Screw the Black Swans: Ichiro is our role model, not Barry Bonds. | Hacker News Reader

Screw the Black Swans: Ichiro is our role model, not Barry Bonds.

500hats.com

183 pointsrelation76 comments

This is such nonsense. We like hustlers too. Every investor does. It's good if they're also good hackers. But (as I've said over and over) we learned early that determination matters more than intelligence in this business, and that's what we look for.

He seems to be trying to give the impression that 500 Startups is for plucky underdogs, and YC isn't. It would certainly be in his interest to have founders believe that. But the fact is that when the black swans show up on our doorstep, they don't seem like they're going to be black swans. That was the whole point of my essay; that's why I refer to them as black swans, and why I say that "we're in a business where we need to pick unpromising-looking outliers."

It appears like he is going after the message that YC is for pretentious founders, and 500 is for practical founders.

no, that wasn't it at all.

Whether or not it was his intention, Dave McClure successfully framed 500 in the discussion of the premier accelerator program - YC. And he also sent a battle cry to his portfolio, pitting them as the underdogs. I'd say this post was pretty well done regardless of whether you agree with his points.

I think pg recognizes the post for it's marketing brilliance, which is why he is calling bs.

It was interesting that aside from having the scrappy image, many of the athletes used in the analogy(Ichiro, Nash, and Dirk) happens to be foreign. The post is an attempt to differentiate from a leading competitor for talent on multiple fronts(Home Run vs Singles/Globalization vs Valley/Hackers vs Marketers).

"Law of the Ladder" strategy of the post is a good play.

Another point about the scrappy image: one of the points of PGs essay was to state that sometime the non-obvious guy/gal wins the biggest the end. 500 is saying they are that non-obvious accelerator.

Not really, he's giving YC a lot of backhanded compliments

Does Dave know Ichiro plays for the Yankees now?

He says so about a third of the way down, but maybe he added it after the fact?

yes, did know that & included it in the original draft.

Airbnb, who Dave uses as an example of a billionaire startup club member, is the definition of an underdog making the big time through pure hustle -- I seem to recall a story about selling cereal boxes to make ends meet before funding started to pour in post incubation

And design. Probably not the best example for Dave's arguments.

Yes, exactly.

I'm afraid there's too much hay to be made from your essay, both because of the content and because the author. In the HN discussion honest (AFIAK) misreadings were rife so it isn't surprising to see someone with an agenda try to pick up the ball and run with it.

If you're looking for unpromising-ness + determination, how do you avoid the thesis devolving into "invest in everyone that's smart and determined since you just never know"?

"trying to give the impression that 500 Startups is for plucky underdogs, and YC isn't."

Essentially he is saying YC is Hertz and 500 is Avis.

"Their corporate motto is "We Try Harder" It was adopted in 1962[4] (during the tenure of Robert Townsend as its CEO) to make a more positive reference of Avis' status as the second largest car rental company in the US, at the expense of its larger competitor The Hertz Corporation. "

http://en.wikipedia.org/wiki/Avis_Rent_a_Car_System

A well intentioned strategy of "attacking" (if you want to call it that) the market leader in the category. Doesn't even matter if they are really Avis by the way. Why? There is fresh kill on the internet every day. And those "fresh kill" are reading things like that and believing it.

the Avis "we try harder" thing has always been a favorite of mine... i guess i always do feel like being the underdog makes me work harder.

anyway, i'm sure most folks at YC feel like they try harder too. probably we're more similar there than different.

but yeah, i don't mind being the underdog.

"sure most folks at YC feel like they try harder too"

It's great to be the underdog it makes everything fun as you are trying to get somewhere. Once you get there you have something to lose. So you either becomes paranoid or you can become lazy and complacent.

You might remember the Dirk Diggler character in "Boogie Nights". First time he won the award he gave a big speech and thanked everyone. Next time a little less, next even less. After he had won so many awards he would just go up on the stage and say "thank you" as if it didn't even matter anymore. Later, he couldn't even "get it up" he became impotent. That's what you have to guard against. Your strategy is great.

While I agree that bit of Dave's article is about trying harder to appeal to underdogs. Is YC investing in companies abroad then? I am not talking about companies started abroad but essentially cater to US and/or global audience(I know you guys do invest in such companies) but Companies for example that were started in India and cater to Indians. Is YC investing in such companies? Last I wrote to YC, answer was no.

