Naval: Like other industries, the best way to make money in technology is to own a piece of a business. “You’re not going to get rich renting out your time. You must own equity—a piece of a business—to gain your financial freedom.”
Founder, employee or investor?
How do you gain substantial equity in a business? One of the classic models is to start your own company. There are downsides, though. For one, it’s highly stressful, grueling work. For another, your chances of success aren’t great; very few companies succeed. You may have to get back up at the plate and take a few rounds at bat.
Another classic route is to get recognized as an extremely competent execution person, so you get the call when the next successful company’s scaling. You want your name on the list when the founders of the next Uber of Dropbox call up their favorite investors and say, “Hey, who are your 10 best engineers that I can recruit right now?”
Someone who’s done a great job at other companies can get a fairly large amount of equity to join a rocketship that’s already solved product-market fit.
As the hits get bigger, it makes more sense to invest
Finally, you can get rich as an investor. As the hits become bigger and bigger and the returns become more nonlinear, it makes more sense to play as an investor and a little less sense to play as a founder.
This is because the upside is nonlinear. When you invest in a startup, you can make a 100x, 1000x, 5000x, 10,000x return—if you were in a Facebook seed round, for example. You’ll own a lot more of your own company, but you may only make a 10x or 100x return.
The human brain is not wired to understand nonlinearities. The people who do—people like Paul Graham and Peter Thiel—end up becoming billionaires as investors, rather than through companies they started themselves.
Now, being a founder is a lot more fulfilling than investing. Many investors tell me they wish they were building something. Being a founder gives you a deeper sense of purpose. There is a sense of teamwork and really being involved.
On the other hand, leading companies burns you out and ages you quickly. Being a founder your entire life is a very tough road. Most people do not have the constitution for it.
Angel investing is something you can do until the day you die
Angel investing is something you can do when you’re 50, 60, 70 years old. It’s something you can do part-time, if you’re partially retired or on leave with a new baby. It’s a way to make money when you can’t crank like you used to as an entrepreneur, whether you’re focusing on your family, have a health issue or are simply tired.
Nivi: Your judgement and your access to capital and dealflow also go up as you get older. It takes a long time to learn, but investing is one of the few professions where you can improve until the day you die.
Naval: Warren Buffet is one of the richest, self-made people on the planet because he’s been compounding capital for a long time. He started reading annual reports when he was 10, 11, 12 years old, and he’s still going strong. If he started later, he would be nowhere near the top 400 list on Forbes, because the magic of compounding wouldn’t have worked.
Every founder should learn angel investing
There’s a famous line, “Try to learn something about everything and everything about something.” In that sense, it’s great to be a founder and also do some investing.
Nivi: Updating that quote for founders: Focus on your work and invest in your network.
No investor would put all their eggs in one basket—why should you? The smart money isn’t trying to find the solution to product-market fit. Instead, it’s betting on a lot of reasonable solutions.