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Black Swan Farming

paulgraham.com

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Re: Black Swan Farming

#211

Post by thaumaturgy »

cperciva wrote: post #85
pg wrote: post #59

Earlier quoted context omitted.

It's pretty grim. I think that's one of the reasons I write fewer essays now. After I wrote this one, I had to go back and armor it by pre-empting anything I could imagine anyone willfully misunderstanding to use as a weapon in comment threads. The whole of footnote 1 is such armor for example. I essentially anticipated all the "No, what I said was" type comments I'd have had to make on HN and just included them in t…

Having people pick over every detail of what I write is something I like about HN -- it forces me to think more carefully about what I'm saying, and on a few occasions (tptacek, I'm looking at you) has even prompted me to go back and write further blog posts about specific points. Of course, my blog posts don't get nearly as much attention as your essays, and I don't have the problem of having people try to draw atte…

I can't tell here if you're just off-hand mentioning something you like about HN, or if you're also suggesting that it's something other people should like too.

Your posts are more technical in nature, and can benefit from debate. Other people might write things that are more personal, or opinion, or thinking-aloud, and while a little bit of good-natured feedback from trusted people might be appreciated, lots of nitpicking and debate and very public arguing is not.

Re: Black Swan Farming

#212

Post by ghshephard »

Estragon wrote: post #207
bambax wrote: post #195

Earlier quoted context omitted.

Is it really that counter-intuitive, though? A sample of two "rock stars" doesn't seem to be enough to draw conclusions from it. For instance, whereas Airbnb can admittedly be seen as a questionable idea (but not outright bad), Dropbox (the idea, before implementation) sounds like a very good idea. Maybe not a $7b idea, but still very good. Of course, among the YC funded startups, there may be a lot of ideas that sou…

Frankly, I still don't understand why everyone's so excited about dropbox.

Go to pretty much any college and see how students share files.

Dropbox is to file sharing, as facebook was to social networking as Google was to search.

When I try to IM a person a picture, they may be on any one of a dozen IM systems (almost all of the compatible with Adium) - and my success in DMing them a picture is Dropbox gives me the ability to drop an image on our shared folder and "real time" have it pop up on their side. I do this all the time, and it's just one of many, many common uses of Dropbox.

Easily the most useful new utility that I've added in the past three years to my OS X system.

But - your perspective on Dropbox - is precisely why it was so hard to predict - even after using it, who on earth would have know that it would have taken over the file sharing space so quickly? And _everyone_ thought google was going to get into this space much, much earlier.

As it is - on the surface, google offers better value and more space for your money - but I don't have a single friend who has switched over to their shared drive. We've all stayed on Dropbox because of the network effect (we've all got shared files via Dropbox - don't want to add yet another file sharing system to slow down our computer.)

We'll see if that works out in the long term - it certainly did with search.

Re: Black Swan Farming

#213

Post by dirtyaura »

rmc wrote: post #205
dirtyaura wrote: post #177

Earlier quoted context omitted.

Are those fifty making 1 million dollars a year (per founder) from products? I mean it's obvious that you can make a good living in tech by consulting, but I'm curious how many "lifestyle" product companies are out there that make profit in millions.

I don't think profit per year per founder is a good definition of "lifestyle business", a better definition would be "can you make money while you're sleeping/on holiday?". If you're a consultant, then you don't make money while on holiday. I don't even think you need €1,000,000 per annum to count as success, I'd set the bar at €100,000. I'd be quite happy to make that amount per year in my sleep.

"a million dollars a year for you" was a limit given in mixmax's comment, and Marc also use that.

So I'm just curious if Patrick was really meaning that he can without pausing name 50 non-VC backed lifestyle product companies that are making $1M in salaries and profits for their founders, or that he meant that he can name 50 companies that are generally well-off, and are making e.g. a few thousand dollars per year for their founders.

The difference is important in my opinion, as I can name a several that make a few thousand dollars a year by consulting, but I don't know people that make over a million a year for themselves with an internet product without an investment. Those that I personally know that earn $1m, are in more fishy type of business (E.g. quick SMS loans) and have a sizeable financial backing from more traditional investors.

Re: Black Swan Farming

#214

Post by ghshephard »

diego wrote: post #152
Gustomaximus wrote: post #137

Earlier quoted context omitted.

They do something similar with equity trades. They get professionals and public entrants to select stocks and include a 'dartboard'. From my limited reading experience the dartboard rarely wins implying people do add value, but it would be interesting if someone could find a history (I didn't with a quick Google). In Australia one news paper includes an Astrologer which I find amusing. With start-ups I think it would…

"From my limited reading experience the dartboard rarely wins implying people do add value" This is wrong. If the dartboard consistently underperformed most stockpickers (i.e. say it ranked around the 30th percentile year over year) then you could make the case that (some) people add value. If, on the other hand, the dartboard is near the mean of the distribution of outcomes, you could make a case that it's all luck.

The fundamental fallacy underlying the "Darts are just as good as people" is that the _entire reason_ the dartboard approach is so successful is because of the massive number of experts who have priced everything close to perfectly.

No such market exists for startups - so selection is required.

Re: Black Swan Farming

#215

Post by pja »

Estragon wrote: post #207
bambax wrote: post #195

Earlier quoted context omitted.

Is it really that counter-intuitive, though? A sample of two "rock stars" doesn't seem to be enough to draw conclusions from it. For instance, whereas Airbnb can admittedly be seen as a questionable idea (but not outright bad), Dropbox (the idea, before implementation) sounds like a very good idea. Maybe not a $7b idea, but still very good. Of course, among the YC funded startups, there may be a lot of ideas that sou…

Frankly, I still don't understand why everyone's so excited about dropbox.

