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Comment by williamsmj | Hacker News Reader

Why? Anything you (an investor) do with your money should be compared to the lower risk alternatives. If it doesn't at least beat those then it's a failure as an investment.

And FWIW, Loopt sold for $43m, but $10m of that went on employee retention. The investors made $3m on their $30m investment. That's an annualized return of 1.3%. It was worse than a zero risk savings account.

Sure, there are other ways of measuring success. Clearly from Altman's view, life has worked out pretty well, presumably in part because of experiences he had and people he met while spending seven years making his investors 1.3%. But doing worse than a savings account is not on it's own a sign that you are a great leader, and clearly Loopt was a failure for its investors.

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This is not how investing works, it's that simple.

If you want bigger returns you will have to accept higher risks.

A single starting company is never an alternative investment compared to a much larger spread across a series of established companies.

Investors work with risk by having certain portions of their available capital earmarked for investments in particular risk segments. Typically a large chunk will be allocated in 'safe' (for want of a better word) investments, which may indeed be index funds, real estate or other such. Another portion may be invested in more risky but higher yield such as larger investments in a single blue chip stock that the investors feel good about. And finally there is the bucket 'gambles'. These are considered very high risk and are either huge wins or huge losses, rarely mid range returns, in fact (for the investors, not the founders) they'd rather the company gambles big than to end up playing it safe.

But if such a company is in a spot where it will likely lose it all and then a plan to end up returning the investors just their outlay is already a huge plus, and if they manage to make the investors look good by posting a return, however slim then that will be a much larger win: investors, especially those with LPs do not like to post write-offs not because of their own book (they pocket their management fees regardless) but because it will impact their ability to raise again.

I should probably write a blog post on this one of these days.

> If you want bigger returns you will have to accept higher risks.

Only in a perfectly spherical economic market. In an efficient market rewards are a function of risk. Lots of founders talk about their secret sauce: information they knew that other competitors did not. Information is not equally known, and economic rents exist, so there are areas where bigger returns are available for less risk. And there are definitely lots of examples where high risks do not have expected high returns!

Information asymmetry is a subject all in its own right, I see it as a modifier, it can obviously improve on the risks but it can also add risks and in some cases taking advantage of it can land you in jail. Typically if there is such information it is communicated to prospective investors as either a trade secret or some other mechanism (for instance: a patent that has been filed) but in the typical start-up setting you are going to have to let other parties know that you have this advantage if you want to get into a position where you can leverage it.

I've come across this a couple of times but in 15 years and 200+ companies not often enough to see it as the big differentiator for success or something that negates the usual risk/reward trade off.

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