Comment by not_that_noob | Hacker News Reader

Comment by not_that_noob | Hacker News Reader

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Index funds have beaten most active management over the long run. If you think about it, YC is a huge index fund in startups. The problem is not data-based prediction - just that it is impossible to pick winners a priori, no matter how much data you have. Ergo the clearly viable long run strategy is to invest in as many as you can. This is why YC is maximizing volume, with the latest being the Startup School.

The other option of course is to invest large amounts into startups that are well on their way, but Sequoia and AH have a corner on that market. And now YC wants to play there as well, with their larger fund.

So there's no oxygen left for a lot of the VC firms in the valley. There's no shortage of money looking for VC funds, as returns are low in general asset classes. So you have this imbalanced situation, where dinky startups get incredible valuations, and there are too few genuine investment opportunities to go around. SC are one of the marquee victims, but other walking dead abound, though they dress snappy so it's hard to tell they're really dead.

YC is anything but an index fund in startups. They take a very active view on which startups to fund and which not to. They don't simply hand invest in all startups that fit externally set, (mostly) transparent criteria.

They are active investors, even with startup school.

YC minimizes risk by spreading money across as many startups as possible using research and and gut instincts to find good deals.

Index funds minimize risk by distributing funds across stocks in an index using research and gut instincts to find good deals.

YC is different only in that it has a more direct impact on the performance of its portfolio through active participation and the ability to influence its management. Both are still similar forms of capital management with different degrees of freedom.

YC is much closer to an index fund than typical VC (or even other accelerators - due to YC's much larger scale), but there's a big difference as index funds don't use any "gut instincts" - the criteria for a stock to be included in an index are fixed rules.

A better (though less succinct) analogy for YC in the public markets would be an "actively managed mutual fund investing in a broad range of early stage companies with a long-term time horizon."

with the technical exception of a new breed of `index funds' that happen to follow their own proprietary indices!

> as index funds don't use any "gut instincts"

Of course fund managers rely on this when relying on computer-assissted recommendations when deciding how much of each stock to buy. If you don't think someone opinion & gut instinct is involved, you're going to be disappointed.

Startup school, what are you talking about? They accepted all 15,000 that applied.

You might be right in general, but this time not for Startup School.

An "index fund" means something specific -- a fund designed to track the performance of a standard index like the S&P 500. Index funds don't actively decide which companies to invest in, and they don't help their portfolio companies. While index funds and YC both have large portfolios, otherwise they're not similar.

For startup investing the pure math explanation to invest in 1,000 companies makes more sense than in public markets. If you have 1 out of 1,000 startups return 1000%, 99 companies break even, and 900 companies go bust, you still make money due to the asymmetric one company generates. In public markets, two deviations of risk is satisfied with 20ish companies where three deviations being around 80 companies assuming a log-normal distribution. Adding more companies does not greatly lower the risk when the outcome isn't so binomial.

I assume you meant 1000x not 1000% (since the latter would only be 10x.

Is there any evidence that even as many as 1/1000 startups provide a 1000x return to VCs, considering that the return is only a fraction of a total exit?

Even then, assuming all investments were equal, that's a very meager return of 1099 on 1000. For a 10-year fund, that wouldn't even beat inflation, let alone compete with something like Treasuries.

An article that delves into more details (although there's some glossing-over, still):

https://news.ycombinator.com/item?id=17874278 https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

Up to a certain point I agree, but I do wonder about the problem that startups can appear out of nowhere if they think there is investment money to be had just for showing up. In other words, your very willingness to fund many startups, may cause the quality of startups to decline. The analogy to stock picking is not complete here because you buying stocks in many different companies (an index fund) doesn't cause more companies to go public. But, if it doesn't take much more than a slide deck and a good talker to take your money, you will easily have 1,000 startups show up that each have 0% chance of succeeding.

Not saying this is currently a problem, just that it could be if most VC's tried to take a "place chips on all the numbers" kind of strategy.

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