How Hard Is It to Generate a 10X Return on an Investment? | Hacker News Reader

How Hard Is It to Generate a 10X Return on an Investment?

bettereveryday.vc

85 pointsprostoalex87 comments

People perform services or produce goods for their community, and they are given resources in exchange for their efforts (aka "return").

Unfortunately, we are now tainted with a lust for more. And then we ask how to get 10x more (aka "return") before we even think about what it is we are providing.

We all just want to be "rich", and all we can think about is the end, not the means. Then we must read articles like these - the likes of which do not provide any practical insight on how one should live a fulfilling life.

It's all about just waiting for numbers get bigger.

Quite. Moreover and with apologies to Marx, where is this 10x coming from? The simple fact is that it's the fruit of other people's labour that is being appropriated.

I wasnt quite sure what the point of the article was, but if the author is a VC, his job is to turn his LP's money into more money. If it is a seed fund, the only way for him to fulfill his obligations to his investors / do his job is to invest in companies with 10x potential, most of which will fail. His goal is to generate a return of 15-20% a year for his investors, and his strategy is to bet on 10x companies with expectation that most of those will be 0x

so ultimately it is greed driving all this (wanting uncorrelated above-market returns), but VCs aren't making 10x -- if they're lucky and good, most funds will make 2-3x overall over a 10 year period -- which is what youd get if you bought S&P 500 index funds 10 years ago

VC math dictates that they need roughly one 10x (or higher) company to make up for a couple of roughly break even companies and several companies in which no money is returned. You can twist the nobs a bit to adjust returns, but ultimately the 10x and higher companies define the returns of pretty much every fund. The rest of the companies are just noise in terms of influence on ROI. Note that this is why VC is sort of a deal with the devil -- you need to be a 10Xer, or you rapidly become much less interesting.

This article is just about the math of those returns that factor in things like dilution. Many people fail to account for this, and I have seen some spectacular failed estimates of YC returns when people somehow think that YC still owns 7% of a huge multi-round company. I don't really see this as a "lust for more" type of article.

Look at the billionaires who spend their fortunes on charity. Do they give back to the community? Would they be able to give that much back were they not be able to make so much on their investments?

Being rich and living a fulfilling life are orthogonal concerns, once you're out of the poor-and-starving territory. This means that both can be achieved independently, including together.

I don't have an opinion on the moral aspect of being a billionaire.

I just want to point out that billionaires don't just magically create more money for charities. Someone had to lose that money.

For the sake of simplicity, lets say... Goods & services were priced optimally to reduce the middle classes disposable income. The billionaire throws the poor-and-starving a bone every now and then.

Should the middle class have more disposable income? Or should charities get their bone? It's a matter of philosophy.

Being rich is being in control. You get to decide who gets your money.

Someone had to trade the money that ended up in the billionaire's pocket. Presumably they received something of more value to themselves than the money, otherwise they wouldn't have made the trade.

This applies on the employee side too: employees have the option to go into business for themselves and take their skills directly to the marketplace, but they make a choice to trade surplus profits beyond their salary back to their employer, usually for the security of knowing that they'll continue to receive a paycheck even if those profits never materialize. This was a very conscious choice for me last time I took a job - I looked at it as "Well, I'll be doing the same thing I was as an entrepreneur, but my employer bears the risk of it not working out in the market" - though I suspect most people don't think like that. It is a choice, though, and once I felt like taking more risks, I left.

You gain other intangibles being an employee... namely training, working within an industry and learning customs/norms, and meeting people.

I was an employee for years before I left to do my startup. I definitely thought about the purely monetary risk/incentive issues you raise, but I thought about many others:

- if I stay longer as an employee, will my training make my startup more successful?

- am I prepared to be alone, not relying on a boss to tell me what to do and provide guidance on my work quality?

- will I become isolated running my startup not relying on an employer for exposure?

- will being so independent make me more motivated or less?

