Black Swan Farming

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 succeed the effect on your returns will be insignificant.

What this means is that YC is not looking for sustainable businesses, but homeruns. Which is entirely fair, that's the business they're in.

But you and your startup are in a different business: Your measure of success isn't the same as Ycombinators. If your startup ends up making you a million dollars a year you will probably be very happy and rightfully call yourself a success. But as the post points out that won't be enough for YC since they need to fund a lot of other startups that will inevitably fail out of their minority share. Thus they need a much bigger success.

If you get turned down for YC it might well be that your idea is just a sound business idea that YC doesn't consider just crazy enough that it might make them a billion dollars. But that doesn't mean that it won't make you a million.

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 (oops, I mean class) as a whole. You're damn right that it would hurt YC's brand if 70% of each class didn't survive past Demo Day -- because for an individual founder, success is pretty much binary, and having a 50% chance of becoming a millionaire is more attractive than having a 5% chance of becoming a billionaire, despite the 100-fold reduction in mean wealth.

You may be in in the business of farming black swans, but if they're all you worry about you'll find that all the swans end up laying their eggs elsewhere.

That we can accept and reject trades (or ideas) based on their agreeability, or dispersion of opinions, is not often considered as a metric. So long as the difference between eccentric crap and alpha is difficult to discern and costly if one goes all in on the wrong bet the uncertainty should be dealt with by diversifying across only disagreeable trades.

As a former quant trader who left a large bank and found the centre of Silicon Valley uncannily similar to the heart of Wall Street, this essay is illuminating. Wall Street is being too conservative, consigning itself to blindly jumping between mediocrity (low expected return) or bubbles (strongly negative expected return) in the top two quadrants. Just like Silicon Valley, though, at its edges it allows itself to be different. It's interesting seeing how similar mantras, based in sound financial theory, change in their aesthetics as they cross domains.

It's telling, though, that the concept of a "black swan", implying a tail event generally unforeseen by the relevant population, is met with trepidation by much of Wall Street and corporate America yet seized with zeal by a select few.

This is partially why I think the YC application process is flawed. If you think about the idea for 20 seconds or so, what good is that? You may be wasting 20 seconds trying to rectify an idea you can't logically determine to be good.

A better process is a continuous one: you'll get an excellent stream of actual data and not just made up answers to "What is your best non-computer hack?" The YC partners could start out the morning looking at their Twitter-like feed of what have potential startup teams done today? At some point a partner would say, "We have to pull these guys into our next batch."

Incidentally, this would be better for startup teams looking to break the threshold of project to startup. By updating this proposed feed, the startup feels obligated to not only continue to put out data, but good data. Eventually the team would realize they can't cut it or they will keep mutating teams or changing ideas until one has great prospects.

EDIT: I'll buy someone a smile and a coke if the above hypothesis is implemented and tested. The following is exactly why: Instagram is the one we'd most likely have missed. It all depends when we'd talked to them. They were a kind of overnight success in traffic. If we'd talked to them even a day after they launched we would certainly have said yes. But before that it might have seemed too speculative.[1]

[1] http://news.ycombinator.com/item?id=4497561

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 when they were starting out):

PayPal, Twitter, Pandora, SalesForce, Instagram, FourSquare, and Pinterest. And perhaps a few others as well.

It would be interesting to do an analysis of those companies that were rejected by YC, and see how many "black swans" were present in those rejects, as well as maybe relative value of the rejected startups vs the chosen ones to see how effective the YC selection process is.

Would you have invested in Wikipedia? Tim Berners-Lee's WorldWideWeb project? WikiLeaks? Linux?

I guess I'm interested because it's not clear to me that any of the founders of these things radiate "winner" in the same way that you seem to look for in your founders. Or maybe they do?

So instead you treat it as a calculus problem. The metaphor Thiel used was that of space travel and the Apollo missions. You assume you know exactly what's going to happen and behave as such. In a nutshell, "no-one would want to ride in a statistically, probabilistically-informed spaceship."

It's a hard task spotting black swan founders (so instead you just leave yourself as open as possible to them). But the conviction of calculus (in them and in you) is almost certainly a necessary ingredient.

You could stretch a Wilde one-liner around this: "We are all in the gutter, but some of us are looking at the stars."

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.

Take the "seems like a bad idea" bit. Many of the big hits are really well-worn ideas done with better marketing, better timing, and a user experience which makes it available to new markets.

