, accredited investors can now invest as little as $1,000 per deal on sites like AngelList. This means that learning how to be an angel investor today costs a tiny fraction of what it used to. Take advantage of it.
Good investing everyone,
Adam