There's no question I thought about monetary risk/reward, but it's so difficult to calculate any risk/reward with any new company. Often, all you have to go on are these softer questions that you have to answer for yourself.

>Someone had to trade the money that ended up in the billionaire's pocket. Presumably they received something of more value to themselves than the money, otherwise they wouldn't have made the trade.

That abstract reasoning seem to miss a lot. Where I live, rent is crazy expensive. Rich people own their own homes. Almost everyone I know rents, giving a lot of money to people who need it less than they do. (I don't even dream of ever owning a house here. A cheap one is >$1m.) It's like a Monopoly game near the end, all the money going one way. So sure, you could say not-being-homeless is 'of more value to themselves than the money' but it would be a weird way of putting it.

Moving may help, unless you have other serious ties (like your spouse's dream job, etc). Just saying.

Little anecdote.

With the rise of racial tensions I got interested about violence against jews (among others) and absurd claims on their financial lobby etc.

Some told me that jews were segregated in middle ages, only allowed as clerks, thus their presence in finance.

Someone then corrected me, saying it's in the ballpark but not true. The reason why jews ended up in banks, is that Christians (and probably other groups/religion) despised loans with interests, usury. They saw it as immoral and fake value (as opposed to work). But it was allowed for other non christian groups to lend money as long as interests weren't indecent (say 5%). From the few I read, jews had a long history of being clerks and were good at math and bookkeeping (at a time where education was rare) so they fit the bill (sic) perfectly. There are a lot to say about the dynamics there, associations, then violence, cycles.

Now reading this in the 2000s I was shocked that the old church guys didn't allow to profit from another's need and multiplying money for nothing. It felt so much more humane, social.. honorable, candid.. And that the subject of money was sensitive even that long ago; somehow amazing.

Nowadays banks, finance, ROI, etc etc are all unquestionable, but it used to be different.

The prohibition against usury that used to be part of Christian practice hasn't died out everywhere: it's still forbidden in the Islamic world (Riba[1]), which is why there are Sharia-compliant banks[2].

[1]: https://en.wikipedia.org/wiki/Riba

[2]: https://www.citywealthmag.com/news/britain-has-more-islamic-...

Quite ironic how old organization schemes were not devoid of useful ideas.

Everyday we are seeing human greed defy basic common sense of how work and rewards should work.

I am deeply questioning Human's future on this planet. Hopefully Musk can get to Mars sooner. I think my children might need that to survive.

And then we ask how to get 10x more (aka "return") before we even think about what it is we are providing.

What the investor is providing is their money, with the understanding that they most likely will never see any of it again. In the event that the person they gave it to is successful, though, the bargain is that they get to share in the success. Without the potential for the 10x to pay for the vast number of failures the math just doesn't work, and the investors are better off keeping their money for themselves. And then entrepreneurs have to save up their own funding before starting anything.

I completely agree here.

Most of the replies state that the VC provides a return on the investment of other people's money.

Which then leads me to question, why do we need to invest money? If you have enough money to live comfortable and all your needs and wants are provided, why invest to get more?

Number becoming bigger is exactly the point.

Most of what is being provided is utter nonsense. Life would not stop if 99% of the services provided ceased today. Life might be uncomfortable, particularly those living in cities without means to provide food for yourself beyond a week. However, would still continue. A much different life, but life nonetheless. More fulfilling is a debate on the purpose of life, but I am sure as hell certain 100% of the issues we concern ourselves with today would become a non-issue.

Money can be a tool or a high score.

I maxed out three years into my career, the amount of money I felt I needed to make. All I've been doing now is trying to figure out how to work less and maintain that income.

What I want is a 20% paycut and every Friday off in addition to the weekend. But it's seemingly not compatible with this world.

" But it's seemingly not compatible with this world."

I was told by a ~50 year old yesterday that the Christmas holidays used to be two weeks. That means that it was common for businesses to close for an entire two weeks, instead of one day.

Now, it's all about the maximum grind.

https://chriskresser.com/busyness-badge-of-honor-or-cultural...

