Black Swan Farming
Sergey Zelvenskiy stashed this in entrepreneurship
It takes a conscious effort not to do that too. After 15 cycles
of preparing startups for investors and then watching how they do,
I can now look at a group we're interviewing through Demo Day
investors' eyes. But those are the wrong eyes to look through!
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 assume that YC can on average triple a
startup's expected value, we'd be taking the right amount of risk
if only 30% of the startups were able to raise significant funding
after Demo Day.
Paul Graham has it right:
The two most important things to understand about startup investing, as a business, are (1) that effectively all the returns are concentrated in a few big winners, and (2) that the best ideas look initially like bad ideas.
The first rule I knew intellectually, but didn't really grasp till it happened to us. The total value of the companies we've funded is around 10 billion, give or take a few. But just two companies, Dropbox and Airbnb, account for about three quarters of it.
And he didn't fund Dropbox's Drew Houston the first time he applied, and he almost didn't fund Airbnb.
This is awesome:
That's made harder by the fact that the best startup ideas seem at first like bad ideas. I've written about this before: if a good idea were obviously good, someone else would already have done it. So the most successful founders tend to work on ideas that few beside them realize are good. Which is not that far from a description of insanity, till you reach the point where you see results.
The first time Peter Thiel spoke at YC he drew a Venn diagram that illustrates the situation perfectly. He drew two intersecting circles, one labelled "seems like a bad idea" and the other "is a good idea." The intersection is the sweet spot for startups.
The fact that the best ideas seem like bad ideas makes it even harder to recognize the big winners.