Dave McClure post was framed as 500=APPL, YC=MSFT analogy. Artists vs geeks. Intuitivity vs analytics.

It's not about being an underdog or a black swan. Both 500 and YC must differentiate. It's the only way for the founder to grasp the accelerators' pitch.

Everyone wants to put out their expressive character. Michael Jackson can be recognized from the silhouette, so can you do with your company.

So it's fine that Paul Graham played out the analytical card and Dave McClure counterplayed the same card as Apple played against Microsoft - we are the hippies, not the science guys.

really hope our branding is more "intuitive artists" than "the hippies"... but yeah, that's probably directionally correct.

i prefer band geeks vs. chess nerds, as stated in the piece.

of course i realize YC appreciates hustlers as well as hackers, however don't you think there's some truth to YC being exemplified by the "hacker" way? i certainly meant that in a complimentary way.

in any case, didn't mean to mis-characterize your post... just thought it would be useful to identify some of the differences in YC & 500 re: style, philosophy, practice.

(regardless, happy hunting / farming :)

To 500hats:

1. Please take a note from pg. He writes clearly, edits his essays and it is almost always clear what he means. I am afraid I read your note twice and still missed some of it's core message(s) (I mean this kindly and politely)

2. If you are serious about external to USA investments and families, please please stop using US only sporting analogies that need Wikipedia articles to unpick. I am glad you love your sports. Now stop it. Say what you mean. Analogies are for lazy HNers like me, otherwise you are bowling googlies on a sticky wicket.

To pg and 500hats

This may or may not be a spat, but it looks suspiciously like when two tribes who were happily expanding across virgin tundra suddenly find they are jostling each other for space.

As you guys are at the leading edge of us it start ups, is this a warning sign of an imminent contraction ahead - have you guys run out of room?

"This may or may not be a spat, but it looks suspiciously like when two tribes who were happily expanding across virgin tundra suddenly find they are jostling each other for space."

Speaking of analogies, that's a great one. I'll have to remember it and use it myself!

Yes, avoiding using analogies is like ....

> 2. If you are serious about external to USA investments and families, please stop using US only sporting analogies

Thanks for pointing this out. Not everyone who reads English understands those. While I have a (very faint) idea what the Yankees are, I have never even heard of the "Oakland A" or any of the players he mentions.

This is a very US-centric post; the line about how their investing team "speaks Mandarin, Japanese, Portuguese, Spanish, Hebrew, Korean, Hindi, Punjabi, French, German, and will probably speak Arabic and Russian sometime next year" sounds forced. Can he explain the rules of baseball in Russian?

I only know the Oakland As after watching Moneyball (recommend it for post midnight slumping), but yes I have a couple of rules for mixed culture teams

1. Writing is best first. Skype is great but really unless English your first language communication with words is easier, because you can take your time and point to code

2. Polite is vital

3. Encourage the weakest communicators This is generally true anyway, but the isolation that can accrue from not being able to make yourself understood a thousand miles away can become crippling to a otherwise useful team member

4. Kiss - keep it simple - everything needs to be simple

5. Pair up - no not pair programming although that's useful but have a "liason" for each remote person at the head office. This way there is a good link for catching misunderstandings etc

6. Be wary of jokes

7. On simplicity - this usually gets difficult when the requirements are not clear - if it's hard to feet a good programmer with bad English to understand what you want the fault is probably in the requirements not the programmer

to be fair that last rule has never failed me with any developer who has enough English to hold a conversation about their favourite sports team. Which is not much really.

Exactly what I felt, and exactly what I did. now I know a bit more about US sports though.

Everyone seems to be completely missing something PG made abundantly clear. Black swan farming is not what YC tries to do. They don't only swing for the fences. PG simply illustrated why and how it makes the most business sense. He says, explicitly, multiple times, that it is not YC's primary objective, they don't reject teams based on this criteria, and they aim to help all of their teams. His essay just documented the interesting truth that venture firms are better off with the unintuitive process of focusing on big winners.

I don't think the sports analogy serves their argument (and I'm not sure I really see what they do all that differently than YC). I don't know Michelle Kwan's story, but of the other three they mention: Ichiro got a nice 17M/year contract. Nash has a couple of MVPs and was the 15th overall pick in the draft. Iverson was a number one draft pick and led the NBA in scoring several times. Ichiro came from Japan instead of the traditional draft/Latin America -> minor leagues route, but considering the Mariners paid $13M just for the rights to negotiate with him, he wasn't exactly an ugly duckling by the time he came over.

