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Black Swan Farming

paulgraham.com

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Re: Black Swan Farming

#51

Post by 00000000swan »

pg wrote: post #20
mikeleeorg wrote: post #4

History tends to get rewritten by big successes, so that in retrospect it seems obvious they were going to make it big. For that reason one of my most valuable memories is how lame Facebook sounded to me when I first heard about it. As a thought experiment, I would love to hear what pg and team would have thought about the following companies, had they applied to YC before they grew in popularity (assuming YC existed…

That is a very interesting exercise. I feel pretty sure we'd have been impressed enough by Max and Peter to fund them regardless of the idea (which initially had almost nothing in common with Paypal). I knew Ev before Twitter so I'm sure we would have funded that. Pandora I know nothing about, so I can't guess there. SalesForce I'm pretty sure we would have funded because Benioff radiates "winner" in much the same ov…

This seems to suggest the decision to fund has less to do with the idea and more to do with the founders. We already knew that.

Does this also mean that the "big winners" will not come merely from a pool of what appear to be bad ideas, but from a subset of that pool: bad ideas put forth by founders the VC thinks are impressive? That too, seems somewhat obvious.

Taking it one step further, can you separate the "idea" from the "founder" in assessing the project's chances of being a "big winner"?

Maybe that was the goal of requesting that people should apply to YC even if they had no "idea".

After all, the supply of "bad ideas" is potentially limitless.

Re: Black Swan Farming

#52

Post by pg »

juniorer wrote: post #46
pg wrote: post #20

Earlier quoted context omitted.

That is a very interesting exercise. I feel pretty sure we'd have been impressed enough by Max and Peter to fund them regardless of the idea (which initially had almost nothing in common with Paypal). I knew Ev before Twitter so I'm sure we would have funded that. Pandora I know nothing about, so I can't guess there. SalesForce I'm pretty sure we would have funded because Benioff radiates "winner" in much the same ov…

Anyone know what the two YC companies Ben from Pinterest was a part of?

Audiobeta and MightyQuiz.

Re: Black Swan Farming

#53

Post by pytrin »

I think the unproportional returns of the really big hits are blinding investors, and even pg a bit in this essay. Yes, it's easy to look at it from that viewpoint and say - 3/4 of our returns are from 2 companies and 1/4 from all the rest. But it misses a couple of important points - 1/4 of 10 billion is not small change, you would still like to have those companies in your portfolio, all things considered, and second, considering the (very) small sample size - it could've been just 1 company worth a 1/4 of the total or 0. That's how variable it is.

Another thing to consider is that the best teams often pivot into a big success rather than start with it. There are countless of such examples, and it just goes to show that even starting with what appears a relatively safe but limited idea can eventually grow into a huge success. Sometimes founders need to get their hands dirty in the market to realize what is the real opportunity. If you pass those teams up because you think their idea cap is too small, you'll be missing a lot of big hits.

What it all comes to for me is investing in people. People make big hits, not markets. Markets can grow and startups can span multiple markets, but it all starts with the people who direct it forwards.

Re: Black Swan Farming

#54

Post by ashrust »

I think the opportunity to reinvest in repeat founders is a large, if currently potential, factor. Stripe & Hipmunk being the likely big win examples, but in our batch there was shoptiques and exec.

I expect it will take a few more years but it will turn out to be financially rational to invest in teams with repeat YC founders.

Re: Black Swan Farming

#55

Post by thaumaturgy »

pg wrote: post #29
cperciva wrote: post #13

Quoth pg: It would hurt YC's brand (at least among the innumerate) if we invested in huge numbers of risky startups that flamed out. Paul, you're sounding like a venture capitalist who is worried about whether he can find investors for his next fund. I would posit that the people whose opinions you should care about are potential founders ; and that their primary concern is themselves , not the performance of a fund…

I do care about would-be founders' opinions, but surely I don't have to use every essay I write to convince people to apply to YC. I've already written elsewhere about the founder's eye view of YC (e.g. http://ycombinator.com/atyc.html ). This essay is just an exploration of the strangeness of startup investing as a business. The goal is not to convince anyone to do anything.

Off-topic, but something I've been chewing on lately: what's it like to have your every written (or spoken!) word analyzed by a bunch of people? Esp. people that you end up having some form of contact with.

It seems like it would be difficult to just have a public conversation about a topic. Do you think about that much when you write?

