The Fallacy Of Bimodal Returns • Hacker News Board

Re: The Fallacy Of Bimodal Returns

#11

Post by fredwilson » Fri, Oct 29, 2010, 2:12 PM UTC

JoachimSchipper wrote: post #7

SkyMarshal wrote: post #2

Not that it's relevant to his point, but he's only showing the current portfolio, which presumes only the companies that haven't failed. I wonder what it would look like if he included their failed investments from the past as well, the companies no longer in existence.

The fund has not been active very long, so there's not been much opportunity to fail yet. Still, the two rightmost companies are valued well below 1x - they seem to be bankrupt or nearly so.

one was sold in a fire sale

the other was shut down

neither did a bankuptcy

Re: The Fallacy Of Bimodal Returns

#12

Post by nandemo » Fri, Oct 29, 2010, 2:42 PM UTC

px wrote: post #3

I appreciate Fred's candor in this post and I find his position reasonable. This seems to be a response to PG's essay about superangels, including this section of it: "So I think VC funds are seriously threatened by the super-angels. But one thing that may save them to some extent is the uneven distribution of startup outcomes: practically all the returns are concentrated in a few big successes. The expected value of…

Huh? That quote doesn't say that returns are bimodal at all. Saying that "practically all the returns are concentrated in a few big successes" is consistent with a power law distribution. And saying that angels can "win battles" implies that some companies are successful without bringing huge returns.

Re: The Fallacy Of Bimodal Returns

#13

Post by far33d » Fri, Oct 29, 2010, 2:48 PM UTC

I'm confused - isn't this the wrong graph? Shouldn't we be looking at a histogram showing return multiple on the x axis and # of companies in that group on the Y?

Or, alternatively, return decile on the x, and total return value on the Y - this would probably end up looking somewhat bimodal, right?

Re: The Fallacy Of Bimodal Returns

#14

Post by revorad » Fri, Oct 29, 2010, 2:49 PM UTC

far33d wrote: post #13

I'm confused - isn't this the wrong graph? Shouldn't we be looking at a histogram showing return multiple on the x axis and # of companies in that group on the Y? Or, alternatively, return decile on the x, and total return value on the Y - this would probably end up looking somewhat bimodal, right?

http://zachaysan.tumblr.com/post/1431828646/paul-graham-is-r...

Re: The Fallacy Of Bimodal Returns

#15

Post by JoachimSchipper » Fri, Oct 29, 2010, 3:15 PM UTC

fredwilson wrote: post #11

JoachimSchipper wrote: post #7

Earlier quoted context omitted.

The fund has not been active very long, so there's not been much opportunity to fail yet. Still, the two rightmost companies are valued well below 1x - they seem to be bankrupt or nearly so.

one was sold in a fire sale the other was shut down neither did a bankuptcy

Sorry! I didn't know a better word for "stopped operating as an independent entity with some haste", and used "bankruptcy" without considering the possible implications for your business. (I see http://zachaysan.tumblr.com/post/1431828646/paul-graham-is-r... uses the same word, I don't hope I inspired him.)

I'll try to choose my words more carefuly next time.

Re: The Fallacy Of Bimodal Returns

#16

Post by wisty » Fri, Oct 29, 2010, 3:32 PM UTC

px wrote: post #3

I appreciate Fred's candor in this post and I find his position reasonable. This seems to be a response to PG's essay about superangels, including this section of it: "So I think VC funds are seriously threatened by the super-angels. But one thing that may save them to some extent is the uneven distribution of startup outcomes: practically all the returns are concentrated in a few big successes. The expected value of…

Another issue - backing the next google may not be as profitable as you think. The founders keep a large portion of the shares, and the IPO will raise a lot but that goes into new servers or acquisitions. Then those pesky employees want stock options.

The VC firms who backed google brag about how they got 25% of a company that's now worth $600B. They don't like to mention that they were diluted (by both the IPO and employee stock options). I think they made a 100X return, which is certainly very good, but it's not as great as they make it sound.

Andy Bechtolsheim, the angel who gave them $100,000 made out like a bandit though. Something like a 10,000X return, I think.

Re: The Fallacy Of Bimodal Returns

#17

Post by rgrieselhuber » Fri, Oct 29, 2010, 4:59 PM UTC

wisty wrote: post #16

px wrote: post #3

I appreciate Fred's candor in this post and I find his position reasonable. This seems to be a response to PG's essay about superangels, including this section of it: "So I think VC funds are seriously threatened by the super-angels. But one thing that may save them to some extent is the uneven distribution of startup outcomes: practically all the returns are concentrated in a few big successes. The expected value of…

Another issue - backing the next google may not be as profitable as you think. The founders keep a large portion of the shares, and the IPO will raise a lot but that goes into new servers or acquisitions. Then those pesky employees want stock options. The VC firms who backed google brag about how they got 25% of a company that's now worth $600B. They don't like to mention that they were diluted (by both the IPO and e…

> backing the next google may not be as profitable as you think

No, I'm sure it's pretty damn profitable, if you're lucky enough to invest.

Re: The Fallacy Of Bimodal Returns

#18

Post by jpwagner » Fri, Oct 29, 2010, 5:09 PM UTC

Cool post and great that he backed up his argument with data.

My only beef with this article is that it does not follow logically that "bimodal" returns means that you want to get in every deal. That's the "throwing good money after bad" flaw that leads to addictions to video poker and the lottery.

Re: The Fallacy Of Bimodal Returns

#19

Post by joshu » Fri, Oct 29, 2010, 5:32 PM UTC

can we not call things "power law curves" just because they are curved like that? all distributions have underlying reasons. arrival time? mean reversion? preferential attachment? go looking for and describe the underlying causes.

Re: The Fallacy Of Bimodal Returns

#20

Post by wisty » Fri, Oct 29, 2010, 7:52 PM UTC

rgrieselhuber wrote: post #17

wisty wrote: post #16

Earlier quoted context omitted.

Another issue - backing the next google may not be as profitable as you think. The founders keep a large portion of the shares, and the IPO will raise a lot but that goes into new servers or acquisitions. Then those pesky employees want stock options. The VC firms who backed google brag about how they got 25% of a company that's now worth $600B. They don't like to mention that they were diluted (by both the IPO and e…

> backing the next google may not be as profitable as you think No, I'm sure it's pretty damn profitable, if you're lucky enough to invest.

My numbers might be wrong. But I think they make 100X, not 10,000X their investment. Which is still magnificent, but not enough to say that the only investement that matters is the one that turn into the next Google.