Really, all those guys are more like a phenomenally successful startup than not. There are countless prospects in sports—this is most obvious in baseball with the huge minor league pro leagues, in basketball the NCAA serves a similar role—and only a very, very few of those players turn out to be stars. And frequently scouting for them in advance (like at the HS level) is a crapshoot. If you were an up-and-coming agent and happened to land a Nash, Ichiro, or Iverson, he'd likely be worth more to you than all your other clients combined.

He lost me at "put in their hours at the gym" and Allen Iverson:

http://www.youtube.com/watch?v=eGDBR2L5kzI

AI might not have a traditional view of "PRACTICE" but i bet he put in a helluva lotta time shooting hoops, one way or another.

besides, not all metaphors have to work perfectly... it's the story that counts.

I don't know Michelle Kwan's story,

She has won a couple of Olympic medals for figure skating(98 and 02). He is probably referring to the fact that in 1996 she came in second in the US championships(which usually gets you on the Olympic team), but they gave Kwan's spot to Nancy Kerrigan. This happened because Tonya Harding(who came in first at that championship) had Kerrigan beaten so Kerrigan couldn't compete.

This post would have made a lot more sense if I had the slightest idea who any of the sports players or teams were.

but our MISSION is to groom ugly ducklings.

Then why do you make it so hard to touch base?[1]

[1] http://500.co

If you think it's hard to touch base with 500 Startups you are hopeless.

First, your comment is vacuous.

Second, your account is over 1900 days old and it seems you are making personal attacks? Is this true, or have I mistaken "you" for a you general.

Third, my original comment was rhetorical. If someone thinks it is hard to touch base with 500 Startups then it doesn't mean anything other than the person thinks it is hard to touch base with 500 Startups. There are plenty of good investors out there, and if you are going to invest in technology then it only makes sense to, you know, use technology to make it easy to collect potential investments (which as I pointed out, 500.co sucks at doing).

Touche on the personal attacks. Am I supposed to go into depth about how easy it is to touch base with 500 Startups (which is more than Dave) and that despite how easy it is, Dave still encourages people wanting to touch base to go through an intermediary as sort of a social proof exercise?

I don't understand what you are trying to communicate in the third paragraph.

I met Dave at an event in Singapore and tried talking to him. He refused to talk unless we got recommended by two people in his network.

Not 'refusing to fund unless I get recommendations'. Refusing to even talk or hear our story. The same thing happened in Startup Chile Demo day as well with their other partner Bedy who was there to listen to pitches.

I think the problem here is that you were at an "event", very little time to meet with people that he already probably had meetings planned with.

I would suggest that you find a way outside of that OR look for 2 people in your network to introduce you.

This is breathless nonsense. What is Dave trying to say?

The only thing I gathered from this is that in his mind 500 startups can't attract or afford the most sought after yc companies and founders and.. That's ok, We're global!

The math on this just doesn't make sense. By definition, the moment a fund has an investment which is a "black swan" that investment will make all the singles and "on base hits" (or whatever) insignificant to the total returns.

I get that he is successful and has a lot of hutzpah but if I was an LP I wouldnt be thrilled by this.

I think pg's whole point (and Taleb's) of a black swan is that they are not identifiable. Over the long term and after many investments, pg is pointing out that its the presence of these black swans that made YC successful (dropbox, airbnb), and extending that to other VCs, its random luck that will make or break them. You can't avoid investing in black swans, because you don't know which ones they are/will be.

That wasn't how I read the black swan farming piece. From what I remember he pointed out how total returns for the fund are dominated by the black swans. Then he discussed what yc would (theoretically) look like if they were going to try to optimize for black swans but conceded that they wouldn't really want to run yc that way. In a way I think the piece flouted the concept of black swans by saying they were something you could optimize for (which I think taleb would disagree with).

Regardless, the unpredictability of black swans and their potential impact on a fund's returns show the ridiculousness of Dave trying to frame this discussion as "Barry bonds vs ichiro".

Taleb not only believes that you can optimize for black swans, but he runs a fund called Universa that does exactly that. Most years it loses money. But in 2008 it had over 100% returns.

This is sort of tangential to the main discussion. That said, I thought that strategy wasnt "optimizing" for black swans (as in trying to find specific investments where a black swan event is likely) so much as accepting that the market underestimates their probability and holding a wide portfolio of securities which will payoff in a dramatic downturn. That may be a bad definition of optimizing, or just an incorrect understanding of their strategy though.