Just of out curiosity to the HN crowd - why is understanding the finance behind venture capital so interesting to people? I regularly see posts like this (including stuff I've written) and people are absolutely enamored by it. VC's likely represent a small fraction of the people on here, and are definitely a small fraction of the overall finance community, so why so much interest from non VC folks?

I suppose it is good knowledge to have incase you find yourself in the seed investor's shoes. It is likely that many on HN have an interest in understanding this from a seed or angel investor viewpoint. That's why I read these. But then again what do I know.

I'm not interested in this.

I wished there was an article on "How Hard is it to generate a 10X return" for normal, Average-Joe investments (ie stocks, bonds, real estate), and how a 10X return is actually at most 6X return, because you need to take into account taxes, costs, and inflation.

if you are - a passive investor and dont want to spend much time thinking about it - want your money to earn a good return over inflation (5%+) - dont need the money for ~ 3 to 5 years (its ok not being liquid)

then an sp500 index fund is probably best. not the 10x return you are looking for, otherwise you have to be a lot more speculative

For a middle-aged person, what % of my money should be in that index fund?

A good rule of thumb is 100 minus your age is your % of stocks to hold. Those stocks should be diversified index funds, so if you're 40 years old 60% in S&P500 ETF is pretty decent.

The exact index funds to hold is a constant matter of debate (including whether to hold international). Doesn't matter as much as having that equity exposure and keeping the fund fees low.

Lots of resources out there to do it yourself (https://www.bogleheads.org/wiki/Three-fund_portfolio) or you could use Betterment/Wealthfront/Personal Capital for extra fees.

I agree about equity exposure, low fees, and simple approaches like a three fund portfolio. Here is a slightly more sophisticated way to think about the percentage that should be in equities. One year from now, equities could be up 25% or down 50%. Twenty years from now, equities are likely to be up, likely to have outpaced inflation, and likely to have outperformed "safer" alternatives (money market funds, bond funds, etc.). If you have a $10,000 bill coming due in one year, and $10,000 in the bank, it would be risky to invest any of it in equities. If you have money to invest that you won't be forced to liquidate for 20 years (e.g. your 401k at age 40), then it is probably fine to start with 100% of in equities. The percentage should be based on when you might be forced to liquidate each available investment dollar. In many cases this will agree with the rule of thumb.

By equities I mean low cost equity ETFs (or index funds) that invest in broad indexes. I do not mean a portfolio of 10 to 30 stocks hand-picked by you or any fund manager. The hand-picked portfolio could be down 100% in 20 years, or in 1 year.

We're on the same page mostly, but I think if forced liquidation is a real risk you should lower your equity % at the start to compensate. 100% at age 40 is overly aggressive, pretty sure you'd have better risk adjusted returns by including bonds in there from the start.

With bonds at historic lows (negative interest rates have never seen since the beginning of money in ~600BC), I would not be so sure about that. What bonds would you invest in?

We're also at record equity levels and low interest rates, but that can change really quickly. I only put them in there because a lot of MPT models say it's a good idea.

I have LQD, JNK, and BNDX.

You might want to consider a target retirement date fund that Vanguard, T.Rowe Price, and others offer that balance the funds every year according to the target date with more risk the farther one is from the end time. Here's one description

https://investor.vanguard.com/mutual-funds/target-retirement...

If you really wanted to manage the risk yourself and rebalance it periodically you could do that too and indulge in more risky sorts of funds but that's up to your inclination/time.

I wonder if it will be true in this century. 20th century was exceptional for US economy, allowing for huge growth and hence great returns on stocks. The playing field looks very different now, though. Personally, given the circumstances, I’d be happy with 2% return over inflation.

10X returns are easy -- just put the money in a savings account.

What's your _timescale_ for generating 10X returns? That's where it gets tricky.

In my lifetime :)

For "normal" investments, a 10X return is easy.... given enough time. Invest in your 20s, it is definitely going to be 10x by retirement.