Dropbox? File sharing. Facebook? Geocities. Both are interesting in that they take something that was a giant pain in the neck but useful enough to put up with anyway, and then they make it usable enough that virtually anyone can do that stuff routinely.

But the meta-cognition isn't all that important. What's important is that they're getting out there and helping new companies learn and grow. They can be wrong all day (or not) about the why because they've developed a process which provably works, and which they can measure and improve upon.

I wanted all of those services before they existed, which to me says that they never seemed to be bad ideas, unless you were unduly afraid of implementation/regulatory difficulties. It may not have been obvious which competitor was going to win, but it seemed likely without the benefit of hindsight that somebody would.

Facebook and Twitter seemed like fundamentally bad ideas to me at the time (in fact, they still do, but the world appears to disagree), and I just don't get instagram, but those are the exceptions that prove the rule.

Or does PG mean that the idea can seem bad because the market is already very crowded? I remember talking to William Morgan about the early days of GitHub. He knew the founders from Powerset, and he told me that at the time he thought to himself, "Really? Another hosted version control startup? That seems like a bad idea."

Best strategy is to "win" in other ways, and let the cards fall where they may.

But whats the thought process and how does it change given this insight ? It should still be the case that as an investor you still should focus on the best opportunities and try to maximize a decent return from the majority of your investments then focus on picking that facebook, dropbox or AirBnB right, just as you would if you were a trader in the stock market ... otherwise your just gambling ?! Focus on the technicals and data that give you the best odds and just take those trades cause taking trades where you are waiting on information from the fed chairman or draghi without insider info for example (even though they have big pay offs if you swing the right way) will earn you pretty much the same amount of returns as losses in the long term.

If the potential to win big time is counter intuitive what do you trust from data in front of you to make the decision to invest other than the "gut feeling" ?

In any case, i would think with dropbox it never really sounded like a bad idea and the founder/founders (Drew and Arash) sounded very promising even from the start. If this is the case even good bets do pay of big time to :) maybe these are easier to pick then the facebooks where at the time it does look like a bad idea.

Basically, Im curious as how this insight in PG's essay would change how an investor should invest or is it just an FYI and something to keep in the back of your mind as an investor ?

If there's only one winner in a class, at best, does it matter if the class is 10 or 50? 50 isn't going to give 5 winners, is it?

Is the idea that 50 gives a 5 times higher chance of finding the 1? Is that really true, though?

Would focusing on a smaller number of potentials actually be better for finding the 1? Thinking through the scenarios more thoroughly?

  > the one thing you can measure is dangerously misleading [Demo Day fundraising]

Footnote [4] http://paulgraham.com/swan.html#f4n says airbnb did get funded; and dropbox was unanimously voted the best in their class (according to one of them http://www.quora.com/Y-Combinator/When-Dropbox-first-present...)

So this is an intriguing thesis, but not supported by the (admittedly scanty) evidence of the two biggest outsize hits. Do the other outsize hits support it (i.e. by not raising funds after Demo Day)?

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.

If you could theoretically "randomize" start up ideas, founders, business models, and every other primary ingredient in current "start-up theory", like a giant multivariate test... would we not see similar results to now?

Or similarly, if you closed your eyes and invested "blindly" how would you expect your results to differ (ROI-wise)?

It seems like investing results more closely resemble a lottery than a predictive model, based on your description.

Sort of a scary thought: what if current investment criteria (and therefore start-up goals) are largely irrelevant?

For example, IQ is distributed in the same way as winners and losers in start-ups. What if that is a key factor,(purely hypothetically, of course)?

In theory, shouldn't "good criteria" for investing generate progressively better results within smaller and smaller samples?

Clearly you don't look at YC in purely financial terms, but it would be an interesting thought experiment to consider whether there would be more efficient ways to generate returns if you did.

Among other things, there may be more efficient ways of testing variations of ideas around a theme, or testing/ranking skills, or assessing likelihood of success for various experimental team combinations.

To use a casino metaphor, it seems like you're taking a 50-100 completely binary and largely independent bets per class and hoping to beat the house on average. As opposed to, say, trying to create the MIT blackjack team to beat the house systemically.

The reason that angels and VCs show up is because YC is providing a service for them, so from their perspective you would have jumped the shark. Each angel only has so much money to invest, and VCs feel it's necessary to provide value-add in other ways, so because their ends don't scale I'm having trouble seeing this purely mathematical strategy benefitting anyone besides YC. If there were a way for follow-on investors to benefit in a way that helps improve the overall startup ecosystem then it makes a lot of sense, but I think that's a case that needs to be made that this essay didn't touch on.