I would call it a somewhat incorrect understanding.

They do a lot of their investing in out of the money options. Those are investments that cost very little to make, which will make a lot of money if something very unlikely happens. (You can make these investments on both sides - both up and down.) Lots of people are willing to take the opposing side of the bet based on standard models. If those standard models are significantly underestimating the risk of unusual things happening, then in the long run the black swan strategy will make money.

Since by definition you don't know where a black swan will happen, you also need to spread your investments out across many places. But you don't just diversify, you diversify across very specific classes of investments that are very cheap to make and have a very low probability of paying off.

In the startup analogy you'd want to diversify across as many startups as possible, and invest in them as early as you can.

Seems to me none of you guys have the correct understanding of what Spitznagel does at his Universa. He actually uses these out of the money options payoffs not to bet on random black swans, but rather to exploit really big moves that he is actually counting on (apparently based on bs understanding of Austrian economics). All this black swan talk was BS afterall. He says... "black swan events have been largely insignificant in at least the last century of capital investment in the U.S., including the current crisis. Investors have indeed encountered surprising and pernicious events, but the fact is those who were surprised have essentially been those (in the extreme majority) with a brazen disregard for the central concepts of Austrian capital theory and monetary credit expansions." in his paper "The Austrians and the Swan: Birds of a Different Feather" here http://www.universa.net/UniversaSpitznagel_research_201205.p...

Universa is run by Mark Spitznagel; Taleb is only loosely associated. Because it's a closed, private fund that isn't required to produce audited financials, nobody on the outside really knows what kind of returns it has produced.

Taleb and his theory make for a good story in the wake of the financial meltdown, but the tangible application is sometimes exaggerated [1].

[1]http://www.businessinsider.com/wait-before-you-invest-in-nas...

That's what I get for skimming to remind myself of facts instead of reading.

I got Universa from the Google search blurb from Wikipedia. I got the over 100% figure from http://www.bloomberg.com/news/2011-10-06/black-swan-money-ma... which quoted "a person familiar with the matter" as saying that the fund brought in 115% during 2008.

However if I read either closely it was obvious that Taleb does not run Universa.

I wouldn't fret; Spitznagel is open about the fact that the firm's strategy is based off of economic "Black Swans" and Taleb's work, and there's definitely an association.

As far as the returns, the 100% figure wouldn't surprise me, really; more than a few bearish funds crushed it during 2008. It just seems like that number is the financial media echo chamber in action. It's repeated over and over in article after article (just look at the citations for it on the Universa wikipedia page). And yet, it always comes from an unnamed source or someone "familiar" with the fund. If there's anything I've learned from the financial crisis, it's that hedge fund managers aren't particularly trustworthy; even less so when they're talking their own book!

I think the main reason 500 could work even without home runs is that they do follow on investments in the most promising companies. YC doesn't do that because it would screw every company they didn't follow on in at Demo Day.

It would also probably result in less home runs if they did this because (as PG stated) the very most promising ideas already often have the hardest time at Demo Day (Fred Wilson + Airbnb).

500 startups may actually be strangling their home runs in the crib with the follow on strategy. A self-fulfilling prophecy.

He probably just lost the non-US audience with all those baseball references (certainly lost me).

the baseball / moneyball metaphor was important.

i know that some folks who don't know baseball won't get it, but the references because of the book & movie were somewhat essential.

You shouldn't declare yourself to be the underdog, it shows a lack of confidence. Other people will do that for you. Everyone loves a David vs Goliath story, but this seems like an unnecessary concession.

And you can't say "screw black swans", it doesn't work that way. The whole point of "black swan" is a completely unpredictable event. Even if 500 Startups accepted only d-list players, they wouldn't decrease their odds of unforeseeable success.

Portraying yourself as the underdog does have some advantages provided you still believe you can win. It can inspire greater effort to beat the odds, it can remove some pressure of expectation and place that on the other side. It can also free you to take risks as you have less to lose.

There are disadvantages too if it gives the opposition healthy confidence of if you don't actually believe that you can win.

I'm British so maybe my attitude to underdogs is a bit different to the US one.

‎"YC made Fire. 500 stole it.", this is a greate punch line, true or not. You got to give Dave credit for not shying away from conterversy and in fact using it to brining 500 into the discussion

But he loses credibility to anyone paying attention. This isn't some press hit to get users. His goal should be to make people think he is a good partner, and even if his point was valid, his approach doesn't help.

