Black Swan Farming

Would the outcome possibly be better by using an approach similar to index funds. By focusing on repeatability would it be possible that one might be able to put together a fund where 30 to 40% of the return is made up by 'average' companies and then take the outliers as bonuses rather than focusing on an event that's unpredictable given the amount of statistical data available?

Or is YC as close to an index fund as it gets?

Not really. He's saying that going by the numbers _should_ be only looking for homeruns but, for a number of different reasons, they don't do that.

The implicit assumption is that the population of startups is uniform across both the set that YC funds and the set that YC does not fund, such that startups in the latter group have the same chance of being a big hit (modulo YC's mentoring, which is accounted for with the "triple a startup's expected value" clause). But the implication of that assumption is that YC is picking startups at random, and that their filtering process is totally useless!

This sort of math comes up all the time whenever there's a screening process. Imagine that you're hiring for a large tech company, you currently hire 1% of applicants, and you find that among the employees hired, there is no correlation between your interview scores and the employee's eventual job performance. Can you conclude that your interviewing is useless? Should you ramp up hires so you get more workforce of equal quality?

Well, maybe. Because there are a bunch of possible hypotheses that could give this result. Perhaps your interview process is designed to weed out false positives more than false negatives, so it's accurate to the 99th percentile, but then gives no discriminatory power. (Many IQ tests are like this; they're highly correlated with life outcomes up until an IQ of about 140, but beyond that they break down entirely and there's often an inverse correlation with income, happiness, etc. past that). Or perhaps your applicant pool is bimodal: 1% come from other employers and are fully qualified, while 99% are the same jobseekers that every other company rejects. Or perhaps your interview process is broken, and you would do better to find a new one. Or perhaps your interview process is okay, but a number of well-qualified applicants are not even applying to your company.

Which of these is correct? You can't know without randomly sampling the population that was rejected and making an estimate of their quality. This is why all decent scientific experiments have a control, and why financial models get backtested on data that was not part of the training set. Even then, there're lots of things that can go wrong in experiment design, and lots of different ways to interpret data that don't necessarily mean "Fund 10x more startups."

I picked a project using my Steps 1 and 2. So, in Step 1 I picked a big unsolved problem, one that nearly every Internet user, desktop to mobile, wants to have solved and that so far is at best poorly solved. Then I executed my Step 2 and drew from my background in pure and applied math, had some new ideas, wrote out some new theorems and proofs, as my education taught me very well how to do, and then wrote the corresponding software.

At this point what is left to do is not very much quite routine Web site construction and some initial data collection. The rest of the software is ready for at least initial production. I've written successful production software before and for this project had no desire to write 'prototype' software.

But what's crucial about my project is the research, just the research, or Step 2 in my post. All the rest is routine.

The main business risk is, will users like my solution. Why is there a question? Mostly because the UI and UX are different. The UI is much easier to use than anything in, say, Office, but there is still a little for users to do.

Can the solution 'scale'? Apparently. From how my software works, my software timings, and some fairly simple estimating, it appears that my software could serve the world from just 2000 square feet of standard rack space in a room of, say, 20,000 square feet. So, my software is relatively efficient. The needed scaling techniques are just the simplest ones -- lots of parallelism and redundancy and processing mostly read only data with good locality of reference.

For 'needing' Paul, really I'm not trying: I've never applied to a YC 'class' and wouldn't want to be part of one. E.g., I don't have a Mac laptop! And I'm building on Microsoft instead of Linux. And I'm writing in Visual Basic .NET instead of C#! So, my software writing doesn't 'fit in' with the YC or HN 'norms'! And, more importantly, I'm not writing just demo or prototype software. Also, I'm a one-person effort: As founder, I insist on knowing all the early software, and the way for me do to that is just to write it. Besides, I enjoy writing software.

The 'business idea', the research, and the corresponding software were all fast, fun, and easy for me. But learning enough about .NET and SQL Server administration has been a self inflicted root canal procedure bottleneck -- that maybe by now I'm mostly through.

When I get some revenue or equity funding, for more obscure details about Microsoft's software, e.g., when I get to be a big uses of Windows Server and SQL Server, I will just pick up a phone, call a Microsoft expert, and pay. My patience working through MSDN Web pages is drawing to a close. Similarly for boxes I get from Cisco.

So far I am 100% owner. Some venture funding would have helped me a little mostly just because I could have called Microsoft instead of worked through thousands of MSDN Web pages. Also a LOT of venture funding would have let me hire people for all the routine software. Net, so far being 100% owner has likely been for the best.

But in the future there may be a role for some venture funding. But it looks like the 'window' will be short: By the time I qualify for such funding, I should be close to no longer needing or willing to accept it.

But YC doesn't really do venture funding. So, I would not be looking to YC for venture funding. So, my post was not to try to get YC funding.

Instead my post was to try to help Paul with the struggles in project evaluation in his essay. Also, since SV has similar struggles, I was writing to help SV. If someone in SV wants to discuss venture funding soon, then okay, but I doubt they will.

For SV funding my project, from all I can tell there will be no problem if and only if my project is nearly far enough along that I no longer need or will accept funding!

My guess, from contacts with VCs I have had, is that to fund my project now, VCs would have to evaluate my research, which they won't do and would have a tough time doing, and then violate some rules from their limited partners.

So, really my post was to tell PG, YC, SV, VCs, and the LPs that for the few "big wins" they want, they should learn to evaluate research and, then, should do that.

Of course, the SV answer, should they ever actually think that far, would be, if the rest of the software is just a little, routine Web site construction, then that is not too much to ask before looking for equity funding. My response would be, okay, but then you risk trying to get on my airplane after it has already left the ground.

Net, then, my post was really to try to shock SV enough to get them to pay enough attention that maybe I could do them some good on one of their worst problems and not really to get funding for my project.

But I should be worth about $500 million: I helped start FedEx and saved it twice. My offer letter said I'd get stock. Later Fred Smith told me, with Mike Basch, that the amount would be $500,000, and that would be worth ballpark $500 million now. That FedEx wouldn't do what they promised in my offer letter is my loss but their shame. Ah, what the heck: If my project works, then I'll be worth more than Fred Smith anyway.