If YC had funded Paypal, they would have made a nice return with the $1.5B eBay acquisition. But their valuation would've ended there. In reality though, they currently make up 44.9% of eBay's revenue. eBay is a $63.45B company.

I don't know YC's policy on holding stock in the acquirers company after someone in their portfolio is bought out, but assuming they keep stock, a company acquired by Google a few years ago which allowed YC to accrue a few million dollars worth of Google stock could very well be their biggest financial gain in 50 years.

* Dropbox used rewards for more storage, as well as its fundamental file-sharing tools, to encourage users to sign up their friends and family.

* Airbnb gamed Craigslist [1] to encourage property owners to signup on Airbnb. With a strong supply of rental properties, Airbnb was able to build a true case for its value in the minds of travelers.

[1] http://venturebeat.com/2011/06/02/airbnb-admits-gaming-craig...

So yeah; right now? PG is absolutely doing the right thing. But if I'm right, after the crash? assuming he comes through financially able (which I assume he will; he doesn't seem the type to bet the farm on facebook stock) and wanting to continue investing, at that point? he will look for sustainable companies. If you are trying to start a traditional sustainable company, in many ways, it's easier to do during a downturn. There is little competition for inputs, so you can get everything you need much more cheaply, and there is a lot less competition, so if you come up with something new, you won't have 5 other 'me too' companies copying you in the first year.

Really, there's less opportunity cost for the founder, too. I mean, right now, the temptation to get a job at facebook or google is really strong, even for me; I'd get to work with some really great people, and probably make about 3x more 'profit' than I do now.

During the downturn, getting those plum jobs that pay really well while letting you work with really great people is a whole lot more difficult, so taking the pay cut while you get your business off the ground is not as big of a deal.

This would basically be a test of the notion that "ideas don't matter", and it would allow you to correlate how even knowing a founder's idea might bias you towards believing they might succeed.

But many startups exit without making it big and return 2-3X to their investors. If the median startup were doing 3X, you'd be making a great return. I don't hear much about this strategy. It would be interesting to look at the remainder of YC's portfolio with Dropbox and Airbnb removed to see what that distribution looks like.

The "not merely not" phrase here is a little confusing. What PG is saying is that the probability of it succeeding is inversely related to the probability of it being a big success?

This reminds me of Arthur Rock's heuristic: he said he invested in startups that were "open ended with no limits to their success" as opposed to ones that seemed likely to succeed.

Solve a big, annoying problem for lots of people. Dropbox was obviously a great idea; look at how much trouble people went through to share files (using flashdrives, CDs, email, spammy uploading sites or ones that enforced a delay) before it got big. Just because there are existing players in the space doesn't mean the problem is solved. There are so many other major inconveniences that people have to put up with that are incredibly ripe for disruption. Healthcare - why is it so damn hard to get an instant, cheap medical opinion on a non-urgent but still worrying issue if you don't have a doctor in the family? Apartment rental (for both owners and tenants).

The hard part is not telling whether or not something is a good idea. It's evaluating whether or not the team can pull it off.

I remember hearing PG comment that as a founder you need just a few million from a startup. That's as true today.

Perhaps the relationship between exit valuation and wealth created is elastic. If the goal is to make wealth, perhaps lots of 10-100M startups has a bigger impact on society than a couple of billion-dollar startups.

In terms of dialing up risk, I think you're looking @ it backwards. You have a finite life, which means you are slowly eroding to zero. You have nothing to lose by taking risk because you are already eroding towards zero.

Even worse, the remaining days you have left are a greater percentage of the remaining days in totality of your existence, so therefore each day is eroding FASTER than the previous one.

So, relatively speaking, you should be increasing risk over time in any case because the rate at which you are eroding is accelerating.

Basically, rather than looking @ risk as what you have to lose, really its about what you have to gain. There isn't any true risk because the end game is the same.

YC would be a pretty lonely place if we only had one company per batch. And yet it's true.

The point is that not only would it be lonely, it would also be impossible to pick that one perfect company per batch. (Well, not impossible, but vanishingly unlikely.)

And I think pg understands this well, as shown by the rest of the article - a person or investment team can't possibly pick that 1000-bagger without it being a complete lottery. So you invest in a large number, knowing that most of them won't do too much, a few will tank, and one in a hundred will be a grand slam that pays for all the others.

