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Black Swan Farming

paulgraham.com

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Re: Black Swan Farming

#191

Post by dirtyaura »

ivankirigin wrote: post #129

It seems like there could be more than one way forward. The big successes dominating point to one path: finding those wild outliers. But many startups exit without making it big and return 2-3X to their investors. If the median startup were doing 3X, you'd be making a great return. I don't hear much about this strategy. It would be interesting to look at the remainder of YC's portfolio with Dropbox and Airbnb removed…

My guess is that it will still resemble a power law curve.

If we just examine YC exits to date, Heroku and OMGPOP are around $200M each, $400M in total, which is likely over 50% of the rest. If we remove those too, there are a few exits in $30-60M range (Loopt, CloudKick etc.) which are quite likely to be over 50% of the rest. At the lower end of exit price curve, the power law might not hold, as acqui-hires typically have a rather standard price ($1-2M per an engineer)

Re: Black Swan Farming

#192

Post by hansc »

What about analysing the other way around: Objectively look at the companies that made it (not just YC companies) and the ones that didn't make it and try to see if there are clues that distinguish them. Were the founders really big dreamers for instance, or was the traction immediatelly high from the start, or was tracction high + no interest from investors?

Re: Black Swan Farming

#193

Post by [deleted] »

dirtyaura wrote: post #177
patio11 wrote: post #112

Earlier quoted context omitted.

it's really rare to find a lifestyle technology business. The traditional challenge you'd level here is "Name three" (37signals, Fog Creek, Balsamiq) but, due to the type of people I hang out with, I could get to fifty before having to slow down and start checking my Gmail. A friend of mine who is in the selling shovels business estimated that there are 30,000 firms selling SaaS. (That number struck me as crazy until…

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.

[deleted]

Re: Black Swan Farming

#194

Post by samikc »

A part of any investing activity requires risk taking (truer now than ever as sovereign debts are defaulting or on verge of that), the other part is making profit based on risk. In case of startup seed funding the risk are much higher but profits are high too (like 1000x). Now an investor can make profit by selling their share to other (future) investors. The point to note here is: the first investor sells thinking that the venture’s value has reached a reasonable price which was expected or it’s now overpriced.

The point is, profit has to be booked to be realized.My question to PG is how does YC decide when to sell?

Re: Black Swan Farming

#195

Post by bambax »

paul wrote: post #12

The counter-intuitive nature of startup investing is a big part of what makes it so interesting to me. In most aspects of life, we are trained to avoid risk and only pursue "good ideas" (e.g. try to be a lawyer, not a rock star). With startups, I get to focus on things that are probably bad ideas, but possibly great ideas. It's not for everyone, but for those of us who love chasing dreams, it can be a great adventure…

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 sounded bad at first; but if all those startups are in fact financially irrelevant, should they be used to try to build a theory of success?

- - -

It's interesting to learn that if YC funded 10x more startups they would be just as successful (and maybe more, since there could be a big success in the startups that are left out) -- it means that if the selection process rate is around 10%, YC could do without it entirely, with no significant effect to its bottom line.

Also, I took this picture this summer http://i.imgur.com/B30hL.jpg

Re: Black Swan Farming

#196

Post by dschiptsov »

It is almost the same idea as of scientific revolution - to make a paradigm shift one must discover something which is orthogonal, incompatible with a main-stream view, with current scientific consensus. There are lots of readings for students about how to become a new Darwin or Einstein.

To make a paradigm shift one should pick up a special kind of person (let's call him focused, disciplined introvert) place this person in a good environment (or just help the person to make one for himself) and it must be done in a right moment - create a wave others will try to catch and ride. Luck could be summoned by avoiding being too narrow focused and self-centered, by being awake.

There is a small essay which, I think, is related to the subject - http://karma-engineering.com/lab/wiki/Hiring

Re: Black Swan Farming

#197

Post by ten_fingers »

salemh wrote: post #184
ten_fingers wrote: post #159

Earlier quoted context omitted.