Now, 10X in a short timeframe, that is a different story. Being rich when you are young is mostly about the right idea, at the right time, in the right place. Being rich when you are old is simply about organizational skills.

Understanding VC dynamics is good for founders and would-be founders

Lots of people would like to be in that position, so it's interesting to them. Why do people follow the lifestyles of the rich and famous in general?

It's a huge part of the tech landscape. If you're working for start-ups, you're an investor in start-ups, so you need to understand how the financing works. You also need to understand what it means when your CEO says they're "almost definitely closing a round now, surely".

Even if you're running a normal, non-VC tech company, understanding the motivations of VCs is very useful. The behaviour of other companies makes much more sense in light of this.

I don’t know about others, but I’m interested in the large cogs that move the world.

Maybe it’s because I’m looking for problems, or wondering how the status quo came to be.

For example, why does it cost $30 for a wire transfer? And why is it only processed on business days. That led to me wonder how banking and ACHs work.

The bank charges you $30 to process a wire. It costs them less than $1 to move your money.

Is there now a cheaper alternative towards wiring money?

A lot people would like to have their startup funded. I believe that knowing what the investment side is looking for, the things that would make your company attractive to them, is important in a sales pitch. It allows you to focus your pitch and business plan around their business model, which makes it easier to get funded.

It's a small part of it, but understanding what VCs are looking for and their business model is important if you ever want to get funded. It will allow you to foresee certain decisions, and give you more options in response to them.

You should know your customer. If you start a business to make widgets you need to understand the needs and motivations of widget users.

But unless you can bootstrap it, you need to know the motivations of your lenders and/or investors. Their interests are different from (and rarely aligned well with) yours, much less those of your customers.

because there is a pervasive interest in making alot of money quickly here. i think (and im probably projecting a bit) that this community exaggerates how interested it is in tech and engineering based on merits, and down plays how much its interested in them as means to an end (wealth). it bothers me because its dishonest, and its also a bit sad to not know the difference between liking something because its cool, and liking something because its going to help you get rich. small criticisms, dont apply to everyone, yadda yadda

I wonder how true that is.

One thing engineers and scientists suffer from in spades is the Illusion of Control. Venture Capitalists are strange creatures that can make you rich or lay you off seemingly on a whim. Trying to manage them makes us feel like we have some say in the outcome.

Thing is, VCs are making money off of information asymmetry, just like most of us. As soon as you think you've figured out one thing they just move the goal posts and you're in the dark again.

Letting some of us win the lottery once in a while is how they keep the rest of us docile. I'm pretty done with it. I already leaned this way anyway, but if I work for a startup again it'll only be because I believe in what they're doing, not because there will be a payday. The execs will see almost all of the upside of you moving heaven and earth. What trickles down to you isn't that much.

I find it interesting coming from the stocks/bond/etc side of finance. Just interesting to see how other people think of investment. I also trade on orders-of-magnitude shorter timescales, and it's important to see what I'm not seeing on the longer timeframe.

> I generally think it’s helpful for founders who take VC money to understand the business of their investors because it impacts their incentives and how they see the world.

If you're anywhere in the startup ecosystem, it's helpful to know venture mechanics. If you're a VC it's essential since yours and your LPs paycheck are on the line. However if you a founder, a would-be founder, maybe even a senior engineer, ..., it's necessary to understand where your VC is coming from and what the term sheet means.

This is necessary before you get a term sheet.

There's a lot of information out there now that didn't used to be out there. You can find out that Shaquille O'Neal, Tiger Woods, Arnold Schwarzenegger and Henry Kissinger were in on the A round for Google. I don't know if that's useful information. But it's out there.

https://www.crunchbase.com/search/principal.investors/field/...

There are a lot more startups and a lot more investors, VCs and angels. Maybe 30 years ago, this was backroom stuff between founders, investors and their lawyers. It isn't anymore.

Every SF techbro is a temporarily embarrassed VC.

This website is run by a VC which isn't a coincidence.