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.

The point is, profit has to be booked to be realized.My question to PG is how does YC decide when to sell?

Now, I wonder whether the understanding of both aspects is enough to put him in a position to recognize founders on the other side of the table capable to provide a solution to random black swan farming?

Eventually more interesting is the question what would be his best guess from which field of science he expects useful outcome enhancing the criteria to make more educated decisions on founders?

Am I alone with the impression the essay sounds stucked?

The fact that the best ideas seem like bad ideas makes it even harder to recognize the big winners. It means the probability of a startup making it really big is not merely not a constant fraction of the probability that it will succeed, but that the startups with a high probability of the former will seem to have a disproportionately low probability of the latter.

It could be that it's a bit late, and I am tired. But it sounds a bit awkward.

Anyone care to clear that up for me?

Thanks!

If the public Demo Day is now fraught with too much expectation perhaps it should be treated as a PR event rather than a goal for the startups to shoot for.

This doesn't solve the other problem you mention, which is that you'd be surrounded by people flaming out, which would be stressful in a lot of dimensions.

Are the returns going to remain of this order over the next 20 years ? I understood that VCs rule of thumb was 10x return paid for the other 9. is this difference earlier stage, bubble or other?

I am still surprised how YC hasn't transitioned to that entirely. They already have the money; optimizing for that is tryin to play a financial game that others have already mastered.

That's a lot like distilling whisky - you have to wait at least a decade to find out how good a batch was.

Assume you could separate the funding vehicle from the YC reputation, having it as a separate unassociated entity.

That is, assume the "reputational" cost could be managed. And no one would accuse you of being "insane".

I liked this essay. I think it's sufficiently honest.

Facebook is useless, Airbnb will be gone in five years when more horror stories surface, as well as dropbox, today storage is so cheap anybody can have 20GB for free when buying a cheapo hosting plan. Even GAE gives you 10GB free, all you need is a piece of software.

So, etsy will last forever, facebook won't, amazon will, dropbox won't, godaddy will, airbnb won't.

Sometimes I think, investing a billion dollars in instagram is running a freight train loaded with money over a cliff.

That money would have been better invested in a new eBay (without auctions) that would last forever, empowering small merchants and providing a complete experience for ecommerce, from payment to delivery.

We already had enough with social, but the hype machine won't die just yet, so fuck investors, I hope they lose all their money and then blame the economy.

http://blakemasters.tumblr.com/post/21869934240/peter-thiels...

if there is a 500 pound supposition in the room it's liquidity. if the only way an investor can achieve it is through a massive "event" such as an ipo or sell out then any otherwise successful company is a non-entity for investors.

if y combinator were holding securities with some liquidity it needn't devolve into a 20th century vc. there are many ways to achieve this, all disruptive yet also quite well suited for this institution and its community.

(http://on.fb.me/Pb3DeP)

Worse, even -- innumerate and/or people who don't have domain knowledge. Probably considerably over 99% of all people.

I think this would be a good metric. I mean think about it, if you're a startup and your only strategy is to burn money making an awesome product that's free, how on earth are you going to return 1000x on investment?

To make a paradigm shift one should pick up a special kind of person (let's call him focused, disciplined introvert) place this person in a good environment (or just help the person to make one for himself) and it must be done in a right moment - create a wave others will try to catch and ride. Luck could be summoned by avoiding being too narrow focused and self-centered, by being awake.

There is a small essay which, I think, is related to the subject - http://karma-engineering.com/lab/wiki/Hiring

Would the outcome possibly be better by using an approach similar to index funds. By focusing on repeatability would it be possible that one might be able to put together a fund where 30 to 40% of the return is made up by 'average' companies and then take the outliers as bonuses rather than focusing on an event that's unpredictable given the amount of statistical data available?

Or is YC as close to an index fund as it gets?

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1.

You know, I came across:

" I think they're not so much dense as bitter. There's a subset of HN readers who regard startups as a whole as a sort of con game, and are angry that the participants get so much attention. There may not be that many of them, but their anger makes them disproportionately active as commenters and voters. "

I want to tell you that I don't like the fact that you and ycombinator only look at immediate sales vehicles and hardly any big ideas, like Google or Skype. Mine is a Big Idea - it's not a sales vehicle. You almost have negative things to say about $100B market aspirations. And your results speak for themselves - smaller companies with no big vision.