Re: Black Swan Farming

#56

Post by cperciva »

pg wrote: post #29
cperciva wrote: post #13

Quoth pg: It would hurt YC's brand (at least among the innumerate) if we invested in huge numbers of risky startups that flamed out. Paul, you're sounding like a venture capitalist who is worried about whether he can find investors for his next fund. I would posit that the people whose opinions you should care about are potential founders ; and that their primary concern is themselves , not the performance of a fund…

I do care about would-be founders' opinions, but surely I don't have to use every essay I write to convince people to apply to YC. I've already written elsewhere about the founder's eye view of YC (e.g. http://ycombinator.com/atyc.html ). This essay is just an exploration of the strangeness of startup investing as a business. The goal is not to convince anyone to do anything.

You're missing my point -- I was objecting to the "(at least among the innumerate)" bit. It would hurt YC's reputation among everybody who matters, whether innumerate or not, if 70% of YC companies didn't survive past Demo Day.

Re: Black Swan Farming

#57

Post by markerdmann »

From the essay: "And since risk is usually proportionate to reward, if you can afford to take more risk you should."

I think I understand the intent of what you're saying here, but it could also be read to mean that you can increase your reward simply by taking on more risk. It might help to clarify that whenever a market isn't perfectly efficient (which is apparently always, unless P=NP), there will be investments that carry more risk without offering a higher return (i.e. that have a negative alpha). Perhaps it's better to state that as the potential reward (or return) of an investment increases, you can tolerate more risk.

Re: Black Swan Farming

#58

Post by thaumaturgy »

mixmax wrote: post #18

There's a pretty interesting lesson for potential YC candidates, particularly the ones that get turned down, here. When you interview a startup and think "they seem likely to succeed," it's hard not to fund them. And yet, financially at least, there is only one kind of success: they're either going to be one of the really big winners or not, and if not it doesn't matter whether you fund them, because even if they suc…

That was my knee-jerk reaction to it too, but I re-read it more carefully and paid attention to the parts that specifically say that that's not what they're looking for. e.g.:

> I'm not saying that the big winners are all that matters, just that they're all that matters financially for investors. Since we're not doing YC mainly for financial reasons, the big winners aren't all that matters to us.

Also,

> If we ever got to the point where 100% of the startups we funded were able to raise money after Demo Day, it would almost certainly mean we were being too conservative.

(and the entire rest of that section talking about how they can afford to take huge risks, and should be.)

On the whole, this piece sounds like some observations and thoughts from pg, and nothing more. I think founders shouldn't try to read too much into it, specifically whether or not YC would be interested in their business.

YC might choose to fund you just because they like you.

Re: Black Swan Farming

#59

Post by pg »

thaumaturgy wrote: post #55
pg wrote: post #29

Earlier quoted context omitted.

I do care about would-be founders' opinions, but surely I don't have to use every essay I write to convince people to apply to YC. I've already written elsewhere about the founder's eye view of YC (e.g. http://ycombinator.com/atyc.html ). This essay is just an exploration of the strangeness of startup investing as a business. The goal is not to convince anyone to do anything.

Off-topic, but something I've been chewing on lately: what's it like to have your every written (or spoken!) word analyzed by a bunch of people? Esp. people that you end up having some form of contact with. It seems like it would be difficult to just have a public conversation about a topic. Do you think about that much when you write?

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 the essay.

It's a uniquely bad combination to both write essays and run a forum. It's like having comments enabled on your blog whether you want them or not.

Re: Black Swan Farming

#60

Post by yesimahuman »

mixmax wrote: post #18

There's a pretty interesting lesson for potential YC candidates, particularly the ones that get turned down, here. When you interview a startup and think "they seem likely to succeed," it's hard not to fund them. And yet, financially at least, there is only one kind of success: they're either going to be one of the really big winners or not, and if not it doesn't matter whether you fund them, because even if they suc…

I've been rejected from YC several times, two of which were in interviews. The most recent rejection was supposedly because they thought it was unclear we could become a large venture backed company. I've also had YC founders trying to hire my co-founder and I, questioning why we were still running our company after the rejection.

Despite the rejection we are growing each month, turning down acquisition offers, our customers love our products, and at 24 years old, we are learning a ton. We have no investors, are profitable, and have a lot of time to grow the company and work on crazy ideas. I am having the time of my life.

It's really important to understand the business YC is in, and to separate your self-worth from it. It's also important to not hold any negative feelings towards them, since they are merely trying to maximize their outcomes, and they know the market quite well.

Go follow your passions and make stuff people love. The rest will follow.

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