Do I really want an investor who enjoys controversy?

Note that pure controversy isn't the same thing as saying something you think is true that makes others uncomfortable. That is what PG's essay did, along with many others of his. That is what makes PG good: incisive ideas.

ivan: i don't think i was creating or enjoying controversy.

there's no controversy in clarifying differences between 500 & YC, that's just simple transparency.

my goal was to clarify and differentiate 500 in the eyes of potential future founders, and perhaps some press and/or influencers who would carry that story to them as well.

don't really care whether i ruffle feathers from some folks as long as the message was loud & clear.

pretty sure i did that.

> as long as the message was loud & clear

I actually do think there is a kernel of something interesting in your post, but the way you said it and a lot of your actual content got in the way.

First, PG was making an observation about the finances, but said "For better or worse that's never going to be more than a thought experiment. We could never stand it."

In other words, YC is like 500 with respect to mission and values.

Second, are your returns following a powerlaw? It seems like they are. So regardless of your strategy, the financial observation PG is making seems to apply to 500 as well.

In that context, "Screw Black Swans" doesn't belong in your title.

Separately, I'm pretty sure your international strategy is a stronger Black Swan strategy. That is actually a really interesting idea, but when couched in a needlessly contrarian post, it is lost.

Ironically, in developing my own strategy as I begin angel investing in earnest hopefully next year, I think we'd agree on a lot. What if the median investment had a 2X return instead of the typical (1/3 gone, 1/3 1X, 1/3 huge) distribution?

Ivan - I think Dave already explained himself really well. But what I have noticed about Dave is that he thinks founders don't push the boundary enough and take enough chances to market their company. Case in point I was giving Dave ride one night (long story) and he was exchanging emails with a founder of a newly funded company. I was able to guess the company, and what I gather from Dave was that the founder/CEO was being a bit cautious against his recommendation. I think Dave's post is very much inline with his philosophy and his brand. Perhaps this is his way of winnowing the hustlers. Basically, if you dig his approach then perhaps you share a bit of DNA with him.

The whole analogy to sports players is confusing and unnecessary, though it probably attracts more views. He claims that 500 Startups focuses more on teaching rather than finding the best talent, yet Ichiro was already a huge star in Japan before he came over to the Seattle Mariners for a sizeable posting fee. Then, the point about consistently "hitting singles" and getting on base more often as opposed to hitting homeruns is strange considering Barry Bonds has one of highest on-base percentages in league history. The steroid issue that clouded the legitimacy of Bonds's career also muddles the message the blog post is trying to convey; in comparing Bonds with YC, casts YC in a negative light, though probably unintentionally.

>>analogy to sports players is confusing and unnecessary >>though it probably attracts more views.

umm... you aren't in marketing, are you?

"probably attracts more views" -> not confusing, necessary

also: yeah, of course Ichiro was big in Japan, and Bonds was one of the greatest at getting walks. doesn't detract from a good story.

Ichiro and Steve Nash are wonderful role models, but I don't think they're very good models, which this essay seems to overlook. "Black Swan Farming" is about the enormous, counterintuitive variance of returns to startup investments. Sports just isn't in the same domain: a batter with 1000x more hits than the league average is inconceivable, but 1000x variations in startup outcomes are quite common.

Being slightly better player than the rest is enough to turn a losing team into a champion, generating 1000x return.

"If you set your goals ridiculously high and it’s a failure, you will fail above everyone else’s success"

What if 500 Startups has the "misfortune" of landing a black swan? With the firm's then increased valuation, how do they grow that with base hits?

I read PGs essay to mean that black swans are like an addiction: once you have one, you need another to get any kind of growth.

there's no misfortune if we have black swans. and we probably already did find one with 9GAG last summer.

the point i was making was about whether that's the focus, or simply a result.

YC's class sizes have been growing every session. Given the importance of the networking between YC companies, is there a maximum size of a YC class (Dunbar's number[1] being the first thing I thought of)? Is there a point that YC and/or its classes become too large?

1. http://en.wikipedia.org/wiki/Dunbar%27s_number

> It would seem from PG’s post this is most definitely YC’s mission – to find the biggest & baddest startup founders, and get them to swing for the fences. Not to mention get them the highest possible valuations at demo day.

I'd like to hear PG's perspective on this.

What is YC's mission?

Reply on news.ycombinator.com