There speaks the man who never had to share files with twenty different people, each using different computing platforms and of varying technical competence.

Cross-platform internet file sharing in a transparent way is a (surprisingly?) hard problem. Before Dropbox there were many companies who had tried to make a success of it and they had all failed[1] in one way or another. (Not cross-platform enough, not seamless enough, reliance on ads for income etc etc.) DropBox succeeded because they took that hard problem and made it look easy.

Re: Black Swan Farming

#216

Post by stchangg »

Is it really so counterintuitive? I think PG is making it out to be more complicated than it really is.

Solve a big, annoying problem for lots of people. Dropbox was obviously a great idea; look at how much trouble people went through to share files (using flashdrives, CDs, email, spammy uploading sites or ones that enforced a delay) before it got big. Just because there are existing players in the space doesn't mean the problem is solved. There are so many other major inconveniences that people have to put up with that are incredibly ripe for disruption. Healthcare - why is it so damn hard to get an instant, cheap medical opinion on a non-urgent but still worrying issue if you don't have a doctor in the family? Apartment rental (for both owners and tenants).

The hard part is not telling whether or not something is a good idea. It's evaluating whether or not the team can pull it off.

Re: Black Swan Farming

#217

Post by [deleted] »

adrianhoward wrote: post #202
bambax wrote: post #195

Earlier quoted context omitted.

Is it really that counter-intuitive, though? A sample of two "rock stars" doesn't seem to be enough to draw conclusions from it. For instance, whereas Airbnb can admittedly be seen as a questionable idea (but not outright bad), Dropbox (the idea, before implementation) sounds like a very good idea. Maybe not a $7b idea, but still very good. Of course, among the YC funded startups, there may be a lot of ideas that sou…

Dropbox (the idea, before implementation) sounds like a very good idea. Maybe not a $7b idea, but still very good I don't think so. My first encounter with DropBox was very similar to my first encounter with Google... but it was "Oh look - another way to share files" rather than "Oh look - another search engine". Or indeed many, many people's reaction to the release of the first iPod ("Oh look - another mp3 player").…

[deleted]

Re: Black Swan Farming

#218

Post by raverbashing »

diego wrote: post #152
Gustomaximus wrote: post #137

Earlier quoted context omitted.

They do something similar with equity trades. They get professionals and public entrants to select stocks and include a 'dartboard'. From my limited reading experience the dartboard rarely wins implying people do add value, but it would be interesting if someone could find a history (I didn't with a quick Google). In Australia one news paper includes an Astrologer which I find amusing. With start-ups I think it would…

"From my limited reading experience the dartboard rarely wins implying people do add value" This is wrong. If the dartboard consistently underperformed most stockpickers (i.e. say it ranked around the 30th percentile year over year) then you could make the case that (some) people add value. If, on the other hand, the dartboard is near the mean of the distribution of outcomes, you could make a case that it's all luck.

If he had said "all people add value" I would've agreed with you

Well, you could try ranking results and calculating a score based on how each person outperformed the dartboard, then calculating a score over time.

Re: Black Swan Farming

#219

Post by resbear »

nostrademons wrote: post #157
onwardly wrote: post #140

Earlier quoted context omitted.

One inefficiency could be related to this point Paul makes: We can afford to take at least 10x as much risk as Demo Day investors. And since risk is usually proportionate to reward, if you can afford to take more risk you should. What would it mean to take 10x more risk than Demo Day investors? We'd have to be willing to fund 10x more startups than they would. Which means that even if we're generous to ourselves and…

That quote was the sketchiest part of the article for me, because the same math was used to justify the subprime mortgage bubble. 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 startu…

I think the difference here is the assumption for failure rather than success for. The subprime bubble existed due to leverage - fancy models said that defaults were unlikely, so rather than extend loans from their own assets, banks decided to double (or triple, or quadruple...) down and lend out multiples of their own total assets. The models were wrong and they blew up.

This is quite different from assuming a high failure rate. The marginal cost of having say, 10% more failed startups isn't a big deal when 95% of them are already failing, and the model accounts for that high failure rate. The black swan is not the unexpected failure that wipes you out, but the unexpected success that outweighs all the failures.

Obviously, you'd still be screwed if none of the stuff you invest in pays off. But that would be the case even if your model was more pessimistic; if even 5% success was too much to ask for, perhaps the market for VC is busted, and there was no hope for profit anyway.

I don't think pg is implying that screening processes are useless. I'm sure many obviously hopeless ideas get filtered out. It's more that, given the current state of knowledge, everything beyond that basic filter is by nature difficult to discern and we may as well assume a random fat tail distribution.

Re: Black Swan Farming

#220

Post by nostrademons »

resbear wrote: post #219
nostrademons wrote: post #157

Earlier quoted context omitted.

That quote was the sketchiest part of the article for me, because the same math was used to justify the subprime mortgage bubble. 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 startu…

I think the difference here is the assumption for failure rather than success for. The subprime bubble existed due to leverage - fancy models said that defaults were unlikely, so rather than extend loans from their own assets, banks decided to double (or triple, or quadruple...) down and lend out multiples of their own total assets. The models were wrong and they blew up. This is quite different from assuming a high…

The comparison I'm trying to draw is about why the models were wrong. Subprime lenders planned for failure too; after all, this is why the loans were subprime, it was expected that a number of them would default. All of this is built into the business model: charge high interest rates on all the loans, to subsidize the cost of some expected number of failures.

The problem is that when the business grew and everyone entered, it changed the assumptions that the models were based upon. A certain percentage of mortgages would blow up when subprimes were 1% of the market. The fatal mistake was assuming that the same percentage of mortgages would blow up when subprimes were 10% of the market, because the process of going for 1% to 10% means writing many more loans and extending credit to buyers who should never have been buying houses in the first place.

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