If my project is successful, I will be a billionaire, many times over. I have no desire to do that, and really don't want the down side of being that wealthy, and didn't try to pick a project that would make so darned much money, but that's just the way my project looks. 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, wa…

This is more venting, or a manic episode (I am not being facetious, I am reading it that way) without any sort of specifics besides the merits you are expounding about applied research without specifics in an attack like style of writing. It's very interesting for me to read as a stream of conscious, but not practical in any aspect, nor open to any debate. Your "doing them some good" had nothing specific to merit att…

My point is clear, simple, rock solid, quite explicit, and very well supported: Again, yet again, this time just for you, my point from DoD research is that DoD research shows that research can find powerful solutions to important practical problems. Examples include a long list of astounding military technology from the atomic bomb, the hydrogen bomb, sonar in all its forms, radar, now a deep and astounding field, laser guided bombs, GPS, stealth, high bypass turbo-fan engines, e.g., first for the C5-A, carbon fiber materials, CAD, originally heavily for aerospace, etc.

What is "practical" is the unique power of research to find powerful solutions to important real problems.

I omitted all my peer-reviewed, published research results. But if you want some examples of research, try the shelves of any research library.

My post, if actually read, directly addressed the main problem in PG's essay, how to evaluate projects. My solution was my three steps. That is, start with an important problem and do some research to get a powerful solution. That solution addressed PG's issue.

For how to evaluate some routine application of software for a simple case of some social, sharing, mobile app, my solution is don't try and, instead, go with projects that use original research to get powerful solutions for important problems.

If you want to know what research is, get a Ph.D. in a technical field from a good research university. If you want to know how DoD does research and applies it, then get a job in a DoD laboratory that does such work -- the DC area is surrounded by such labs from NRL, NSRDC, JHU/APL, and many more, and there are many more such labs all across the US.

Re: Black Swan Farming

#198

Post by gregcohn »

...in purely financial terms, there is probably at most one company in each YC batch that will have a significant effect on our returns, and the rest are just a cost of doing business.

Clearly you don't look at YC in purely financial terms, but it would be an interesting thought experiment to consider whether there would be more efficient ways to generate returns if you did.

Among other things, there may be more efficient ways of testing variations of ideas around a theme, or testing/ranking skills, or assessing likelihood of success for various experimental team combinations.

To use a casino metaphor, it seems like you're taking a 50-100 completely binary and largely independent bets per class and hoping to beat the house on average. As opposed to, say, trying to create the MIT blackjack team to beat the house systemically.

Re: Black Swan Farming

#199

Post by 6ren » 

  > the one thing you can measure is dangerously misleading [Demo Day fundraising]
That this is misleading follows from the thesis that the best ideas look like bad ideas. But - historically - didn't the best ideas (dropbox and airbnb) raise funds after Demo Day?

Footnote [4] http://paulgraham.com/swan.html#f4n says airbnb did get funded; and dropbox was unanimously voted the best in their class (according to one of them http://www.quora.com/Y-Combinator/When-Dropbox-first-present...)

So this is an intriguing thesis, but not supported by the (admittedly scanty) evidence of the two biggest outsize hits. Do the other outsize hits support it (i.e. by not raising funds after Demo Day)?

Re: Black Swan Farming

#200

Post by YuriNiyazov »

ten_fingers wrote: post #190
YuriNiyazov wrote: post #187

Earlier quoted context omitted.

You seem to be new here. Let me give you a tip: you will be hellbanned very shortly if you continue commenting on the site the way that you have been doing so far. Please read the guidelines: http://ycombinator.com/newsguidelines.html

You responded to my post about the law of large numbers and utility functions? That is actually a good and appropriate observation. Of course, some mods came along and down voted it. I doubt that they understand either the law of large number or utility functions. Of course, the law of large numbers is a crown jewel of 20th century probability theory, and utility functions are one of the better contributions of von N…

I responded to your post about large numbers and utility functions only because it was your most recent one. I would've sent you a private message had the site supported PM functionality or if you had some e-mail address in your profile.

The point that I am making is about your general behavior in this thread. You have broken multiple guidelines:

'Be civil. Don't say things you wouldn't say in a face to face conversation.'

'When disagreeing, please reply to the argument instead of calling names. E.g. "That is an idiotic thing to say; 1 + 1 is 2, not 3" can be shortened to "1 + 1 is 2, not 3."'

'Please don't use uppercase for emphasis. If you want to emphasize a word or phrase, put asterisks around it and it will get italicized.'

'Please don't bait other users by inviting them to downmod you.'

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