That's what I don't like.

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2. this was after leaving him this comment which I hope he also saw

(PG here on HN): Financially, as if you were an investor. They're the people whose job it is to evaluate startups' prospects, and they care above all about two things: the founders and the market. The founders should be relentlessly effective, and the market should ideally be of a size that can only be obtained by riding on trends beyond the startup's control (but visible to few besides the founders, or the market would already be full). Joining the young Microsoft, for example was a bet on Bill Gates and microcomputers, both of which turned out to be very good bets.

As a hacker you may be able to judge market bets as well as or better than many investors. E.g. I think HN readers knew Dropbox was onto something before most investors did. So if you go wrong it will be in judging founders. For many hackers, especially the unwordly sort, it's hard to distinguish true Bill Gateses from mere good talkers.

I wish I could offer some advice about distinguishing, but that would take a whole essay. The best simple hack I can think of is completely self-serving, but I'll offer it anyway: piggback on our filter. YC specializes in distinguishing between genuine Gateses and good talkers. We're occasionally fooled, but far less often than a typical hacker looking for a job would be.

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1 point by its_so_on 0 minutes ago | link | edit | delete

where's your Microsoft?

My only problem with your filter is that it filters out companies that genuinely have a plan to grow to revenues in the billions or tens of billions annually. This doesn't happen by chance alone, but through planning and commitment. That very commitment is a red flag for you and reason enough for you to say "no".

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3.

To drive the point home: it's almost impossible to adjust to investors like YC with a big idea. You can't sell what you have, however cheaply - which I think is ridiculous.

If you are holding a winning lottery ticket that is worth $20 billion and you need $500,000 to go and cash it, you would think that selling 7% of your company for the 500k amount is a no-brainer. Yeah, it's expensive, but so is taxes. You can live with 93% of the $20Billion. Expensive for you, not for the investor.

The ticket in this example is worth $1,400,000,000 (7% of the $20b) minus a bit of net-present-value calculation, and you are selling it for $500,000. This means the built-in return is 2800x or 280000%. Selling this share is very expensive for you, the owner of the company/holder of the winning ticket.

But would an investor like YC jump on this? No. An investor like YC will go ahead and take the step of applying a "0.000..% chance of successfully cashing" to the winning lottery ticket you hold. (If you are honest with them about what you will do and what you need to do it.)

NOT 1%, leaving an expected 28x or 2800% return (2800x built-in * 1%) from the 2800x or even 0.1% which would leave a 2.8x or 280% expected return (2800x * 0.1%) out of the built-in 2800x. But, exactly 0.000..% with unlimited precision. And then, obviously, in their estimation "it doesn't make sense to invest." (Even though in reality they have a built in 2800x return from the terms you are offering them. A cool 1.4 billion dollars basically for free.)

Then they will go ahead and say "no".

What is interesting is that you can show that the "0.00..%" they go ahead and apply to you really does have unlimited significant figures. If you were to hypotehtically need only $50,000 instead of $500,000 in this round you have to lie if you want their money.* The above calculation still produces a "no".

Yet another way to show significant figures in the 0.000%: if your winning ticket has 200b written on it (mine doesn't, mine has 20b written on it) it does not increase your chances of funding or interest in it. The 0.0000 that YC and several other "investors" apply really has that many sig figs.

So now you understand why I would never like to be associated with an outfit like YC. If I need money to cash my check, why would I ever want to associate with someone whose only M.O. implies they will go and apply a 0.000000000000% (infinite zeros) factor to it? I don't need that kind of tarnish. Where is YC's "Google"? Nowhere. They wouldn't touch a $200B or even $20B seed-stage company with a 200-foot pole.

* how can you build a $50b company from $50,000? Maybe you're an Indian-American entrepreneur and an able CTO and single founder, and you can get nearly unlimited high-quality output for peanuts, while personally overseeing it, from your Indian network. Then $50,000 is easily as much as $800,000 in the hands of a non-tech MBA who must first of all find a CTO and then insists on expensive labor.

In part you are correct, but you are making some huge mistakes and, in a saying from my past, are "straining over gnats and forgetting elephants".

> 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.

That's likely true from what you and Silicon Valley see, but that's just a gnat.

Basically you are saying that success is a shot in the dark and it is impossible for an entrepreneur and their financiers to design success with good reliability. That is, from enormous data, obviously nonsense.

Paul, instead of shooting in the dark, you need to turn on a light!