I suspect that a very important part of it is that in the life of an entrepreneur capital is a very important tool in the toolbox and to know how some of the providers of capital think and are organized can help maximize the use of that tool. Knowing what the other party is looking for is a very important bit of knowledge during any kind of negotiation.

Right - but the mechanics of VCs are well documented at this point. I feel like the content is just all a re-hash of the same thing with individuals all jockeying for the latest position.

PS - Jacques, we should sync up sometime, I'll be doing some tech diligence in the EU/UK market in the future and I understand you're based there. If I recall correctly, we've gone back and forth about the topic of diligence on here before.

It needs to be both well-documented as well as easy to find in "native" internet circles. Currently I would humbly suggest that the content is not easy to find for most people.

As a simple example in a different field, 'patio11 has taken standard practices in the online marketing world and exposed them to the engineer set with a fairly decent level of success and exposure. Very little of what he has said is original or novel... to those who hang out in marketing circles. That said, he has been able to open the eyes of many engineers to the realities of marketing via using appropriate communication style and sharing it in appropriate forums (in the broad sense of the term).

The translation aspect is an important point. But also all the personal perspectives, anecdotes, ramblings are highly interesting to those who look for the outliers. The perspectives that don't fit into the current frame of explanation are so essential for any new hypothesis to arise.

Marketer here. While I agree that these are often standard practices he shares, there's a strong difference between knowing about them, and knowing how to apply the practice to different business situations properly, or educating others on how to do so. Patrick excels at that part.

Also, honestly, I've met many "marketers" who don't know those things, or don't know how to actually implement them, or why.

Indeed.

If it came across that I was understating the skills of 'patio11, then I sincerely apologize. He's talented at what he does, and his combined skill set is rare. I will also add that some of original contributions are seminal ("Falsehoods Programmers Believe about Names" comes to mind).

As far as the state of today's median online marketer, I agree with you that the level is not particularly high.

I completely agree. The mathematics behind the argument are so boring and obvious, yet explained in an extremely convoluted language. Fascinating how you can describe 10+1=11% to otherwise intelligent people here and get to the frontpage of HN, just because it's about VC.

Because people want to know how people who have money got it. What kind of question is that?

Well, I thought, a perfectly reasonable one. I don't want to know how people who have money got it. (I find 'money' the most boring subject in the world, by some distance.) Perhaps, it seems, you assume everyone wants to know that. Well, maybe everyone you know does. But I found your comment extremely strange at first. ..well, I'm not in the USA - such a mindset seems rather estadounidense.

I'm not sure why it seems strange to you. The desire for wealth is certainly not uniquely American. Money is the means by which most people in the world get what they want. What do you think motivates millions of people around the world to go to work every day? We all want money, and we all like to learn about more efficient ways to obtain it. You can pretend you're above that if you want, but if you've worked for any amount of wealth in your life then you're just lying to yourself. Maybe you haven't. Most of us have.

For me, it's understanding which types of parties across the table can and can not do what. Saves a lot of time!

People are fascinated by it, but many people (even those seeking funding) don't really seem to have a solid understanding of what they are getting themselves into when they are seeking funding.

Specifically, I think that there are many people who make companies that are better off being bootstrapped, but they go the VC route because that's the sexy thing that gets reported on and talked about. They don't understand why they get no interest from good VCs when they have good product-market fit and are making money. It's usually a market that's too small or a trajectory that's too flat, but these ideas do not really resonate with most people who don't spend a lot of time around financial people/ideas.

Hearing VC explained in different ways and in different voices is a healthy thing. If anything, it will help people either correctly self-select out of the VC funding process or create a company that has the potential to work at VC scale.

I would spend more time writing about this topic using the questions and wording that you hear from people who are curious about the VC world but clearly don't know the answers. This will probably mean talking in a way that is more engineer/maker-oriented than financier-oriented.

Because as an entrepreneur I've spent way too much of my life chasing funding. I just want to build tech and make money from it so I can make more tech ( and so forth), the fastest way to do that is to understand investor incentives.

Because many of us techies fortunately or unfortunately live off of VC capital, indirectly, via jobs. More information is better than less information.

Ohh thank you, I was wondering what "VC" was.

As a cryptocurrency investor, I can confidently say it's hard not to generate a 10X return.

You heard it here first, folks: We're in a crypto bubble.

what's your risk adjusted return?

after or before the bubble... :-)

Have to agree with this, I've got a couple already too.

A few 100% losses too of course, and who knows how many more...

Which one do u suggest to buy now ?

If you're asking that question you've already lost.

The difference between investing now and staying in now is a single transaction fee.

You're forgetting capital gains tax.

Bitcoin.

One thing I like about this wave is that there are other people to talk about these returns with

In prior years I would usually downplay my trading acumen and past performance, like "yeah you can 300% (3x) returns in a nice swing trade", talking with people that MAYBE have touched a penny stock the wrong way, yet realizing that extrapolating even that to an annual return would have them posting a scarlet letter on me as a liar and scammer

the reality is that I was making 40x returns, back in 2013. A couple here, a couple there, a diversified portfolio. should have kept with some names, should have not trading some others.

Now everyone knows: it is not hard to generate a 10x return. A 10x return is underperforming the benchmark of bitcoin which made 20x this year.

And that is great.

As someone that knows how to trade bullish markets, bearish markets, and sideways markets, I can't wait for this to shake newbies out.

Your ideas interest me, and I wish to subscribe to your newsletter.

Seriously, I’d love more info. It’s become accepted wisdom that trading loses money, 10% returns year after year are unrealistic, experts underperform the market, don’t time the market, etc. It’s such accepted wisdom that I’m skeptical of it. In particular, I wonder whether it actually is realistic for someone who is thoughtful, has a strategy, and has an appropriate risk tolerance to drastically outperform the market at small scale. For example, it seems like with so much index and large fund capital sloshing around and moving the market overall one way or another, it’d be moving a lot of companies with it on a given day / week / month that really shouldn’t be moving. Just an example.

Would love any reputable links, books, etc about this!

Simplest way is to have information others don't. Much more difficult would be information they have but aren't using correctly.

One example I've heard before is this (maybe garbage...). Publicly traded ecommerce company is going into the peak holiday weeks, and analysts are bullish. You found informational leaks of KPIs by digging through html source code (incrementing order ids, cancellation ids, etc). These KPIs show a downward trend in the final few weeks. You posit these are real, and short the stock since they're likely to miss earnings.

As Warren Buffett wrote in his 1985 letter to the shareholders of Berkshire Hathaway: "What could be more advantageous in an intellectual contest—whether it be bridge, chess, or stock selection—than to have opponents who have been taught that thinking is a waste of energy?"

Yes you can drastically outperform the market

Im glad you put your own independent thought into it

Small scale is a much bigger scale than you might think

People have been taught to use asset managers and accept their underperformance.

People act under the assumption that the power law is some fundamental property of the universe. But it seems the 10x effect exist partly due to network-effects, and partly due to a minimum barrier requirement for liquidity. It's economically infeasible to support mini-size IPOs because the fixed overhead cost of regulation, auditing, legal work, and underwriting is too high.

With all the stigma associated with ICOs, lower barrier to liquidity may be a good thing overall. The power law phenomenon incentivize entrepreneurs to take excessive risks and force VCs to adopt extreme portfolio management strategies.

For comparison, the 11:1 payouts in roulette are a 7.89% chance.

whew it's not about crypto. Getting fatigued by the btc talk.

"The problem arises when multiples are inferred from incomplete data."

I heard the collective clacks of Command-W's at that line closing the tab from every single Crypto investors laptops sighing relief saying "See yeah crypto isn't overvalued it's just ya know people have incomplete information"

Answering the question in the title...

Easy.

Doing it consistently?

Hard.

Not hard at all, given a long enough timeline.

Just 34 years at 7%!

VC is a very tough business.

Poor darlings.

It just got tougher too :)

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