I claim that we can design success, on just clean sheets of paper, with high reliability and that how to do so is well known with a fantastic track record with the long track record right in front of us.

Also, we need to address your:

> if a good idea were obviously good, someone else would already have done it.

Nonsense. Paul, where do you get such stuff? You have one of the best backgrounds of anyone in Silicon Valley entrepreneurship, and yet you still fall for that nonsense that fills the trash and the offices on Sand Hill Road.

What you mean by "a good idea" is just a good 'business idea', e.g., a very short, nearly superficial, description of the business to, say, an early customer. But, Paul, that's nearly irrelevant.

Want a good business idea? Make a billion dollars quickly? A sure fire winner? Okay, this is your lucky day. May I have the envelope, please (drum roll). Yes, here it is: One pill to take once that provides a safe and effective cure for any cancer. That's your guaranteed, 100% true, died in the wool, sure fire, billion dollar "good business idea". And it's obvious, and no one has done it. Done.

Since the 'idea' is obvious, why has no one done it? Sure: No one knows HOW to do it.

Are you beginning to understand?

So, for a hand up, in case you were up all night drinking beer with the boys, here is a 'generic method' (ALL TRUE hackers just LOVE such verbiage):

Step 1. Think of a big, unmet need, something a billion people will pay a little for or thousands of people will pay a lot for. E.g., the one pill cure for any cancer. That is, think of an important, unsolved problem.

Step 2. Find a way to meet this need. E.g., for the cancer pill, have to do some quite good biomedical research. Uh, did I say that it was all easy? I don't remember saying it was all easy. If Step 2 is too difficult, then return to Step 1 (we're writing this in the form of an 'algorithm' since ALL TRUE hackers just LOVE algorithms). Else proceed to Step 3.

Step 3. Sell the solution to the customers and take the money to the bank.

There it is, in just three steps. Of course, likely the bigger the unmet need from Step 1, the more difficult will be the research in Step 2. Whatever, the key to the 'algorithm' is the research in Step 2.

Did I mention 'research'? Gee, does anyone on Sand Hill Road consider research? Well, Paul, you and Y Combinator have high qualifications in evaluating research, but a cursory look at several of the best known venture capital firms in Silicon Valley, Boston, Winter Street, and NYC show little to no ability or willingness to evaluate research. Uh, to evaluate research, as usual, we want at least a relevant Ph.D., a tenure track faculty position in a research university, and some relevant peer-reviewed publications of original research.

So, research is being ignored! Opportunity knocks!

Now, should we have any faith in the promise of research to get solutions to practical problems, or is all of research just ivory tower intellectual self-abuse that has yet to be proven totally useless forever?

Let's see: It turns out that there is in all of the world in all of history exactly one, unchallenged, unique grand champion of doing research to get powerful solutions to important practical problems. And the track record is much better and much longer than that of Silicon Valley.

Without further ceremony, here's the envelope. Yes, the answer is, the US DoD. They got going about 70 years ago and did little projects like "the bomb, the hydrogen bomb", radar, synthetic aperture radar, spread spectrum radar, encoded with shift register sequences, adaptive beam forming passive sonar, inertial navigation, GPS, and on and on.

So, for the question, is it possible to do research that yields powerful solutions to important practical problems? Sure. Done.

So, should Silicon Valley fund research? Well, perhaps not. But, if an entrepreneur has selected a good "unmet need" in Step 1 and done some good research to get a powerful solution in Step 2, should Silicon Valley consider the research?

Hmm ...? But, such research is rare! Right! Did I notice that you have already noticed that big winners are rare, 'black swans', outliers, "few"? Yup.

How many $200 billion winners does a $100 million venture fund need to give good returns to its limited partners? Many? Several? A few? How about just one?

Silicon Valley is shooting in the dark into a pond with nearly only small fish. Silicon Valley needs to turn on some lights, look, pay attention to powerful research for big unmet needs, and then evaluate pulling the trigger.

My guess is that the real problem is the limited partners (LPs) who really prefer to look at reports from accountants. So, the LPs tell their venture funds to do all evaluations as close to accounting as possible. Since the usual accounting metrics are not yet available, the venture firms use surrogates, and their favorite is 'traction'. They want their coveted 'traction' to be high and growing rapidly. E.g., in the case of the bomb, they would have said "You build and test one and get one ready for delivery, and we will chip in for the gas for the Enola Gay.".